Defining Business Profits: FCT v Myer Emporium Ltd (1987) 163 CLR 199

Caselaw in taxation: FCT v Myer Emporium Ltd (1987)

  • The case:
    • The taxpayer was a large retail company
      • On 6 March 1981, the taxpayer (Myer) lent $80 million to Myer Finance, provided that:
        1. the principal would be repaid to Myer on but not pror to the 30 June 1988
        2. Myer Finance would pay interest to Myer on the dates and in the amounts set out in the agreement
        3. Myer had right during the term of the loan to sell, transfer or assign the Principal Amount and/or the interest payable or prepayable
      • 3 days later, Myer assigned to Citicorp the moneys due or to become due as the interest pursuant to the loan agreement, so Citicorp paid the sum of $45.37 million to Myer on that day.
    • The Commissioner treated the whole of $45 million lump sum as assessable in the year of receipt and the taxpayer appealed.
  • The decisions:
    1. Victorian Supreme Court and Full Federal Court held that the lump sum was a non-assessable capital receipt.
    2. The Commissioner appealed to the High Court
      • The Commisioner’s arguments:
        • a gain made by a taxpayer as the result of a business deal is income of the taxpayer, even if the transaction yielding the gain is outside the ordinary course of the taxpayer’s business.
      • The taxpayer’s argument:
        • a gain made as the result of a business deal in the nature of trade is not income unless it is made in the ordinary course of carrying on business
        • the realisastion of a capital asset is capital, not income
      • The High Court held that the Commissioner’s appeal was allowed:
        1. A receipt may constitute income if it arises from an isolated business operation or commercial transaction entered into otherwise than in the course of the carrying on of the taxpayer’s business, so long as the taxpayer entered into the transaction with the purpose of making a relevant profit or gain from the transaction.
        2. A contractual right to interest is not the source of the interest and a contractual right severed from the principal debt is not the structure which produces the interest. The sale by a lender of his mere right to interest for a lump sum converts future income into present income.
        3. The consideration for an assignment of the right to future income may constitute income in a variety of circumstances. Many instances may be given of the sale of a capital asset for a consideration which is income in the hands of the seller. For most part these are instances of the sale of a capital asset for periodic, regular or recurrent receipts, with periodicity, regularity or recurrence being characteristics of an income receipt; but there is no reason for thinking that the conversion of a capital asset into an income receipt is confined o such cases.
        4. The transactions in question in this case were entered into by the taxpayer in the course of its business. Although the transactions, and more particulary the assignment, were novel in the sense that this was the first time that the taxpayer had entered into such an arrangement, this fact did not take them out of the course of the carrying on of the taxpayer’s profit-making business
        5. It was not possible to describe the transactions, or the assignment standing on its own, as the mere realisation of a capital asset. The assignment was not unrelated to the loan agreement – the taxpayer would not have entered into the loan agreement unless it knew that the finance company would shortly thereafter take an assignment of the moneys due or to become due for a sum approximating the amount payable in consideration of the assignment. From the taxpayer ‘s viewpoint, the two transactions were essential and integral elements in an overal profit-making scheme.
        6. Accordingly, the $45 million lump sum received by the taxpayer constituted assessable inome under both sec 25(1) and the second limb of sec 26(a).

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