BTC3150 - Income Tax Law - Cases
2. Assessable Income
16 Appelgate – The taxpayer was sent overseas and intented to return of Australia. Although his intention
was true, he had to stay on for the job, and ultimately established a place of abode overseas. O: The court
held that even with his intention to return, he had established a place of abode overseas for the time, and
therefore was not a resident, and his income derivied was not assessable.
201 Junkins – Same facts as above except the taxpayer has a intention of definite stay overseas for three
years, however he still developed a place of abode. O: The court held that a definite stay doesn’t not
preclude the fact that he developed a permanent place of abode, therefore his income was not assessable.
122 Esquire Nominees – The taxpayer company was an overseas company. However in making some of
its decisions, it sought the advise of an Australian firm, of which advised its directors on the appropriate
course of action. O: the court held that the source of income cannot be claimed from an Australian source
just because the advice was given from an Australian source.
18 Arthur Murray – The taxpayer received income for work that have not been done. O: The court held
that usually income received before work done is not regarded as derived. Therefore it was not assessable.
34 Barratt – The business, a taxpayer did a contract of which payments were not due until the whoel
contract is finished. However, the commissioner took the accruals basis of accounting. O: the court held
that in deciding between the two methods of treating income, the taxpayer must pay regard to the “nature
and particular circumstances of the taxpayer’s business”.
128 Carden’s Case – The taxpayer a medical practioner used the accrual basis of accounting for his
business, however some of the payments were usually not forth coming. O: the court held that the method
should be determined in accordance with business and commercial principles, and said that in this case the
cash method should be used.
176 Henderson – A large accounting partnership derived income from all sources and distributed between
the partners. O: the court held that the size, structure and method of operation of accountancy partnership
were relevant factors in decideding between the two methods, in which this case was accrual.
332 Rowe – The taxpayer incurred legal expense while defending a case against him, after he won, he was
compensated for the legal expense. The commissioner sought to tax this as income, and claim that because
the legal expenses was deductible, then the compensation of it must be assessable. O: the court held that
this was not the case, and said that because he did not derived any benefit from it, then its not income.
242 Malayan Shipping – The company was an overseas company, however all of its directors and
management team resided in Australia and lived in Aurtralia. O: the court held that the company was an
Australian resident since the central amnagemetn and control of the co resided in Aurtralia. Since that team
excercises complete control over the company.
b. Personal Exertion Income
7-046 Rowe – The taxpayer was compensated for an amount equalled to the legal fees his incurred while
defending himself in a legal battle. O: There was no benefits and therefore was not assessable.
7-050 Brent – The taxpayer sold the rights to his lifestory. He argued that it was the sale of capital asset.
O: the court held the income assessable since the sale of his life story included him being interview.
Therefore was paid for his time and services as well.
7-050 McArdle – The taxpayer was given a consideration for his option to buy certain assets. O: the court
held that the sale of rights and option not ordinary income.
7-060 Jarrold v Boustead – The taxpayer was paid an inducement payment for him to turn pro football
player. The payment was on top of the salary he would get. O: The court held the inducement payment not
ordinary income. The distinction have to be drawn between whether the payment was an advancment of
payment for contracts or a bonus on top.
7-060 Beak v Robson – The taxpayer was given money for not obtaining a job in a competing business
after retiring. O: the court held that Restrictive convenants generally characterised as capital.
7-150 Cooke & Sherden – The taxpayer’s supplier had an incentive program where on selling enough
softdrinks, the taxpayer could win a trip. They did so, and won the trip. O: the court held that although
they receive it because of their employment, the supplier was not their employee, and there was no nexus to
justify assessment under test of s26(e) ITAA36
180 Higgs & Oliver - restrictive Convenant a non-taxable capital receipt?
c. Business v Hobby
9-060 Ferguson – A navel officer bought cows before he retired and took on a system and organisation:
“commerciality” preliminary business. He claimed hobby for the income. O: the court held that it was
business and assessable.
9-060 Walker – The taxpayer started with one goat in a breeding. O: the court took to be in business
because the things he did was in a system and organisation: “commerciality”, even if not profitable.
9-090 Brajkovich – a Gambler who said that he took all the necessary steps to form a his hobby gamling
as business. O: the court held that Profit motive for gambling not enough to classify it a business. Gambling
although primary source of income not business
9-260 Case D69 - Pilot project not classify as business
9-280 AGC Ltd - Temp ceasation doesn’t mean termination
245 Martin - Gambling not assessable income
126 Evans - Gambling not assessable income
391 Trautwein - Gambling is assessabe income from business
338 St Hubert’s Island - Sale of land from liquidation constitute income
207 Kelly – The taxpayer was a footballer who took an gift payment for best and fairest. O: the court held
that the payment was income since he received the gift for being a footballer. Nexus of gift to employment
355 Softwood Pulp & Paper - Prelminary activities of business not business.
30 Babka - Gambling although primary source of income not business
d. Compensation in Relation to Business
9-810 (175) Heavy Minerals Pty Ltd - Payment for cancellation of contract assessable income.
