|Class of income |Law |Source | |Disposal of trading stock | | | |Disposal of property other than trading | | | |stock | | | |Property Income |Rhodesia Metals Ltd v CT (1391ATL) |WHERE property is located should determine | | | |source. | |Services (i. e. income from employment) |FCT v Efstathakis: (1392 ATL) |The place where the services are performed | | |Greek public servant worked for the Greek Press in|is generally the source, subject to | | |Australia held to have derived income in Australia|exceptions where greater weight may be | | |as she performed the relevant work here.
|placed on the place where payment is made, | | | |place of contract. Apportionment where | | |FCT v French: (1392 ATL) |different sources occur. | | |Australian engineer was employed by Australian | | | |company derived income from work he performed | | | |while in NZ rather than Australia | | | | | | | |FCT v Mitchum: (1392 ATL) | | | |Place of contracting OR place of payment may | | | |determine source, particularly so when the | | | |services can be performed anywhere. | | | | | | | |FCT v Evans: | | | |Academic on vacation continued to have his salary | | | |paid into his Australian bank account.
Held that | | | |his salary still had an Australian source. | | |Business income | |Place where business is carried on. | | | |Permanent establishment. | |Interest |Commr of IR v Phillips Gloeilampenfabrieken: (1393|The place where the loan contract was | | |ATL) Source of interest income is the place where |entered into or the obligation to pay the | | |the credit is provided and this means EITHER the |interest otherwise arose | | |place of contracting or the place where the funds | | | |are advanced.
| | | | | | | |FCT v Spotless Services: (1393 ATL) | | | |Considerable weight given to the place where the | | | |contract in determining the source of interest | | | |income. | | |Dividends (1393 ATL) | |The place where the profits (out of which | | | |the dividend was paid) were made. Residence| | | |of coy.
| |Royalties (1395 ATL) |s6C ITAA36 |Where the payment is an outgoing of an | | | |Australian business, any royalties derived | | | |by a non-resident are deemed to have been | | | |sourced in Australia | |Royalties – “Know-how” |FCT v United Aircraft Corporation: (1395 ATL) |Otherwise, the source of the royalty may be| | |US company supplied know-how IN the US to an |the location of the industrial or | | |Australian company. Held that the income DID NOT |intellectual property from which the | | |have an Australian source because the income was |royalty flows | | |supplied in the US under agreement.
The fact that | | | |the know-how was used in Australia did not give it| | | |Australian source. | | RESIDENCE (1370 ATL) S6-5(2) RESIDENT ( “Ordinary income derived directly of indirectly from sources in and out of Australia, for the year”. Can tax the person in questions income earned ANYWHERE in the world. S6-5(3) Foreign resident/NON-RESIDENT ( : “Only Australian sourced income can be taxed”. Can only tax the person’s AUSTRALIAN income. Australian resident definition s6(1) ITAA36: Seen as RESIDING IF: 1.
Domicile (1375 ATL) (by birth or choice) of Australia unless commissioner feels the permanent place of abode. [Applegate Case (1375 ATL)] 2. In Australia, during the year continuously or intentionally for more than 182 days unless commissioner… ”” (1377 ATL) 3. If member of a superannuation fund within Australia. (1378 ATL) PLUS: residence according to ordinary concepts (1372 ATL) aka The Reside Test – Common law cases have interpreted ‘resides’ very widely 1. Physical presence in Australia during the year of income. That is, where a person “eats and sleeps” (Cesena Sulphur) 2.
Frequency, regularity and duration of visits: (Taxation Ruling TR98/17). 3. Maintenance of place of abode in Australia during absences (Rogers v Inland Revenue) 4. Family and business ties (Levene v IR Commissioner) (1373 ATL) Apple Gate Case (1375 ATL) – Solicitor was posted and worked in Vanuatu in mid 71-72, he then took up residency in Vanuatu. In early 73-74 the solicitor returned to Australia due to ill health: Decision: Permanent is not permanent but something more than temporary or transitory – Therefore ruled as not a resident.
