Kosciusko Thredbo v FCT (1984) – The courts have often tended to take a dynamic view of the scope of a business’s activities, and recognized the commercial reality that the nature and scope of business activities may change, eg by expansion or diversification into new areas. 

Facts: The taxpayer had a 45 year lease granted by the NSW government to carry on business of resort operator. The taxpayer derived its returns primarily from skiers using its lift facility, its accommodation, restaurants and other facilities in the town such as transport. Taxpayer decided in order to increase the use of its facilities, to begin building apartments.  It would sub-let the apartments at a premium, to recover its costs plus a profit in respect of the building of the apartment.  It could only sub-let, as it only had a lease itself from the government.  It would grant the leases for one-off premium, for the period of its own lease, and no rent was payable.

Held: The court said the transactions were repetitive and recurrent and were carried on for a number of years.  Taxpayer was in business of carrying on business as a property developer i.e. question of fact.  The court said in this case the taxpayer was carrying on the business of developing the land, as a developer, and in that context the premium was income and assessable as ordinary income.

FCT v Cyclone Scaffolding (1987) – Receipts not held to be ordinary income.

Facts: Taxpayer owned scaffolding equipment which it hired to the public, although it occasionally sold scaffolding equipment to governmental and semi-governmental authorities.  The taxpayer usually made special purchases of equipment for the purposes of these sales but, on occasion, it also sold some of its hiring equipment.  In addition, the taxpayer also “sold” plant where hirers lost or destroyed the equipment, because under the terms of its hiring contracts, the hirer was required to pay the taxpayer’s current list price for any equipment loss or destroyed.

Issue: The Commissioner unsuccessfully attempted to assess the company on the basis that the amounts received from sales of equipment and from payments by hirers for replacement equipment were assessable income. 

Held: The Full Federal Court said the compensation money had to be looked at in the context of the activities as a whole.  It was then clear that the money was received for disposal of part of taxpayer’s profit making apparatus i.e. sale of the taxpayer’s income producing assets and therefore capital.  It is distinguished from Memorex where the company had extended its business.  Cyclone was not in the business of losing scaffolding and making money out of it.  They did not sell leased equipment, it had simply been lost and the receipts were simply compensation for the loss of their profit-making assets.  The receipts were held not to be ordinary income. 

Memorex v FCT (1987)

Facts: The taxpayer carried on business as a supplier of computer equipment.  It bought the equipment from its American parent company and then either sold it or leased it out to customers.  Some goods which were on lease were sold to the customers, and some leased equipment was also “sold” to its finance company to secure borrowings by the company.  The taxpayer treated equipment which it leased to customers as depreciable plant and, if it sold the leased equipment for a consideration greater than the depreciated value, the depreciation recouped was brought to account as assessable income under s59 ITAA36.  The Commissioner took the view that where the leased goods were sold for a price higher than their cost, the excess was an assessable profit under s25(1) or 26(a) and succeeded in his assessment.

Held: The FFC decided, that there had been a downturn in the economy, such that the company was having troubles selling computer equipment.  The company then went to customers and said, rather than you paying out a great lot of money for the equipment, we will install it in your premises and lease it for a little while, and when things improve and you make enough money, then you can buy it.  This became the modus operandi by which they were moving their trading stock.  The court said that the nature of the business had changed.  They had branched out into the business of leasing and selling the leased equipment.  The Court found the nature and scope of the business had actually changed as a result of a downturn in business.

(b) Isolated Transaction or Undertaking

This deals with isolated transactions where one goes past mere realization of an asset, but appears to cover something less than actually carrying on a business.  The court sometimes describes it as “a venture in the nature of trade”.  Strictly speaking, you are not carrying on a business, but because it has such a commercial flavour, it is considered to constitute an isolated business venture such that it is considered to be income. 

Scottish Australian Mining Co v FCT (1950)

Facts: Company had incorporated in 1859 and acquired properties in the Newcastle area for mining operations.  In 1924 there was no more coal left, so the company decided to sell the land off. The taxpayer incurred considerable expense in building roads and subdividing the site and dedicating other parts of the land for schools, parks etc, and made quite a large profit on the sale of the land.

Issue: It went to the High Court as to whether the taxpayer was liable for tax on the profits.

Held: HC ruled that the profit was not assessable.  It was held not to be income as it was simply part of the process of realizing a capital asset to the best advantage.  He said the facts would have to be strong before a court would be induced to hold a company which had not purchased or otherwise acquired land for the purpose of profit making by sale was engaged in the business of selling land and not merely taking the necessary steps to realize the land to best advantage.  The important factors in the case were:
• taxpayer had not acquired the land for the purpose of dealing with the land and had held onto the land for a long period of time;
• court gave the concept of “a mere realization to best advantage:
• the decision has the scope of restricting what would be ordinary income;
• a pretty broad restriction, much could escape being income under this principle
• a more recent case has greatly restricted the ‘mere realisation’ rule – see FCT v Whitfords Beach (below). 