9-820 Wade - Loss of trading stock assessable
9-830 London and Thames Haven Oil Wharves Ltd v Attwooll - Temp disablement of income
producing assets assessable
9-840 (405) Van den Berghs - House of Lords on cancellation of structural agreement. Not assessable
9-840 Glenboig Union Fireclay - Permnent loss of a fixed asset not assessable
9-850 (58) Californian Oil - Termination of agency where agency is taxpayer’s business – not assessable
9-880 (237) McLaurin - Lesser amount in compensation not subdivided to assessable and non-assessable
9-880 Allsop - Lesser amount in compensation not subdivided to assessable and non-assessable
9-880 (361) Spedley Securities - Lesser amount in compensation not subdivided to assessable and nonassessable
9-900 Gourley - Discount damages to eliminate windfall gains
148 GKN Kwikform Services – The taxpayer hires out equipment, but this once received payment for
damage ones. O: the court held it Revenue nature of compensation payment even though they were not in
the business of selling them.
133 Federal Coke - Payment from third party without corresponding consideration regarded as capital and
not assessable
298 Phillips - Compensation replaces salary assessable
10 Allied Mills & Industries - Cancellation of contract not capital because not structure damage
e. Extraordinary or Isolated Transactions
9-420 Kosciusko Thredbo - New business activity part of business. O: Ordinary income.
9-420 Jennings Industries - New business activity part of business. O: Ordinary income.
9-420 Merv Brown - What doesn’t classify as part of business. O: Capital.
9-420 (148) GKN Kwikform Service – as above in part (d) Establish sufficient nexus between the
extraordinary transaction and business. O: Ordinary income.
9-430 Whitfords Beach - Three companies bought shares in another company and then proceeded to
develop the new land acquired for sale and profited from it. O: Ordinary income
9-430 Gutwenger – if the property was received as a Gift then subsequently sold the proceeds is capital in
nature. O: Capital.
9-440 (267) Myer Emporium - Myer sold its right to receive interest on a preplanned loan to its
subsidiary to Citicorp who in turn paid a lump sum to Myer. The loan to its sub would not have occured if
Myer wasn’t sure that Citicorp would purchase the right of them. O: Ordinary income.
9-445 (422) Westfield - Taxpayer originally acquire land for development. Having difficulty with law and
others, it eventually sold the land for a profit to AMP who then hired Westfield to develope the land. O:
Disposal of capital asset.
9-445 Lees & Leech - No gain from compensation even with profit making purpose not assessable. O:
Capital.
9-445 Montgomery - Lease incentive that is vital to structure not operation of business. O: Ordinary
income, but not uanimous.
248 Memorex - New activity carried out in the ordinary course of business. O: Ordinary income.
94 Cyclone Scaffolding - Sale of assets in a hiring business. O: Not assessable income.
341 Scottish Australian Mining - Taxpayer own mining land and had exhausted the mining activity.
Then developed the land extensively and sold it for profit. O: Realisation of capital asset at its best value.
310 RACV Insurance - RACV used its excess premiums to invest in a range of securites of which they
can be sold to pay out liabilities. O: Income from sale of those assets were assessable income under
ordinary course of business.
188 Hyteco Hiring - Taxpayer bought and leased trucks for hiring out purposes. It also sometimes acquire
trucks cheap second hand from other dealers for the purpose of hiring them out. Eventually they would be
sold and sometime for a profit. Over the years, the profit have become frequent and became an integral part
of the business. O: Realisation of capital assets and income not assessable.
232 McClelland - Taxpayer and her brother were the successor of land from their uncle’s will, of which
the both had to pay a certain sum to acquire the share of the land from the will. Eventually the subdivided
the land, first sold the cheapest lot to acquire the rest of the land and then sold the remaining. O:
Realisation of capital asset. Not business activities.
g. Annuities; Eligible Termination Payments
9-360 (115) Egerton-Warburton - Taxpayer sold his land in return for payments in instalments first for
his life, then for his widow’s life and finally for his childrends. The taxpayer did not keep records of the
orginal capital cost of purchasing the right for annuity payment for his family. O: Taxpayer’s family
couldn’t seek exclusion from tax of the repayment of capital as the court had no proff of value. Couldn’t
use s27H ITAA36.
9-380 Moneymen - Taxpayer sold its milk business and in return, the new company under contract would
buy at the highest price, milk from the taxpayer for the duration of the contract. O: Same as EgertonWarburton, the payment was seen as income nature in return for the sale of business at an unspecifiy
amount.
9-380 (140) Foley - Taxpayer sold her rights in certain property. In return, for a lump sum plus
instalments thereafter for 30 years. O: Taxpayer sold it for a specific amount, and therefore the instalments
were seen as return of capital price.
9-380 Ramsay - Taxpayer bought a dental practice worth 15000 by paying 5000 at first, then followed by
10 instalments of 25% of the annual profits. The total might end up either higher or lower than the orginal
sum, but that would be accepted. O: Court held that the instalments, although variable, constituted as
payment of capital nature and therefore the taxpayer could not claiim it as deduction to his own income.
Reasons include the fixed sum to be repay of 15000, irrespective of the variable sum to be paid each year.
9-380 Dott - In relation to a debtor, the taxpayer agree to receive 1000 for first two years and then 250 per
year as long as he shall live in consideration to a 9500 owing to him. O: Court held that 250 payments were
capital even though they were fixed each year. The agreement between the two stipulates that the payment
is in retrun of the amount owing only.
