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ACC3TAX – 2018/1 Week 3 Statutory Income Compensation Payments Income from Isolated Transactions

Livia Gonzaga

Week 3 - Summary of Topics

Statutory Income

Compensation Payments

Income from Isolated Transactions

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Statutory income

Part 1

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Statutory Income

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Div 10 – Checklist of Statutory Income Categories. Examples:

ITAA97 s 15-2: allowances gratuities, bonuses given for employment or services rendered whether in money or other form.

ITAA97 s 15-20: royalties

ITAA97 s 15-60: certain scholarship money

ITAA97 s 15-15: profit making plans

ITAA36 s 44(1): dividends

Assessable Income

Ordinary Income (s 6-5)

Statutory Income (several sections)

Compensation payments

Income from Isolated Transactions

Compensation Payments

Part 2

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Compensation Payments

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Golden Rule (a.k.a. Principle of Replacement) Compensation payments generally take the character of the item they replace

If a compensation payment replaces an amount that would have been ordinary income if received, it will be assessable as ordinary income under ITAA97 s 6-5. If a compensation payment would have been assessed as statutory income if received, and falls outside ITAA97 s 6-5, the amount will be assessed as statutory income under ITAA97 s 6-10 and s 15-30.

Examples: Compensation for loss of income or profits (s 6-5) Compensation for loss or destruction of a capital asset (e.g. loss of a building due to fire – CGT event C1) Restrictive covenants (e.g. restriction on a right to work – CGT event D1) Compensation for cancellation of contracts (s 6-5 or CGT regime, depending on type of contract).

Audio

When someone receives compensation it is because that person lost something or suffered some kind of damage. Compensation exists to make amends for that loss.

There are several types of compensation. For example, Workers' compensation is a form of insurance which provides wage replacement and medical benefits to employees injured at work. Another example is insurance compensation which can be paid for a variety of reasons.

In order to determine the tax treatment of a compensation payment we need to apply the Golden Rule, aka Principle of Replacement. According to the golden rule, compensation payments take the character of the asset they replace. Therefore, if a compensation payment is replacing an item of income that had been lost, then the compensation payment will be assessed as income. If it replaces a capital asset, then the compensatory amount will be subject to the CGT rules.

When compensation is paid in lieu of salaries, or in lieu of a tangible capital asset which had been lost or damaged, the tax treatment can be pretty straightforward and mainly relies on the application of the golden rule that we just explained. The tricky areas, which are also very frequent, relate to compensation payments made for the loss or variation of contracts. In these cases, first you will need to determine what type of contract is being replaced, and only then you will analyse the compensation payment.

Compensation Payments – other types

Type of Compensation	Assessable (income tax)?
Weekly or other periodical workers compensation payments received as compensation for loss of wages (as to replace lost earnings during a period of disability).	Yes (ITAA97 s 6-5 if replacing ordinary income, or s 15-30 if replacing statutory income)
Compensation payments received for loss of a limb, eyes, etc.	Exempt. Not assessable for income tax, also not subject to CGT [ITAA97 s118-37(1)]
Lump sums received as compensation for personal injury or wrong doing	Exempt. Not assessable for income tax, also not subject to CGT [ITAA97 s118-37(1)]
Amounts received as a result of a restriction on the right to work (regarded as compensation for the loss of a capital asset SCOTT – 1935)	Capital in nature, subject to CGT (e.g. entering into a restrictive covenant – CGT event D1).

Livia Gonzaga

Audio

So following the golden rule from the previous slide, if you receive a compensation payment replacing an item of ordinary income, that compensation payment will be assessable to you under s 6-5 ITAA97. Basically compensation payments which are periodical and recurrent, such as workers compensation, are typically assessed under s 6-5.

If the compensation is replacing an item of statutory income, then it will be generally assessable under s 15-30 ITAA97.

However, as a matter of tax policy, certain types of compensation are exempt from income tax. This is the case of compensation for the loss of a limb, as in a work injury, for example.

