Journal of Australian Taxation
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DISTINGUISHING BETWEEN INCOME AND CAPITAL RECEIPTS - A SEARCH FOR PRINCIPLE
By Michael Flynn[*]
The purpose of this article is to provide the reader with a conceptual framework for determining whether a gain which has been realised by a taxpayer is capital or revenue in nature. It will be asserted that the characterisation of receipts as revenue or capital can be explained by reference to two criteria - the consideration in respect of which the item is received and the quality of the receipt as a flow. An attempt is made to outline the scope of these two principles.
Section 6-5(1) of the Income Tax Assessment Act 1997 (Cth) ("ITAA97") provides that "[y]our assessable income includes income according to ordinary concepts, which is called ordinary income". The phrase "income according to ordinary concepts" is not defined in the ITAA97. Therefore, as was the case with the Income Tax Assessment Act 1936 (Cth) ("ITAA36"), it is necessary to turn to case law to determine the meaning a court will attribute to the section.
Prior to the introduction of capital gains tax the distinction between income and capital receipts was critical, as capital receipts generally escaped tax. A conclusion that an item is on capital rather than revenue account no longer has such a dramatic impact. Instead, such a gain will probably fall to be taxed as a capital gain. However, even though gains will now be taxed regardless of whether they are income or capital the method of calculating the taxable gain differs. Further, a range of assets remains outside the capital gains tax net due to the exemption for assets acquired prior to 20 September 1985. The characterisation of receipts as income or capital therefore remains relevant.
From time to time courts comment about the difficulty of distinguishing between income and capital. Lord Greene MR famously remarked that "in many cases it is almost true to say that the spin of a coin would decide the matter almost as satisfactorily as an attempt to find reasons."[1]
In a similar vein the Full Court of the Federal Court has remarked that:
The problem of distinguishing between a receipt of income and a receipt of capital frequently engages the attention of the courts, and, whilst the law reports are replete with cases involving this distinction, in the end each case has been found to turn on its own facts. No criteria emerge of universal application; but the decided cases do provide useful guidance to principles which may be helpful in considering the question.[2]
The central theme of this article is that, contrary to the suggestions in the passages quoted above, certain fundamental principles may be distilled from the numerous judicial decisions concerning the income/capital distinction and that these principles provide a coherent framework for distinguishing between the two.
The state of the case law in relation to s 6-5 may be contrasted unfavourably with judicial analysis of s 8-1 of the ITAA97, where there is a generally accepted set of primary principles for distinguishing income from capital expenditure. Those criteria are to be found in the judgment of Dixon J (as he then was) in Sun Newspapers Ltd v FC of T.[3] In that case, Dixon J described the difference between expenditure on capital account and expenditure on revenue account in the following terms:
The distinction between expenditure and outgoings on revenue account and on capital account corresponds with the distinction between the business entity, structure, or organization set up or established for the earning of profit and the process by which such an organization operates to obtain regular returns by means of regular outlay, the difference between the outlay and returns representing profit or loss.[4]
In drawing the distinction, Dixon J indicated that the following factors are relevant:
There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods, commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment.[5]
While these criteria have not been explicitly relied upon in every case concerning the characterisation of expenses as revenue or capital their value as a reference point emerges most clearly in difficult or novel cases for which there is no obvious precedent. For example, in Steele v FC of T[6] the majority (Gleeson CJ, Gaudron and Gummow JJ) were able to refer to one of those criteria to support their conclusion that the interest expense claimed by Mrs Steele was deductible.[7]
In contrast to the approach in Sun Newspapers, there is no single case in which a court has laid down a set of principles that are accepted as being of universal application for determining whether receipts are on revenue or capital account. Instead the courts have tended to take a piecemeal approach, which some have interpreted as spawning a multitude of principles. Indeed, so complex has the concept become that in seeking to provide a comprehensive definition of income Professor RW Parsons did so by reference to no fewer than 15 propositions.[8] Of these propositions, eight relate to the income/capital distinction. These propositions are as follows:
Proposition 8: A gain which is a mere gift does not have the character of income.
Proposition 9: A mere windfall gain does not have the character of income.
Proposition 10: A capital gain does not have the character of income.
Proposition 11: A gain which is one of a number derived periodically has the character of income.
Proposition 12: A gain derived from property has the character of income.
Proposition 13: A gain which is a reward for services rendered or to be rendered has the character of income.
Proposition 14: A gain which arises from an act done in carrying on a business, or from the carrying out of an isolated business venture, has the character of income.
Proposition 15: A gain which is compensation for an item that would have had the character of income had it been derived, or for an item that has the character of a cost of deriving income, has itself the character of income.
In this article I will endeavour to demonstrate that it is possible to reduce the eight propositions which I have identified as relating to the capital/income distinction to two essential elements. Reducing the distinction between capital and revenue receipts to a minimum set of principles has the advantage of providing the reader with the simplest explanation of the basis of the income/capital distinction. In addition, because the principles are necessarily expressed in more abstract language they have a broader application than more specifically worded principles and should provide a more consistent frame of reference for distinguishing income from capital in novel factual situations.
It is submitted that a key concept connects Parsons' propositions 8, 9, 10, 12 (to a lesser extent than the others), 13, 14 and 15. The most authoritative articulation of that concept appears in the judgment of Brennan J in Federal Coke Co Pty
Ltd v FC of T[9] where his Honour said that:
When a recipient of moneys provides consideration for the payment, the consideration will ordinarily supply the touchstone for ascertaining whether the receipt is on revenue account or not. The character of an asset which is sold for a price, or the character of a cause of action discharged by a payment will ordinarily determine, unless it be a sham transaction, the character of the receipt of the price or payment. The consideration establishes the matter in respect of which the moneys are received. The character of the receipt may then be determined by the character, in the recipient's hands, of the matter in respect of which the moneys are received.[10]
In MIM Holdings Ltd v FC of T[11] Drummond J, applying this principle, commented that "this passage has been applied repeatedly by courts, including the Full Court of this Court". Other cases in which this principle has been applied or approved include Allied Mills Industries Pty Ltd v FC of T,[12] Reuter v FC of T,[13] JB Chandler Investment Co Ltd v FC of T,[14] and Stapleton v FC of T.[15]
The principle does not confine a court to an examination of the consideration identified in the contract between the parties. When determining whether a receipt is on revenue or capital account it is appropriate to have regard to the entire context in which the payment was made.[16] In particular, if it can be seen that a document or transaction was intended to have effect as part of a nexus or series of transactions, or as an ingredient of a wider transaction intended as a whole, the nature of the payment or receipt should be determined by reference to the series or combination rather than the particular contract under which the payment was made or received. For example, in Federal Coke the Court considered "the history of the matter and the circumstances leading to the receipt of the sums by Federal."[17] It did not confine itself to the terms of the deed under which the payment was received.