Jenkins Case (1376 ATL) – Banker posted in Vanuatu for 3 years – he had real estate in Australia which he could not sell, instead he rented it out. Decision: Evidence showed that he had not turned his mind to come to Australia and the period was significant to hold that the taxpayer had a permanent place of abode OUTSIDE of Australia.. [COMPANY] (1379 ATL) ( Esquire Nominees Case (1380 ATL) Three tests (only need one correct) for residence of companies (page 1429 of ATL).
s6(1): • Incorporated in Australia ( regardless of where company’s control or management is located • Central management and control in Australia o Must carry on business in Australia and the company’s central management and control must be located in Australia o However, If a company’s central management and control is in Australia, then ipso facto (the deed itself) must be carrying on business in Australia (Malayan Shipping Co v FCT) (1379 ATL) • Voting power controlled by Australian residents while carrying on a business in Australia.
Dual Residents (including double tax agreements) – A person or company may be a resident of more than one state i. e. a company may be incorporated in NZ and have its central mgt and control in Australia. – Tax relief will most likely only be obtained under a Double Tax Agreement (DTA) – DTA’s limit states’ right to tax source income as there is a potential for tax avoidance. – s170-35 and s170-135 ITAA97 prevent a “dual resident investment company” from grouping losses where a company is a dual resident investment company if it: o is a resident of Australia under s6(1) ITAA36.
o is a resident of another country by reason of that country’s tax law o It does not carry on business with a reasonable view to profit or substantial purpose is the acquisition/holding of shares, securities or other investments. ASSESSABLE INCOME (117 ATL) Ordinary income s6-1 ( Developed by judicial decisions where underlying principle is the income ‘FLOW’. s6-1(1): Assessable income consists of ordinary income and statutory income s6-1(2): Some ordinary income and some statutory income is exempt income s6-1(3): Exempt income is NOT assessable income.
Statutory income s6-10 S6-10(1): Your AI also includes some amounts that are NOT ordinary income such as statutory income (aka statutory income s6-10(2)) s6-10(3): If an amount would be statutory income apart from fact that you have not yet received it, it becomes statutory income as soon as it is applied or dealt with in any way on your behalf or as you direct. Exempt Income s6-20.
s6-20(2): ORDINARY INCOME is also exempt income to extent this act excludes it (expressly or implicitly) from being assessable income s6-20(3): By contrast, an amount of STATUTORY INCOME is exempt income only if it is made exempt from income tax by a provision of this Act outside this Division or another Commonwealth law Non-assessable income s6-15 s6-15(1): If an amount if not ordinary income and is not statutory income, it is not assessable income s6-15(2): If an amount is exempt income it is not assessable income s6-15(3): If an amount is non-assessable non-exempt income it is not assessable income.
Non-assessable non-exempt income s6-23 s6-23(): Income definition (character of income) In determining whether an amount is ordinary income, the courts have established the following principles: – What receipts ought to be treated as income must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as statute dictates otherwise (Scott v FC of T)(120 ATL) – Whether the payment received is income depends on close examination of all relevant circumstances (The Squatting Investment Co Ltd v FC of T) – It is an objective test (Hayes v FC of T).
Relevant factors in determining whether an amount is ordinary income include: – Whether the payment is the product of any employment, services rendered or any business (FC of T v Harris) – The quality or character of the payment in the hands of the recipient (FC of T v Blake) – The form of the receipt, i. e. lump sum or periodically (FC of T v Dixon) INCOME GENERAL FACTORS (5 factors): 1. Income must be EARNED (i. e. there must be a nexus with an earning activity) AND RECEIVED WITHOUT QUALIFICATION (Arthur Murray Pty Ltd v FCT).
