Tax Law Notes--Income From Business

March 27, 2018 | Author: Winson Li | Category: Lease, Trust Law, Investing, Dividend, Fiduciary



Taxation law notes – Winson Edition 2010Income from business The main issues that arise from income from business: 1. Is a business being carried on? Ferguson v FCT FCT v Walker Ruling TR 97/11 Ruling TR 2007/8 1.1 hobby or business - Evans v FCT—gambling - FCT v Stone—sportman and sponsorship 1.2 Share trading - Shields v Deputy Commissioner of Taxation 2. Is income or capital nature? 2.1 scope of business - Californian Copper Syndicate v Harris - Western Goldmines (NL) v DCL (WA) - Scottish Australian Mining Co Ltd v FCT profit making scheme - FCT v Whitfords Beach Pty Ltd - FCT v Myer Emporium Ltd - Westfield Ltd v FCT - FCT v Cooling - FCT v Montgomer Intellectual information - Evans Medical Supplies Ltd v Moriarty - Rolls-Royce Ltd v Jeffrey Use of business receipt to acquire capital assets - G P International Pipecoaters Pty Ltd v FCT Property development and land dealing - Statham v FCT - Moana Sand Pty Ltd v FCT Trusts and Investment Companies - Charles v FCT (fiduciary duty) - London Australia Investment Co Ltd v FCT (investment, carry on business) Gift - Federal Coke Co Pty Ltd v FCT Debt defeasance is not ordinarily income - FCT v Orica 2.2 2.3 2.4 2.5 2.6 2.7 2.8 1 1. An asset may have been acquired for the purpose of using it as part of the capital structure in a business. The tp’s profitmaking intention must exist at the time of entry into the scheme and the profit must be made in the vey way intended at the time of entry: Westfield Ltd Business: it includes any profession. Is a business being carried on? The relevant factors identified by the courts are as follows:  System and organization: this can change what would have been a hobby into a business. employment. and the date of artificial insemination.  Issue: was the taxpayer carrying on a business of cattle production  The taxpayer carried on activities such as reading periodicals. An overall loss was made on his transactions. trade. type. maintaining a card index system where he recorded particulars as to date of birth. are income on ordinary concepts: Myer Emporium  Income may arise from an isolated profit-making scheme outside the scope of the business or even where no business exists. maintaining a system and a ledger. provided that they are derived from within the scope of the business. and then been sold where the business venture has collapsed  A business can be carried on even though the activities are illegal: FCT v La Rosa Ferguson v FCT  Taxpayer wished to establish a business of primary production. FCT v Walker 2 . he carried on activities such as reading periodicals. a business may be carried on in a small way: Thomas v FCT  Frequency of transaction: whist frequency is one indication of business. for example gambling or a hobby farm. vocation or calling but does not include occupation as an employee. An isolated transaction occurs when there is a one-off transaction without a continuing business operation. even though there may not be objective evidence that it can make a profit: Ferguson v FCT  Size or scale of activity: despite this factor. a business venture can be confined to an isolated transaction: FCT v Whitfords Beach Pty Ltd (that case involved a profit-making scheme rather than a business)  Period of ownership: a quick resale of property tends to indicate a business activity: Turner v FCT  Nature of property: property that gives no inherent pride of ownership is more likely to have been acquired for business purposes: Rutledge v IRC  Supplementary work done on the property: FCT v Whitfords Beach Pty Ltd  Circumstances responsible for the realization: the taxpayer may be able to point to non-business reasons for selling. but a business will be found often to exist where the motive is present. which explains the business-like approach of the venture.  The profit motive: a business may exist without this motive. sire and dam.  The activities were conducted on a commercial basis and were part of a mass marketed scheme.  He also maintained a ledger as a record of his receipts and payments. The tp acquires an asset intending at the time of acquisition to resell it for a profit and carries out that intention.Taxation law notes – Winson Edition 2010  The proceeds of a business. not in accordance with a preformulated plan). Ruling TR 2007/8 There must be a business of afforestation and that business must be the business of the investor Hobby or business Evans v FCT  Was the taxpayer engaged in the business of gambling?  What was lacking to characterize his gambling as a vocation or business was the element of system or organization (no tipping or information service. no use of technology. and the rest of her services were therefore business 3 . no attempt to work out combinations of bets designed to give him a positive result or limit his exposure to risk.  It seems quite inconsistent with the money-making systematic.  Whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity  Whether there is repetition and regularity of the activity  Whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business  Whether the activity is planned. appearance fees and sponsorship. grants from QSA. No one indicator is decisive. and  Whether the activity is better described as a hobby. organized and carried on in a businesslike manner such that it is directed at making a profit  The size. business-like character which is an essential ingredient in the carrying of a business.  What the court regarded as of considerable significance in this case is that the odds given are unknown at the time the bet is placed and the dividend will be unable to be precisely calculated until it is announced 10 minutes or so after the race is concluded. scale and permanency of the activity.  The small scale of his activities did not precluded them from constituting the carrying on of a business Is it a business of primary production? Ruling TR 97/11 The courts have held that the following indicators are relevant:  Whether the activity has a significant commercial purpose or character.  Issue: was the taxpayer carrying on a business?  Held: Stone was carrying on business in relation to her sporting activities and that all cash receipts from this business were ordinary income under s6-5 of ITAA 1997  The taxpayer’s subjective intention of pursuing excellence rather than money did not prevent her from carrying on a business.Taxation law notes – Winson Edition 2010  He had a profit-making purpose. there was repetition and regularity in his activities and his activities were concluded in a businesslike way. FCT v Stone  Stone was a world-class javelin thrower and earned prize money. a form of recreation or a sporting activity.  She had turned her skills to account by sponsoring commercial products. and some profits that are outside the scope of the business are also assessable where they result from entry into a profit-making scheme. But it was forced to do so owing to changing circumstances. but was the essential feature of the business.  The difference btw an isolated transaction that does or does not produce OI  A “mere realization” of a capital good made by enhancing the value – this will result in a capital gain  A gain made carrying on a business – this will generate OI  This was that the turning of investment to account was not to be merely incidental. it then becomes necessary to decide what is the scope of the business. the mine was sold for profit. since not all profits made by a business are assessable income. speculation being among the appointed means of the company’s gain. It carried on a business by selling an asset. formed part of the proceeds of a business. if a grocer were to sell his premises. The profit is a gain made in an operation of business in carrying out a scheme for profit making. Californian Copper Syndicate v Harris  Taxpayer was incorporated for the purpose of mining and it acquired certain mines. For example. The resultant profit was held not to be assessable income 4 . it seems that where a professional sportperson such as a football player enters into a number of contracts with different clubs and endorses products and gets money for appearance fees. any profit realized would not normally be assessable income  Those profits that are within the scope of the business are assessable income. The taxpayer intended at the time of acquisition (at the time of entry into the scheme) to resell the mine at a profit rather than work the mine for trading receipt. Is income or capital nature? Scope of the business  Once it has been decided that there is a business. with other receipts being put into a category marked “sport”.  Was the taxpayer assessable on the profits arising from the sale of the land?  Held: the profit was assessable income.Taxation law notes – Winson Edition 2010  The prizes were clearly part of the business and the AOC grants. The taxpayer had not intended to resell the mine at the time of its acquisition. Instead of working them.  The sponsorship agreements cannot be put into a separate category marked “business”. although gratuitous. professional sportsperson seeking employment Although the definition of carrying on business expressly excludes being an employee. Nor can some receipts be distinguished from others on the basis that the activity producing a receipt was not an activity in the course of carrying on what otherwise was to be identified as a business. such person will be carrying on a business: Spriggs v FCT and Riddell v FCT 2. Western Goldmines (NL) v DCL (WA)  The taxpayer acquired mines for the purpose of working them. then it will generate OI even though it is a one-off transaction. It is simply part of the process of realizing a capital asset. where the transaction:  Forms a business in itself  Falls under the first strand of FCT v Myer Emporium  Falls under the second strand of FCT v Myer Emporium These categories are not mutually exclusive. Scottish Australian Mining Co Ltd v FCT—the land not acquired with a profit-making intention by resale  Taxpayer purchased land for the purpose of mining coal. It is a question of mixed fact and law whether the taxpayer is carrying on a business.  