This principle may be restated more broadly to accommodate non-contractual receipts. In Federal Coke, which concerned a receipt that, from Federal Coke's perspective, was voluntary, Brennan J indicated that the correct approach in such a case is to identify "the matter in respect of which the payment is received" through an enquiry into the "how and why" of the receipt.[18] However, for the purpose of this article I will continue to refer to the principle as the "consideration principle".
The consideration principle requires a further enquiry before the nature of the receipt can be determined. What was the nature of the consideration given from the perspective of the recipient of the payment? The categorisation process called for is precisely the same as that undertaken in the context of characterising losses and outgoings. If the right or advantage given up is a right or advantage disposed of as part of the process by which the profit earning structure or organisation operates to obtain regular returns, the receipt will be on revenue account. On the other hand, if the right or advantage disposed of is part of the profit-yielding structure, the receipt will be capital in nature.
The operation of the consideration principle may be illustrated by reference to three common transactions.
The first illustration relates to compensation payments. Payments which represent compensation for a loss suffered by a taxpayer or for a right which a taxpayer surrenders may arise in wide variety of circumstances. However, the nature of the payment is generally determined by identifying the matter in respect of which the payment is received. Hence, if a taxpayer receives compensation for the loss of a revenue asset or advantage the compensation will be on revenue account while if the loss relates to an asset or advantage which formed part of the taxpayer's profit-yielding structure, the payment will be on capital account.
A related question is the nature of an amount that is received in substitution for another amount. Usually, the payment will be on revenue account if the amount which it replaces would have been income.[19] However, the distinction will not always be an easy one to draw. In particular, it is sometimes necessary to recognise a difference between compensation for a loss of an income item on the one hand and compensation for the loss of the ability to produce the income or the right to receive the income on the other.
Thus, if a taxpayer agrees to permanently cease an income earning activity, a payment received in exchange for agreeing to the cessation would be likely to be on capital account, notwithstanding that it has been calculated by reference to the future profits which the taxpayer may have earned from the activity - see for example Glenboig Union Fireclay Co Ltd v IRC,[20] where the House of Lords held that an amount received as compensation by the taxpayer for agreeing not to work a deposit of fireclay adjacent to a railway line was on capital account, notwithstanding that it was calculated by reference to the profits foregone.
The second illustration of the consideration principle is where the consideration for the receipt is the provision of services, or of a service. Salary and wages received by an employee is a simple example of an amount received as consideration for the rendering of services. It appears that if the consideration for a receipt is the personal exertion of a taxpayer, or the rendering of a service by a taxpayer, the receipt will invariably be revenue in nature. Authority for this proposition may be found in the decision of the High Court in Brent v FC of T.[21]
Brent's case arose out of an agreement under which the taxpayer, Mrs Brent, who was the wife of the great train robber Ronald Biggs, agreed to sell her life story to a company which owned a television station in exchange for the sum of $65,250. Under one clause in the agreement Mrs Brent assigned all her right, title and interest in the copyright of the manuscript containing her story. Under another clause she also agreed not to give any press, radio or television interviews within 60 days of signing the agreement.
One of the issues which the High Court had to consider was whether the money received by Mrs Brent was income. Gibbs J formulated the issue in the following terms:
The question whether the amount payable under the agreement was income in my opinion depends on whether it should properly be regarded as a sum earned by the appellant in relation to services rendered by her for the company. If so, it would not only be income within ordinary usages and concepts, but would also be within the scope of s.26(e) of the Act. If the moneys were, in truth, earnings from the performance of services by the appellant, it would not matter that she carried on no business or vocation, or that there was no element of regularity or periodicity about their receipt. The question, therefore, is whether the moneys she received answer that description or whether they were rather, as the appellant contended, the consideration for the sale of proprietary rights or of rights analogous to rights of property. That question must be answered by examining the agreement and the manner in which the parties to it carried it out.[22]
This passage suggests that a finding that a sum of money is earned in relation to services rendered is sufficient in itself to give to the receipt an income character. It is not necessary that there should be an element of regularity or periodicity about its receipt. It is also not necessary that the taxpayer should be employed on an on-going basis or that the services should be rendered in the context of a business relationship. Hence the provision of services automatically generates a revenue receipt.[23] Cases illustrating the application of this principle include Reuter v FC of T[24] and JB Chandler Investment Company Ltd and Chandlers Rental Pty Ltd v FC of T.[25]
The third and final illustration relates to income produced by property - for example, interest on a loan or dividends payable on shares. The consideration principle does not explain the characterisation of income from property as satisfactorily as in the earlier two illustrations. To take the first example, interest on a loan, the consideration is the use of the money lent to the borrower, the interest being the price for the use of the money calculated by reference to the period to which it relates. The lending of money at interest is part of the process by which the capital asset, the loan funds, generates income. In this way the consideration for the interest may be explained as being revenue in nature. However, the consideration principle struggles to explain the revenue nature of dividends on shares, for the shareholder in receipt of a dividend gives no consideration directly for the payment of the dividend. The matter in respect of which the dividend is paid is the shareholder's proprietary rights in respect of the shares. A more satisfactory explanation for the income nature of dividends and other types of income from property is provided by reference to the second of the two criteria which, it is asserted in this article, are the defining characteristics of income.
The second principle for distinguishing between income and capital receipts is that income is a detached flow. This principle is much maligned[26] and often not acknowledged. Despite the reluctance to acknowledge it or to fully explain its reach, the influence of the flow concept is persistent and familiarity with its manifestations essential for an understanding of the income/capital distinction.
The flow concept does not appear anywhere among the 15 propositions propounded by Professor Parsons. The proposition which comes closest to acknowledging its significance is Proposition 15, which asserts that the periodicity of a payment is a signpost that it is revenue in nature, an assertion which is supported by case law.[27] It is submitted that the reference to periodicity represents an oblique acknowledgement of the flow concept, but although periodicity is a central characteristic it does not fully capture the concept of a flow.