– PAYMENT FOR SERVICES: An amount that is a product or ordinary incident of employment or a reward for services rendered is ordinary income- this is referred to as the “income from personal exertion” principle o Salary and wages are ordinary income (SPORT: cricket)(Moorehouse v Dooland)(155 ATL) o Voluntary payments LINKED to the provision of services are also ordinary income (i. e. tips) (Calvert v Wainwright)(155 ATL) o Includes payments made by third party if incidental to employment – Cash payments or other benefits (i.e. prizes and awards) are assessable income if connected with employment or the exploitation of personal skills in a commercial way i. e. the “best and fairest” award won by professional footballer in Kelly v FCT (155 ATL) as per Taxation Rule TR 1999/17.
– Payments to former employees o An unsolicited gift is NOT income according to ordinary concepts o Problems arise where an employment relationship exists or has existed with the donor or is providing (or has provided) services to the donor.
– Hayes v FCT (153 ATL): shares were a mere gift – Scott v FC of T (152 ATL): Example of a “mere” gift after services had ended. “an unsolicited gift does not…become part of the income of the recipient merely because generosity was inspired by goodwill and the goodwill can be traced to gratitude engendered by some service rendered”. Factors considered include: ? Size of gift ? Unusual circumstances in which gift was made ? The fact the taxpayer had been fully remunerated for services ? Fact that gifts had been made to other persons at the time ? The gift was unsolicited and unexpected.
2. Must be distinguished from a receipt of ‘CAPITAL’ Capital gains is NOT ordinary income. A receipt attributable to the workings of the profit making structure is INCOME while a receipt to the disposal of the profit making structure is CAPITAL. Common law tests to identify ‘capital’ ( Distinguish income from capital pg 303 ATL a. Once and for all test – (One off) money spent in a lump sum is capital in nature. Rolls Royce Case (300 ATL) b. Enduring benefit test – Lasting qualities are capital in nature. Van den Bergh Case (304 +307 ATL) c. The business entity test.
– Character of advantage sought, manner used and enjoyed and means adopted to obtain it. Sun News Papers Case (576 ATL) CAPITAL RECEIPTS – “Mere realisation of capital asset” – Capital receipts: • Californian Copper Syndicate (262 ATL) • Scottish Australian Mining (262 ATL) • Whitfords Beach (267 ATL) EXEMPT INCOME – s11-1, ITAA97 ( 3 main classes: 1. Nature of income e. g. child welfare or army reserve payments. Exempt no matter what kind of ordinary or statutory income they have. 2. S23L – Non cash business benefits. Income of entities that are exempt anyway. 3.
Not-for-profit entities. Exempt only if it is derived by certain entities 3. Principle of ‘MUTUALITY’ (526 ATL) – To be income the receipt must arise from a source outside the taxpayer i. e. the taxpayer cannot pay themself. – The mere return of a person’s capital outlay is not ‘income’ i. e. there must be a gain – Payments by clubs members for subscriptions, meals and drinks are not income of the club: “a man is not a source of his own income” Bohemians Club v Acting FCT (526 ATL) “Income consists of moneys derived from sources outside”. 4. Income must be regular and recurrent
– Seen as prima facie (on first appearance) indicators that an amount has character of ordinary income. – Voluntary payments not remuneration still ordinary income as payments were regular, periodical and relied upon (FC of T v Dixon) (132 ATL) – Irregular receipts are normally CAPITAL BUT use “once and for all” test to check. 5. Income must be MONEY OR CONVERTIBLE INTO MONEY: – Income is something that “comes in” in the form of money or convertible into money [s15(2)] – If payment is made other than in cash, the money value of the payment is deemed to have been paid or given (s21 ITAA36). See below.