Held: the profit from sale was not income. Profit-making scheme The proceeds of an isolated or extraordinary transaction will be OI if they fall into at least one of three categories.  Leading case: FCT v Whitfords Beach  The difference btw an isolated transaction that does or does not produce OI (Californian Copper Syndicate v Harris)  A “mere realization” of a capital good made by enhancing the value – this will result in a capital gain 5 .  Where the taxpayer acquired the land for a purpose other than resale and then. The land which was acquired and used for different purpose is no longer a business-like carry out (not within scope).  If it is advantageous to the sale of the land as a whole to set aside part of the land for parks and other amenities. many years later. As the company is not formed for dealing in land. so it is possible for a transaction to fall into more one category. this does not convert the transaction from one of mere realization into a business.  Where taxpayer acquires land by purchase. The sale was for the purpose of securing to itself a share. which is a change of a form of investment but not for making a profit in a commercial transaction.  It an isolated transaction exhibits sufficient characteristics of a business. Transaction forms a business in itself under the principle in FCT v Whitfords Beach Principle applied to isolated transactions Case law indicates that if an isolated transaction has sufficient indicators of a business. there will be little problem in characterizing the proceeds as income. Then it sold the land in subdivision and granted to schools and churches. then profit from it will be considered a form of business income and so will constitute OI. There was no intention to sell it when acquired.Taxation law notes – Winson Edition 2010  Held: the profit was not assessable income. decides to subdivide and sell. and subsequently subdivides and sells. This does not convert the transaction into a business. all the company did was to take steps to realize the land to the best advantage. The two transactions were essential and integral elements in an overall scheme. and then sold the land. Issue: was the taxpayer assessable on the profit on the sale of the subdivided land under either s25(1) or 26(a) or was the taxpayer merely realising a capital asset?   Held: the profit was income. so this transaction is outside the scope of the business. Post-myer developments FCT v Cooling  Taxpayer was a partner in a firm that was considering moving premises. and then assigned the right to receive the interest income to Citibank for 45million.  The assignment was not unrelated to and independent of the loan agreement.Taxation law notes – Winson Edition 2010  A gain made carrying on a business – this will generate OI This is highly influenced by the fact that the development was extensive and required considerable effort and capital.  Profit made on a realization or change of investments may constitute income if the investments were initially acquired as part of a business with the intention or purpose that they be realized subsequently in order to capture the arising from they expected increase in value. it had enough characteristics of a business to conclude that the proceeds are OI. 6 . the two transactions were an overall profit-making scheme. The lease was held by a service company B. Later the company was taken over by three shareholders who caused the company to change to enable land development.  The extensive work of development and subdivision is seen to be more than the mere realization of an existing asset and to be work done in the course of what was truly a business venture. The taxpayer was transformed from a company which held land for the domestic purposes of its shareholders to a company whose purpose was to engage in a commercial venture with a view to profit. that being scheme a profit-making scheme. as the taxpayer intended to sell the right to receive interest. The two transactions were interdependent in the sense that Myer would not have entered into the loan agreement unless it knew that Citicorp would shortly thereafter take an assignment of the moneys due or to become due for a sum approximating the amount payable in the consideration of the assignment. The lessor promised to pay money to partner if B would become the tenant of lessor.  The scheme may be a profit-making scheme notwithstanding that neither the sole nor the dominant purpose of entering into it was the making of the profit. the purpose of the company is to acquire land. Although the transaction was a one-off isolated transaction. Issue: was the receipt by taxpayer assessable under s25(1) as an income receipt or under the second limb of s 26(a) as a profit from a profit-making undertaking or scheme?  