Sadiq, K. et al., 2019. Principles of taxation law 2019, Thomson Reuters (Professional) Australia Ltd.Answers to QuestionsCHAPTER 8 – INCOME FROM BUSINESSQuestion 8.1AnswerTo determine whether Georgina is in business or only conducting activities that are preliminary to abusiness, it is necessary to apply the indicia of a business used by the courts. In Ferguson v FCT(1979) 9 ATR 873, the main criteria used were that: a purpose of profit‐making may be important but not essential; repetition and regularity are considerations, but a business could involve a single transactionand every business must commence with a single transaction; organisation and a businesslike approach with appropriate record‐keeping etc are indications ofa business activity; having other sources of income did not preclude this activity from being a business; the size of the operation and the amount of capital are relevant, but must be looked at in thecontext of the type of activity, eg a recreational pursuit may have considerable effort andresources contributed to it and not be a business.The fact that Georgina conducts the activity through an agent will not in itself show that she is not inbusiness as the court will consider a number of factors and weigh these up to form a conclusion.The facts given for Georgina do not have some of the key elements that were present in Ferguson vFCT. For example, there is no clear indication of a longer term plan to develop the herd, there is noreal personal involvement in the planning and operation of the breeding program, the size of thetransaction was rather small and there is no capital involved.On the other hand, a business may exist even though it is small (Thomas v FCT 3 ATR 165) orconducted inefficiently. If Georgina could show that this breeding program is part of a plan to build alarger herd of stud cattle and that she was undertaking this in a businesslike manner, there would bea reasonable case to argue that she is in business. However, on the facts presented, it would bedifficult to justify that her activities are a business.Question 8.2AnswerThe first issue raised in the question is whether the sale is an isolated transaction that is ordinaryincome following the decision in FCT v Whitfords Beach Pty Ltd (1982) 12 ATR 692, or whether it is amere realisation of a capital asset. Axis Holdings is carrying on a farming business and whether this isan extraordinary or isolated transaction will depend on whether the current business is still inoperation: see [8.170]. As the property is developed for resale it could be argued that the businessof farming has ceased and the sale is an isolated transaction. On this basis, the principles in FCT vWhitfords can be applied to help determine whether this sale is ordinary income or a mererealisation. From the cases following Whitfords Beach it appears that they are only guidelines and nostrict rules on how a mere realisation can be separated from a sale undertaken in a businessmanner. However, the businesslike approach to the disposal is an important distinguishing factor.This is seen in cases such as Casimaty v FCT (1997) 37 ATR 358 where the development was nottaken to the final stage of selling individual blocks. In this case, Axis Holdings has sold the area as one2parcel of land and this fact would help the argument that it is a mere realisation, as in ScottishAustralian Mining Co Ltd v FCT (1950) 81 CLR 188.These facts also need to be considered in relation to the possible application of the first strand ofFCT v Myer Emporium Ltd (1987) 163 CLR 199. The first strand of Myer will apply if there is acommercial transaction entered into with an intention to profit and the profit ultimately realisedarises from the initial intention. For the first strand of Myer to apply, it would be necessary to showthat the property was purchased with the intention to sell it at a profit. The facts give someindication of this intention in that the shareholders of the company have been involved in propertydevelopment and the purchase is in an area of extensive real estate development. However, thecompany appears to have been established to operate a farming business. The other factor that maybe used to argue against the application of Myer is that the property was not developed as might beexpected from a property developer, but was sold rather quickly because of imminent changes tozoning. The decision in Westfield Ltd v FCT (1991) 21 ATR 1398, where it was shown that theintention to sell the property must clearly exist at the time of the purchase, may also be used tosupport the case that this is a mere realisation.It could be reasonable to argue that this is ordinary income from an extraordinary transactionprovided it is assumed that the development is continuing, but if the sale is not ordinary income itmay be subject to CGT.Question 8.3AnswerThe issue raised in the question is whether the sale is an isolated transaction that is ordinary incomefollowing the decision in FCT v Whitfords Beach Pty Ltd (1982) 12 ATR 692, or whether it is a mererealisation of a capital asset. Peter has been carrying on a farming business and whether this is anextraordinary or isolated transaction will depend on whether the current business is still inoperation: see [8.170]. The subdivision of the land and the sale of the separate block indicate thatthe business of farming has ceased and the sale is an isolated transaction. On this basis, theprinciples in FCT v Whitfords can be applied to help determine whether this sale is ordinary incomeor a mere realisation. From the cases following Whitfords Beach it appears that there are onlyguidelines and no strict rules on how a mere realisation can be separated from a sale undertaken ina business manner. However, the businesslike approach to the disposal is an importantdistinguishing factor. This is seen in Statham v FCT (1988) 20 ATR 228 where the lack of involvementin the development by the owner was a consideration in the court holding that the sale was a mererealisation. In Stratham, the property was developed and finally sold as subdivided lots through areal estate agent so there was a high degree of development. In Peter’s case there is a strong chancethat this will be seen as an isolated business transaction with the net gain taken as ordinary incomeunder s 6‐5 because of the extent of the development undertaken. The main case against thisconclusion would be that Peter had limited involvement in the process.Clearly these facts do not give rise to the application of the first strand of Myer as Peter did notpurchase this property with the intention of profiting through its sale. The property was initiallypurchased to conduct a farming business and the fact that he may have had in the back of his mindthat the land may at some time be sold at a profit is not sufficient to apply Myer: Westfield