FCT v Whitfords Beach (1982)

the company had purchased a large tract of land outside Perth in 1954 so that the members of the company could continue to enjoy access to their fishing shacks on the beach.  As time passed the land appreciated substantially and the shareholders of Whitfords Beach Pty Ltd decided to sell the land.  They did so by arranging to sell for $1.6m their shares in Whitfords Beach Pty Ltd to a syndicate of 3 companies, all of which were property developers.  The transfer of shares was completed and the new company appointed two of the purchasers as managers of its land for 15 years with powers to do all that was necessary to subdivide, develop and sell the land.  The company then procured the re-zoning of the land.  The first subdivided lots were sold.  The managers anticipate a profit of $7m once completed.  The Commissioner assessed Whitfords Beach to tax on the profits from the sale of the land that arose from sales during the years 1972-1975.

Held: HC unanimously upheld the assessment. Gibbs CJ held that the profits made by the company from the venture were assessable as income from carrying on a business-like transaction designed to realize a profit, that transaction being the development and sale of the company’s only substantial asset. HC held that the property developers “profit” was assessable as ordinary income under s25(1) ITAA36.  Gibbs J took the view that the “mere realization” doctrine in Scottish Australian Mining would have applied had the takeover by the developers in 1967 not occurred.  However, the takeover meant that Whitfords 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 … after December 1967 [Whitfords] became a company which existed solely for the purpose of carrying out the business operation on which the new shareholders had decided to embark when they acquired their shares.” The High Court held it to be a one-off business venture. 

(c) ‘Extraordinary’ Transactions

FCT v Myer Emporium (1987) - established that gains made from isolated or extraordinary transactions may nevertheless still be of an income nature where they arise from business operations or commercial transactions entered into by taxpayers with the intention or purpose of making a profit.  This principle has become known as the “first strand” of Myer.  For the first strand of Myer to apply, the taxpayer must have a significant purpose (although not necessarily the sole or dominant purpose) of making a profit from the transaction at the time of entering into it.  Where this requirement is absent, the first strand of Myer has no application.

Facts:  (“Myer”) had decided to diversity its operations.  To obtain in funding for this diversification, Myer entered into a prearranged series of transactions under which Myer sold certain shares in subsidiary companies to an associated company for $80m, then on 6 March lent that $80m to Myer Finance Ltd at an interest rate of 12.5%pa.  As arranged, three days later on 9 March 1981, Myer assigned to Citicorp Canberra Pty Ltd (“Citicorp”) for seven years and three months the moneys due or to become due as the interest payments …” on Myer’s loan to finance.  In return, Citicorp paid Myer a lump sum of $45,370,000.  Citicorp had tax losses available to wipe out any tax liability on the interest payments from Finance.  The court found as a fact that all the transactions were interlocked and interrelated, and that Myer would not have made the loan to Finance if Citicorp had not agreed in advance to take the assignment of income and pay the lump sum of $45.37m to Myer. 

Held: The HC held that the $45.37m received by Myer from Citicorp was income under the ordinary income provision and endorsed the basic principle in Californian Copper Syndicate as interpreted in Whitfords Beach. What they sold was the income producing right (like selling a building), the right to interest.  The High Court said if you carry on a business and you enter into a transaction not in the ordinary course of business, but an extraordinary transaction in the context of your business, in the course of your business with the purpose of making a profit, then it will be ordinary income. 

Westfield v FCT (1991)

Facts: The taxpayer’s main activity was design, construction and management of shopping centres.  The taxpayer had acquired land for $450,000 – originally taking an option for the purpose of itself establishing a shopping centre and, after that had lapsed, taking a further option in order to block development on the site by a rival.  The taxpayer ultimately sold the land to AMP for $735,000, on the basis that AMP would employ the taxpayer to design and construct the shopping centre which AMP proposed to build on the site. 

Held: The profit made on the sale to AMP was held to be non-assessable. Hill J reiterated that the Myer doctrine did not mean that every profit made by a taxpayer in the course of carrying on business activities must be of an income nature. Hill J outlined a principles that govern the application of the first strand of the Myer doctrine:

(1) Where the transaction which generates the profit is “not an activity in the ordinary course of business, or, for that matter, an ordinary incident of some other business activity”, the profit will not be assessable as ordinary income unless the transaction was “commercial” and at the time the transaction was entered into the taxpayer had “the intention or purpose of making a relevant profit”. 
(2) The purpose of profit-making must exist in relation to the particular operation which gives rise to the profit, and by the very means by which the profit was in fact made.