ASSIGNMENT ONE
FEDERAL COMMISION OF TAXATION V THE MYER EMPORIUM LTD (1987)
The federal commissioner and the Myer Emporium Company limited (Myer) marked a significant change in approach in tax jurisprudence .since 1987, virtually every case dealing with the characterization of receipts as income or capital has cited called Myer, usually at some length.
But is going too far to suggest that Myer transformed the way in which income is characterized the decision in Myer reflects a reduced emphasis on formalism and legal technicalities, the main stream approach of the courts. Under that approach the characterization of amounts as income as income or capital is determined as a matter of commercial substance and not by subtleties of drafting, or by unduly literal or technical interpretations.
While some prominent cases could have been decided the other way on their facts ,its inherent in the fact intensive difference between income and capital that hard cases will arise that can be decided either way. These circumstances do not detract from the enduring importance of the decision in Myer.
A brief introduction of the topic above will be a genuine implication of the truth f the case.
Brief introduction
From the years back then it has been almost 20 years since the high court handed down its decision in federal commissioner of taxation and the Myer Emporium Ltd (Myer)
It is therefore easy to forget that the decision aroused real controversy and apprehension among tax payers. This decision was seen as a landmark in tax jurisprudence and the immediate and the immediate reaction was that a reappraisal of traditional distinctions between revenue and capital was required.
Basing the historical significance if the Myer the fear of the decision would have been be destructive of traditional doctrine, this was so much that in 2002 one commentator expressed the view that in retrospect the decision was merely an illustrative of more pragmatic and a realistic understanding by the judiciary of modern business and in many and is quite consistent with the general approach taken by the courts.
From distance it is possible to see much more clearly that the controversy that initially surrounded the Myer was the product of the era that immediately proceed it rather than that any remarkable extension or innovation worked by the decision in terms of traditional jurispudesence .The decision remains a land mark in tax jurisprudence,
It is important for the cogence and practically of its reasoning and for shift in the approach that returned tax jurisprudence to its root.
Legal issue
Different look on the legal proceedings and a matter of facts that were experienced during the case this may include;
Commissioner tax ruling
Lease incentive
Capital gain tax
The new climate tax and many others
Brief introduction
Concept of the income
The income assessment act has never contained any definition of income or for that matter capital. The closet it comes is to define from personal exertion and income property but both definitions repurpose that income has a recognized meaning. Much the same approach has been adopted in the income tax assessments acts let’s see a brief definition of the term
The word income is not a term of art, and what forms receipts are comprehended within it and what principles are to be applied to ascertain how much of those receipts ought to be treated as income, must be determined in accordance with the ordinary concept of mankind, except in, so far as the statute which states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income or that special rules are to be applied for arriving at taxable amount of such receipts.
To determine whether a receipt is as income or a capital nature, various factors must be relevant, sometimes the character of receipts will be revealed mostly clearly by periodicity, regularity or re occurrence .sometimes by the character of a right or a thing disposed of in exchange for the receipt. The factors relevant to the ascertainment of the character of a receipt are not necessarily the same as the factors relevant to the ascertainment of the character of its payment.
Ti set the scene for discussion of Myer, it is helpful to identify some factors relevant to the characterization of income and capital receipts that were established by the case prior 1987.in variety of situations, net amounts were recognized as ordinary income. Examples of these situations are; profits of an investments company where the shares in question were not trading stock
Exchange gains and losses and the profits from sale of land not purchased for the purposes of resale at profit but sold as business activity.
Let’s look on an overview of the decision of Meyer.
The decision in Myer
The decision in Myer was straight forward. The Myer emporium ltd(Meyer)lent $80million to its subsidiary, Myer finance ltd at interest and for a term in excess of seven years, three days later it assigned Citicorp Canberra PTY limited the moneys due or to become due as interest under the loan agreement for consideration of $45.37million .Citicorp paid there consideration on the same day. The consideration was calculated as the value at the date of the assignment of the right to interest over the period of the loan. The loan agreement and the assignment were interdependent In the sense that Myer would not have entered into a loan agreement unless it was Citicorp would immediately thereafter take an assignment of the moneys that would become due the loan agreement as interest payments.
in joint judgment the court held a consideration that Myer received for the assignment constituted income under caps 25 of the agreement. Myer essentially advanced two arguments .first it submitted that a gain made as the result of business deal or venture in the nature of trade is not income unless it is made in the ordinary course of carrying out business.
The high court relied upon longstanding authority to reject the first argument ,the court first observed that although it is well settled that a profit gain made in the ordinary course of carrying out business .secondly submitted that the assignment transaction involved a realization of capital assets and consequently the amount of $45.37million that Myer coupled this argument with a submission that the amount received exactly reflected the value of the capital assets that it had realized so there was no profit to be taxed.
The high court relied upon understanding authority to reject the first argument. The court first observed that although it was well settled that a profit or gain made in the ordinary course of carrying business constitutes income, it does not follow that profit or gain made in transaction entered into other wise than in the ordinary course.
A gain in the ordinary course has a profit making sense and is considered as an income as the purpose of the business is profit.
However a gain outside the ordinary course of business form of transaction has a profit making sense could also be considered as a income. The determination depends on the very much the circumstances of the case.
