Where the cancellation of an agency contract results directly in termination of the taxpayer’s business, the payment will be capital in the recipient’s hands at common law.

Allied Mills Industries v FCT (1989) – Payment was income (not capital) and assessable.

Facts: Taxpayer carried on a business in various divisions; one of its divisions was a groceries and packaging divisions.  In 1973 taxpayer obtained sale rights to distribute through its groceries and packaging division Peak Freans business.  In 1975 Arnotts took over Peak Freans and re-negotiated the agreement.  The taxpayer continued as a sole distributor but as an agent.  In 1977 Arnotts decided it wanted to do the distribution itself, and parties agreed to cancel the distribution agreement.  Taxpayer given $372,000 compensation for termination of agreement.

Issue: Matter went to Full Federal Court as to what was the nature of the receipt.

Held: Full Federal Court said the arrangements accounted for a substantial turnover of the division, but the company must be looked at as a whole, and whether those rights that were terminated constituted a structural asset of the company. Court said that in order for the contract to be a capital asset it must have substantial importance to the structure of the business as a whole.  This is a matter of fact and degree.
Here, Allied was not parting with a substantial part of its business or ceasing to carry on business. Furthermore, the company was not disposing of part of the fixed framework of its business. The contracts here in themselves yielded profits; they did not simply provide the means of making profits.  Held, the payment was income.

Reimbursement of Previously Deducted Expenses

Compensation for an amount that has previously been allowed as a deduction would normally be income, but not necessarily so.  Just because taxpayer has received a deduction for an item does not mean reimbursement for that item will be income. 

H R Sinclair v FCT (1966)

Facts: Taxpayer was a sawmiller & paid royalties for 4years to the Forestry Commission of Vic. Taxpayer claimed deductions for those payments. Royalties were paid under protest, because there was a dispute over how the statutory formula was supposed to work. The department eventually conceded it had got it wrong, and refunded $3,400.

Issue: Was whether the receipt was assessable as ordinary income.

Held: The High Court went to some lengths to point out that the mere refund of an allowable deduction does not of itself mean that the refund is of an income character.  The question is whether it is of an income nature.  But they went on and held that the refund was income, as the taxpayer was in the business of a saw miller.
Court said that in the capacity of running a sawmill business, he had paid the royalties out, and it was in that capacity that he had received the amount of the refund – an incidental receipt in the course of carrying on a sawmill business.

S20-20(2) – An amount you receive as recoupment of a loss or outgoing, which was previously deductible then the amount is an assessable recoupment if:
• you receive the amount by way of insurance or indemnity; and
• you can deduct an amount for the loss or outgoing for current year, or have deducted it for an earlier year.
This refers to a situation where you recoup an amount you previously claimed as a deduction, but it is only assessable if the recoupment is by way of insurance or indemnity is a restriction.  A deductible amount was recouped, but as it was not recouped by way of insurance or indemnity, this section would not apply. 

Section 20-20(3) does not have that qualification.  An amount you received as recoupment of a loss or outgoing is an assessable recoupment if:
• you can deduct an amount for the loss or outgoing for the current year; or
• you have deducted or can deduct an amount for the loss or outgoing for an earlier year under a provision listed in s20-30.
Ie if you receive a recoupment for a loss or outgoing that is assessable even though the recoupment is not by way of insurance or indemnity, but only if the deduction was claimed under one of the provisions in s20-30.  S20-30 does not list the general deductibility provision, only for limited sorts of expenses.  See list.  May make a difference to Sinclair’s case. 

S15-30 if you receive an amount by way of insurance or indemnity for the loss of an amount that would have been included in your assessable income, but not as ordinary income it would be assessable. 

S70-115 your assessable income includes an amount that:
• you receive by way of insurance or indemnity for a loss of trading stock; and
is not assessable as ordinary income under s6-5. 

Apportionment Of Compensation Payments

Where a compensation payment wholly comprises income elements, the amount of the payment will be assessable in full – Allied Mills is authority.

