Defining Business Profits: FCT v Cooling 90 AtC 4472; (1990) 21 ATR 13 at ATC 4476-4485

Caselaw in taxation: FCT v Cooling (1990)

  • The case:
    • The taxpayer was a partner in a Brisbane firm of solicitors. Over the 50 hears of its existence, the firm had practised from various leased premises.
      • The firm agreed the A.M.P. Society agents’ offer to relocate to a new office block with a 10-year lease with an incentive $162,000. The building was built by the A.M.P.
      • The taxpayer received $21,060 as his share of the incentive payment, but stated that it was not assessable.
    • The Commissioner included that amount in the taxpayer’s assessable income
      • The taxpayer objected, but it was disallowed. Then the taxpayer appealed to the Federal Court
  • The decisions
    1. The Federal Court: the appeal was allowed:
      • the payment was made so that the firm would move to the new premises and was made independently of the entity which formally took over the lease.
      • the receipt of the payment was not incidental to the taxpayer’s occupation as a solicitor and therefore not assessable under sec 25(1) and sec 26( e).
      • the payment was not to be caught by sec 160M(6) or (7) and was not assessable under the capital gains tax provisions of Pt IIIA, because the rights created by the lease were not carved out of any asset held by the taxpayer
    1. The Commissioner then appealed to the Full Federal Court. The appeal allowed:
      1. The trial Judge was entitled to find that the payment was an incentive to the firm to cause it to move rather than a payment for services rendered by the firm as contended by the Commissioner. The character of the payment as income was not to be determined by focusing on the words of the offer letter (written by the AMP agents) to the exclusion of all the circumstances surrounding the payment which provided the real context. His Honour was not in error in considering that the payment was made so that the firm would move to Comalco House and that it was made independently of the entity which formally took over the lease. It was therefore clear that sec. 26(e) relating to services had no application.
      2. Where a taxpayer operates from leased premises, the move from one premises to another and the leasing of the premises occupied are acts of the taxpayer in the course of its business activity, just as much as the trading activities that give rise more directly to the taxpayer’s assessable income. The transaction entered into by the firm was a commercial transaction; it formed part of the business of the firm and a not insignificant purpose of it was to obtain a commercial profit by way of the incentive payment. The lease incentive payment was therefore income according to ordinary concepts and was assessable under sec. 25(1).
      3. Although unnecessary to consider the application of the capital gains tax provisions, sec. 160M(6) could not apply as that subsection should be confined to those cases where proprietary rights are created out of or over existing assets in circumstances where the asset affected by the rights created continues to exist.
      4. Per Lockhart and Gummow JJ. (with Hill J. dissenting): Section 160M(7) would apply to include the payment in question in the assessable income of the taxpayer. The entry into the lease and the giving of the guarantee (of the service company’s obligations under the lease) constituted an “act or transaction” that took place in relation to an “asset”, namely the new offices, within the meaning of sec. 160A and 160M(7)(a). The “asset” first-mentioned in sec. 160M(7)(a) was not confined to an asset of the taxpayer. There was a sufficient connection between the receipt of the lease incentive payment and those acts or transactions to conclude that the payment was received “by reason of” those acts or transactions. In the result the deemed disposal and creation of an asset to which sec. 160M(7) is directed occurred. Reasons as to the application of capital gains tax provisions should be read together with those stated in Hepples v. F.C. of T. 90 ATC 4497.

        • Per Hill J. (dissenting): Section 160M(7) does not apply in this case. The operation of sec. 160M(7) should be confined to assets of the taxpayer and should not extend to assets of some other person.

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