Present article requires the transformation of Australian tax law in respect of tax on capital gains with its relevance considering three case studies- Californian Syndicate v Harris(1904) 5 TC 159, Whitfords Beach Pty Ltd v FCT 82 ATC 4031 and Myer Emporium Pty Ltd v FCT 87 ATC 4363. Introduction of capital gains tax had been implemented in Australia since 20th September, 1985 by Hawke-Keating government. As the three cases are related to the impact of capital gains refer to different nature, the implication of the same with short discussion on the cases are appended below with relevance of those cases for development of Australian Tax Law for understanding the consequential effect of the same in present scenario.
The above case is to consider the issue of realization of any capital asset with the profit generated from this transaction through deployment of its business to be treated with the nature of ordinary income or capital.
a. The application of Income Tax Assessment Act 1936 of Australia through its subsection 25(1) had defined the term of ‘isolated transaction’ for those transactions which are not falling under the normal course of business tax payer and non-business tax payer.
b. This application of ruling is not considered as the application found under section 25A referring capital gains and losses provision (Part IIIA) or division 6A of Part III.
The taxpayer was incorporated in 1901 with the objective of acquirement of land bearing copper in California. With initial acquisition of land of such nature, the taxpayer found insufficient fund to work with the business objective of mining and decided to sale the land to other entity with the consideration of allotted shares which yielded substantial profit.
It was the observation of the tax personnel that subsequent profit generated from the transaction of resale of land was not as per the memorandum of the incorporation; hence the generation of such profit was to be treated as income by nature.
The defense of this case by the taxpayer was framed with the justification that the transaction of resale of land is to be treated as substitution by another asset in the form of shares of the buying identity and so the same had not generated profit which could be assessable.
The case was heard by Lord Justice Clerk and he had concluded that:
In this case the main issue is to determine the profit generated from sale of land is to be assessed from income tax point of view. The judgment had significantly clarified that the same is to be assessed under section 25(1) of 1936 and this has contributed to the development of Australian Tax law for its further elaboration in 1985 related to the segment of capital gain.
This case is to find out if the assessable income from profit of the taxpayer generated in the context of sale of subdivided land under the impact of section 25(1) or 26(a) or the nature of realization of capital asset with the consideration of business income as ordinary income or capital gain in nature.
a. Through the guidance to determine the nature of profit from isolated transactions as assessable income under section 25(1) of the Income Tax Assessment Act, 1936 with the definition of Isolated Income as generated from normal course of business of taxpayer along with the transaction exercised by non-taxpayer.
b. The law does not allow considering the applicability of section 25A –Provisions for Capital Gains and Capital Losses –Part IIIA or Division 6A of Part III.
The referred taxpayer was with the status of company established since 1954 formed by the group of fishermen who owned the shares of the taxpayer. The acquisition of land on the beach by the company subsequently gave the ownership of the land to the fishermen. On 20th December, 1967 some intended developers had taken the strategy to acquire the land by procuring the shares of the fishermen for considerable amount of $ 1.6 million with the introduction of new Article of Association and appointment of two developers in the company in the status of general manager. Ultimately the zoning of the land had been changed with subsequent development for residential purpose resulting substantial profit.
Income tax Commissioner had assessed the taxpayer on the generated profit from the sale of land with the conclusion that the profit such generated was to be assessed under section 25(1) of the I T Assessment Act 1936 with the notion of income from the business of development of land along with implication of 26(a) as profit from the carrying out of profit generated from undertaking or scheme.
The taxpayer, with reference to case of Scottish Australian Mining Co. Ltd v FC of T (1950) 81 CLR 188, had argued that the profit generated for subdivision and subsequent sale of land should not be assessed and on the profit generated from the transaction due to the reason that the referred case had endorsed the giving up of existing business.
Decision by Judges of Full High Court and Federal Court
Significance of the case for development Australian Tax Law
This case is to determine the income from sale of subdivided land for assessable purpose. As per the application of 25(1) the Court had concluded that the income from profit is to be assessed which was generated from sale of subdivided land through undertaking and scheme. This case has significant contribution to the development of Australian Tax Law which had introduced Capital Gain Tax since 20th September, 1985 through the change of section 25A and section 26(a) by new section 25A (1A).
This case is to find out the income received from interest within the group of Myer Emporium Ltd for the amount lent to the subsidiary.
Rules involved in this case is governed by subsection 25(1) to define income , second limb of 26(a) with subsection 25A(1) defining profit arising out of profit making undertaking or scheme.
The company Myer Emporium Pty Ltd was the taxpayer within the group involved in the business of retail trading with property development. As a part of strategic reorganization of the group, taxpayer had lent money to its subsidiary company which is financial activities attracting @ 12.5% interest per annum.
After three days, the subsidiary company had paid interest to the taxpayer with the discounted rate of 16% per annum.
The Commissioner had considered the interest amount as assessable for taxpayer although the appeal in Supreme Court of Victoria and the Full Court of the Federal Court of Australia had opined that the amount should not be treated as assessable.
After declination by two respectable courts, the Commissioner had appealed to the Full High Court.
The Judges of the Appellate Court had concluded that:
The judgment confirmed the nature of income as interest is as per the application of subsection 25(1) and second limb of section 26(a) and subsection 25(1). It also highlighted that such income is arising from the intention to make profit. The Commissioner had concluded that the case has its own understanding so far weighing up of the factors which are driving returns along with other criteria like the legal form and the transaction materiality. The case should attract consideration of TR `1992/3 to determine the nature income from any isolated type of transactions. This ambiguity can only be avoided by legislative changes and the development of Australian Tax Law enhanced the requirement of required changes in the respective fields.
Before the enactment of Part IIIA 1936 in 1986, more effort was demanded to discriminate income and capital. After the newly enacted I T Act of Australia in 1997 including capital gains, the definition is clearly derived and described as per Chapter 3 of the said act to be included as assessable income. The application of this rule is enforced when the taxpayer has acquired the asset on or after 20th September, 1985 with subsequent disposal of the asset after that date.
The three cases discussed above had contributed to the development of Australian Tax law and their relevance will not be diminished for reference of future cases related to the field of discrimination of income and capital.
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