– A benefit which cannot be converted into money is not income • “If a taxpayer received a benefit which cannot be turned into pecuniary account, he has not received income as that term is understood according to ordinary concepts and usages” FCT v Cooke & Sherden. (138 ATL) • This is now subject to FBT under s21A ITAA36: if payment is made other than in cash, the money value of the payment is deemed to be paid or given. That is, s21A(1) says that in determining the income derived by a taxpayer, a non-cash business benefit that is not convertible into cash shall be treated as if it were convertible into cash.
Note: s21A does not deem a non-cash-business benefit to be income- the section only operates on amounts which are inherently of an income character. For s21A to apply: 1. there must be a “non-cash business benefit” as defined in s21A(1) 2. that benefit must represent income derived by the taxpayer from the carrying on of a business for the purpose of gaining assessable income 3. the total assessable value of all non-ass business benefits received by the taxpayer during the income year MUST EXCEED $300 (s23L(2) ITAA36) and 4.
the cost of the benefit MUST NOT be non-deductible entertainment expenditure to the provider (s21A(4)). • Frequent flyer points are not money and is not your employer, therefore non-assessable: Payne v FCT case (138 ATL) PERSONAL EXERTION INCOME ( s6(1), ITAA36 An amount will be ordinary personal exertion income if it is a product or incident of the employment of, the nexus test is satisfied if the amount is characterised as a “product or incident of employment or a reward for services rendered” (Hayes v FC of T)(153 ATL).
This is referred to as the “income from personal exertion principle”. Principles: o Salary and wages are ordinary income (Dooland, Brent) o Voluntary payments linked to the provision of services are also ordinary income(tips etc) (Calvert) o Ordinary income includes payments made by 3rd parties if incidental to employment (Kelly) o Income must be earned and received without qualification (Arthur Murray Pty Ltd) NEXUS with employment or services rendered – Benefit in return for services – If monetary in nature s6-5 or s15-2 ITAA97.
– S15-2 Allowances and other things provided in respect of employment – s15-2(1): Your assessable income includes the value to you of all allowances, gratuities, compensation, benefits, bonuses and premiums provided to you in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by you. – If non-monetary: s21A, FBT, non-cash business benefit. – There must be an employment or services relationship o Cooke v Sherden – vendor gave purchaser a free trip for meeting quotas.
The relationship was not one of employee/employer, there had been no rendering of services, simply advantages have accrued to the manufacturer. – Consequence of employment/services may be sufficient o There is a sufficient nexus exists if benefit is a product, incident or consequence of employment (Smith v FC of T) o s15-2 does not apply to payment in discharge of a statutory obligation to compensate the taxpayer for the loss of earning capacity (FC of T v Inkster) Voluntary payments: – If payment is for employment of reward for service provided, it is ordinary income.
A Christmas bonus is still a product of employment and is ordinary income. – ON THE OTHER HAND, payment made purely on personal grounds is properly characterised as a “mere gift” and is therefore not within the income from personal exertion principle (Scott v FCT: 152 ATL) Voluntary payments by a party to the services relationship: i. e. Payments to former employees – Is the payment a GENUINE PERSONAL GIFT or is it in reality a form of remuneration? – Factors to consider- o Has the recipient already been adequately remunerated?
IF so more likely to be gift – Hayes (153 ATL) received shares as a “mere gift” o Did the recipient expect the payment? IF so more likely to be remuneration o Does the recipient depend on the payment? IF so more likely to be remuneration o Recurrence or regularity suggests income. Periodic payments: If payments are periodic in nature, they may be held to be OI. In FC of T v Dixon (153 ATL), the payments made to substitute income forgone by joining the army were found to take the character of that which they replaced and were therefore still ordinary income.