21-540 (317) Reseck - Taxpayer was given severance payment from the termination of a job even though
he was re-employed in a different district. O: The payment classified as ETP as there existed nexus
between the payment and the termination of employment. Therefore assessed under a lower tax bracket.
21-540 McIntosh - Taxpayer received payment after his retirement, and then decided to receive a lump
sum instead of instalments. He argued that the lump sum decision is not in relation to the termination of
employment, but rather an after thought of retirement. O: Court held that the lump sum is still classified as
ETP as there existed nexus between the payment and the termination of employment.
21-540 (144) Freeman - Taxpayers were retired directors who received payments 12 months after they
sold the former business to a new owner. O: Court held that the payments were not directly related to their
termination. It could be said that the payment were in line with available cash from the new owner. The
payments therefore were not ETP and were fully assessable income.
21-540 Grealy’s - Taxpayer negotiated so that on termination of a fixed term contract, he would
commence a new employement contract with the same employer. He did receive payments for the
termination of the first contract. O: Court held that in essence, his employment was never really terminated,
and therefore the payment were not ETP.
4. Allowable Deductions
a. General Deductions
13-040 Charles Moore - Money stolen from employees of a department store while they where banking it
was allowed as deduction under s8-1(1)(b) because it was held to be necessary risk associated with carrying
on of business. However, same situation to an individual might not be deductable under s8-1(1)(a). O:
The court held that the stolen receipt was deductable because the banking procedure was incidental and
relevant to the carrying on of business.
13-050 (179) Herald and Weekly Times - Newspaper claimed deduction from a payout from a
defamation case against it from one of the publishing of the newspaper. O: The court held that there was
enough nexus between the loss and the business since it arrised as a result of the newspaper, and therefore
deductible.
13-050 (409) W Nevill - The taxpayer was allowed a deduction for a payout to a joint managing director
because the joint venture was not satisfactory. O: The court held that the prime objective of the business
was to operate as efficiently as possible with a view to profit. Therefore, the payout was an attempt to run
the business as efficiently as possible. The existence of the liability to pay already satisfy the criteria of the
loss or outgoing incurred. It does not have to be paid physically.
13-100 Australian Guarantee Corporation – The taxpayer issued deferred interest debentures. No
interest was payable under the agreement until redemption at end. O: The court held that the incurred
interest payable was deductible even though the interest payment was not yet due.
13-100 (196) James Flood – The taxpayer put aside money which he would be obligated to pay
employees which has work for 12 months continously and was entitled to holiday pay. Some of his
employees however did not satisfy that criteria and quite before 12 months had elapsed. He try to claim
proportional deduction for the holiday pay put aside for the amount of time they did work for. O: The
court held that the money put aside was merely an anticipation of the incurrment of the expense and not an
actual incurment, as this only happens when the employees have work for more than 12 months.
13-110 (136) Finn – the taxpayer claimed expenditure incurred by an employed architect to keep up to
date with developments in his profession. These expenditure included travels to overseas, and all expenses
paid. He came back with a range of sketches, and devoted his time 100% to studying architecha while
overseas. O: The court held that the incurment of loss or outgoing does not have to directly produce
income for that year. They found that it was incurred to be deductable, self education expenses.
13-110 (77) Coles Myer Finance – The taxpayer incurred loss in issuing debentures between the income
years of 83/84 and 84/85. The debentures would produce income in both of the years. O: The court held
that the acceptance of the bills and the losses incurred (interest to be paid – discount of the bills) was
deductible, and in both years. They should be approportioned between the two years. The judges applied
the matching principle.
13-110 Woolcoombers case – the taxpayer, a wool trader, bought a futures contract to purchase wool in
the future. It claimed a deduction for the expense incurred on the contract. O: the court held that the
expenses incurred satisfied as a deduction of income tax. However, the court did not use the matching
principle as oppose to the Coles Myer case. The expense was not a financing nature. The liability does not
accured daily, as interest does, or otherwise accrued periodically.
13-160 Snowden & Willson – The taxpayer claimed deductions for the expenses incurred while defending
accusation on their dishonest business practice. O: the court held that, the word necessarily in s8-1(1)(b)
does not mean in the strictest sense but rather commerically. The court held that in defending the court
case, the taxpayer had the intention of purely to keep the business running and in its best interest. It is
incidental that a business could be sue, therefore the expenses was incurred necessarily in carrying on a
business.
13-160 (14) Amalgamated Zinc – The taxpayer, a mining company, try to claim deduction for worker
compensation payments to exworkers after the business had practically sold off all its assets and is now
trading in the money market for its income. O: The court held that the loss or outgoings was completely
dissociated from the gaining or profucing of the assessable income of that year, but rather it was related to
previous year. Usually, the losses can be deducted in a later assessment year, but only where it is of such a
character that “in a continuing business.
13-160 Queensland Meat export – The taxpayer claimed a deduction for the cost of maintaining a factory
of which they have no use for three years. The reason being that they did not have sufficient cattle to open
the premises. O: the court held that the expenses were deductable in that the company carried on its
business in another premises as an ordinary business, and had hope that when conditions improve, that they
would reopen the empty premises.
