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Lecturer Name: Mr Bala Subramaniam Name: Senthilkumar Anushya Student Number: 32764311 Word Count: 1,494 (including footnotes)

BUS 303B - TAXATION

Individual Assignment

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Californian Copper Syndicate v Harris (1904) 5 TC 159 Taxpayer, Californian Copper Syndicate, was in the business of copper and for which it acquired copper-bearing land. Subsequently, it sold off the copper-bearing land, earning a substantial profit. The Surveyor of Taxes assessed the profit made from the reselling of the land to be of income nature stating the taxpayer was formed for the purpose of acquiring and reselling copper-bearing land. The taxpayer contended that it was a mere realisation of a capital asset rather than income. The court held this was not income but mere realisation of capital asset. 1 This case was a landmark in identifying the difference between mere realisation of a capital asset and gain made from selling capital assets in the course of a business. Mere realisation is when the owner, who was not in the business of selling capital assets, sold the capital asset for profit. 2 The following is an extract of the judgment given by Lord Justice Clerk for this case. The principle of mere realisation is well explained in here. “It is quite a well settled principle in dealing with questions of assessment of Income Tax, that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit assessable to Income Tax. But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable, where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business.” 2 The first part of the extract that states mere realisation of capital asset is not assessable is now not applicable with the enactment on Capital Gains Tax (CGT). CGT was enacted to tax all capital gains which were previously exempted from income tax regime. 1 CCH Australia Limited, Australian master tax guide 2015 (56th ed.) (CCH Australia Limited, 2015). 2 Manyam, Joel, Taxation Of Gains From Banking and Insurance Businesses In New Zealand (Revenue Law Journal Vol. 20 Iss 1 Article 6, 2015).

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According to S104-10(5) of ITAA 1997, this case falls under pre-CGT category (before 20 Sept 1985), thus CGT exempt, therefore non-taxable. However, if this case were to happen in today, it would be caught under CGT Event A1(disposal of CGT assets) becoming taxable income and thus the judgment of the case is no longer relevant. Nevertheless, this case has its relevance today in distinguishing between mere realisation and gains made from carrying out a business cases. If it was mere realisation of capital asset it will be assessed as capital gain under S102-5 of Income Tax Assessment Act (ITAA) 1997 which is statutory income under S6-10 of ITAA 1997, thus taxable. On the other hand, if it was gains made from carrying out a business, it will be assessed as ordinary income under S6-5 of ITAA 1997 which is also taxable.

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Whitfords Beach Pty Ltd v FCT 82 ATC 4031 Taxpayer, Whitfords Beach, was a company formed for the purpose of acquiring land and fishing shacks. On 20 December 1967, the company was bought by three shareholders who were real estate developers. The new shareholders changed the constitution of the company, developed the land, subdivided and sold it for profit. The issue was whether the profits made from the sale of the land was mere realisation or gains made in the course of business i.e income. The high court held this was not mere realisation but gain made from carrying out business, hence income. 3 When this case was brought to the lower courts, it compared the facts of this case to that of Scottish Australian Mining 4 case and concluded it as a mere realisation stating that the initial purpose of buying the land was for access to fishing shacks for the company’s shareholders and not for reselling land. Therefore, it concluded that the gains made from the sale of land was only mere realisation of the asset and not gains made in the course of business. 3 However, High Court held this was more than mere realisation. The day that company was acquired by the three shareholders, who were real estate developers, and the constitution of the company was changed to enable development and subdividing of land, the purpose of acquiring the land changed from its initial purpose and became one for reselling land. 3 Therefore, selling of the land was in the course of business and thus it was a gain made from the carrying on a business which will fall under ordinary income of S6-5 of ITAA 1997. This case was a landmark in establishing that isolated transaction (one-off transaction) can be ordinary business income as long as there are others indications of a business such as

3 CCH Australia Limited, Australian master tax guide 2015 (56th ed.) (CCH Australia Limited, 2015). 4 Scottish Australian Mining Co Ltd v FCT (1950) 81 CLR 188.