This principle is difficult to explain except by resorting to analogy. The most famous analogy is that of Pitney J in Eisner v Macomber,[28] where his Honour said:
The fundamental relation of 'capital' to 'income' has been much discussed by economists, the former being likened to the tree or the land, the latter to the fruit or the crop; the former depicted as a reservoir supplied from springs, the latter as the outlet stream, to be measured by its flow during a period of time.[29]
The concept is traditionally associated with income produced by property: rent, royalties, dividends, interest and annuities. A definition based on that association is that:
...a flow is the consequence of some act or event in relation to property, that is seen as capital, which triggers a receipt by the owner which is not a receipt in realisation of that property.[30]
However, the concept is sometimes said to also apply to salary and wage income and income from operating a business. The principle has both an inclusionary and an exclusionary operation.
The inclusionary operation is that where a receipt is the natural produce of a capital asset, it will be income. This is the case even where the notion of gain, which Professor Parson's identifies as an essential attribute of the concept of income,[31] is absent. For example, a taxpayer who purchases a share cum dividend will derive income when the dividend is paid or credited, notwithstanding that the price paid for the share may have reflected the imminent payment of the dividend and that on payment the share decreases in value by the amount of the dividend.
The exclusionary application of this principle is that a gain which is realised as a growth of the principal and not as a detached sum is regarded as capital. To return to the analogy drawn in Eisner v Macomber if the tree is sold before the fruit is picked, the sum received for selling the tree with the fruit attached is wholly capital. An example is where a taxpayer who holds shares as an investment sells them cum dividend. The part of the sale price attributable to the dividend payable is not regarded as income.
The exclusionary operation of this principle may be distinguished from the requirement that an item must be realised before it can be income. The effect of the realisation principle is that the fruit does not become income until it is picked. The effect of the flow concept is that if the value of the fruit is realised without selling it separately, it will not be income.
The exclusionary operation of the principle is illustrated by the decision in Clowes v FC of T,[32] where the taxpayer, who was a draper by trade, entered into two agreements, the first in 1926 and the second in 1929 with a company called Pine Plantations Pty Ltd. The agreements provided for the company to transfer certain land to a trustee company. The trustee was to hold the land on trust to plant and maintain pine trees and to market and sell the trees when mature and to hold the proceeds thereof as to one-tenth for the company and as to nine-tenths for the taxpayer and the other lot holders.
The taxpayer paid £75 to the company and the land was planted with timber which was eventually marketed. During the year ended 30 June 1945 the company distributed to the taxpayer sums totalling £105. The Commissioner contended that £30, being the difference between the £105 and the £75, was assessable income.
It was submitted on behalf of the taxpayer that the distributions among the lot-holders resembled a distribution by a liquidator in the winding-up of a company. Kitto J observed in relation to this argument that:
Clearly enough, in such a case what the members would receive in the winding-up would be wholly capital in their hands, even though it was more than they had put into the company, and even though the excess arose from the making of profits of an income nature by the company. The reason would be that the case would not be one of detachment from each member's capital asset of the profits it had produced, so that the profit came to the member as the fruit of his asset while the asset itself remained intact; there would simply be a receipt by the member of 'his proper proportion of a total net fund without distinction in respect of the source of its components', and he would receive it 'in replacement of his share': Commissioner of Taxation (NSW) v Stevenson [(1937) [1937] HCA 72; 59 CLR 80, at p. 99].[33]
He concluded that the "profit" was capital:[34]
That a larger amount would some day be received was assuredly hoped, perhaps believed, but not promised. The chance of getting more was the recompense for the risk of getting less; and the inherent uncertainty as to the time of receipt and the amount of the more, if more there should prove to be, necessarily made all calculations based on interest rates irrelevant. The essence of the matter simply was that the company bound itself to follow, over an indefinite period of years, a course of action which it expected would yield substantial net proceeds, and, in consideration of an immediate payment by the appellant, it promised to pay him a proportion of those net proceeds if and when they should come in. In the event, that for which he had paid £75 turned out to be an amount of £105. The £75 was capital, and there is no reason for denying the same character to the larger sum which ultimately replaced it.[35]
These comments indicate that where an item which represents a gain by way of a growth in a capital asset, it does not automatically follow that the item will be capital. An additional factor is required before that conclusion may be reached: there must have been some risk associated with the original investment in the asset with the growth representing a reward for the risk. The significance of this qualification is illustrated by FC of T v Hurley Holdings (NSW) Pty Ltd,[36] in which the taxpayer purchased a discounted bill of exchange for $442,199 in January 1983. The bill matured in January 1984, when the taxpayer received the face value of $500,000. Gummow J accepted the submission by the Commissioner that the taxpayer purchased the bill seeking to invest its funds with no risk and a reasonable return. He therefore held that the discount was on revenue account.
Another illustration of the flow concept arises in the context of the sale of a business. In C of T (WA) v Newman[37] the taxpayer was a pastoralist who in 1918 sold his property, including plant and stock, as a going concern for £16,000. The Commissioner apportioned an amount of £6,770 as the amount referable to the sale of livestock. The taxpayer accepted that the apportionment was accurate but argued that the receipt was on capital account.
A Full Court of the High Court agreed that the amount was capital, on the basis that the amount arose not in the course of carrying on the business but for the purpose of putting an end to the business. The decision in this case may be seen as an example of the operation of the flow concept. The trading stock of the pastoralist was realised as part of a sale of the entire profit earning structure, thereby escaping tax.[38] (s 70-90 of the ITAA97 reverses the result in Newman's case.)
More recently, courts have shown a reluctance to extend the flow principle. In Stapleton,[39] the Federal Court considered the question whether a payment that was received by a former partner of a legal firm in respect of his share of the firm's work in progress was on income account. Pursuant to an agreement with his former partners, he was entitled to be paid $95,918 payable over five years beginning in December 1982 at the rate of $9,592 every six months. This was referred to in the agreement as a "future income entitlement". The partnership lodged a return of income which showed the amount as a distribution of income and the Commissioner sought to assess a total of $19,184 received by the taxpayer in the year ended 30 June 1983 in respect of work in progress.
Sheppard J found that the payment constituted assessable income. There were two main reasons given by his Honour for his decision. The first was that the application of the consideration test as laid down in Federal Coke pointed to the receipt being income. The second reason for the decision related to the taxpayer's failure to satisfy his evidentiary burden.