Similarly, in FC of T v Harris (154 ATL), the periodicity of payments coupled with the bank’s intention to continue supplementing the income of the pensioners was found to be enough evidence to hold that the RECIEPT WAS INCOME according to ordinary concepts. Voluntary payments by a 3rd Party s21A – An amount may be characterised as a product of employment or services rendered even though it is paid by a 3rd party. This will be the case where the amount is a ‘clearly recognised incident’ of the recipient’s employment (Kelly v FC of T).
o Sportspersons- all benefits received from involvement in sport(coach, referee, amateur or professional) are treated in the same way as other payments relating to employment – TR 1999/17. Moorehouse v Dooland (155 ATL). ? Full time police woman found to be ‘turning her talent to account for money’ and therefore money from competing was found to be reward for competing therefore assessable income (Stone Case)(156 ATL) Payments for giving up valuable rights (158 ATL) – Advance payment for services not yet rendered – an advance payment for incomplete services is considered ORDINARY INCOME.
When the receipt is consideration for giving up valuable rights rather than performance of services, it will NOT be income from personal exertion. ‘Incentives’ to forego a right are NOT income. o Jarrold v Boustead (158 ATL): Rugby player received a “signing-on fee” which was characterised as being compensation for the giving up of the taxpayer’s amateur status and therefore not as remuneration for services yet to be rendered. Consequently, a CAPITAL RECEIPT. Where the taxpayer is already a professional athlete, a signing-on fee or similar payment may be characterised as a normal incident of employment as a professional athlete.
o Pritchard v Arundale (159 ATL): Offered shares as an inducement to accept new job offer. Inducement was COMPENSATION for the loss of status it was NOT an advance payment for services yet to be rendered. – Payments made for the surrender of rights – consideration for giving up rights of a capital nature under a service agreement will NOT constitute ordinary income. o Bennett v FC of T (159 ATL): Payment was CONSIDERATION for giving up valuable rights of a capital nature and for entering into the new agreement.
o Case Z9 (159 ATL): Compensation received was characterised as CONSIDERATION for the surrender of valuable rights of a capital nature and therefore NOT ordinary income. – Lump sum payment for entering into a restrictive covenant (160 ATL): A lump sum payment made in return for an employee’s agreement not to compete or do certain things is generally CAPITAL. A receipt attributable to the disposal or giving up of the taxpayer’s profit making structure or part thereof is capital. o Beak v Robson: Payment was not a product of the taxpayer’s employment even though the covenant was entered into while Robson was still serving his current employer.
Seen as CAPITAL and therefore NOT assessable. o Higgs v Olivier: Lump sum in return for agreement not to act was held to be CAPITAL and therefore non-assessable having been paid to Olivier for giving up the right to earn income as an actor during the specified period BUSINESS VERSUS HOBBY – Is the taxpayer CARRYING ON A BUSINESS? – Ordinary proceeds from a business are ordinary income AND losses are deductible – Ordinary proceeds from a hobby are NOT ordinary income and losses are NOT deductible. A hobby is non-assessable income (not taxed).
Common law principles suggest that normal proceeds of a business are income, plus – Isolated or one off transactions could also be regarded as business proceeds and thus come within the common law principle (Whitfords Beach)(267 ATL) – Unusual or extraordinary transactions can also be considered business income (Myer)(272 ATL) Definition of ‘business’ s995-1, ITAA97 – “Business includes any profession, trade, employment, vocation or calling but does NOT include occupation as an employee” Identifying a business (244 ATL):
o Profit motive: the presence of a profit motive by undertaking a transaction with the intention of achieving financial gain, even if the chances of doing so are “extremely slim” (Glennan v FC of T)(250 ATL in footer) o NOT carrying on a business – even though taxpayer has a profit motive. “Taxpayer not in business of gambling even though taxpayer strongly desired to make a substantial financial success of gambling”… (Brajkovich v FC of T)(250 ATL). o Profit motive ESSENTIAL to the factual matrix which leads to the conclusion that a particular activity is business (Babka)(250 ATL foot).
