Tax Law Tutorial 6 - short answer PDF

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Tutorial Week 6 Income II – CGT Short Answers 1. ATO TR 97/11 Normal proceeds of business = income from business = ORD income -

ITAA97 s6-5

Isolated business transaction (FCT v Whitfords Beach) Extraordinary transaction (FCT v The Myer Emporium Ltd 87 ATC 4363)

Badges of Business → indicators that someone is carrying on a business -

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Profit-making purpose o Californian Copper Syndicate Ltd v Harris (Surveyor of Taxes) (1904) 5 TC 159 Systematic/organised (eg. Hiring staff, hiring premises, keeping accounts and records) o Thomas v FCT 72 ATC 4094  This case was about a barrister who had planted 30 avocado trees and macadamia trees. He was found to be carrying on a business of primary productions because his activities were systematic and organised Must be of sufficient size/scale o FCT v Walker 85 ATC 4179  Walker was carrying on a goat-breeding business  The goat kids died, so it was not a very successful operation but it was determined that he was carrying on a business o Rutledge v IRC (1929) 14 TC 490  Rutledge opportunistically bought toilet paper and brought back with him to UK, sold rolls made profit > $10,000 pounds. Therefore is income from business because derived from nature of trade → profit-making purpose. amount of toilet paper bought was more than personal consumption Frequency (of transactions) o FCT v Whitfords Beach (1982) 150 CLR 335

2. The two strands of reasoning in the Myer Emporium case. - 1st strand → three requirements o Commercial transaction o And this was outside the normal course of business (ie. extraordinary transaction) o Profit-making purpose at the time of entering the transaction o Profit was therefore deemed assessable - 2nd strand → alternative reasoning o Similar to the compensation principle TR 92/3 – Income tax: whether profits on isolated transactions are income The Myer Case The taxpayer = parent company in a group which carried on business primarily in retail trading and property development. As part of a group reorganisation in March 1981, the taxpayer lent $80m to a subsidiary for 7 years @ 12.5% pa. Three days later, the taxpayer assigned to a finance company its right to receive the interest payable over the remainder of the loan period. As consideration for the assignment, the finance company paid the taxpayer company $43.37m in a single sum. This amount was calculated on the basis on the outstanding interest payable discounted at the rate of 16% pa.

 The Commissioner treated this lump sum = assessable income for year ended 30 June 1981 On appeal, both the Supreme Court of Victoria & the Full Court of the Federal Court of Australia held that the amount was a non-assessable capital receipt.  The Commissioner then successfully appealed to the Full High Court. o In a joint judgement… the judges held that the amount = income under subsection 25(1) as ORD income + subsection 25A(1) as profit arising from the carrying on or carrying out a profit-making undertaking or scheme The Full Court relied on two alternative reasons for its decision: (1) The amount in issue was a PROFIT from a transaction which, although NOT within the ORD course of the taxpayer’s business, was entered into with the purpose of making a profit and in the course of the taxpayer’s business. (2) The taxpayer SOLD its mere right to interest for a lump sum, that lump sum being received in exchange for, and as the PV of, the future interest it would have received. The taxpayer simple converted future income into present income.

3. Comparing two cases: - Scottish Australian Mining Co Ltd v FCT (1950) 81 CLR 188 o Company carried on a coal-mining business from large parcel of land for many decades…. The court found that this was merely the realisation of a capital asset. In other words, taxpayer took necessary steps to realise the land to its best advantage. Therefore profit = capital gain.  Not ORD income, it’s capital receipt  Property development in the 1950s = capital receipt - FCT v Whitfords Beach (1982) 150 CLR 335 o Similar facts to the above case but the courts reached a different conclusion. The taxpayer was a company formed by 3 fisherman who had acq'd land. o Change of control of the company; the company ventured into a land development business. As such, profit from selling the land was income from business (ie. land development business)  Property development and sale = ORD income -

Differing facts – key distinctions : o Change of control o For many decades → Scottish Australian Mining conducted operations  TIME  Whereas Whitfords Beach had an isolated business transaction

Whitfords Beach: there was a change of ownership

4. Three examples of income from property. This is income that is NOT from personal exertion. (1) (2) (3) (4)

Rent received Dividends received from, and gains from the profit of, shares Royalties Annuities

5. RE: different outcomes in the decisions in McCauley v FCT and Stanton v FCT. Cases about royalties. -

McCauley v FCT (1944) 3 AITR 67

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The court said that this is royalty (s6-5) and is ORD income

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Stanton v FCT (1955) 92 CLR 630 o The court reached an opposite conclusion o Found that this is not a royalty. It was a simple a sale of standing timber.

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S15-20 → royalties that are not ORD income ITAA36 s6(1) → statutory royalties

6. Compare the decisions in Egerton-Warburton and Foley v Fletcher. How may the facts in Egerton-Warburton be distinguished from Foley v Fletcher? Annuity payments -

Egerton-Warburton (1934) 51 CLR 568 o Egerton was a farmer who sold some land to his 2 sons o In exchange, the sons were to pay him $1,200 pounds every year for life o Court applies fixed gross sum test o Court used this test to conclude amounts received by farmer = annuities income

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Foley v Fletcher (1858) 157 ER o Foley and Fletcher were the vendors who sold a block of land for a series of instalments of purchase price

7. Consider s15-2 ITAA97, s21, and s21A ITAA36. How (if at all) might these provisions affect the tax treatment of the free non-transferable accommodation in the Alan problem question in the Week 5 tutorial questions?

ITAA36 s21A: LINK...