Assess the significance of EACH of the following cases for the development of Australian tax law:
Californian Copper Syndicate v Harris (1904) 5 TC 159
Whitfords Beach Pty Ltd v FCT 82 ATC 4031
Myer Emporium Pty Ltd v FCT 87 ATC 4363.
The case study involves the issue on assessability of capital profits and realization of capital asset with respect to the property sale utilized for minerals exploitation. Accordingly, the case involved the regulations of Taxation Rulings under section 25(1) ITAA 1936 for assessing the sale of property as ordinary income or capital income[1]. The case involved the issue on sale of land as the company did not have sufficient funds to improve it for mining purpose therefore, the company sold it and realized substantial profit. The tax surveyor contended that the profit earned by the company should be assessed as ordinary income rather than capital income since the intention of the company was to earn profit from acquisition and resale of land. It was observed that the company did not have sufficient funds since the beginning therefore, sale of land for profit could not be referred as investment substitution. Besides, capital income as per the regulations under ITAA 97/36 refers to the income derives from the sale of personal assets that may be long- term or short- term[2].
In the given case study, the court observed that the taxpayer company endeavored to earn profit from the sale of acquired land in the ordinary course of business. It has been noted that the taxpayer entered in the speculative business actions by acquiring the land and sale it for profit since unavailability of fund did not occur after the acquisition of land. In addition, regulation under ITAA 97 provides that the income earned by way of speculative business transaction is regarded as ordinary business income rather than capital income and hence the same should be included in the taxable income[3]. Accordingly, the present case study provides emphasis on the consideration of profit earned from the speculative business as many taxpayers enter such business transaction and consider the income as capital income so that it is not included in the assessable income. As capital income is not included in the assessable income of and taxed separately at relatively lower rate, taxpayers enters into the transaction of sale of property with the intention of earning profit and assess the same as capital income. Therefore, judgment of the present case clarifies the difference in assessment of capital income and ordinary income in accordance with the regulations of ITAA 97.
The present case study incorporates the issue on assessability on the capital income or ordinary income of the taxpayer considering the regulations under section 25(1) or section 26(a), ITAA 97/36[4]. Facts of the case involved a group of company formed by fishermen who owned entire securities of the assessee company. It was considered that the company acquired a piece of land close the shacks, which was owned by the fishermen providing them the authority to use the beach. However, the company together with three other development organizations subdivided the land for the purpose of sale during the year 1967. The company also acquired the shares of fishermen for a value of $1.6 million and changed the land zone for developing it for the purpose of residence subdivision and disposed off for profit. Accordingly, the taxpayer company considered the profit on sale of land as capital income contending that the sale proceeds realized from the capital asset.
On the contrary, Commissioner of tax assessed the income from sale of land as ordinary income under section 25(1) ITAA 36 stating that the income had been realized from the business of development of land. Accordingly, high court contended that the transaction on sale of land cannot be considered as capital transaction since the activities on land constituted land development business while the purpose of sale of land was to earn profit. Moreover, capital transaction as per ITAA 97/36 refers to the transfer of capital asset that has not been used to carry business and the purpose of sale of asset is not to earn profit. Similar to case of Scottish Australian Mining Co Ltd v FC of T (1950) 81 CLR 188 it was held that the income from sale of land derived after the mining business was given up by the taxpayer[5]. Besides, in case of present situation, sale of land took place during the continuation of business with the purpose of constituting commercial venture. Therefore, it can be said the assessment of income under capital transaction should be considered only when the purpose is not to earn profit together as well as the transaction should not be conducted as commercial transaction. The present case study provides understanding on assessment of income from property to be classified as ordinary income or capital income. It provides emphasis on considering the purpose of sale of property that should not be conducted as for conducting business or for development of business activities[6].
The given case study involves the issues on assessment of income amounted to $45,370,000 as ordinary income or capital income during the taxable year 1981. In case of Myer Emporium Pty Ltd. the significance of assessment cannot be appreciated completely since there were several decisions that covered the concept of substance over form for assessing the income as ordinary income under section 25(1), ITAA 36 or as capital income under ITAA 36. The present case constituted the taxability of income from isolated transaction that the taxpayer contended as capital income instead of ordinary income[7]. Federal court of Australia held and decided that the income amounted to $45,370,000 received by Myer Emporium can be regarded as ordinary income instead of capital income since the income was derived from the transaction from ordinary course of business. The case was similar to the decision in Ruhamah Property Co Ltd v FC of T in which the court held that the income from sale of property can be assessed as ordinary income since the purpose of the taxpayer was to earn profit[8].
However, the Myer Emporium did not agree to the decision stated by the Federal Court of Australia and appealed to the Supreme Court contending that the income to be assessed as capital income as it has been derived by transferring a property. The present case incorporates the concept of statutory declaration that has been accepted under the Australian Law, which consists the income from property under business operations[9]. As the case incorporates, the consideration received as interest for the purpose of loan received by the taxpayer against the assignment for moneys under a contract entered with Citicorp. It was observed that the intention of earning income was to earn profit from the ordinary course business hence; it cannot be assessed as capital income under the regulation of ITAA 97/36. Federal law of Australia provides clear concept on assessment of profits from property transfer and isolated transactions, which is essential to be considered by the taxpayers[10]. Accordingly, the present states the clarification on assessing the income that derives as interest income under an agreement is an income under ordinary course of business.