Ltd v FCT(1991) 21 ATR 1398.If the sale is not ordinary income it may be subject to CGT, however it appears from the facts thatthe property was acquired pre‐CGT and hence not subject to CGT. If Peter undertook any capital3improvements to the land, depending on the extent, the improvements may be CGT asset throughthe application of the separate CGT asset rule: see [11.200]. In the alternate, the profit may besubject to s 15‐15: see [8.290].Question 8.4AnswerAs Bruce has not undertaken a business of development, the principle from FCT v Whitfords BeachPty Ltd (1982) 12 ATR 692 cannot apply. Therefore, the issue that must be considered is whether thefirst strand of Myer would make this sale ordinary income and assessable under s 6‐5 or whether it isa mere realisation and therefore capital in nature. The first strand of Myer will apply if there is acommercial transaction entered into with an intention to profit and the profit ultimately realisedarises from the initial intention.The facts clearly indicate that Bruce purchased this land with the intention of subdividing it andselling it at a profit. However, the initial plan never came to fruition and the property had to be soldbecause it could not be subdivided. Nevertheless, there is still the possibility of the application of thefirst strand of Myer on the basis that the property was purchased with an intention to develop it andsell it at a profit.If the sale is not ordinary income, it may be subject to CGT.Question 8.5AnswerThis is an isolated transaction issue, under what is commonly known as the “first limb of Myers” – ie,if a commercial transaction has a profit‐making purpose, then the proceeds will be ordinary incomeunder s 6‐5. However, for the “first limb of Myers” to apply, the profit‐making purpose on acquiringthe asset must also be consistent with the way the profit was eventually made (Westfield).For the sale to be ordinary income under Myer, both the commercial transaction and the intentionto profit must be shown and, as Peta does not appear to be in business, the intention must bepresent at the time of acquisition. In this case the facts indicate that Peta had an intention of profitthrough the development and sale of part of the property so it could be argued that the intentionexisted. However, the original plan was not proceeded with and for Myer to apply it would benecessary to show that the intention of profit survived the change in plan. In contrast, it could beargued that the original intention was abandoned and that this is a mere realisation at the bestpossible price, as in Westfield. The fact that Peta was approached by the tennis club supports theview that this is a change in plan, and it could be argued that the original intention has beenabandoned.The Commissioner may disagree with this based on the view set out in TR 92/3 at [55‐58] and arguethat an amount will be assessable if the taxpayer:a) acquires property with the a purpose of making a profit by whichever means prove mostsuitable and a profit is later obtained by any means which implements the initial profit‐making purpose;b) acquires property contemplating a number of different methods of making a profit and usesone of those methods in making a profit; or4c) enters into a transaction with the purpose of making a profit by one particular means butactually obtains the profit by a different means.In Case 1 (1999) 99 ATC 101, the AAT stated that these paragraphs of TR 92/3 were “wrong andshould be rewritten”. So what did the High court mean in Myer? Case 1 of 1999 involved anintention to make a profit but the actual profit was made in a different way. The courts said it wasnon‐assessable. Also in FCT v Haass (1999) 99 ATC 4814 it was held that the amount was assessablebecause the way in which the profit was made was only slightly different to the way in which it wasoriginally intended. If the taxpayer intended to make a profit by any number of alternatives, eventhough the actual method had not been determined initially, the profit may still be assessable. Thatis, the intention was to sell at a profit but the profit was made in a way that was not specifically setout at the time the acquisition was made.It could also argue that the profit is assessable under Whitfords Beach – ie, Peta is in the business ofreconditioning tennis courts. In the Whitfords Beach case, it was suggested by the judges that asimple subdivision and sale of land would not be ordinary income, but a mere realisation. However,an extensive development of land (which includes not only a subdivision, but also constructingroads, etc) would constitute a business and so would be ordinary income. Applying this principle toPeta requires a determination of whether what she has done is enough to show a business orcommercial intent – this is a question of fact.Question 8.6AnswerConsider whether the betting is a business activity on its own and therefore ordinary income or, ifnot, is the punting a transaction of the horse training and racing business and therefore ordinaryincome under s 6‐5?From the decisions in Babka v FCT (1989) 20 ATR 1251 and Evans v FCT (1989) 20 ATR 922, it can beseen that the courts have applied a higher test of business to gambling activities. To be judged asbeing in the business of gambling it is necessary to show that you take a commercial decision inrelation to the gambling. This would require the ability to alter the odds or to manage the risks, suchas would be the case for a casino or book‐maker. It is not likely that the gambling would be abusiness in its own right in this case.It is more likely that the gambling will be part of the horse racing and training business, as in Prince vFCT (1959) 7 AITR 505. In this case it could be argued that the high level of participation in the horseracing business makes the gambling part of the business. This is a question of fact and a conclusioneither way is fine.Question 8.7AnswerNeither of the payments would be normal business proceeds and so would be unlikely to constituteordinary income. This is because the payments were not within the scope of the business. Althoughin GP International Pipecoaters Pty Ltd v FCT (1990) 21 ATR 1 a government payment to build afactory was found to be ordinary income due to being in the scope of the business, the facts weredistinguishable to the ones here. Specifically, in GP International, the taxpayer was incorporated to5build and use a factory under a government contract, and was given government funds for thesetasks. Whereas on these facts the government payments were for making the business operableagain.However, both of the payments would be assessable under s 15‐10 and so would constitutestatutory income. Section 15‐10 would apply because the taxpayer is receiving subsidies in relationto carrying on a business.
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