Looking at how the payment is made, generally compensation payments received in a lump sum tend to be capital in nature. However this is not a decisive factor, and you must always check what item or what asset is being replaced.

Finally, compensation payments made to someone because that person was subjected to a restriction on their right to work are also capital in nature, because a person’s right or capacity to work is a fundamental part of their income producing structure.

Compensation for loss/variation of contracts

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Audio

Now what are the tax consequences when someone receives compensation for the variation/cancellation of a contract? In order to understand this I’ll give you two examples, as in Scenario A and B.

Scenario A

In Scenario A we’ll be looking at the contract between you, an individual, and your mobile services provider “MobileCo”. MobileCo has millions of mobile services customers under that 24-month contract. If one of those customers decides to cancel their contract to change to another provider, do you think this will represent a substantial damage to its income? Not at all, in fact, when you cancel the contract you pay in advance the amounts which would be due according to that cancellation clause, and there is no damage at all. Even if you don't pay, it isn’t a substantial damage to MobileCo’s income producing structure. This example illustrates a situation where that amount which you paid to MobileCo as to compensate them for cancelling your contract is income in nature and is assessable to MobileCo under s 6-5, as it is replacing the income that they would be receiving from you on a regular basis.

Scenario B

In Scenario B, let’s imagine MobileCo and an infrastructure services provider “Landline”. Suppose that Landline and MobileCo have a contract according to which Landline is responsible for maintaining the transmission towers in the whole of the state of Victoria, New South Wales and Queensland. If Landline cancels that contract and the towers stop working, all MobileCo customers those states would be affected, and that would cause a significant impact on MobileCo’s income producing structure, as without the towers they cannot provide telecommunications services, therefore they cannot derive income. A compensation paid by Landline to MobileCo in a situation of this kind would be capital in nature, as the contract which was cancelled was a business contract which had a significant impact in MobileCo’s income producing structure.

Compensation for loss/variation of commercial contract(s)

Received in the course of running a business

The loss/variation of such commercial contract(s) does not affect/has little impact on profit yielding structure of the business

Compensation for loss/variation of business contract(s)

Received in the course of running a business

The loss/variation of business contract(s) significantly affects the profit yielding structure of the business

Compensation is assessable as ordinary income s 6-5 ITAA97

Compensation is capital in nature, will be subject to CGT regime (especially CGT event D1)

Compensation Cases

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Compensation Cases (all involving commercial/business contracts)
Compensation assessed as income	Compensation regarded as capital*
Phillips (1936) Allied Mills (1989) Heavy Minerals (1966)	Higgs vs Olivier (1951) Dickenson (1958) Van den Berghs (1935) Californian Oil (1934) McLaurin (1961)** Currently assessable under CGT rules *Undissected lump sum treated as capital

Phillips (1936) – Income in nature - Assessable

Facts: The taxpayer received a series of compensation payments to surrender of his rights under a service agreement. The payments were to be made at the same regular time periods as the salary would have been paid had the original service agreement continued.

Court held: The payments were income in nature as there was an element of recurrence and regularity

Compensation Payments – Cases

Allied Mills (1989) - cancellation of agency contract not affecting profit-yielding structure - income in nature

Facts: The taxpayer was a large food manufacturer who had been appointed as the sole distributor of one of its products to Australia, Papua New Guinea and Fiji. In 1975 another company took over control of the taxpayer’s business and the taxpayer agreed to terminate its sole distribution agreement and waive its residual manufacturing rights in exchange of the payment of a lump sum of $372,700. The agreement did not constitute a structural asset for the taxpayer, it was one among a number of other existing contracts.

Court held: Compensation payment was income in nature as the agency constituted one part of the company's many business activities. The payment was essentially the loss of anticipated profits from the agency agreement which was entered into in the course of carrying on business.

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Compensation Payments – Cases

Heavy Minerals (1966) - cancellation of business contracts not affecting profit-yielding structure - income in nature

Facts: A company which mined rutile entered into a long-term contract to supply rutile to overseas clients, mainly American and German companies. Due to the collapse of the rutile market, the clients negotiated the cancellation of those contracts and paid to the company compensations amounting to around 221,000 pounds. The company then shut down the rutile mines but continued to sell in other markets in Asia.