13-160 AGC – The taxpayer took over the business after its predecessor went under. After one year of
cessation. They try to claim deductions for the losses incurred in relation to debts unrecovered from its
predecessor. O: The court held, against the Amalgamted Case, that despite the break of the continutiy of
business, there was no change in the nature of the business at all, and the break in business was not a sign of
abandoning the business. Therefore the deductions were acceptable.
13-160 (300) Placer Pacific – The taxpayer ran an conveyor belt business and was taken to court on faulty
conveyor belts after the business had ceased. The settlement was not paid until 8 years after the ceasation
of the business and the taxpayer claimed deduction for the settlement plus legal fees. O: The court held
that the taxpayer were entitled to the deductions as the liaiblity was incurred while in business, deductions
would not only be allowable as a result of incurrment during a active trading business.
13-160 Brown – A couple took a loan to purchase a business, and ultimately sold it. They were still
paying interest for the loan, however, after the sale and claim deductions for the payments. O: The court
held in favour of the taxpayer, and said that, in applying the principles established in AGC, Placer Pacific,
the ceasessation of the business does not sever the nexus between the payments and the purpose of
producing income.
13-220 Cecil Bros – The taxpayer who usually brought their trading stock from a direct wholesaler
introduced a middle man, Breckler, into the equation. He now buys the trading stock from Breckler, who in
turn brought them from the wholesaler. The taxpayer was charged at a 10% mark up and claim deductions
for the now larger amounts paid. O: The court held that there is no apportionment of the outgoings, even
though Cecil now pays more than they really have to. Judges said that it is not a matter of how much he can
pay for the same goods, but what is actually paid for those goods. The court took the ‘Legal rights’
approach.
13-220 (123) Europa Oil (1) – The taxpayer bought oil products from Gulf. They had a contract which
allowed the taxpayer to receive a discount of the products, however, Gulf only agreed if they can undisclose
the discount details on the contracts, and therefore would be unaware to any other companies. Therefore,
the companies incorporated a company owned half each, and Gulf took to sale oil products to the new
company to refine, only to buy it back at a marked up price even though Gulf might have done most of the
refining themselves. The effective profit generated from the newly incorporated company would give the
desire discount to Europa when taken off the full price paid to Gulf. O: The court held against the Cecil
Bro decision, and said that only the amount paid minus the profit earned from the newly incorporated
company could be claimed as deductions.
13-220 (124) Europa Oil (2) – The taxpayer now buys oil from another company which they were not
related to. This compnay in turn buys the petrolieum products from Gulf, but they are also not related to
Gulf. O: the court held that all the outgoings incurred from the purchase of oil products from the middle
company at a higher prices that previously have to, were all deductible. The court took the ‘Legal rights’
approach in Cecil bros.
13-220 South Australian Battery Makers – SABM was the lessee in an agreement between its parent and
the lessor. The lessor in an attempt to entice the parent of SABM to use their developments offered them
that a 10% of the capital cost to erect buildings and development of their lands could be paid in a lease
agreement of which at the end the site could be bought at the remaining value of the lease. SABM took the
lease and claimed full deductions on the lease payments. The commissioner deny the claim, saying that the
payments were of capital nature. O: the court held that the payments, in the legal sense, were payments for
the lease of the premises, and the fact that the agreement was done to speically to entice the renting did not
come into consideration.
13-220 Robert G Nall – The taxpayer paid a director a certain sum of money pa and continue to pay it
after the director had ceased its duties as a director and only did jobs of much lesser importance. O: the
court held that the payment of ‘grossly excessive’ salary was not deductible because the value paid was
much too high for the generation of income from that person on the activities that he was performing.
13-220 Phillips – The taxpayer was a law firm who hired services from a unit trust held by the siblings of
the partners of the lawfirm. This unit trust owned services of the law firm and charged at a 10% markup for
the sevices rendered to the law firm. The benefits are for the siblings. O: the court held that the full
payment of the services were deductible because the rates paid for the services were not excessive to the
commercial rates paid for those kind of services.
13-230 Ure – The taxpayer paid interest @ 12% pa for a loan which the company then generated profit of
1% pa from the loan to his wife. O: the court approportioned the interest payments and made only the
amount received as profit as deductible. The court held that the loan was to mainly finance the
accommodation for the family and so forth, therfore was not “incidental or relevant” to income generation
purposes.
13-230 (139) Fletcher – The taxpayer borrowed 2m for 15 years to purchase an annuity. The annuity was
designed so that the five years, the interest on the loan would out weight the annuity payments while the
finnal five years, the annuity payments would out weight the interest payments. The taxpayer try to claim
the interest a deductions. O: the court held that it is necessary to consider the subjective purpose of the
outgoings for a voluntary payment. In this case, since the annuity was not intended to be ran to the end, the
taxpayer was in a sense had the intention to withdrawn from the annuity and claim the tax deduction while
they were higher than the income produce by it. The court held that if the annuity runs its full course, the
interest expense would be deductible because it was incurred in producing income. However, if it doesn’t
run its full course, then it can be said that there was no plans to derive assessable income from the annuity in
the first place, since the interest would greatly exceed the income produced in the first 10 years, therefore
no interest should be deductible.