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profit making intention. It is always not necessary for the business transactions to be regular and repetitive. 5 The sale of the land is also assessed under S15-15 of ITAA 1997 which is profitmaking undertaking that will be statutory income (S6-10 of ITAA 1997). Profit-making undertaking involves a conduct that produces profit and it is achieved through something more than ordinary buying and selling of property. 5 However, S15-15(2)(a) has a no contrary intention which means if the income is assessed under ordinary income, it will not be assessed under this section. After the introduction of CGT, Profit-making undertaking has only limited application i.e it only applies to assets purchased before 20/9/1985 and those that doesn’t fall under ordinary income. 5 Introduction of CGT doesn’t diminish the importance of this case since assessable income (ordinary or statutory) prevails CGT as stated in the S118-20(1)(a) of ITAA 1997 that if a transaction is assessable income it will be reduced capital gain i.e not included in capital gain calculations. Therefore, even though the profit made from the sale of the developed land is caught under CGT Event A1(disposal of a CGT asset), CGT doesn’t apply in this scenario since isolated transaction in the course of business will be assessable as ordinary income under S6-5 of ITAA 1997.

5 Sadiq, Kerrie & Coleman, Principles Of Taxation Law 2017 (Thomson Lawbook Co, 2016).

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Myer Emporium Pty Ltd v FCT 87 ATC 4363 Taxpayer, Myer emporium, lent $80 million to one of its subsidiaries at commercial rate. Three days later, it assigned its right to receive interest to another company for a lump sum of $45 million. This was an intended course of action. The issue was whether the $45 million was income or not. The High Court held $45 million as ordinary income (S6-5 of ITAA 1997) stating the two strands of reasoning: 1. Isolated transactions amount to ordinary income when the intention of entering into the transaction was to make profit and the profit was made via that transaction and the transaction was in the course of business regardless whether it is the ordinary course or extraordinary course. 2. Conversion of a stream of income into a lump sum doesn’t change the nature of the income. It is like the compensation replacement principle. The nature of the compensation depends on that nature of what it is compensating. Likewise, by selling the mere right to receive interest doesn’t change the nature of interest from ordinary income to non-taxable. 6 However, the High Court Decision was overturned by Full Federal Court. Therefore, Parliament enacted S102CA of ITAA 1936 which states that if a right to receive income from property is transferred and the consideration has been received in respect of the transfer then this will be part of the transferor’s assessable income. Therefore, based on S102CA of ITAA 1936, $45 million is statutory income under S6-10 of ITAA 1997. S102CA of ITAA 1936 doesn’t have a no contrary intention embedded, thus S6-25 of ITAA 1997 comes into action where it states that statutory income prevails ordinary income. 7

6 Australian Taxation Office, Income tax: Whether profits on isolated transactions are income, TR 1992/3, 30 July 1992. 7 CCH Australia Limited, Australian master tax guide 2015 (56th ed.) (CCH Australia Limited, 2015).

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The two strands of reasoning and creation of S102CA of ITAA 1936 were major milestones in tax law for businesses. Due to the importance of the two strands Federal Commissioner of Taxation issues a Tax Ruling which is TR92/3 to explain about the two strands in detail. These two strands of reasoning were foundation for assessment of profits made from isolated transactions, reconfirming the judgment in Whitfords Beach 8 case. If any one of the two strands are satisfied, it will be an ordinary income under S6-5 of ITAA 1997. If 2nd strand is satisfied it will also be assessed as statutory income under S102CA of ITAA1936 /S6-10 of ITAA 1997 since it transferring of right to receive income from a property. Introduction of CGT doesn’t diminish the importance of this case since assessable income (ordinary or statutory) prevails CGT as stated in the S118-20(1)(a) of ITAA 1997. Therefore, even if the event of selling the right to receive interest is caught under CGT Event A1(disposal of a CGT asset), CGT doesn’t apply since that act will be caught under statutory income S102CA of ITAA 1936/S6-10 of ITAA 1997.

8 Whitfords Beach Pty Ltd v FCT 82 ATC 4031.

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