If Stapleton's case stood by itself it might be explained as turning on its own facts, since the outgoing partner and the partnership lodged inconsistent income tax returns. In FC of T v Grant,[40] the Federal Court followed Stapleton. That case might also be explained on the basis that, as in Stapleton, the continuing partners and outgoing partners lodged inconsistent income tax returns. However, in the recent case of Crommelin v DFC of T,[41] Stapleton was interpreted as establishing that a receipt associated with the sale of work in progress is automatically of a revenue nature.[42]
In most instances the flow concept and the consideration principle will point in the same direction. For example, salary and wages are regarded as a flow. The consideration provided for the salary and wages is the periodic provision of services, which also points to income. However, some of the most troublesome cases concern receipts where the flow concept and the consideration principle are in direct conflict.
For example in Egerton-Warburton v DFC of T,[43] a farmer disposed of his farm to his two sons in exchange for an annuity during his lifetime of £1,200 by quarterly instalments, with further annuities to be paid after his death to his widow and daughters. The consideration for the payments was a capital asset, the farm. Nevertheless, because the form of the payments was an annuity, the High Court held that they were assessable.[44]
A survey of the decided cases suggests that a court is likely to find that a series of payments in exchange for a capital asset will be revenue in nature if it constitutes a flow. The relevant principle is set out in Jones v IRC[45] in which Rowlatt J said:[46]
...but there is no law of nature or any invariable principle that because it can be said that a certain payment is consideration for the transfer of property it must be looked upon as price in the character of principal. In each case regard must be had to what the sum is. A man may sell his property for a sum which is to be paid in instalments, and when that is the case the payments to him are not income: Foley v Fletcher [(1858) [1858] EngR 1107; 3 H&N 769]. Or a man may sell his property for an annuity. In that case the Income Tax Act applies. Again, a man may sell his property for what looks like an annuity, but which can be seen to be not a transmutation of a principal sum into an annuity but is in fact a principal sum payment of which is being spread over a period and is being paid with interest calculated in a way familiar to actuaries - in such a case income tax is not payable on what is really capital: Secretary of State for India v Scoble [[1903] AC 299]. On the other hand, a man may sell his property nakedly for a share of the profits of the business. In that case the share of the profits of the business would be the price, but it would bear the character of income in the vendor's hands. Chadwick v Pearl Life Assurance Co [[1905] 2 KB 507, 514] was a case of that kind. In such a case the man bargains to have, not a capital sum but an income secured to him, namely, an income corresponding to the rent which he had before.
Hence, one of the attributes of the flow concept is that if a capital asset is exchanged for a series of payments constituting a flow (such as an annuity, or a share of rents or profits), the receipts are income in nature, the capital asset being the price of the income stream. If on the other hand, the payments are instalments of a fixed amount the receipts will be capital.
While it is reasonably straightforward to convert a capital asset into an income stream, converting an income stream into a capital receipt is problematic. If an income stream, as distinct from the contractual right to the income stream, is exchanged for a lump sum, the proceeds are revenue in nature.[47] The distinction between the sale of an income stream and the sale of the right to the income stream is subtle and, possibly, illusory, however, it is required by the judgment in FC of T v Myer Emporium Ltd,[48] in which the Court distinguished between the sale of the right to an annuity, which the Court said is a capital asset, and the sale of the right to interest on a loan, which the Court characterised as being revenue.
In the final part of this article, I will highlight certain common situations in which receipts fall close to the boundary between income and capital. Such cases arise because in some circumstances the facts may be such that an asset or advantage functions partly but not solely as part of the profit yielding structure while in other situations precise identification of the profit-yielding structure may be difficult. In particular, three sets of factual situations have generated disputes which prove difficult to resolve satisfactorily:
(a) where an asset which originally functioned as a capital asset is converted into a revenue asset and vice versa;
(b) where in some respects an asset functions as a capital asset and in other respects as a revenue asset, and
(c) where a gain is realised from an isolated transaction.
It will be asserted that in each of these situations the consideration principle enables the character of the receipt to be correctly identified. I will also take the opportunity to comment on special rules that have arisen to deal with the tax accounting issues which arise in these situations.
There are some circumstances in which an asset which was originally a capital asset may be converted into a revenue asset and vice versa. The potential for trading stock to be converted into a capital asset is controversal. Prior to the enactment of the ITAA97, the Australian Taxation
Office apparently took the view that if a person holding trading stock ceased to carry on the business of dealing in an asset, the asset ceased to be trading stock.[49] The Federal Court's decision in FC of T v Cyclone Scaffolding Pty Ltd[50] and a passage in the High Court's decision in FC of T v Westraders Pty Ltd[51] provide some support for the Commissioner's view. Notwithstanding these two cases, there is clear High Court authority to the effect that, as a consequence of the statutory definition in s 6 of the ITAA36, an item that is trading stock when acquired will always remain trading stock. In FC of T v Murphy,[52] the High Court commented that:
There is nothing in the definition section (s. 6) to tie the expression to a period in which the taxpayer carries on a business. The Act does not so far desert ordinary usage in its substantive provisions referring to 'trading stock' that they may apply to property otherwise than in virtue of its association with a business. But bearing in mind that property is by definition 'trading stock' if it has a particular history or a particular physical nature, there is no grammatical incongruity in its being referred to as being trading stock of a business which was carried on by the taxpayer.[53]
While property which was trading stock did not lose that status if a business ceased, it appears that property not originally trading stock could become trading stock if the holder of the property commences a business of trading in the item: FC of T v St Hubert's Island Pty Ltd[54] The judgments in St Hubert's Island which acknowledged the possibility that property may become trading stock failed to explain how the tax accounting regime in ss 28, 29 and 51 of the ITAA36 would cope with such a transformation.
It is also clear that an asset which was originally acquired on capital account may be converted into a revenue asset other than trading stock if it is ventured into a profit-making scheme. The leading decision on this point is Whitfords Beach Pty Ltd v FC of T[55] in which a company acquired land as a capital asset. The High Court held that, following a change in the shareholding of the company, the company commenced to hold the land as an asset which was part of a profit-making scheme. The "profit" from the scheme was calculated by subtracting the value of the land at the time it was ventured into the profit-making scheme (together with the costs and expenses of the scheme) from the sale proceeds.[56]
Division 70 of the ITAA97 contains specific tax accounting rules designed to accommodate the conversion of a capital asset into trading stock or from trading stock into a capital asset, applicable to years of income commencing 1 July 1997.[57] Under s 70-30 of the ITAA97, a taxpayer who begins to hold an item as trading stock which was originally acquired on capital account is deemed to have disposed of the asset for either, at the taxpayer's election, its cost or market value and to acquire it, also at cost or market value depending on the election. Section 70-110 of the ITAA97 deems a taxpayer who stops holding an asset as trading stock to have disposed of it at cost price and to have re-purchased it for the same amount.