o NOT PROFITABLE – even though no profit is made…he is genuine in his belief that the property will generate profits, and has devoted much of his efforts towards developing and operating the property to that end, judge held that he was carrying on a business (Daff v FCT)(251 ATL) – System and organisation (245 ATL): To carry on a business means to ‘conduct some form of commercial enterprise systematically and regularly’ (Hyde v Sullivan). o Ferguson (245 ATL): Five Cows: HELD AS BUSINESS as court was influenced by the fact activities were carried on in a systematic and well-organised way, the venue as a whole had a commercial flavour to it.
o Walker: One Goat: HELD AS BUSINESS even though the venture was not particularly successful. The presence of system and organisation was a factor which contributed to the findings. o Thomas (247 ATL): “A man may carry on a business although he does so in a small way’. Small orchard held to be committed to undertaking business. – Sustained, regular and frequent transactions (247 ATL): Even isolated transactions may amount to the CARRYING ON OF BUSINESS. o “Purchased bulk commodity for the purpose of resale, then proceeded to sell it on the occasions when there was a market…It was not necessary…that he repeat or intend to repeat the venture.
The one venture was a single trading operation” (FC of T v St Hubert’s Island)(247 ATL) o Traded in shares as a private pursuit during work time: HELD to be carrying on a business of share trading at work, even though there were limited transactions, the activities were organised, systematic and therefore business (Shields)(248 ATL) – Commercial nature: Some importance to the NATURE of the particular transactions in which the taxpayer has been involved. A person in business is usually prepared to trade on the open market. o Taxpayer borrowed $4m, lent most to other company in its corporate group, balance lent to unrelated companies.
The balance lent to others outside the group was seen as open market (FC of T v Bivona Pty Ltd)(252 ATL) – Characteristics of taxpayer: Activities that are conducted by a company rather than an individual suggest that those activities form part of a business because companies were commonly used as trading vehicles. o However trusts are not commonly used as business vehicles so activities of trustee were less likely to be regarded as business (Charles v FC of T)(254 ATL) o Activities of the trustee were seen as BUSINESS and subsequently expenditure was DEDUCTIBLE (Fanmac v FC of T)(255 ATL).
– Substance rather than form: Look at the substance of the arrangement o Focused on SUBSTANCE rather than form: Taxpayer entered into partnership designed to carry on business of trading shares for the reason of gaining share-trader status for the purpose of tax minimisation. Deductions were REJECTED as purpose was only to get a tax loss (Deane & Croker v FC of T)(257 ATL) Commencement of a business (257 ATL) CANNOT claim deductions BEFORE a business has commenced OR AFTER it has been terminated. Preparatory Activities
Softwood Pulp & Paper Ltd v FC of T (258 ATL): Investigations were undertaken regarding viability of a paper mill. Subsequently, the taxpayer company was incorporated in Australia to carry out further tests and run the paper mill if the project proceeded. The Canadian company eventually abandoned the project and made no real income, but tried to claim deductions for expenditure incurred on feasibility studies. Court REJECTED as company had NOT reached a stage of carrying on a business and had not committed itself or decided to go ahead.
The taxpayer had not “committed itself” or decided to go ahead “in any definitive sense” with the project and certainly had not done anything to actually carry on the business”. Preliminary Activities “Activities preliminary to commencement of actual business such as preparing land for primary production DO NOT amount to engaging in primary production” (Southern Estates Pty Ltd v FC of T)(258 ATL footer) o Taxpayer leased land, entered into feasibility of growing chestnut trees and entered into a contract to buy trees.
The soil was infertile and was treated but Osborne abandoned the project. Tried to claim a deduction for expenses. Court found the expenses to be capital in nature and non deductible (FC of T v Osborne)(259 ATL) o CONTRASTED: case where taxpayer was “carrying out” activities which are more appropriately classified as ongoing maintenance on a property which had been actively used in the immediate past for the very purpose now intended to be undertaken by the taxpayers” (Case 75/96). I. e. the land was already for use from date of acquisition so EXPENSES were DEDUCTIBLE.