Held: 45million was assessable income. However. FCT v Myer Emporium Ltd   Myer lend 80million to associate. Myer’s business is retailer and property developer. FCT v Whitfords Beach Pty Ltd  At the beginning. The firmed wanted to move premises and received premises from lessor. and the intention of the taxpayer at the time of acquisition was to employ it in business and receive ordinary trading receipt. in order for the profit to be assessable in accordance with the principle in Myer’s case. The premium is outlaid on capital account. but later sold it for a profit. The firm got the inducement offer to take premises as it was attractive. As the transaction entered into by the firm was a commercial transaction and it formed part of the business activity and obtained a commercial profit by way of incentive payment.  If a lessee pays premium to obtain advantage of the lease and that lease may well form part of the profit-yielding structure of the lessee’s business. Issue: was the incentive payment according to ordinary concepts?   Held: the payment was on revenue account. Cooling and Westfield that certain profits are not income as they neither within the scope of the business. benefit and disposal and it does not necessarily form part of profit. Issue: was the profit on the sale of the land assessable according to the principle in Myer’s case  Held: the profit is not assessable. as it was regarded as a particularly attractive tenancy target. nor the product of a profit-making scheme. The sale of the head office of a trading or financial corporation will give rise to a 7 . FCT v Montgomer –lease incentives  The taxpayer was a partner of company.Taxation law notes – Winson Edition 2010  Issue: was the lease incentive payment assessable under s 25(1)  Held: the payment is assessable income. the inducement paid by the lessor could be seen as an income for the lessee because the lessee used of exploited its capital ( in this case carrying on business) to derive/ receive for separate use. It acquired land for developing it to shopping center. Westfield Ltd v FCT   Taxpayer carried on business of designing. which means it used its capital in course of carrying on its business. leasing and manage shopping centre. The receipts were an ordinary incident of part of the firm’s business activity even though they were an extraordinary and unusual part of that business activity. Is the receipt capital or income?  It is clear from Myer.  Eg.yielding structure. So the amount received by a lessee on agreeing to take a lease is not capital account. the transaction was entered into there must be a purpose of profit making by the very means which give rise to the profit actually made. But the firm did commit itself to the move and it was an integral part of this commitment that it receives the incentive payment which is properly a profit of the partnership. it formed part of the business activity of the firm and a not insignificant purpose of it was the obtaining of a commercial profit by way of the incentive payment.  The firm was reluctant to move. So there was no profit-making scheme.  The transaction entered into by the firm was a commercial transaction.  However. constructing. The transaction is outside the scope of ordinary business activities.  Where a transaction occurs outside the taxpayer’s ordinary business activities.  If there is no business and the tp supplies confidential information for a fee. They has no business. Its agency closed and sold certain confidential information for fee. Evans Medical Supplies Ltd v Moriarty   Taxpayer carried on business as a manufacturer and wholesaler of drugs. The payment is regarded capital in nature because of effective disposal of business asset. there was no disposal of asset. there is no disposal of an asset. but simply provision of services for a fee: Brent v FCT  Where there is a business. The exceptional nature of Evans Medical Supplies Ltd v Moriarty was explained by the House of Lords in Rolls-Royce Ltd v Jeffrey Facts: taxpayer carries out a business and sells out its confidential information. but only provision for services for a fee.  Sale of the profit-making structure for a lump sum will give rise to a capital receipt. Issue: was the lump sums received under the license agreements of an income or capital nature  Held: the lump sums were income. The profit-making structure is not confined to property.Taxation law notes – Winson Edition 2010 capital receipt.  Held: this payment is capital as the effective disposal of business asset. Issue: was the 100000 sum received from the Burmese government as consideration fort the supply of secret processes and ancillary know-how a receipt of the taxpayer’s trade liable to income tax or was it a non-taxable receipt. the supply of confidential information and knowhow can be on capital account in exceptional circumstances.  The company had sold to the Burmese government a secret process on which the success of its business in Burma had to depend and it had disposed altogether of its Burmese trade. ( Brent’s case !)  The company has parted with an asset which was once the source of its profit.  