In order for the specific rules in s 70-110 to operate, it has also been necessary for the ITAA97 to adjust the definition of "trading stock" so that it no longer results in an item that is trading stock when it is acquired remaining trading stock in spite of a change in the purpose for which it is held. Section 70-10 of the ITAA97 defines "trading stock" as follows:
Trading stock includes:
(a) anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a business; and
(b) live stock.
The definition in the ITAA36 (and in the original draft of the new definition[58]) made no reference to items "being held" for the purpose of manufacture, sale or exchange. The requirement that the trading stock "is held" for the requisite purpose should overcome the effect of Murphy's case, though the amendments could have been more clearly drafted.
"Dual function" assets are assets which are acquired to produce an income stream as part of the profit-yielding subject but which are also disposed of on a regular basis. The label is derived from a remark of Jacobs J in London Australia Investment Co Ltd v FC of T[59] where his Honour described such assets as property acquired for a "dual purpose". The existence of assets which perform a dual function was first identified in the context of the banking and life assurance industries.
In Colonial Mutual Life Assurance Society Ltd v FC of T,[60] the taxpayer made a surplus of £27,713 in the year ended 31 December 1940 from selling various stocks and debentures. There was evidence from the general manager of the company, which was accepted by the court, that the general policy of the Society was to hold its securities as investments and not to traffic in or to make a profit from realising them, and that the governing consideration in purchasing stocks or debentures or varying (or "switching", as it was referred to) its investments in such securities was to increase its effective interest yield. There was also evidence that the gains or losses were taken into account in calculating the effective yield.
On appeal to a Full Court of the High Court, Latham CJ, Dixon and Williams JJ affirmed the decision at first instance, saying:
The acquisition of an investment with a view to producing the most effective interest yield is an acquisition with a view to producing a yield of a composite character, the effective yield comprising the actual interest less any diminution or plus any increase in the capital value of the securities. Such an acquisition and subsequent realization is a normal step in carrying on the insurance business,...of the society.[61]
The Court added:
The accretion in capital value is used for the purpose of increasing the effective interest yield from the investment and therefore for an income purpose: Cunard's Trustees v Inland Revenue Commissioners [(1945) 174 LT 133, at p. 135]. It is as much a source of income as the interest payable on the investment: Inland Revenue Commission-ers v Desoutter Bros. Ltd [(1945) 174 LT 162].[62]
For many years, the effect of this decision was confined to banks and life assurance companies. However, in London Australia, the principle behind this decision was extended to a company which was neither a bank nor a life assurance company. In that case, the taxpayer was a company which was established with the principal object of investing in Australian securities for the purpose of producing dividend income for distribution to its shareholders. The company's articles of association prohibited it from distributing profits from the sale of shares as dividends. During 1967, 1968 and 1969 the company engaged in a continuous large scale activity of the buying and selling of shares and had surpluses in those years of $816,651, $140,166 and $413,263, representing the difference between the proceeds from sale of the shares and the average cost of the shares sold. The Commissioner sought to tax those amounts.
On appeal, the High Court affirmed the decision of the trial judge that the profits were assessable. Gibbs J found for the Commissioner, saying:
In the present case the taxpayer naturally placed considerable reliance on the finding that the shares were not bought for the purpose of selling them at a profit. That is indeed an important circumstance. It was then submitted that the shares were acquired on the capital account of the company, for the purpose of adding to its profit-making structure, as the means of producing dividend income... But the question whether the shares were acquired on the capital account of the taxpayer can only be answered by applying the tests indicated by Californian Copper Syndicate v Harris [(1904) 5 Tax. Cas. 159]. ... The taxpayer systematically sold its shares at a profit for the purpose of increasing the dividend yield of its investments. The sale of the shares was a normal operation in the course of carrying on the business of investing for profit. It was not a mere realization or change of investment.
The present case is in my opinion indistinguishable from the decision in Colonial Mutual Life Assurance Society Ltd v Federal Commissioner of Taxation.[63]
Jacobs J agreed, his reasons are summarised in the following extract:
If a man makes a business of acquiring property with a dual purpose of enjoying it or its profits and of reselling it eventually at a higher price than he paid for it, then not only the income from the property but also the profit on resale will be income in the ordinary sense of the term ...[64]
The principle that the profits from the sale of securities acquired primarily to produce an income stream may be on revenue account has been extended to general insurance companies: Chamber of Manufactures Insurance Ltd v FC of T.[65]
The issue of dual function assets has also arisen in a series of cases involving taxpayers which are engaged in a business of hiring out plant and equipment. The first case in the series is Memorex Pty Ltd v FC of T,[66] a case which involved a company that carried on the business of both selling and leasing computer equipment. From time to time some of the leased equipment was sold to the lessee at more than its original cost. The taxpayer returned the difference between the written down value and original cost as income under the recouped depreciation provisions but treated the difference between original cost and the sale price as a capital receipt. The evidence showed that considerable profits were earned from the sale of formerly leased plant, for example, $145,723 in 1976.
The Full Federal Court held unanimously that the profit on sale was wholly assessable. Davies and Einfield JJ referred to London Australia and Whitfords Beach, among other cases and concluded that:
There is no analogy between this case and the case of plant or equipment that a taxpayer may have and may use as part of the structure of an enterprise. The subject goods were part of the goods in which the applicant was dealing. When it was profitable or financially convenient to do so and the customer agreed, the goods were leased, rather than sold outright. But they were destined for sale or other disposal by the taxpayer sooner or later, either to the customer, another customer, an overseas affiliate or perhaps if they had no value at all, by scrapping.[67]
The decision in Memorex has been followed in GKN Kwikform Services Pty Ltd v FC of T[68] and Hyteco Hiring Pty Limited v FC of T[69] but a different outcome was reached in Cyclone Scaffolding,[70] where the major part of the taxpayer's business was hiring out scaffolding equipment but it also sold some of the equipment it held for hiring out. Under a long standing agreement with the Commissioner, the taxpayer treated plant as trading stock up to the end of the year of income in which it was purchased and thereafter as depreciable plant. The Commissioner sought to treat all profits from the sale of the plant as income.