Court held: The compensation payments were considered to be income in nature, as the company was not put out of business by the cancellation of its overseas contracts, but from the collapse of world rutile prices. The company was free to continue to sell its mining output to new customers, as they did, searching for new markets in Asia. Compensation was assessable.

Note: the decision in HEAVY MINERALS followed the principle established in MEEKS (1915) according to which “damages received as compensation for non-performance of a business contract stand on the same footing as the profits for the loss of which the damages are paid”.

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Higgs v Olivier (1951) - restrictive covenants (restriction on the right to work) – capital in nature

Facts: A film company paid a lump sum payment to Olivier under an agreement by which he agreed not to act in, or produce or direct, any film anywhere for a period of 18 months, except for the company.

Court held: Payment not assessable income. It was not recurring and restrictions were placed on the taxpayer’s future income earning capacity (because he was prevented from exercising his job which relied on his personal skills). Note: Where a taxpayer receives compensation in respect of giving up a right (such as a restrictive covenant or for rights under a contract) the CGT implications should be considered especially: CGT event D1 (the right didn’t exist until the contract was entered into). This may bring such a payment to account as a Capital Gain.

Compensation Payments – Cases

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Note: The following cases were all decided before the introduction of the CGT Regime in 1985. As a consequence, where the decision ruled the compensation as capital in nature, the outcome was generally “capital in nature, therefore non-assessable”. However, if these cases had been decided after 1985, the outcome would have generally been “capital, subject to CGT regime”.

Dickenson (1958) - capital in nature

Facts: Taxpayer owned a petrol station and sold different petrol brands, supplied by different companies. In 1952 he entered into an exclusive trade-tie agreement with Shell, according to which (i) he could only sell Shell’s products for a period of 10 years and (ii) for a period of 5 years he would not establish another service station within five miles of the existing one. For the agreement the taxpayer received two payments of $2,000, as compensation for surrendering part of his income-producing structure.

Court held: The compensation (by way of two fixed payments) made by Shell to the taxpayer were held to be capital in nature and therefore non assessable for income tax purposes. However, a capital gain made on entering into an exclusive trade-tie agreement wasn’t subject to a CGT event D1 (see week 5). The payments were not recurring, and a restriction was placed on the taxpayer’s future income earning capacity.

Van den Berghs (1935) - surrendering rights - capital in nature

Facts: Company entered into “friendly alliance agreement” with a Dutch company which determined the way in which profits would be shared and market territory determined. After a disagreement, the “friendly alliance agreement” was cancelled and Van den Berghs received 450,000 pounds for its consent to terminate the contract, not in lieu of profits outstanding.

Court held: Compensation payment was capital in nature as Van den Berghs surrendered its rights under the contract. The cancelled contracts were not commercial contracts but contracts which affected the profit yielding structure of its activities.

Compensation Payments – Cases

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Californian Oil (1934) - cancellation of business contracts affecting profit-yielding structure - capital in nature

Facts: Californian Oil entered into a 5 year agency contract with an overseas supplier which gave it sole rights to distribute its oil products in Australia. Agency was Californian Oil’s sole business. The overseas supplier terminated the agreement and paid the company an amount as compensation for the termination of the contract. Its whole business ceased and company went into liquidation.

Court held: The compensation payment received for the termination of the contract was capital in nature. It was compensation for abandoning the only business which the company conducted. It was not income earned in the course of carrying on business.

McLaurin (1961) - Undissected lump sum for claim covering both income and capital elements – capital in nature

Facts: The taxpayer was a sheep grazier who lost both his farm and his livestock in a bushfire originated in a neighboring property. The damages to the farm and livestock considerably reduced the income producing capacity of the property for 12 months. McLaurin was later compensated by the neighbor with an undissected lump sum of 12,350 pounds.