13-260 (404) Vallambrosa Rubber – The taxpayer owned a rubber plantation and claim a range of
deductions. The commissioner only allowed on seventh of the deductions, saying that only one seventh of
the plantations were producing income at that time, only because it just started. O: the court held that all
the claims were deductible because they were not of capital nature, and the taxpayer have to incur the
expenditure every year. This is the “once and for all” test.
13-260 Southern v Broax – The taxpayer defended a court case where the city of LA claimed one of their
buildings as theirs and that the taxpayer had no right to develop it. The taxpayer in turn claim deductions of
the legal fees. O: the court held that the legal fees were deductible because they were not a capital nature
to the reason that it did not alter the taxpayer’s fixed assets, and gave the taxpayer nothing of enduring
benefit. This is the “enduring benefit” test.
13-260 Mount Isa Mines – the taxpayer claim deductions for expenditure incurred in demolishing
dangerous buildings which had been finished with in the mining activities. O: the court held that the
expenditures were of capital nature because it had the effect of removing disadvantageous assets from its
land, with enduring benefit.
13-270 (374) Sun Newspapers – the taxpayer paid out a large sum on money to a rival company which
agreed to sell the taxpayer its interest in a newspaper in was publishing and agreeing not to produce another
newspaper within three years 300 miles of Sydney. O: the court held that the expenditure were of capital
nature. In appliying the “business entity” test, the expenditure were seen to relate to the structure of the
business rather than for the purpose of income producing.
13-280 (167) Hallstroms – the taxpayer paid legal fees for a challenge incourt against electrolux to extend
their patents on a certain refrigerators that they were about to produce. The won the case and try to claim
the legal fees as general deductions. O: the court found that the fees were deductible, in that the taxpayer
did not gain an enduring advantage in either accuring a capital asset. It simply put itself into a posistion
where it was prior to the electorlux’s extentsion. However, minority of judges held that the payment were
in fact of capital purpose, since it used the fees to carry into effect plans (business structure) of
manufacturing and selling the refrigirators, and not the actual selling itself. The later view has been adopted
in Australia, that for an outgoing to be capital, some assets doesn’t have to been created or acquired.
13-280 (51) Broken Hill Theatres – the taxpayer claim deductions for legal fees which were incurred
while fighting a court case against another theatre licence for being issued opposite theirs. O: the court
held that the outlay was of capital nature in that it sought to protect the structure of the business according
to the business entity approach, even though it did not arrise any new assets.
13-280 (203) John Fairfax & Sons – the taxpayer claim deductions for legal costs incurred while
defending an injunction against its takeover of an associated newspapers. O: the court held the decision in
relation to the ruling of the Suns Newspaper, in deciding that the expenditure was a capital nature in that in
dealt with the structure of the company. The lawsuit was an incident of competition for the takeover of
capital assets.
13-280 (29) BP Australia – The taxpayer try to claim deduction for inducement payments to petrol
stations for only selling and buying their oil products for a certain contracted time. o: the court held that
the expenditure were of revenue nature and said the expenses were deductible. Facts court look for when
deciding whether it is of capital nature in concerning the “once and for all” and “enduring benefit” test.
13-280 NAB – the taxpayer paid out a lump sum of 42m to secure a 15 yr franchise to supply loans for the
Commonwealth Defence Force, and claimed that sum as deduction for outgoings incident to producing
income. The commissionser argured that the sum was of capital nature using the decision of Sun
Newspaper, in that it was a payment to secure structure. O: the court held that the deductions were
allowed. They were of expenditure incurred to produce income because the sole purpoer of the lump sum
was so make income from the issuring of the loans in subsequent periods.
13-430 Faichney – The taxpayer claim deductions from interest on loan of house and other expenses such
as electricity for work done at home which generated income. However, the work was not independent of
the work he normally does, only excess of it. O: the court held that the deductions of interest were not
allowed, on the grounds that they were of “capital, private or domestic nature”. However granted
deductions of portions of other expenses.
13-430 Handley – The taxpayer claim deductions from interest on loan of house and other expenses such
as electircity for work done at home which generated income. This was amounted to 20 hours per week for
45 weeks of the year. O: the court denied a deduction for all the expenses, stating that the work done could
have been done at work, and that the study used to perform the work was more part of the house than a
business permises. It would, and could be use in everyday living.
13-440 Forsyth – Barrister claim dedctions on rent paid for house in which he used the study to perform
work. O: The court held that deductions were not incidental nor relevant to producting income because he
found that Forsyth used the study out of “convienience rather than compulsion”.
13-450 Smith – the taxpayer, a dentist, claimed deductions for premium paid for an insurance policy which
pays him in the event of an injury in which he can no longer perform as a dentist. O: The court held that
the payments from the policy were assessable income because it replaces his existing income, and therefore
the premium were deductible.
13-450 Australian National Hotels – The taxpayer claim deductions for premium paid on insurnace on a
foreign exchange contract to protect itself against losses that might be incurred when repaying the loan. O:
the court held that the premiums were deductible, similar to interest incurred on loan. It would be unfair to
say that interest on loan is deductible, but the premium paid to protect the chances of paying more interest is
not deductible.
