Tax Laws and Rules - Income Tax

Added on - 28 May 2020

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TAXATIONQuestion 1Memorex Pty Ltd v FCTMemorex conducted the business involving both leasing and selling of computer equipment. Theequipment which might be leased previously was sold when a price higher than the acquisitionprice was available. The profit made in the process was not booked as ordinary income but rathercapital receipts. The Tax Commissioner claimed that selling of computer equipment was part ofthe ordinary business activity and hence profit arising from the same must also be taxed. Thecourt ruled that the profits from the disposal of the computer equipment would be considered asassessable since it was inevitable that the computer equipment would be sold and this wasessentially part of the business. Thus, it highlighted that asset characterization as revenue orcapital was based on the nature and scope of the business rather than the liquidity characteristics(Barkoczy, 2016).FCT v Cyclone ScaffoldingCyclone Scaffolding was engaged in the business of hiring scaffolding to customers and also attimes engaged in sale of the same. However, the profits derived on the sale of the scaffoldingwere not recognized as assessable income owing to scaffolding being a depreciable asset. TheTax Commissioner did not agree with the same and considered the scaffolding as trading stock.The matter landed in court where it was highlighted that the primary business of the companywas to provide scaffolding on hire and not on outright sale. As a result, the honorable courtconcluded that the scaffolding would be treated as equipment and not a trading stock implyingthat profits on sale of scaffolding would not amount to assessable income in the ordinary sense(CCH, 2013).GP International Pipecoeters v FCTThe taxpayer i.e. GP International Pipecoeters got a tender from the State ElectricityCommission (SEC) for coating of pipes. But in order to fulfill the same, it was required to setupa factory. The SEC provided the taxpayer with a capital of $ 5 million to set the factory. Thetaxpayer considered this amount as capital while the Tax Commissioner considered the same asrevenue. The court ruled in favor of the Tax Commissioner as it highlighted the nexus between
TAXATIONthe capital obtained and the business activity undertaken by the taxpayer. It also highlighted thatthe capital was obtained by the company only on account of winning the tender (Sadiq et. al.,2016).FCT v Hyteco Hiring Pty LtdThe taxpayer (Hyteco Hiring Pty Ltd) was engaged in the business of forklift trucks hiring.Depreciation was claimed by the taxpayer on the forklift trucks. Further, when it was found thatthe trucks were not suitable for hiring, then they were sold and the money received was never inexcess of cost of new truck. However, in certain cases where used trucks were acquired, it sohappened that the residual value exceeded the acquisition cost which gave way to profits whichthe company considered as capital receipts. The Tax Commission disagreed and advocated thatthe trucks would be considered as trading stock. The court decided in favor of the taxpayer citingthat selling was done only when the equipment could not be hired anymore and hence theprimary business contributing to ordinary income would be hiring activity alone (Deutsch et. al.,2016).ReconciliationReconciliation between the above decisions is possible as it is clearly visible that the court whilereaching the verdict tends to provide consideration to all the circumstantial evidence. The higherfrequency of outright sale transactions acted as an indicator of selling being part of the mainbusiness in Memorex case. This was found missing in Scaffolding case where the intention wason hiring. Similar observation can be made in the Hyteco case where selling of the trucks wasdone only when hiring was not possible, thus implying hiring as the main business. Further, inGP Pipecoeters case also, the emphasis is on the underlying circumstance rather than consideringthe capital in isolation (Gilders et. al., 2016). Thus, it is apparent that when deciding on capital orrevenue, it is of essence to focus on the underlying circumstances rather than the nature of theactivity in isolation and the same is visible from the verdict in the above mentioned four cases.Question 2
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