Federal Commission of Australian Taxation Office introduced tax on the income derived from sale of capital assets and property, which impose tax liability at special rates. The government of Australia introduced tax on capital gains to comply the principles of equality and economic with respect to generate revenue in appropriate manner. Considering the issues of the above mentioned cases, it was observed that the taxpayers used to assess the income from sale of properties or any isolated transactions as capital income so that their tax liability can be minimized. It was due to consideration of assessable income derived from ordinary course of business while capital income was exempted to include as taxable income as per the regulations of ITAA 36[11]. Accordingly, taxpayers used to take advantage contending several transactions as capital asset transfer instead of assessing as ordinary income under section 25(1) in order to save the amount of tax liability.
The above three cases considered the matter of assessment of income from sale of land by the taxpayers as part of conducting business for development of land and other commercial purpose. On the other hand, capital gain tax introduced by the Australian Taxation System to assess the income from the sale of capital asset at different rates so that the income from personal assets or collectables fall under the taxability sources[12]. Previously, taxpayers used to take advantage for the assessment of profitability as capital income to save the tax liability considering the sale of properties as capital asset transfer. Moreover, introduction of capital gain tax provides clarification on understanding the difference between capital income business income as capital income is no longer exempted[13].
Reference List
Armour, P., Burkhauser, R. V., and Larrimore, J. Deconstructing income and income inequality measures: A crosswalk from market income to comprehensive income. The American Economic Review, (2013) 103(3), 173-177.
Ato.gov.au. Home page. [online] Available at: https://www.ato.gov.au (2017) [Accessed 1 Feb. 2017].
Austlii.edu.au. Australasian Legal Information Institute (AustLII). [online] Available at: https://www.austlii.edu.au/ (2017) [Accessed 1 Feb. 2017].
Cloyne, J. S., and Surico, P. Household debt and the dynamic effects of income tax changes. The Review of Economic Studies, (2017) 84(1), 45-81.
Faccio, M., and Xu, J. Taxes and capital structure. Journal of Financial and Quantitative Analysis, (2015) 50(03), 277
Howard, M., Pancak, K. A., and Shackelford, D. A. Taxes, investors, and managers: Exploring the taxation of foreign investors in US REITs. The Journal of the American Taxation Association, (2016) 38(2), 1-19.
Jacob, M. Tax regimes and capital gains realizations. European Accounting Review, (2016) 1-21.
Ludwig, T. Pay for Success: building on 25 years of experience with the Low Income Housing Tax Credit. Community Development Investment Review, (2013) 9.
Rimmer, X., Smith, J., and Wende, S. The incidence of company tax in Australia. Economic Round-up, (2014) (1), 33.
Sharkey, N. C. Simplicity in the Chinese context: The categories of differential income tax treatment and their complications. In The Complexity of Tax Simplification (2016) (pp. 45-69). Palgrave Macmillan UK.
Taylor, G., Richardson, G., and Lanis, R. Multinationality, tax havens, intangible assets, and transfer pricing aggressiveness: An empirical analysis. Journal of International Accounting Research, (2015) 14(1), 25-57.
Wiseman, S. A. Property or Currency: The Tax Dilemma behind Bitcoin. Utah L. Rev., (2016) 417.
Ato.gov.au. Home page. [online] Available at: https://www.ato.gov.au (2017) [Accessed 1 Feb. 2017].
Austlii.edu.au. Australasian Legal Information Institute (AustLII). [online] Available at: https://www.austlii.edu.au/ (2017) [Accessed 1 Feb. 2017].
Jacob, M. Tax regimes and capital gains realizations. European Accounting Review, (2016) 1-21.
Austlii.edu.au. Australasian Legal Information Institute (AustLII). [online] Available at: https://www.austlii.edu.au/ (2017) [Accessed 1 Feb. 2017].
Faccio, M., and Xu, J. Taxes and capital structure. Journal of Financial and Quantitative Analysis, (2015) 50(03), 277
Rimmer, X., Smith, J., and Wende, S. The incidence of company tax in Australia. Economic Round-up, (2014) (1), 33.
Armour, P., Burkhauser, R. V., and Larrimore, J. Deconstructing income and income inequality measures: A crosswalk from market income to comprehensive income. The merican Economic Review, (2013) 103(3), 173-177.
Ludwig, T. Pay for Success: building on 25 years of experience with the Low Income Housing Tax Credit. Community Development Investment Review, (2013) 9.
Taylor, G., Richardson, G., and Lanis, R. Multinationality, tax havens, intangible assets, and transfer pricing aggressiveness: An empirical analysis. Journal of International Accounting Research, (2015) 14(1), 25-57.
Sharkey, N. C. Simplicity in the Chinese context: The categories of differential income tax treatment and their complications. In The Complexity of Tax Simplification (2016) (pp. 45-69). Palgrave Macmillan UK.
Howard, M., Pancak, K. A., and Shackelford, D. A. Taxes, investors, and managers: Exploring the taxation of foreign investors in US REITs. The Journal of the American Taxation Association, (2016) 38(2), 1-19.
Wiseman, S. A. Property or Currency: The Tax Dilemma behind Bitcoin. Utah L. Rev., (2016) 417.
Cloyne, J. S., and Surico, P. Household debt and the dynamic effects of income tax changes. The Review of Economic Studies, (2017) 84(1), 45-81.
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