13-450 WD & HO Willis – the taxpayer, a tobacco company, paid a related company to insure itself
against claims of cancer and tobacco related claims. O: the court held the premiums paid were deductible
even though they were paid to a related company, because the indemnity payments were not fixed, and the
chances of a lawsuit were real.
13-460 Yeung & Anor – A couple advanced money to their own partnership to start the business. The
partnership once taken off, took a loan to repay the advance to the couple and paid interest on the loan. O:
the court held that the deductions were warranted since it was the maintenance of the income-earning
properties. The “but-for” test.
13-460 Travelodge – Taxpayer claimed deductions on interest on loan that was acquired for the
construction and development of a site over a four year period. O: the court held that the interest was
deductible because it was not capital in nature. The loan was used to built a hotel which at completion
would produce income.
13-460 Steele – The taxpayer claimed deductions on interest paid on a loan taken out to build a motel a
piece of land. However, the development never occurred. O: the court held, in line with the travelodge
case, that even though the capital assets that the loan sought to build never occurred, it does not mean that
the interest is capital in nature. According to Sun Newspaper, the recurrent payment to secure the use for a
limited term of loan funds should be a revenue item. Once the interest has been deemed an outgoings in
relation to producing assessable income, than there should be no argument that the interest is capital nature.
13-470 Chapman – The taxpayer claim deduction on legal cost when it try to object to the discontinuence
of his licence to operate a quarry. O: the court held that the payment itself would have be deductible as an
expenditure, so there should be no reason why the legal cost incurred in defending that payment is not
deductible.
13-475 Wiener – A teacher claimed deductions for travel expenses for the travel between her home to
work and work to home. However, the special circumstances is that she was on a trail run of teaching at 5
school where she would use her home as the place where she would prepare for the next class. O: the court
held that the deductions were essential for the performance of her duties. This is a exception to the Lunney
decision.
13-475 Coolings – the taxpayer, a computer programmer, claimed travel expenses for travels between her
home and place of work outside normal business trading hours. Her job required her to be on call as a
technician 24 hours a day. If she could not solve the problem over the phone or portable terminal, she
would have to go into the office to fix the problem. O: the court held that the deductions were warranted,
and that she had to places of work. Office and home.
13-475 Vogt – a musician claimed travel expenses between his home and work place. O: the court
allowed the deductions holding that because of the need to transport heavy and cumbersome equipment.
13-475 Garrett – A doctor who also carry a farming business at home claimed travel expenses when he
flew from his home to attend the practice in other parts of NSW in his plane. O: the court held that the
deductions were allowed because he would not have been able to meet the demands of both his occupation
if he didn’t travel the way he did.
(275) New Zealand Flax Investment – The taxpayer sell bonds for a business. They try to filed claims on
revenues, which included expected revenue that has not been received. The taxpayer included the whole
sale price of the bond as revenue for the year even though they were paid in instalments. The same went for
expenses which they try to deduct in whole in the year of sale rather then apportioned over the life of the
bond. O: the court held that the expenses should have been apportioned.
(241) Magna Alloys – The taxpayer, part of a company which sold welding and maintance services,
claimed deductions on legal fees when it defended allegations of unlawful business practice of its directors
and managers from the government. O: Similar to the Snowden decision, the fees were deducible, as they
were seen as reasonably capable of being regarded as desirable and appropriate from the point of view of
the business ends. It’s perfectly nature to defend itself against damaging allegations. Whilst it was done in
directors interest, this does not preclude it from being outgoings incurred in producing assessable income.
The expenses were not capital in nature because it did not correspond with the structure of the business nor
any assets.
(173) Hatchett – A teacher claimed deduction for payment of typing a thesis for his Teacher’s Higher
Certificate, which would get him on a higher salary bracket. He also claimed university fees in relation to
undertaking a degree offered by the faculty of Arts. He claimed that they are self education expenses. O:
the court held that he was entitled in claiming the thesis’s fees, as it would improve his income producing
ability. However, the uni fees were not deductible, since it was not related to his line of work. Neither costs
were capital in nature.
(246) Martin – The taxpayer, a single mum, claimed deductions on child care expenses while she was at
work. Her employer has strict rules that approprate child care must be provided to her child before she can
commence work. O: the court held that the expenses were not deductible. The character of the payment
were not incidental to her work.
(181) Highfield – The taxpayer claimed deductions for expenses ( including accomodation, living, meal
expenses etc) incurred while studying overseas to gain a Periodontics degree which he work related to but
was not a specialist in. When he came back to Australia, he sold his existing general practice and
eventually became a specialist in periodontics.
O: the court held that the expenses were deductible in to it was incurred necessarily while carrying on a
business for the purpose of producing income. The court held that it was necessarily to advance his general
practice to make it more profitable.
(225) Lodge – The taxpayer claimed deductions for the payments of child care while she was at work. She
prepare bills for a law firm as her work. She argued that the expenses were indicental to her producing
income. O: the court held that the expense were not deductible. The costs might be incidental to her
producing income, however, it is not incidental to her preparing bills, of which is the operations of her
producing income.