Experiments, pilot projects and preliminary businesses A taxpayer is not carrying on business while merely experimenting in order to choose between alternative possible products. o Taxpayer was denied a deduction for R&D because taxpayer had not committed itself to the project. Commitment is seen as a key factor (Goodman Fielder Wattie Ltd v FC of T)( o EXPANDING BUSINESS: Court was prepared to distinguish between ‘mere experimentation’ and the carrying on of a ‘preliminary business’ preceding and facilitating commencement of the taxpayer’s eventual business.
There, it was found that in leasing and breeding several cattle, taxpayer was carrying on a “preliminary business” through which he would in due course build up a herd of breeding cows sufficient to enable him to engage in the wider business he ultimately intended to undertake (Ferguson v FC of T) Termination of a business (260 ATL) When businesses cease is a question of fact and degree. The fact that a business is inactive for a period of time DOES NOT automatically mean that the business has terminated (Avondale Motors Pty Ltd v FC of T)(260 ATL) Factors of Termination • Intention of controllers: i. e.did the controllers intend to restart the business?
• Nature of the business • Reason for close or pause in activities – Case ( AGC (Advances) Ltd v FC of T (261 ATL): The taxpayer company was a financier lending money for the hire purchase of goods. The taxpayer struck financial difficulty and ceased all but a small portion of its business operations. All the shares in the taxpayer company were sold to AGC and after the sale, the taxpayer resumed as a financier under a different name, address and with a different shareholding. It was seen that the taxpayer’s business had not been terminated at any stage. Commissioner considers:
Primary producers – Walkers Case Gamblers – Brajkovich case Sportpeople – Kelly case Disposal of trading stock and other disposals: Ordinary income ( Proceeds from disposal of trading stock Capital ( Proceeds from disposal of other assets (exceptions: bank, investment and insurance companies) COMPENSATION PAYMENTS (303 ATL) At common law, a compensation receipt generally takes the character of the item which it replaces (C of T v Meeks)(303 ATL). A taxpayer hired out scaffolding, customers who failed to return significant amounts of scaffolding at the end of the hire period were required to pay taxpayer the current price of that equipment.
Court held that the receipts were a “regular, ordinary and expected incident of the taxpayer’s business” or an “additional fee” payable as part of the total hiring charges ( INCOME (FCT v GKN Kwikform Services)(303 ATL). Distinguish Income from capital What are you being compensated for? – Compensation for loss of income = INCOME s15-30 (insurance claim) and s6-5 (OI), is assessable. – The loss of a RIGHT (= asset) to earn income = CAPITAL – If it relates to the business structure = CAPITAL Sommer v FC of T (303 ATL) – $140,000 lump sum paid in consideration of cancellation of an insurance policy and as such was a CAPITAL amount.
Court upheld Commissioner’s argument that the amount was in settlement of taxpayer’s right to income under a Professional Income Replacement Policy and being in satisfaction of an entitlement to income, was itself income. The court made the following points: 1. In general, insurance monies are received on revenue account where the purpose of the insurance was to fill the place of revenue receipt which the even insured against has prevented from arising (Carapark Holdings) 2. Amounts payable under a policy that provides a monthly indemnity against income loss arising from inability to earn are of a revenue character (Smith) 3.
The fact that the payment of the monthly benefits in this case is made in one lump sum does not change the revenue character of the receipt if it was meant to compensate for lost income (Allied Mills) 4. Where money is received in consideration of surrendering a benefit to which a taxpayer is entitled under a contract, the inquiry as to whether the receipt is of capital or of income enquires consideration of the “congeries of rights” which the tax payer enjoyed under the contract and which, for a price, were surrendered (Van der Berghs) o Also from Van der Bergs: “whole structure, its profit making apparatus”.
Cancellation of business contracts (304 ATL) o Compensation received by a shipbuilding company for the cancellation of contracts for the construction of two ships was held to be INCOME and therefore assessable (Short Bros Ltd v IR Commrs)(30