If however the compensation payment is in relation to assessable and non-assessable (capital) items, the assessable items will only be assessable if it is possible to apportion the lump sum.

If the parties agree to allocate a lump sum to each head of liability then the amounts allocated to the income items will be assessable.
If the compensation payment is less than the amount claimed, but each of the claims is in respect of liquidated damages, then it is possible to apportion the amounts to each of the claims, and those amounts apportioned to income items will be assessable.
If the compensation payment is in respect of both liquidated and unliquidated claims and no allocation is made by the parties, then it is not possible to apportion the payment between the various items, and no part of the amount is assessable – authority McLaurin v FCT and Allsop v FCT

McLaurin v FCT (1961)

Facts: A fire caused by a railway engine resulted in considerable damage to both revenue and capital assets on the taxpayer’s property. The taxpayer duly issued a writ claiming £30,000 damages.  McLaurin accepted £12,350 in full settlement of his claims.  The Commissioner of Taxation attempted to assess McLaurin on the ground that at least £10,590 represented compensation for revenue losses.

Principle: The High Court indicated that it would be prepared to contemplate apportionment where, for example, a single payment or receipt of a mixed nature could be apportioned and an income or non-income nature attributed to portions of it.  But while it might be appropriate to apportion where a payment or receipt is in settlement of distinct claims of which some at least are liquidated or are otherwise ascertainable by calculation, it could not be appropriate where (as in McLaurin’s case itself) the payment or receipt is in respect of a claim or claims for unliquidated damages only and is made or accepted under a compromise which treats it as a single, undissected amount of damages.

Held: In such a case the amount must be considered as a whole and accordingly no part of it was assessable.

Allsop v FCT

Facts: Taxpayer had paid permit fees to the NSW Commissioner for Motor Transport totalling over £45,850. The Act was later held to be invalid and the taxpayer sued for the amount of the fees. The matter was settled out of court whereby Allsop accepted £37,500 in full settlement of all claims of any nature which he had or might have against the Commissioner. 

Principle: Barwick CJ and Taylor J in the HC held that Allsop could have claimed unliquidated damages in respect of certain unlawful interference with the appellant’s vehicles and his business operations by officers of the Department of Motor Transport, and in respect of these matters he may have had valid claims for unliquidated damages against the Commissioner. Therefore the amount received represented compensation. It seems to be accepted in the case that had the $37,500 been a refund only of the permit fees, it would have been assessable as in HR Sinclair v FCT.  But here, it was not paid simply for the refund of permit fees, the release was compensation in that it covered any action the taxpayer might have, including general damages for unlawful interference by the government in its business. 

Held: The High Court held the whole amount not assessable.  The point is, if you have a lump sum payment in a settlement, which might include:
• loss of past income (income)
• loss of future earning capacity (capital)
• pain and suffering (capital)
• interest (income)
but without agreement as to how the figure was arrived at between the four heads, then the whole lump sum is treated as unassessable income.  This is what happened in Allsop.

FC T v Spedley Securities (1988) – Applied principle from Allsop

Facts: Spedley (a merchant bank) had been engaged by Santos Ltd to secure a loan of A$65m for Santos, at a commission of 1 ¼% of the loan amount.  Santos subsequently terminated Spedley’s contract because legislation introduced in the interim adversely affected Santos’ position.  The Full Federal Court found on the evidence that there was “no adequate basis for saying that the release was illusory; on the contrary it was undoubtedly meaningful and of practical importance to Santos”.  Accordingly, Spedley had received “a lump sum, the ingredients of which were not identified” but which included compensation for a capital asset (loss of goodwill/reputation). 

Principle: Under these circumstances, there was “no basis for dissection or apportionment … [and] … in accordance with authority the whole receipt is to be treated as one of capital. 

Held: The Full Federal Court held that, as in McLaurin and Alsopp, there was no basis for apportionment and therefore the whole amount is not assessable.