Income FROM Business - great note helpul PDF

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INCOME FROM BUSINESS Introduction  s 6-5 ITAA 97 = income generated from carrying on business is ordinary income  Step 1 = purpose test o Is the taxpayer a mere investor? o Is the taxpayer a hobbyist?  If it is a business o Scope test  normal incident of business?  Taxpayer is a mere investor o Is the receipt capital or income?  Taxpayer is a hobbyist o Income from recreational activities or a hobby is not assessable as it fails s 6-1 ITAA 97 Carrying on business  Business = s 995-1(1) ITAA 97 = any profession, trade, employment, vocation or calling, but does not include occupation as an employee  Employment is more general than personal exertion  Can include sporting activities where there is a high degree of professionalism  Need to determine whether a business is being carried on Indicia of business (only factors not determinative)  Profit making intention o Stone v FCT (2005): operation can still be a business despite taxpayer lacking profit motive  Scale of activities o Larger scale = more likely to be a business o FCT v JR Walker (1985): large scale of breeding Angora goats = carrying on business o Ferguson v FCT (1979): size of operation and capital is relevant  Commercial approach adopted o Thomas v FCT (1972): tree planting was much greater than what would be needed for domestic purposes and the activity was more than a recreational pursuit or hobby  System and organisation o Degree of planning involved, amount of time devoted to activity and whether records were kept o Ferguson v FCT (1979): organisation and business-like approach with appropriate record keeping = indicia of business  Methods adopted are typical of the particular industry o EG: using methods similar to those used in similar commercial business, such as a dairy farmer using planned breeding programs to increase milk production  Sustained and frequent activity o Ferguson v FCT (1979): repetition and regularity are considerations  Type of activity and type of taxpayer  Turning talent to profit

o Stone v FCT (2005): business, turned talent into profit without intention Mere investment or carrying on business?  Investment is not limited to shares or land  Investment income = passive and insufficient business activity = FCT v Radnor Pty Ltd (1991)  Look for o Speculative, high turnover and methods = business o Long term growth = investment o Consider intention and facts of taxpayer  AGC (Investments) Ltd v FCT (1992) o Not carrying on investment business but holding shares was for long-term capital growth o Key factor = investments undertaken for long-term growth rather than speculative returns o Shares were not bought and sold to maintain liquidity for parent company  FCT v St Hubert’s Island Pty Ltd (1978) o Where firm’s primary activity is purchasing, developing and selling land = ongoing business of selling land Specific example – Gambling  Role of chance, lack of organisation or addiction  Is it a pursuit of hobby?  Clear system or organisation to eliminate chance o Evans v FCT (1989)  Not conducting business due to lack of systematic approach  Often bet on long odd bets o Martin v FCT (1953)  Pursing recreational past time despite facts indicating a business  Where gambling is part of a related business more likely to be seen as carrying on business o Trautwein v FCT (1936)  Gambling activities were part of taxpayer’s racehorse business = ordinary income  Taxpayer’s gambling was closely associated and integrated with horseracing business  Other factors included: size of bets, systematic and organised approach, commitment of substantial amounts of money and time to betting, employment of other people to place bets and collect winnings Specific example – Sportsperson  High degree of professionalism = significant money, coaches, training, managers, agents, media/advertisers  Fees paid by club for professional sportsperson = ordinary income  Sponsorship money = s 6-5 ITAA 97 o Stone v FCT (2005)

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 Sponsorship fees were ordinary income: s6-5 ITAA 97  Entering into sponsorship deals was an indicator of business Prizes for sporting achievements o Stone v FCT (2005)  Carrying on a business = ordinary income o Kelly v FCT (1985)  Money from sporting achievement = ordinary income due to being directly related to employment as a footballer

Normal proceeds of business  Californian Copper Syndicate v Harris (1904): if a business is being conducted figure out what receipts are part of the normal proceeds of the business  To find out normal proceeds of the business o Investigate nature of business  FCT v Merv Brown Pty Ltd (1985)  Taxpayer was in the business of purchasing and selling clothing and material and therefore the sale of import quotas was not normal proceeds  narrow approach  GP International Pipecoaters Pty Ltd v FCT (1990)  Money was received as a result of work required  broad approach  Nexus to business activity o Transaction that is part of ordinary business activity o Transaction that is an ordinary incident of the business activity  Memorex Pty Ltd v FCT (1987)  Nature of business was selling and leasing computer equipment and receipts from sale of leased equipment = nexus with core business activity  Although sales were not major part of business, they were sufficient magnitude, frequency and regularity to be normal incident of business operations  Non-cash benefits o Non-cash benefits are not ordinary income = FCT v Cooke & Sherden (1980) o s 21A ITAA 36: introduced to overcome issue of non-convertibility of business receipts  Deems non-cash benefits to be cash convertible and then prescribes a method of valuing non-cash benefit o Required to establish if benefit has sufficient nexus  Amount is to be included as assessable income as arm’s length value  s 23L ITAA 36: exempts application of s 21A if total amount applicable for tax year is $300 or less Isolated or extraordinary transactions  FCT v Whitfords Beach Pty Ltd (1982) = one-off transactions and not undertaken by an existing business operation = isolated transaction  Myer Emporium: transactions outside normal proceeds of business are extraordinary transactions that may or may not constitute business

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To generate s 6-5 ordinary income from such transactions at least one of the following is to be met o Transaction forms a business: Whitfords Beach o Falls under first stand of Myer Emporium o Falls under second strand of Myer Emporium

Principles applied to isolated transactions  Only net profit is assessable as s 6-5 ordinary income  Transaction will exhibit sufficient characteristics of a business where it involves o Significant amount of effort, capital and planning  Whitfords Beach Pty Ltd (1982)  Profit from developed land = ordinary income  Development of sale was so extensive it had characteristics of business o More than mere realisation of enhance asset  Scottish Australian Mining Co Ltd v FCT (1950)  Proceeds of sale were not ordinary income  Taxpayer was not in the business of land sales  Casimaty v FCT (1997)  Sale of land was a mere realisation and did not constitute ordinary income First strand of the Myer Emporium  If three requirements are satisfied extraordinary amount received = ordinary income o There was a business operation or commercial transaction o There was a profit-making intention behind transaction o The profit actually made is of the find intended at the time transaction was entered into  Westfield v FCT (1991)  Not ordinary income  The way the taxpayer made profit (resale) was not consistent with original profit-making intention (developing shopping centre with AMP Society)  Satisfying either strand is enough both not required Second strand of Myer Emporium  Proceeds from a transaction will be ordinary income if taxpayer sells the right to income from an asset without selling the underlying asset  Income assessed as s 6-5 ordinary income  Satisfying either strand is enough both not required Statutory provisions that may apply to extraordinary and isolated transactions  Can be statutory income: s 6-10 ITAA 97  s 6-25 ITAA 97 = if both ordinary and statutory income more likely to be taxed under statutory income  s 15-15 ITAA 97: all proceeds from profit making undertaking is assessable unless o Gains are ordinary income (s 6-5 = precedence)

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o Gains sourced from post Sept 1985 assets = CGT may be applicable s 25A ITAA 36: makes assessable profits from selling an asset that was initially acquired for the purpose of resale unless o It is a post Sept 1985 asset o Resale was not the dominant/sole purpose...