The taxpayer was not disposing of a capital asset under the licence agreements but was exploiting its know-how in the best way possible in countries where it could not directly manufacture or sell engines. It chose to do it because it was unable to sell its engines in this country. The supply of know-how under the licence agreements was undertaken by the taxpayer on a regular and systematic basis over a period of years and was properly regarded as either being a trading activity in 8 . it may extend to assets such as know-how and confidential information which belong to a business.  The lump sum was received in an isolated transaction as consideration for communication of secret processes with a resulting total loss of the company’s Burmese trade. and turn the “know-how” to account by reward it to others in order to bring about alternative form of manufacture. Rolls-Royce Ltd v Jeffrey   Taxpayer entered agreement to supply technical information necessary to manufacture such engines. So it cannot be account to capital. which is a capital asset and received for it a capital sum. The agency is closed so that the company had in substance parted with a part of its income-producing property for a purchase price. the entire k. the character of the receipt is necessarily determined by the character of its proposed expenditure by the recipient. Part of the contract price was agreed to be used to build the plant. as part of the monetary consideration payable for the tp’s agreement to perform.  The relevant question is whether the receipt of the establishment costs was income in the tp’s hands.  The establishment costs were not received under a severable part of the k relating to the construction of the plant. or its performance of. Generally speaking. without in any sense destroying its value to him. When money is received for the purpose of its being expended by the recipient. Use of business receipt to acquire capital assets  Whether a receipt is income or capital depends on its objective character in the hands of the recipient.Taxation law notes – Winson Edition 2010 itself or else as a mere extension of its principal trade of designing and manufacturing engines. 2.  The establishment costs were received by the tp under the k. The relevant question is whether the receipt of the establishment cost was income in the taxpayer’s hand. whether a receipt is income or capital depends on the character in the hands of the recipient. so that it was received as income rather than received in exchange for an item of capital. By constructing the plant and coating the pipe the tp performed the obligations in consideration for which it was entitled to be paid the establishment costs and other moneys payable under the k. Facts: portion of investment spent on building a plant for construction only ( no use after performance of the contract) was income. Issue: were the amounts received by the taxpayer in respect of the construction of the pipe coating plant of an income or capital nature?  Held: the contract price was income being a trading receipt. it was not affected by the fact as it was been used to construct the plant.  Know-how has the peculiar quality that it can be communicated to or shared with others outside the manufacturer’s own business.  Capital : sth is built to generate assessable income and can be depreciated under s 54 of ITAA 1936 Sale of depreciable plant Property development and land dealing Statham v FCT  It was held that the receipts were on capital account because the trustees were not 9 .  That character is not affected by the recipient’s decision to acquire capital assets with the money G P International Pipecoaters Pty Ltd v FCT   Taxpayer entered into contract to supply coatings for pipes for SECWA. The activity of the taxpayer corresponds to the contract and receives under the contract for its performance. But in this case the character does not affect the substance of the payment. finance companies and the doctrine of switching Australian Catholic Assurance Co Ltd v FCT  Taxpayer is an insurance company. no office . Also. A scheme can be a profit. Share trading: carrying on business vs hobby Shields v Deputy Commissioner of Taxation   Taxpayer is a finance staff. his trading was regular and purpose for profit-making is undoubted. so the flat was been sold for profit. However. no manager. So his operation was businesslike. His strategy leaded to loss. However. o Degree of repetition o Turnover is substantial in relation to the applicant o Sufficient accounting records o The applicant used the office of his employer and needed no other o The applicant has counted in a manner considered adequate (yrs of experience and skills and care) Insurance companies. kerbing. no secretary and no letterhead Owner has retained his own career No advertisement of the land for sale No engagement of other contractors Bookkeeping of sale of land was done by the owner personally Land was sold by listing it with real estate agents Moana Sand Pty Ltd v FCT  The intention was that the land should be used for estracting sand and subdivided for sale. Was the receipt assessable as income 10  . which purchased blocks of flat as long-term investment and hoped to hold 30 years.Taxation law notes – Winson Edition 2010 carrying on a biz of subdivision. he