A majority of the Full Federal Court held as a result of evidence about the taxpayer's accounting system that it was not possible to trace items of plant and therefore it was only possible to estimate the taxpayer's true income. The Court held that the accounting method adopted was appropriate for producing a substantially correct estimate of its true income.
It is submitted that the decision in the Cyclone Scaffolding case is an unusual one and is likely to be distinguished on its facts.[71] The Court itself accepted that it was not possible to accurately determine the taxpayer's income and the fact that the Commissioner had, in previous years, accepted the taxpayer's treatment of the plant influenced the outcome.[72]
The leading modern authority on the assessability of a gain made from an isolated transaction entered into outside the ordinary course of business is Myer. At the time of writing, the appeal in Montgomery v FC of T[73] had been argued before the High Court but the decision had not been handed down. In Myer, a Full Bench of the High Court explained the circumstances in which a profit from an isolated gain may be assessable:
Because a business is carried on with a view to profit, a gain made in the ordinary course of carrying on the business is invested with the profit-making purpose, thereby stamping the profit with the character of income. But a gain made otherwise than in the ordinary course of carrying on the business which nevertheless arises from a transaction entered into by the taxpayer with the intention or purpose of making a profit or gain may well constitute income. Whether it does depends very much on the circumstances of the case. Generally speaking, however, it may be said that if the circumstances are such as to give rise to the inference that the taxpayer's intention or purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary judged by reference to the ordinary course of the taxpayer's business.[74]
After the decision was handed down, some interpreted it as meaning that any receipt of a business is necessarily income.[75] However, it is submitted that the decision is simply an application of the consideration principle. If a taxpayer's purpose when it acquires an asset is to dispose of the asset for a profit rather than to hold it to produce an income stream, the proceeds will be on revenue account because the asset was not part of the profit-yielding structure.
The treatment of profits from isolated transactions has been modified in two subsequent cases: FC of T v Cooling[76] and Westfield Ltd v FC of T[77].
In Cooling, the taxpayer was a partner in a firm of solicitors which received a payment to induce it to execute a lease for a term of 10 years of new premises. At first instance, the Federal Court held that the payment was capital. The Commissioner appealed from that decision to the Full Federal Court, which held that the receipt constituted income under ordinary concepts. Hill J, who delivered the leading judgment, gave two reasons for the decision.
The first reason followed from evidence that incentive payments were an ordinary incident of moving premises in Brisbane in 1985. Hill J found that the move from one premises to another and the leasing of the premises were acts of the taxpayer in the course of its business activity just as much as the performance of professional services. Why then, his Honour asked, should the receipt not be income?
His Honour's second reason appears in the following passage:
It is true that the incentive payment was not the sole purpose of the firm moving premises. The previous premises had the disadvantages to which I have earlier referred and the securing of premises in what may be assumed to have been a prestige building was a clear purpose of the firm in taking the course it did which led both to Bengil entering into the lease and to the receipt of the incentive payment.
A scheme may be a profit-making scheme notwithstanding that neither the sole nor the dominant purpose of entering into it was the making of the profit.
In my view the transaction entered into by the firm was a commercial transaction; it formed part of the business activity of the firm and a not insignificant purpose of it was the obtaining of a commercial profit by way of the incentive payment.[78]
This part of the judgment may be criticised on the basis that the test ("a not insignificant purpose") is inconsistent with prior case law. Hill J relied for his formulation on two decisions, the first of which was the Myer case. According to Hill J, the High Court in Myer did not disturb the judge at first instance's finding of fact that the motivation for the transaction was the obtaining of working capital to diversify. However, although the High Court mentioned this finding of fact in its judgment, the assumption underlying the decision is that Myer entered into the transaction for the purpose of realising a profit.[79] The Court made no effort to reconcile this assumption with the factual finding.
The second, and stronger, authority that Hill J relied upon was Moana Sand Pty Ltd v FC of T.[80] However, before turning to Moana Sand, it is helpful to mention earlier authorities concerning the depth of intention required to render a gain from a profit-making scheme assessable.
The intention required to render a profit assessable from the sale of property acquired for the purpose of resale or from any profit-making undertaking or scheme has been considered in a number of cases concerning former s 26(a) of the ITAA36. There is not room in this article to explore the case law thoroughly. Suffice it to say that it was necessary for the purpose of profit-making by sale to be a dominant purpose[81] while there was conflicting authority about whether a dominant purpose was required to render the profit from a profit-making scheme assessable.[82] Although these cases related to the statutory provisions of s 26(a), the reasoning should also be applicable to the sale of property acquired for the purpose of resale and to profit-making schemes under s 6-5 of the ITAA97.[83]
In Moana Sand, the Tribunal made a finding of fact that the profit-making scheme being considered was not entered into for the predominant purpose of making a profit from the sale of the property which was acquired as part of the scheme. However, the Full Federal Court was at pains to demonstrate that the Tribunal made this finding solely in order to justify the inapplicability of the first limb of s 26(a). The Court then referred to the comments of Gibbs J in Bidencope regarding purpose[84] and to the judgment of Jacobs J in London Australia Investment Co Limited in which his Honour referred to the existence of a "dual purpose" as sufficient to give an asset the character of a revenue asset. Relying on those cases, the Court rejected the relevance of the "dominant purpose" test for profit-making schemes. However, despite the rejection of the dominant purpose test it is submitted that the Court went no further than to endorse the "dual purpose" test which Jacobs J adopted in London Australia. Indeed the Court described the sale of the property by Moana Sand as "the fulfilment of the ultimate purpose of the company in relation to the land".[85] In summary, it is submitted that Moana Sand stands for no more than the proposition that if a profit-making scheme is entered into for dual purposes, one of which is profit-making, that will be sufficient to render any profit on revenue account.
The second case in which the role of purpose has been refined is Westfield. In that case, the main activity of the taxpayer was the design, construction, letting and management of shopping centres. When it designed and constructed shopping centres on land which it owned, the shopping centres had usually been held as long term investments. There was no suggestion that Westfield or any company associated with it had ever acquired land for the purpose of resale at a profit. Between 1978 and 1980, the taxpayer acquired options to purchase land in a Brisbane suburb near an existing shopping centre with the intention of developing a new shopping centre.