Court held: Compensation was of a capital nature. Court highlighted that if a taxpayer receives an undissected lump sum compensation payment in settlement of an unliquidated claim covering both income and capital elements, and it is not possible to make an apportionment, the whole amount will be treated as capital in nature and not assessable.

Compensation Payments – Cases

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Isolated transactions

Part 3

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Analysing Income from Business

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Ordinary Income vs Income from Isolated Transactions Income that is received in the normal (ordinary) course of business is ordinary income, assessed under s 6-5 ITAA97. Income received outside the normal scope of business activities may be income from an isolated transaction, and may be assessable in different forms, depending from the circumstances of each case.

How to analyse income from isolated transactions?

Ordinary Income (ITAA97 s 6-5): transactions that are regular and frequent would suggest that a taxpayer’s activities constitute the proceeds from carrying on a business.

S 6-5 + Myer Principle: isolated transaction + profit-making plan. TR 92/3 - A gain from an isolated transaction is generally assessable if: The intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain; and The transaction was entered into and the profit made in the course of carrying on a business or in carrying out a business operation or commercial transaction Note: In limited circumstances, if the transaction involves a pre-CGT asset, then income may be assessable under s 15-15.

Mere realisation of capital asset: CGT provisions may apply.

Audio

Before analysing the specific issues about income from isolated transactions we need to understand how they can occur and what consequences there can be.

We already know that income derived from regular core business activities, day to day business activities, which is expected, regular, recurrent and periodic is ordinary business income, therefore it is assessable under s 6-5. For example, a restaurant’s core business consists of selling meals, therefore their ordinary income comes from the sale of meals.

On the other hand, a business may derive income from an extraordinary transaction. For example, the owner of this restaurant bought the property where the restaurant is located in 1982 (before CGT rules). Overtime, the property became oversized for the restaurant’s demand, and the owner decides to subdivide the place and sell that unused portion. When they sell it they will have capital gains, which is outside the restaurant’s main scope of business, and depending on the circumstances and characteristics of the transaction, and most importantly, if a profit making plan is configured, then the income from that sale can be directly included in the assessable income under s 15-15 ITAA97 (rather than be subject to CGT).

In this same scenario, if the property in case had been originally acquired after 1985 and the restaurant owners had a profit-making plan, the gain would be assessable under s 6-5 as per Myer’s principle.

Finally, if the owners had acquired the property after 1985 with the sole purpose of running the restaurant and there was no profit-making intention that could be objectively verified at the time they originally purchased the property, then the transaction would be subject to CGT rules.

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Income from Isolated Transactions – TR 92/3

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TR 92/3: Whether profits on isolated transactions are income

The relevant intention or purpose of the taxpayer (of making a profit or gain) must be attained from an objective consideration of the facts and circumstances of the case.

The intention of profit-making does not have to be the only or the dominant purpose for entering into the transaction. It is sufficient that profit-making is a significant purpose to make the income assessable.

The taxpayer must have the profit-making purpose at the time of entering into the relevant transaction or operation. If a transaction or operation involves the sale of property, it is usually, but not always, necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property.

When analysing whether the proceeds received by a taxpayer constitute income or capital, the following aspects must be considered (especially when in an isolated transaction or within a possible profit-making plan): The property generating the profit or gain was acquired in a business operation or commercial transaction, and The purpose of profit-making must exist in relation to the particular operation since the beginning.

A receipt may constitute income if it arises from an isolated transaction and the elements above are present.

Isolated Transactions – Cases

Myer Emporium (1987) – Isolated Transaction – assessable ITAA97 s 6-5

Facts: The taxpayer carried on a retail business, and acted as a finance company for its subsidiary companies. In order to obtain funding to diversify its operations, they entered into a series of prearranged transactions. Myer Finance lent $80M to a subsidiary at commercial interest rates. This loan was to be repaid in 7 years. However, only 3 days later, they assigned to Citicorp (a finance company) the right to receive the money back (which was originally to be paid back to Myer in instalments over 7 years), in return for a lump sum of over $45M.

