S6-5 Gross or net receipts PDF

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[¶18-215] Gross or net receipts? Click to open document in a browser Several court decisions have addressed the preliminary question whether ‘‘income’’ refers to a net amount (eg the profit from a transaction) or a gross amount. This consideration was no doubt motivated by the use of the phrase ‘‘gross income’’ in ITAA 1936 s 25(1). Although neither ‘‘net’’ nor ‘‘gross’’ feature in s 6-5(1), the issue remains relevant. The general scheme of ITAA 1997 is that losses and outgoings under s 8-1 are deducted from a taxpayer’s assessable income to produce the taxable income (s 4-15). That is, there are three distinct steps: the calculation of the assessable income; the calculation of allowable deductions; and the subtraction of allowable deductions from assessable income. This presumes that the amount of assessable income is a gross amount. Net amount may be ordinary income Several cases have concluded that a net amount can be ordinary income. In Australian Catholic Assurance Co Ltd v FC of T (1959) 11 ATD 577, Menzies J held that a profit made by the taxpayer from the sale of land and buildings was assessable as ordinary income. In FC of T v McClelland 69 ATC 4001, Kitto J (with whom Menzies and Owen JJ agreed) said that the excess arising from the carrying out of a scheme would plainly be profit which would answer the description in the second limb of ITAA 1936 (former) s 26(a) (now s 15-15) and would also be ordinary income since it would be the net proceeds of an adventure in the nature of trade. Similarly, in Commercial & General Acceptance Ltd v FC of T 77 ATC 4375, Mason J (with whom Barwick CJ, Gibbs and Jacobs JJ agreed) stated that the view that a net amount may be included in ordinary income appeared, at first, to fail to take account of the general deduction provision. However, his Honour reconciled this view by pointing out that the antecedent deduction of outgoings from the gross amount to produce the net amount would not involve the application of the general deduction provision because the gross amount received was neither gross income nor assessable income. Further, if it was the net profit only which was taken into assessable income, then there was no outgoing which had been incurred in relation to that figure. His Honour concluded (at p 4380) that, where a net amount alone has the character of income according to ordinary concepts (rather than being derived from gross revenue receipts), then that net amount enters the calculation of the taxpayer’s assessable income. (On the particular facts, a foreign exchange gain was held to be on capital account.) A similar view was also expressed by Dixon J in New Zealand Flax Investments Ltd v FC of T (1938) 5 ATD 31. In FC of T v Whitfords Beach Pty Ltd 82 ATC 4031, the proceeds from the development and sale of land were held to be ordinary income, but it is clear from the judgment of Gibbs CJ that the court was, in fact, referring to the profit from the sale of the land. The Full High Court seemed to have little difficulty in holding that exchange profits were ordinary income in International Nickel Australia Ltd v FC of T 77 ATC 4383 and AVCO Financial Services Ltd v FC of T 82 ATC 4246. London Australia Investment Co Ltd v FC of T 77 ATC 4398 concerned the assessability of profits from the sale of shares by a taxpayer who was not engaged in the business of trading in shares and did not acquire the shares for a profit-making purpose. Gibbs J held that the net profit was properly assessable as ordinary income. This was because the taxpayer was carrying on the business of investing, for the purpose of producing income, and the buying and selling of the shares was done as part of that business. The resulting profits were therefore profits of the business and income within ordinary concepts. In that same case, however, a contrary view as to the inclusion of a net amount as ordinary income was expressed by Jacobs J. His Honour said that an alternative view was to ask whether the incomings and outgoings on the sale and purchase of the shares were incomings assessable under the general provision

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or outgoings deductible under the general provision. In any event, Jacobs J confirmed the Commissioner’s assessment of the profit. Examples of net amounts included as ordinary income In FC of T v Citibank Ltd & Ors 93 ATC 4691, Hill J, delivering the principal judgment of the Federal Court, said that there were many cases where gross income equates with net profit and gave as examples:     

• net profits of finance and banking companies (FC of T v Employers’ Mutual Indemnity Association Ltd 90 ATC 4787) • profits of an investment company where the shares in question were not trading stock (London Australia) • exchange gains and losses where the moneys advanced themselves are capital (AVCO Financial Services) • the sale, as a business activity, of property originally not purchased for the purpose of resale at a profit or trading stock (Whitfords Beach), and • profits made as a regular incident of a taxpayer’s business where plant is disposed of (Memorex Pty Ltd v FC of T 87 ATC 5034; FC of T v Kwikform Services Pty Ltd 91 ATC 4336). Note that balancing adjustments are now covered by Subdiv 40-D (¶87-500) and that, generally, if an amount is included in assessable income as a balancing adjustment amount or a capital gain, the amount cannot also be included in assessable income as ordinary income (s 6-25).

The Commissioner takes the view that, in relation to general insurance companies (Taxation Ruling IT 2663) and general reinsurance companies (Taxation Ruling TR 95/5), the net premium income (ie gross premiums less acquisition costs and reinsurance) is taken into account in determining the assessable premium income for the relevant income year. Last reviewed: 1 August 2013

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