(229) Lunney, Hayley – Both taxpayer try to claim deductions for traveling between their home and their
place of work. Neither of them was employed to work from home. O: the court held that the expenses
were not deductible.
b. Repairs; Capital works
14-030 Phillips v Whieldon – Example of repair
14-030 (223) Lindsay – The taxpayer claimed deductions on the repair of a slipway. Due to the
unavailability of certain material used in the old slip, they had to demolish part of the old slipway and
completely rebuild the section with newer and better materials. However, upon completeion, the slipway
did not gain any working advantages over the old. O: the expense were not deductible. The court held that
the slipway should have been classified as separate asset in itself to begin with, instead of a subsidiary asset
of the taxpayer’s property. Secondly, they found that the repair was substantial part of the slipway did not
constitute a repair, but rather the acqusition of new capital asset.
14-030 (320) Rhodesia Railways – The taxpayer repair s large section of a railway line, in which it
replaced the old lines, nails and others with new parts. It also built a new part of track at the same time. o:
the court held the repair deductible, since periodic repair of railway track with new part is seen as repair
warranted in producing income from those tracks.
14-030 Samuel Jones – The replacement of chimney was held to be “physically, commercially and
functionally an inseparable part of the factory”, therefore is a repair.
14-030 Case V2 – The reconstruction of the foundation of a building included a wall which acted as a
support, and doubled as a blocking off for the car park. O: the court held that the repaid, although
extensive and expensive, were deductible because it did not change the building’s nature or character.
However, the wall was not deductible because it added additional function which the building did not
perform before the construction.
14-040 (421) Western Suburbs Cinemas – The taxpayer tried and fail to claim deductions on the
replacement of the roof for their cinemas. It then claim the cost of $1200 that they would have incurred if
they only repaired it rather than replace the roof. O: the court held that you cannot claim deductions for
repairs that has not been done. Only ones that are actually performed – the “notional” repair.
14-070 Western Suburbs Cinemas – The taxpayer replaced it existing tin roof with new fibro sheeting
roof. It is proven that the fibro will reduce the likelihood of repair bills in the future. O: the court deny the
deduction, as it was an improvement to the roof, capital in nature.
14-080 (216) Law Shipping Co – The taxpayer bought a ship to sail around the world. However, before
it could sail, it had to repair it so that it was in satisfactory condition and approved by the governing body.
O: the court held that since he repair was warranted at the time of the purchase, it is included as the buying
cost.
14-080 AB Donald – The taxpayer purchased a ship and started operating business with it. After a short
period of time, it took on extensive repair to the ship. O: the court held the repair not deductible even
though the ship had already been used. It held that the repair was still a repair of initial defects.
14-080 (410) W Thomas – The taxpayer purchase a building, unaware of the damage already exist on the
building, and started his business in it. After a long period of time, he had to take on extensive repair to the
building. O: the court held the expense not deductible as it was repair of initial damages, even though the
taxpayer wasn’t aware of the damages to begin with.
c. Depreciation
14-155 Nutley & Finn – Depreciation claims on a chimney in a factory. O: the court held the
depreciation non deductible because its function was to remove effluent gases to make working condition
more pleasant, therefore not plant.
14-155 Case 37 – Depreciation claims on a chimney in a tile making factory. O: the court held the
depreciation deductible because the chimney was essential in providing the necessary draft to the
combustion so that the tiles could bake properly.
14-155 (342) – Scottish & Newcastle breweries – The taxpayer operated hotels and public houses and
leased these out. It sought to claim depreciation on decorations which enhanced the prospect of future
lenders and this was supported by both market research and pratical experiences. He claimed that the
decorations were part of plant of which he used to produce assessble income. O: The court held that the
depreciation were deductible. The decoration were included as plant, and the judge said that there is no law
that excludes the inclusion of atmoshpere to attract customers. And if the case is that it is warranted in the
course of business, and decoration is needed then so be it. The important factor is that the trading of
business to produce income promoted it.
14-155 (418) – Wangaratta Woollen Mills – The taxpayer was in the business of dyeing yarn, which uses
dangerous chemicals especially acids. He sought to claim depreciation of parts of building and equipment
in which very special work was done to ensure safety and workability of the building. O: The court held
that the depreication was deductible except for the part of builiding which constituted outside cladding of
the building. The court held that the building was in the nature of a tool, and played a part in its
manufacturing process, as opposed to merely being a setting for its operations.
14-155 (190) – Imperical chemical industries – The taxpayer sought to claim depreciation on ceiling
fittings and electrical wiring in a acoustic building in which he used to produce income. O: the court held
that neither part of the house was plant or articles. The function of both the parts did no go beyond making
the building a suitable palce to conduct his business.
Taxation Rulings IT196, 2236 – Allow depreciation to a hirer of plant under a hire purchase agreement.
14-160 (37) - Bert Needham – The taxpayer imported a custom car into Australia for promotion.
However, some time after he acquired it, but before he put it to use produce income, it was confiscated by
customs as it breach the customs act. Under the act, the item would immediately be transfer to the
ownership of Crown. Upon releasing the item on bond, the taxpayer try to claim depreciation on the item.
O: The court held that his was not entitled to claim deductions as in no point in time was he the owner of
the item, when it was used in producing income, or installed ready for use. Under the law, the release on
bond did not extinguish the ownership of the item by crown.