Court held: The lump sum was assessable income as part of a profit making plan, and thus assessable income.

Myer Principle: When a gain is made outside the ordinary course of a business from an isolated commercial transaction, the gain may still be income in nature provided the taxpayer had a profit making purpose at the time the transaction was entered into and there must have been a purpose of profit-making by the very means which gave rise to the profit actually made. Note: The outcome of Myer does not mean that every profit made by a taxpayer in an isolated transaction is necessarily assessable income. It can be an isolated transaction and still be mere realisation of a capital asset (WESTFIELD and HYTECO). The income from an isolated transaction will be assessable by income tax if there is a profit making plan (see notes from TR 92/3)

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Isolated Transactions – Myer Principle

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Myer’s Principle

First Strand

“A profit or gain will constitute income if the property generating the profit was acquired in a business operation or commercial transaction for the purpose of profit-making by the means giving rise to the profit.”

For the 1st strand to apply, the taxpayer must have a “not insignificant” purpose (although not necessarily the sole or dominant purpose) of making a profit from the transaction ant the time of entering into it. (see Cooling’s case)

Second Strand

“Where a future right to interest is converted into a present lump sum amount, the present lump sum amount will be of an income nature since it replaces the future interest which, when derived, would have been treated as income. (see Henry Jones’ case)”

Isolated Transaction Cases

Isolated Transactions Cases – Cases discussed on the merits of the isolated transaction
Discussed on the basis of Isolated transaction, decided as “ordinary Income”, assessable under s 6-5 ITAA97	Discussed on the basis of isolated transactions, decided as “realisation of capital asset”, CGT rules apply	Discussed on the basis of isolated transaction within a profit-making plan, decided as “profit-making plan”
GKN Kwikform Services (1991) Memorex (1987)	Cyclone Scaffolding (1987) Hyteco Hiring (1992)	Myer (1987) – Reference case for profit-making plan Coolings (1990) – Reference for lease incentives and profit-making plan

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Isolated Transactions – Cases

GKN Kwikform Services (1991) – ordinary income, s 6-5

Facts: Company carried on business of hiring out scaffolding. Customers who failed to return sufficient amounts of scaffolding at end of hiring contract were required to pay the company an amount as compensation for the non-return of scaffolding equipment, which happened regularly and frequently.

Court held: Payments were income in nature as receipts were a regular, ordinary and expected incident of the taxpayer’s business. If the disposal of depreciable assets is considered to be a regular, ordinary and expected incident of the taxpayer’s business activities, the profit (in excess of the balancing adjustment) will generally be assessable income under s 6-5 ITAA97.

Memorex (1987) – ordinary income, s 6-5

Facts: The taxpayer sold and leased computer equipment. Their main business was selling new equipment, but sometimes it leased equipment and sold them back to customers for more than its cost. The taxpayer argued that the difference between the sale price and historical cost was not assessable being a capital gain, as the leasing of computer equipment was separate from its business of selling equipment.

Court held: The gain on sale of leased equipment was income as the disposal occurred in the normal course of carrying on the taxpayer’s business and the goods supplied were not part of the company’s fixed assets (the computer equipment were trading stock, not plant).

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Isolated Transactions – Cases

Cyclone Scaffolding (1987) – realisation of capital asset

Facts: Taxpayer hired and sold scaffolding, although the hiring amounted to 80% of gross sales. The remainder included the sale of equipment. Their main business was hiring, not selling scaffolding.

Court held: The scaffolding equipment held by the taxpayer was plant and not trading stock, thus any profit from sale above original cost was capital in nature.

Hyteco Hiring (1992) – realisation of capital asset

Facts: Taxpayer hired out forklift trucks. Trucks no longer suitable for hire were sold, sometimes at a price higher than the actual price paid by the taxpayer for each truck.

Court held: The taxpayer’s main business was the hiring of forklift trucks, and the profits from selling the trucks did not constitute income. They did not acquire the trucks with the intention of making a profit from their resale. The proceeds were capital in nature.