The court said that if the circumstances give rise to the inference that the taxpayers intention was profit ,the profit will be income even if the transaction was extra ordinary judged by the reference to the ordinary course of the tax payers business .the fact the gain is made as a the result of an isolated venture or as an off transaction does not preclude it from being properly characterized as an income.
The court elaborated on the conclusion later in this judgment
If the profit is or be made in the course of carrying on business that in itself fact of telling significance. It does not detract from its significance that the particular transaction is unusual or extra ordinary judged by the reference to the transactions in which the taxpayers agree or engages. And if it appears that there is a specific profit making scheme it is pointless to say that it is unusual or extra ordinary in the sense of being discussed as this was reflected by what is seen by both parties in the true reflection on the court concerned.
Applying this principle to the fact that, the court concluded that the loan agreement and the assignment transactions were the integral elements in an overall profit making scheme. Once the two transactions are seen as an integral elements in one profit marking scheme it is apparent that Myer made a relevant profit ,that profit being amount payable on the assignment ,The court stated that Myer had made a profit of the first interest payment and the amount paid to the assignment as a result of the two transaction.
While the value of right to recover was substantiality less than the amount of the principal as there was no obligation to repay, this circumstances cannot affect the character of the consideration of the assignment. Such as circumstance exists in every case where money is lent for a fixed term. The same process of reasoning supported the courts conclusion that the amount also constituted the second limb of section 2a.
The most contentious aspect of reasoning is whether the overall scheme generated a commercial profit.plainly, the court was right to conclude that the loan and the assignment transactions were integers in a single scheme, and that Myer was actuated by the purpose of deriving a lump sum receipt of $45.37 million.
Regarded as a single scheme it is not to the point that Myer received the sum from corticop rather than from the borrower. As the court had already noted, the authorities provide ample support for the view that an isolated or extra ordinary transaction that is undertaken for profit marking purposes in the context of carrying on business operations.
After all the above a look on various legal issues is illustrated below.
Legal issues
Commissioner tax ruling
In the taxation ruling the commissioner sets out his views regarding the proper application of Myer .by and large the taxation ruling contains a useful summary of the principles established by Myer .in some prospects however it unduly extends those principles.
One extensions concerns the specify of the purpose which must be demonstrated to attract the principles in Myer’s mentioned above the full federal court which was held in Westfield that there must exist a purpose of profit making by the very means by which the profits was made. the taxation ruling discusses further passages in the Westfield in which hill considered the profit were the profit derived by one of a number of alternative methods contemplated by the taxpayer .using this discussions as a hint. Ruling assets that a profit made in either of the following situations;
One A taxpayer acquire property with a purpose of making profit by which ever means prove most suitable and a profit is later obtained by any means which implements the initial profit making purpose or;
A taxpayer acquires property contemplating a number of different methods of making profit and use of one of those methods in making profit
New tax climate
It has been registered that Myer created a climate which has made the court more inclined to find that borderline receipts are of an income character.
Various cases have been invoked to support this thesis beyond those mentioned above. in Allied mils industries PTY ltd commissioner of taxation the full federal court held a lump sum payment received by the company as consideration for surrendering all of its rights under a sole distribution agreement was assessable as ordinary income. While acknowledging that payments made as compensation for the termination of a contract may often have the character of capital, the court said that whether that is so in any particular case depends on the nature of the contract which generated the payment.
Capital gain tax
Prior to the enactment of the part of law of part three of the ITAA in 1936 in 1986 much greater consequences attached to the distinction between capital and income ,part 3 and the corresponding provisions in chapter three which include the net capital gains, which are expansively defined in the taxpayers assessable income. They apply where tax payers acquires the asserts on or after September 1985 and the disposal of the assesses after the date .when this part was enacted the old act was amended that provided no application of the asserts after the above provided dates. in summary the commission of taxation assessed the whole of the incentive under section 25 rather than the part three .the taxpayer argued that any net gain arising from incentive payment would be a subject to capital gains so that there was no need to strain the principles in Myer to reach an appropriate tax result.
Neither nor the judgments in the high court refers to the possible application of the incorporate parts or sections.
Lease incentive
Cooling was the first of several cases concerning lease incentive. In aggregate these demonstrates the limits of Myers principles.
The critical consideration in cooling were that firm had no need to move and a (not significant purpose)of moving was to obtain a commercial profit by way of incentive payments. it was not disputed that the whole of the incentive payment represented a profit by the taxpayer .however, the decision in cooling is not all together satisfactory. This reasoning from Hill j involves a logical slide from the propositions that incentive payments were an ordinary incident of leasing premises in new building.
In summary, so the present case comes down to the question whether in entering into a transaction designed to achieve what is was mended to achieve, the client had a profit making purpose from which it received neither profit nor gain. This can for present purpose resolve itself into a single question namely whether the applicant made a profit or no gain in the relevant sense. Since if it did there is no dispute that the applicant intended the nature and consequences of its actions.
Conclusions of the above (legal issues)
Myer undoubtedly made a significant change in approach in tax jurisprudence .virtually every case dealing with the characterization of the receipts as income or capital ,cites Myer ,usually at some length .but it is going too far to suggest that Myer transformed how income is characterized.
I agree with Hills’s assessment that the Australian court’s perception has broadened the concept of income and, consequently, narrowed the concept of capital is merely a perception.
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