Lecture 5: Income from Business; Tax Accounting and Trading Stock
Lecture 5: Income from Business; Tax Accounting and Trading Stock
Income from Business Overview Flow Concept Gains arising from carrying on a business constitute ordinary income (s6-5) Gains from non-business activities such as a hobby are not assessable unless. : - another general concept of ordinary income applies(extraordinary and isolated transactions; or - Specifically made assessable by legislation: statutory income Receipts from 2 step process business activity STEP1: Normal process?
1.
Consideration of whether the receipts are the normal process of that business Receipt from normal proceeds of business constitute ordinary income (s6-5) Characterizing a receipt as normal part of business requires: 1. An investigation into the nature of the business 2. Assessing whether the receipt has a nexus with the identified business
Nature of business: A broad of narrow view of the business activities can be taken to determine if the receipt is from the normal proceeds 1. Broad view (most common) – more likely that unusual receipt could be business income: GP International Pipecoaters v FCT(1990) Broad approach requires a strong nexus between the core business and the unusual activity: Memorex Pty Ltd v FCT (1987) 2. Narrow – Less likely than unusual receipt will be normal proceeds of business: FCT v Merv Brown Pty Ltd (1985) Nexus of receipt with the business A receipt constitutes the normal business proceeds when it is derived as: 1. Part of the ordinary business activity; OR 2. An ordinary incident of the business: the frequency and magnitude of the activity is an important consideration: Regular sale of ex leased equipment in a leasing of equipment business Memorex Pty Ltd (1987) Sale of import quotas: FCT v Merv Brown Pty Ltd (1985)
STEP 2: Carrying a business?
Non-cash business benefits Must also meet the prerequisites of ordinary income being Cash or convertible to cash + Real gain to the taxpayer = prerequisites of ordinary income satisfied Does not include receipts that are not cash or convertible to cash: FCT v Cooke and Sherden (1980) Section 21A ITAA36 enacted to deem non-cash business benefits as being convertible to cash (at its arms length value) The gain will be assessable as ordinary income provided it arises from a business and satisfies the nexus requirement 2. Determining whether the taxpayer is carrying on a business Business rather than hobby No single characteristic alone can be used as a decisive factor to determine the existence of a business; it is a question of degree. Indicators include commercial approach, profit making intent, frequency of activities. Ferguson v FCT (1979) – main case to use for “carrying a business” Lack of intent to make profit doesn’t mean there is not a business: Stone v FCT (2005) Scale of activities: FCT v JR Walker (1985) Commercial approach: whether the activities are more than a recreational activity: Thomas v FCT No exact distinction between a hobby and a business System and organization employed – degree of planning and amount of time invested, taxpayer may delegate these duties: Ferguson v FCT (1979) Methods characteristic of the particular line of business: consistent with industry practices Sustained and frequent activity – output greater than domestic needs: Thomas v FCT (1972) Type of activity + type of taxpayer? 1
Income from Business Overview Flow Concept Gains arising from carrying on a business constitute ordinary income (s6-5) Gains from non-business activities such as a hobby are not assessable unless. : - another general concept of ordinary income applies(extraordinary and isolated transactions; or - Specifically made assessable by legislation: statutory income Receipts from 2 step process business activity STEP1: Normal process?
1.
Consideration of whether the receipts are the normal process of that business Receipt from normal proceeds of business constitute ordinary income (s6-5) Characterizing a receipt as normal part of business requires: 1. An investigation into the nature of the business 2. Assessing whether the receipt has a nexus with the identified business
Nature of business: A broad of narrow view of the business activities can be taken to determine if the receipt is from the normal proceeds 1. Broad view (most common) – more likely that unusual receipt could be business income: GP International Pipecoaters v FCT(1990) Broad approach requires a strong nexus between the core business and the unusual activity: Memorex Pty Ltd v FCT (1987) 2. Narrow – Less likely than unusual receipt will be normal proceeds of business: FCT v Merv Brown Pty Ltd (1985) Nexus of receipt with the business A receipt constitutes the normal business proceeds when it is derived as: 1. Part of the ordinary business activity; OR 2. An ordinary incident of the business: the frequency and magnitude of the activity is an important consideration: Regular sale of ex leased equipment in a leasing of equipment business Memorex Pty Ltd (1987) Sale of import quotas: FCT v Merv Brown Pty Ltd (1985)
STEP 2: Carrying a business?
Non-cash business benefits Must also meet the prerequisites of ordinary income being Cash or convertible to cash + Real gain to the taxpayer = prerequisites of ordinary income satisfied Does not include receipts that are not cash or convertible to cash: FCT v Cooke and Sherden (1980) Section 21A ITAA36 enacted to deem non-cash business benefits as being convertible to cash (at its arms length value) The gain will be assessable as ordinary income provided it arises from a business and satisfies the nexus requirement 2. Determining whether the taxpayer is carrying on a business Business rather than hobby No single characteristic alone can be used as a decisive factor to determine the existence of a business; it is a question of degree. Indicators include commercial approach, profit making intent, frequency of activities. Ferguson v FCT (1979) – main case to use for “carrying a business” Lack of intent to make profit doesn’t mean there is not a business: Stone v FCT (2005) Scale of activities: FCT v JR Walker (1985) Commercial approach: whether the activities are more than a recreational activity: Thomas v FCT No exact distinction between a hobby and a business System and organization employed – degree of planning and amount of time invested, taxpayer may delegate these duties: Ferguson v FCT (1979) Methods characteristic of the particular line of business: consistent with industry practices Sustained and frequent activity – output greater than domestic needs: Thomas v FCT (1972) Type of activity + type of taxpayer? 1