Westfield (1991) – Isolated Transaction, realisation of capital asset

Facts: Westfield was in the business of constructing, letting and managing shopping centres. They acquired options to purchase land originally intended to be developed and managed as a shopping centre. The initial plans were abandoned when they realised one of their competitors was interested in the land, so they sold the land to the competitor making a profit out of the sale.

Court held: The profit from the sale of the land was capital in nature, as the taxpayer lacked the necessary profit making plan/purpose at the time of the acquisition of the land, therefore the principle from Myer’s case did not apply.

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Common Isolated Transactions – Lease Incentives

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Cash Lease Incentives (TR IT 2631)

Lease incentive agreements are a common form of isolated transaction. Amounts received as lease incentives may be assessable under s 6-5 (on the basis of MYER and COOLINGS) where the taxpayer had the intention of making a profit by entering into the transaction (see TR IT 2631).

However, in some cases, in spite of the lease incentives being assessable, they will end up being tax neutral. Example: ABC Ltd needs to move to smaller offices in the city. The owner of new premises offers ABC a 3-month rent free period (this is a lease incentive) if they sign the lease agreement. ABC moves to the new rented premises and accepts the incentive. This incentive would be assessable to ABC under s 6-5 ITAA97, in accordance with the criteria of TR IT 2631 and Myer and Cooling's principles, as there was a relevant intention by ABC to obtain such benefit by moving into the new premises. However, as the rental expenses would be wholly deductible for ABC had it incurred them (rental expenses are a common business deduction under s 8-1 ITAA97), the otherwise deductible rule of s 21A(3) ITAA36 will apply to make this a neutral lease incentive (meaning there will be no adverse tax consequences for the taxpayer).

Common Isolated Transactions – Lease Incentives

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Non-Cash Lease Incentives (also TR IT 2631)

“Subsection 21A(2) requires that both "convertible" and "non-convertible" non-cash business benefits provided after 31 August 1988 that are income of a business taxpayer be included in assessable income at arm's length value, less any amount paid as consideration for the benefit.”(TR IT 2631 para 16)

However, under s 21A(3) ITAA36 the non-cash benefit will be neutral where the taxpayer would otherwise be able to claim a one-off deduction in relation to that benefit in that year (therefore excluding depreciation) had the taxpayer incurred the expense to provide such benefit.

Free fit-out: generally assessable, however can be tax free (under the ODR s 21A(3) ITAA36) if tenant only has the right to use the fit-out (but does not own it). If tenant owns the fit out, it will be capital in nature (therefore ODR does not apply), however tenant may claim depreciation (TR IT 2631 paras 26 and 27).

Myer Principle and other Lease Incentive Cases

Case	Details	Outcome
Coolings	Taxpayer received a payment of $162,000 from the owner of a property it leased as an incentive to lease the property and move into the building.	The payment received from the landlord as a lease incentive was ordinary income.
Montgomery	Received incentive payments to move	Ordinary income
Selleck	No money provided, but was given a free fit out of premises	Free fit out and leaseback were not income
Lees and Leech	Assistance in the form of a free fit out	Free fit out not income
Important note: See IT 2631 regarding treatment of lease incentives.

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Isolated transactions – Profit-making Plan – ITAA97 s 15-15

ITAA97 s 15-15 – Profit making undertaking or plan

ITAA97 s 15-15 affects:

Pre CGT property

Note: If property is a CGT property, the capital gain on disposal will either be taxed under the CGT regime or under s 6-5 where there is a profit-making plan, by application of Myer’s principle.

Not originally acquired with a profit-making intention

That becomes part of a profit-making plan

However note that s 15-15 nowadays has very limited application.

15-15 (1) Your assessable income includes profit arising from the carrying on or carrying out of a profit-making undertaking or plan. 15-15(2) This section does not apply to a profit that: (a) is assessable as ordinary income under section 6-5; or (b) arises in respect of the sale of property acquired on or after 20 September 1985.