(130) Faichney – The taxpayer a reasearcher had established an study at his residence to do research
during weekends. He sought to claim deductions for part of the interest on the home loan attributable to the
study, electricity attributable for heating and lighting for the study, and depreciation for carpets, curtains,
and bookshelfs for the study. O: The taxpayer was not entitled to claim interest payments as they were
private and domestic nature – a study in a home, no matter how much is used for business still is a study in a
home for private and domestic nature. The taxpayer was allow to claim deductions for the electricity as the
judge saw it as exclusively used while the taxpayer was engaged in work to the extent of the business. The
depreciation was also granted deductible as the articles were judge to be within the meaning of articles, and
the judge also contended that the items doesn’t not have to be predominantly used for income producing to
be depreciable, however if they are not, then they might be apportioned.
5. Dividends and Company Taxation
19-610 (40) Black - A couple who controlled two company sought to liquidate one of them. While in
liquidation, the board of directors extinguished a debt that the couple owed to the liquidating company. The
commissioner sought to include that debt forgiven in the assessable income as dividends. O: The court held
that the forgiviveness is not a distribution and therefore not a dividend under s6(1). Also, it cannot be
classified as dividend under s108 as the debt forgiveness was not a loan or advance.
(402) Uther – The taxpayer received a sum in return of his cancelled shares. This sum is in excess of the
value of the shares. The commissioner sought to include the excess as assessable income by the way of
dividends under s44(1). O: the court held that the whole sum was a return of paid up capital and cannot be
split up within the meaning under s6(1).
(350) Slater Holdings – The taxpayer received a payment on him ceasing to be a shareholder in a
company. This payment was paid out of partly from revenue profits, capital reserve from capital gains and
capital reserve represented by a gift. The commissioner sought to include the whole amount as assessable
under s44(1) while includes dvidents paid out of “profits” as assessable. O: the court held that the whole
amount was assessaable. The decision was based on the decision of Spanish Prospecting Company which
said that proftis included gain made by the business during the year, including the comparison of assets.
Also, gift received by company increases the net tangible assets of the company, which is included as
increase in assets.
6. Tax Administration
(73) Citibank – The applicant was searched by taxation offices purport to obtain documents which the
bank held for its clients pertaining to a tax avoidance scheme of preference shares overseas. The
commissioner gave authority to its officers to search and obtain documents, but citibank appealed the action
under the ADJRA77 against the commissioner saying that it was an excessive exercise of commisioner’s
power under s263 because it did not give citibank enough time to sought legal advice and exercise its legal
professional privilege over some of the documents. O: the court held the commisioner was within its power
to give verbal authority to its officers to search the premises. However, because it took documents of non
relating to the circumstances, as well as did not give advance notice, the court held that it was excessive
exercise of power.
(35) Batagol – The commissioner assessed the taxpayers tax return ending 1954 and wrote not taxable in
taxpayer’s file and issued a cheque for refund. Consequently, the commissioner found that the taxpayer was
not entitled to a deduction he claimed for the previous tax return and sought to make the amendments in
1955. The taxpayer argued that the commissioner has already issue an assessment, and that his could not
make it again. O: the court held that a “nil assessment” does not constitute the making of an assessment. A
refund advice did not constitute an assessment by was merely issued to explain why the tax deductied
during the year was being refunded.
7. Tax Avoidance
23-635 (295) Peabody – The taxpayers took a whole range of transactions of which some gain tax benefits
from, during of which was concentrated on the acquisition of some shares and the ultimate disposal of them
to a trust. O: the main points from the case is that:
 A part of a scheme cannot be taken to be a separate scheme of its own that was aimed to gain tax
benefits. If the overall operation involves several steps, all the steps are said to be included as a
scheme, and if some of those steps were done to provided tax benefits, so as long as the purpose of the
scheme was no to that effect and was in commercial purpose, then Part IVA cannot operate to change
the circumstance, and the scheme does not fall into its definition.
 The purpose of the scheme is very important in identifying whether the scheme has its “dominant” or
“sole” purpose of gaining a tax benefit.
23-635 (362) Spotless – The taxpayers under the advise of it tax advisor, established an investing
company in Cook Islands and paid out its excess funds into it, of which the new company invested
successfully and earned a return. The returns were liable to taxes in Cook Islands and upon paying the
returns to Spotless, Spotless was exempt from tax in Australia because it already paid taxes in Cook Island,
which was in a lower rate. O: The court held that there was a tax benefit s177C(1) since without the
scheme, the taxpayer would have invested the money in Australia and would have earned interest which
would have been included in its assessable income. The taxpayer did enter into the scheme for the sole
purpose of deriving a tax benefit from the exemption of a Australian tax.
23-635 (411) WD & HO Wills – the taxpayer was a subsidiary of Amatil which sold tobacco products in
Australia. They could not estabilsh a reasonable rate of insurance in Australia so Amatil established a
insurance company in Malaysia of which the taxpayer paid premiums to. The commissioner argue that the
payments were to a related company, and that they were not deductible. O: the court held that they were
deductible, and the fact that it’s a related company does not prevented from being deducted. As long as the
transaxtion was on a business manner. Although there was a tax benefit from paying to a Malaysia
company, PartIVA could not apply because the court held that the dominant purpose of the transactions was
not to gain that tax benefit.