This case arose from the exercise of an option to acquire one particular lot of land for $450,000. The option was exercised on 16 April 1981. After it purchased the land, Westfield entered into negotiations with AMP, which owned the existing shopping centre on adjoining land. As a result of the negotiations, an arrangement was entered into whereby AMP would develop the new shopping centre but would give the work of designing, building and managing the centre to Westfield. On 2 December 1982 the land was sold to AMP for $735,000. There was evidence that the taxpayer did not seek to extract the highest possible price for the land from AMP and that if another purchaser had made a higher offer it would not have been accepted, as Westfield's main concern was to obtain the opportunity to design, construct and manage the centre.
At first instance, Sheppard J held that the profit on the sale of the land constituted income according to ordinary concepts. However, this decision was overturned on appeal by a unanimous decision of the Full Federal Court. In rejecting the reasons of Sheppard J, Hill J commented that:
First, the obtaining of the contract to construct and manage the centre is not, of itself, relevantly a scheme of profit-making, it is a scheme for deriving assessable income, which income is derived from the performance of the work under the building and management contracts. Second, where a transaction falls outside the ordinary scope of the business, so as not to be a part of that business, there must exist, in my opinion, a purpose of profit-making by the very means by which the profit was in fact made.[86]
Later he said:
While a profit-making scheme may lack specificity of detail, the mode of achieving that profit must be one contemplated by the taxpayer as at least one of the alternatives by which the profit could be realised.[87]
Gummow and Lockhart JJ concurred with the decision and reasons of Hill J. The Commissioner of Taxation has contended, persuasively, that Hill J's statement of the law in Westfield is incorrect.[88]
It is submitted that the jurisprudence developed in Cooling and Westfield has added an unnecessary veneer to the case law on isolated transactions. Arguably, one must now ask whether the making of a profit "by the very means adopted" was a "not insignificant purpose" of entering into a transaction. The complications introduced by these twin requirements could be avoided by a simple requirement that the requisite purpose of entering into a profit-making transaction or an isolated purchase and sale should be at least one of two dual purposes. Indeed, there is much to be said for applying the same "dual or dominant purpose" rule to the characterisation of profits from isolated sales of property. The cases on "dual function" assets, profit-making schemes and isolated sales would then be seen as particular examples of a single broader principle.
In spite of comments to the contrary, judicial decisions concerning the income/capital distinction in the context of receipts are a product of the application of certain fundamental principles. It is submitted that a plausible framework for analysing a receipt is to first identify the matter in respect of which the amount is paid. If the recipient has parted with an asset or advantage which formed part of its profit-yielding structure the receipt is on capital account. If on the other hand, the asset or advantage did not form part of the profit-yielding structure the receipt is income in character. The second test is to ask whether the receipt represents a flow produced by an item of capital. If it does, the receipt is revenue. If on the other hand, the receipt relates to the sale of a capital asset pregnant with an imminent flow of income the whole of the proceeds will be on capital account.
While I have described the first of the two tests as the more important, it is so only in the sense that it applies in a greater variety of circumstances. It is not more important in the sense that it overrides the flow concept; indeed a quality of the flow concept is that an income stream may be purchased by the exchange of a capital asset.
The consideration principle, by its nature, gives rise to a number of situations where receipts may fall close to the border between income and capital. Three situations which pose distinctive challenges occur where a person's intention changes in relation to the role an asset performs; where an asset is acquired for a dual purpose of generating income and being sold to realise a profit, and where a single asset is acquired and realised for a gain or a single profit-making venture is embarked upon. However, although these transactions tend to throw up cases that are near to the border of the income/capital distinction, the principle underlying their resolution is clear.
Michael Flynn is a barrister practising primarily in the area of income tax. He is a member of the technical committee of the Victorian division of the Taxation Institute of Australia and is Editor of the Revenue Law Volume of the Laws of Australia.
[*] The ideas for this article were developed while writing commentary on s 25 in the Australian Tax Practice Commentary, now published by ATP.
[1] IRC v British Salmson Aero Engines Ltd [1938] 2 KB 482, 498.
[2] Allied Mills Industries Pty Ltd v FC of T 89 ATC 4365, 4369 (Bowen CJ, Lockhart and Foster JJ).
[3] [1938] HCA 73; (1938) 61 CLR 337 ("Sun Newspapers").
[4] Ibid 359.
[5] Ibid 363.
[6] 99 ATC 4242.
[7] Ibid 4248.
[8] RW Parsons, Income Taxation in Australia (1985) para 2.7.
[9] 77 ATC 4255 ("Federal Coke").
[10] Ibid 4273.
[11] 96 ATC 4666, 4675.
[12] 89 ATC 4365, 4369-4370 (per Bowen CJ, Lockhart and Foster JJ).
[13] 93 ATC 4037, 4047 (per Hill J) affirmed on appeal ("Reuter (FC)").
[14] 93 ATC 4810, 4810 and 4819 (per Drummond J) affirmed on appeal.
[15] 89 ATC 4818, 4824 (per Sheppard J) ("Stapleton").
[16] Europa Oil (No 1) v IRC 70 ATC 6012, Federal Coke 77 ATC 4255; FC of T v Cooling 90 ATC 4472 and JB Chandler Investment Company Ltd and Chandlers Rental Pty Ltd v FC of T 93 ATC 5182. The effect of these decisions is considered at length in MT Flynn, "Substance Versus Form in Tax Disputes - An Analysis of Recent Developments" (1995) 24 Australian Tax Review 171.
[17] 77 ATC 4255, 4257.
[18] Ibid 4273.
[19] FC of T v Myer Emporium Ltd [1987] HCA 18; (1987) 163 CLR 199; 87 ATC 4363 ("Myer").
[21] 71 ATC 4195 ("Brent").
[22] Ibid 4197-4198.
[23] Although it is possible to agree to restrict the future provision of services in exchange for money which may be on capital account - see FC of T v Woite 82 ATC 4578.
[24] 93 ATC 5030 (FFC).
[25] 93 ATC 5182.
[26] See RW Parsons, "Income Taxation - An Institution in Decay" (1986) 3 Australian Tax Forum 233, especially 242-244.
[27] See eg GP International Pipecoaters Pty Ltd v FC of T (1990) 170 CLR 124, 138; 90 ATC 4413, 4420 and FC of T v Dixon [1952] HCA 65; (1952) 86 CLR 540, 557 (per Dixon CJ and Williams J).