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Isolated Transaction + Profit making plan: Cases

Isolated transactions + Profit Making Plan cases (application of Myer’s principle)
Discussed on the basis of isolated transaction within a profit-making plan, decided as “profit-making plan”	Discussed on the basis of isolated transaction within a profit-making plan, decided as “ordinary income”	Discussed on the basis of isolated transaction within a profit making plan, decided as “realisation of capital asset”
Myer (1987) – Reference case for profit-making plan Coolings (1990) – Reference for lease incentives and profit-making plan	Whitfords Beach (1982)	McClelland (1970) Scottish Australian Mining (1970)

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Profit-making Plan – Cases

Whitfords Beach (1982) – profit making plan, assessable income s 6-5

Facts: A company formed by 3 fishermen acquired land to provide them with access to fishing shacks on the beach. In 1967 they sold their shares to a group of land developers who intended to develop and sell the land (i.e., the fishermen’s business was taken over by a land development business, who ultimately controlled the acquisition of the land). The land was then subdivided, developed and sold at a profit, as in land development business. Taxpayer considered the proceeds on sale were the mere realisation of a capital asset.

Court held: The land development company acquired the shares with the intention of exploiting the land, not for the mere realisation of a capital asset. The profits arising from the subdivision and sale of blocks of land were ordinary income as the owners of the land were land developers.

Principle: The decision of WHITFORDS BEACH limits the practical application of the mere realisation of a capital asset (principle established in SCOTTISH AUSTRALIAN). The decision expands the concept that a receipt from an isolated business transaction can constitute assessable income.

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Profit-making Plan – Cases

McClelland (1970) – not profit-making plan, mere realisation of capital asset

Facts: the taxpayer and her brother were beneficiaries under the will of their deceased uncle. The brother sold his share of the land to his sister who subdivided the land into three lots and planned to sell one lot to pay her brother for his interest in the land.

Court held: The taxpayer did not acquire the property for profit making purposes, but through a will. The profit from the sale of the subdivided blocks were not assessable as she had merely realised a capital asset to its best result, albeit in an enterprising way. The mere realisation of an asset, though in an enterprising way, is capital in nature.

Scottish Australian Mining (SAM) (1970) – not profit-making plan, mere realisation of capital asset

Facts: SAM was carrying on a coal mining business. In 1929 it ceased the mining business (the coal mine exhausted), subdivided the land, built roads and sold off parcels of land at a considerable profit. In this case, it was discussed whether the proceeds from the sale constituted assessable income from carrying on a business under a profit making plan or whether it was the mere realisation of a capital asset.

Court held: The profit was capital in nature. The company was merely taking the necessary steps to realise the land (capital asset) to its best advantage.

Livia Gonzaga

Audio

Although SAM case is authority for the principle that a mere realisation of a capital asset does not constitute a profit making plan, it is not entirely clear what steps needs to be taken before it can be said that a taxpayer is carrying on a business or a profit making undertaking or plan. This will depend on the facts of each case. (see WHITFORDS BEACH). If the proceeds arise from the sale of a capital asset purchased after 20/09/1985 CGT provisions apply.

Isolated transactions, Profit-making Plans and Mere Realisation – Case Law Conclusions

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Case law has established that

The mere realisation of an asset though in an enterprising way is capital in nature.

A gain made in an operation of business will generally be income in nature.

For the transaction to be income it must be an operation of business (carried out in the course of the business of profit-making)

Isolated Transactions - Realisation of Investments

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Principle: realisation of capital assets may be ordinary income if it is an ordinary incident of the business (as for banks and insurance companies): see Californian Copper

Cases

Punjab Co-operative Bank London Australia Investment RAC Insurance National Australia Bank Equitable Life Insurance

Your analysis must cover all the following aspects (YOU MUST follow the sequence below, applying appropriate legislation and applying supporting cases – do NOT skip any steps!):

Ordinary Income (s 6-5)

Isolated transaction (Myer principle/s 6-5)

Profit-making plan (s 6-5 or 15-15)

Mere realisation (CGT provisions)

Answering Isolated Transactions/ Profit-Making Plans Questions

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End of Week 3

Thank you!

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