buy shares after declaration of franked dividend and sold before the market price changed. electricity and severage works. Issue: was the taxpayer carrying on a business  Held: taxpayer carried on a business because of his extensive commercial knowledge and his strategy. A reverse list to Ferguson’s case Owner were at first content to sell the land as one parcel but was unable to do so No money borrowed Limited clearing work was involved Owners rely upon others to carry out roadworks. the land were compulsorily resumed by a government department for 370000  It was held assessable income either as proceeds of business or as a profit-making scheme. banks.making scheme even though the dominant purpose is not profit-making. which are required to be done No erect buildings No business organization. during the war taxpayer cannot afford maintenance and expenditure. Trusts and investment companies: scale. Capital gains made on purchase and sale of securities by insurance companies. the conduct of the investment business required the share portfolio should be given regular consideration and that shares should frequently be sold when the dividend yield dropped. which was what they intended from the very first. so the manager can request trustee to sell investment and re-investment. the large-scale of activity in the buying and selling shares could be another determined reason. so the income is within the ordinary concept. The shares were not bought for the purpose of selling them at profit. finance companies and the doctrine of switching are assessable income. which is not part of profit-making activities so that the s15-2 cannot be applied. banks.  Held: the profit was not assessable income but a capital receipt. Also. Direct meetings were held to decide sell or buy securities and later it made gain from disposal shares. As part of their investment business. frequency and intention of fund managers determines whether trusts and investment companies are carrying on business to pursue capital increments or maintaining fiduciary duties? Charles v FCT (fiduciary duty)  Taxpayer was a trustee whose managers were closely informed of market trends and who sold shares that were likely to fall in the value. London Australia Investment Co Ltd v FCT (investment.Taxation law notes – Winson Edition 2010  Held: the profit was assessable income. bought real estate at high return and sold it profitably before it became bad investment. although business was to invest shares and get dividend. but from transactions effected in the course of performing a fiduciary duty to preserve for beneficiaries as far as practicable the assets comprising the trust fund and any increments in the value of those assets which might appear from time to time to be in jeopardy. The money arose here was not from transactions in the conduct of business or a profit-making scheme. So the income is according to the ordinary concept. The reason is that investment for capital gain is within the scope of the business of taxpayers and it is necessary for these taxpayers to generate a certain yield to meet clients’ claim and that the realization of capital gains is an inevitable consequence of the pursuit of high yields through switching. The deed gave a wide power to vary investment. Issue: was the taxpayer assessable under s 25(1) on the surplus arising from the sale of its shares   Held: the profit was assessable income under s25-1936. Gifts Federal Coke Co Pty Ltd v FCT 11 . carry on business)  Taxpayer’s principal object was to invest in Australian securities to produce dividend income. However. Its policy is to produce 4 percent return. 12 . Issue: was the compensation payment of an income or capital nature  Held: the money to F is not assessable income. Debt defeasance is not ordinarily income FCT v Orica  Taxpayer wanted to raise new funds for expansion and entered into assumption agreement with MMBW. For F. while in 1987 the money MMBW paid to taxpayer is over the present value under the assumption agreement. B has a contract to supply coke to LN. the taxpayer only received MMBW’s promise which is not income. It is income in B’s hand but did not necessary to be income in F’s hand. which would receive a payment in consideration of its agreement to pay the principal sums.Taxation law notes – Winson Edition 2010   B was the holding company while F is its subsidiary.  Held: the difference between present value and the amount payable on maturity was not assessable income. But B gave the money to F related to closure of F. the payment was unexpected and its business is produce coke. As at the time of agreement. the money is compensation to B but not to F. LN wants to cancel the contract and agree to pay compensation to B. which has been ceased when payment received and it did not perform any financial work for B. Then. There was no income according to ordinary concept or profitmaking scheme. It was a benefit constituted by the discharging of that capital obligation. MMBW need to made series payment to taxpayer. And also.
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