[28] [1919] USSC 119; (1919) 252 US 189.
[29] Ibid 206.
[30] Parsons, above n 26, 237.
[31] Parsons, above n 8, para [2.7]: "Proposition 4: To have the character of income an item must be a gain by the taxpayer who derived it."
[32] [1954] HCA 10; (1954) 91 CLR 209 ("Clowes").
[33] Ibid 222.
[34] Ibid 223. Dixon CJ delivered a separate judgment in which he also found in favour of the taxpayer. Taylor and Webb JJ found for the Commissioner on the basis that there was a profit-making undertaking or scheme for the purpose of s 26(a). As the Court was evenly divided, the decision of the Chief Justice prevailed.
[35] See also Milne v FC of T [1976] HCA 2; (1976) 133 CLR 526; 76 ATC 4001 in which the High Court followed Clowes.
[36] 89 ATC 5033.
[37] [1921] HCA 37; (1921) 29 CLR 484 ("Newman").
[38] See also Rose v FC of T [1951] HCA 68; (1951) 84 CLR 118, a decision which indicates that the principle applied in Newman applies equally to a payment received by a departing partner from a continuing partner.
[39] 89 ATC 4818.
[40] 91 ATC 4608.
[41] 98 ATC 4790 ("Crommelin").
[42] Ibid 4798 (per Foster J). A fuller analysis of the work in progress cases prior to Crommelin may be found in DK Raphael, "Dissolution of Partnership" (1998) 27 Australian Tax Review 79.
[43] [1934] HCA 40; (1934) 51 CLR 568.
[44] Other cases where a capital asset was sold for an income stream are Just v FC of T (1949) 4 AITR 185 and Moneymen Pty Ltd v FC of T 91 ATC 4019, both of which found that the income stream was of a revenue nature.
[46] Ibid 714-715.
[47] Myer 87 ATC 4363, 4371-4372; [1987] HCA 18; (1987) 163 CLR 199, 218.
[48] [1987] HCA 18; (1987) 163 CLR 199; 87 ATC 4363.
[49] See Taxation Determination TD 92/127.
[50] 87 ATC 5083 ("Cyclone Scaffolding (FFC)"). An explanation of the Cyclone Scaffolding case appears later in this article.
[51] [1980] HCA 24; (1980) 144 CLR 55, especially 70-73 (per Mason J); 80 ATC 4357, 4361-4368 (per Mason J).
[52] [1961] HCA 66; (1961) 106 CLR 146 ("Murphy").
[53] Ibid 154. A fuller discussion of the effect of this decision may be found in Parsons, above n 8, paras [12.99] - [12.108].
[54] [1912] HCA 78; (1978) 138 CLR 210; 78 ATC 4104 ("St Hubert's Island") according to two of the judges forming the majority, 216-217 (per Stephen J) and 236 (per Jacobs J). Aickin J at 249, who dissented, appears to have taken the contrary view. Parsons, above n 8, para [14.22] and S Barkoczy, "Income According to Ordinary Concepts - Part 3: Net Profits or Gross Receipts?" (1997) 3 New Zealand Journal of Taxation Law and Policy 195, 200 express a view that a capital asset was not convertible into trading stock under the ITAA36.
[55] [1982] HCA 8; (1982) 150 CLR 355; 82 ATC 4031 ("Whitfords Beach (FC)").
[56] Whitfords Beach Pty Ltd v FC of T 83 ATC 4277 (FFC); see also Stevenson v FC of T 91 ATC 4476, 4486.
[57] Income Tax (Transitional Provisions) Act 1997 (Cth), s 70-1.
[58] See Tax Law Improvement Project Exposure Draft No. 5, July 1995, s 60-2.
[59] 77 ATC 4398 ("London Australia").
[60] [1946] HCA 60; (1946) 73 CLR 604.
[61] Ibid 620.
[62] Ibid.
[63] (1977) [1977] HCA 50; 138 CLR 106, 116-117.
[64] Ibid 128.
[65] 84 ATC 4315.
[66] 87 ATC 5034.
[67] Ibid 5044.
[68] 91 ATC 4336.
[69] 92 ATC 4216.
[70] 87 ATC 5083 (FFC).
[71] In refusing special leave to appeal the High Court remarked that the outcome of the case depended on its own facts in relation to one income year: FC of T v Cyclone Scaffolding Pty Ltd 88 ATC 4527 (HC).
[72] For a similar assessment of the Cyclone Scaffolding case see RR Fryer, "Revenue or Capital: Trips Down Memorex Lane" (1993) 1 Taxation in Australia (Red Edition) 203.
[73] 97 ATC 4287 (FC). An appeal from the decision in Montgomery v FC of T 98 ATC 4120 (FFC).
[74] [1987] HCA 18; (1987) 163 CLR 199, 209-210; 87 ATC 4363, 4366-4367 (per Mason ACJ, Wilson, Brennan, Deane and Dawson JJ).
[75] See the Commissioner's submission in FC of T v Spedley Securities Ltd 88 ATC 4126, 4130.
[76] [1990] FCA 297; (1990) 22 FCR 42; 90 ATC 4472.
[77] [1991] FCA 97; (1991) 28 FCR 333; 91 ATC 4234 ("Westfield").
[78] [1990] FCA 297; (1990) 22 FCR 42, 56-57; 90 ATC 4472, 4484.
[79] See especially 87 ATC 4363, 4369.
[80] 88 ATC 4897 ("Moana Sand").
[81] See Pascoe v FC of T (1956) 6 AITR 315, 320 (per Fullagar J) ("Pascoe").
[82] The judgment of Gibbs J in Bidencope v FC of T 78 ATC 4222, 4234 ("Bidencope"), which was a dissenting judgment, adopts a view that it is only necessary for one of the purposes of entering into a profit-making scheme to be the securing of a profit in order to attract s 26(a). However, in Burnside v FC of T 77 ATC 4588, Mason J (with whom Barwick CJ and Jacobs J agreed) suggested that a "dominant purpose" test applied.
[83] These cases were accepted as authoritative in Moana Sand.
[84] See Pascoe (1956) 6 AITR 315, 320 (per Fullagar J).
[85] 88 ATC 4897, 4905.
[86] 91 ATC 4234, 4243.
[87] Ibid.
[88] In Taxation Ruling TR 92/3 (see, in particular, para 58).
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