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REVENUE LAW, 5 questions open test

QUESTION ONE

Sec CA 1(2) of the Income Tax Act 2007, is intended to tax an amount which is income of a person.

(a) How has the term, ’income’, been interpreted and applied for the purposes of sec CA 1(2)?

It has been conflicted that economists cannot settle on a common definition of “income.” Concepts like

  • maintenance of capital
  • flow of income
  • One of the proposed definitions is the comprehensive income idea associated with HC Simon’s research.
  • of the potential to consume as opposed to actual consumption

The recipient’s ability to exert influence over goods and services is enhanced by a general notion that treats all gains like income, no matter where they came from or what they look like. Gain and income are synonymous in economics, both representing monetary gains.  “Therefore, the economist may define the income of such a period as that of the difference between the taxpayer’s worth at the start of the period and the taxpayer’s worth after the period, plus the cost of the taxpayer’s consumption during the period. Simons called the idea of a correlation between time period and income “fundamental”. The wealth of any individual is included in the base if they have accumulated wealth over any period. Haig and Simons noted that receiving a gift or unexpected financial windfall increased the recipient’s economic leverage and potential. According to Simons’ definition of money: Twelve, one’s income may be thought of as the algebraic combination of two components: the cost of land acquired and sold and the value of consumer rights as they are exercised. Put another way; it’s just the difference between starting wealth and ending wealth after accounting for consumption over time.[1]

(b) What, if any, significance has the role of the courts been in outlining the kinds of gains which will be considered taxable under sec CA 1(2)?

The courts in Seymour, Case V135, Hayes, and Moore interpreted the funds in question as presents rather than as remuneration or repayment for services rendered. As soon as the contract was over, monetary transactions occurred in Moore and Hayes. Another issue debated by Moore, in the court was whether or not the cash in question counted as income. Because there was no regularity, no recurrence, no anticipation of a reward, no contractual entitlement, and no services done, the receipt did not have the characteristics of a source of income, as required by section CA 1 (2). Courts have considered the issue of whether or not a given sum can be regarded as income under common law in the instances of Dixon, Blake, Harris, and Reid. CA 1 described the reception as having the features of income because it was periodic, recurrent, or regular; there was an expectation of remuneration, and the doner relied on the payments to sustain himself and his dependents.[2]

In Dixon, Louisson, Reid, Blake, Moore, Ball, and Hayes, Case V135, it was ruled that the payments made to Harris and Hochstrasser were not taxable under CE 1 because they were not made to them in their position as employees and were not in any way related to their work. Because of this, it was decided that the money shouldn’t be taxed. The earnings of Dixon, Reid, and Blake were deemed taxable, however, after applying CA 1(2). However, the New Zealand court that considered the Louisson case disregarded CA 1(2). If the New Zealand court had looked at section CA 1(2) of the Act, similar to the Australian decision FCT v. Dixon, which has some similarities to the Louisson case, the additional payment would have been regarded as “income.” Although Moorhouse and Blakiston tried to answer the question of whether or not periodicity, recurrence, and regularity exist, they were unable to do so. In Ball and Haye’s Case V135, Seymour and Moore’s compensation was determined by the claimants’ characteristics rather than their actual working conditions.[3]

Consider the New Zealand Court of Appeal decision in Louisson v Commissioner of Taxes [1943] NZLR 1 (Course Materials Book One at page 437) and the High Court of Australia decision in F C of T v Dixon [1952] 86 CLR 540 (Course Materials Book One at page 422).

Explain why in respect of identical facts and payments made to the respective taxpayers in each case, the respective Courts reached quite the opposite decisions regarding the character of the payments concerned.

Supreme Court Justice DIXON and Associate Justice WILLIAMS were present. At issue here is whether or not a one-time payment given by an employer to an employee who had joined the military to bridge the gap between military pay and the remuneration he would have obtained in civilian employment during the war is considered taxable income by the Internal Revenue Service (IRS) This payment was paid to an employee who left civilian employment to join the military to help him make up the income gap between his military pay and his civilian salary. From July 12, 1940, to the end of the year, the taxpayer worked as a clerk for the shipping company Macdonald, Hamilton & Co. The universality of this guiding principle resulted in uniformity of practice across all businesses in Australia and England. The breadth of the problem was illustrated by two English decisions that dealt with identical issues: National Association for Local Govt Officers v. Bolton Council [F8] & Lally v. Durham Local Council. Both of these judgments were made under the English legal system. [4]

English courts have ruled on both of these matters. Since the taxpayer’s legal team relied heavily on two New Zealand instances, particularly Louisson v. Commissioner of Taxes [F10], it is evident that the policy or practice was widely adopted.[5] The breadth of the problem was illustrated by two English decisions that dealt with identical issues: National Association for Local Govt Officers v. Bolton Council & Lally v. Durham Local Council. Both of these judgments were made under the English legal system. [6]

There appears to be no exemption again for the type of supplemental payouts at issue, which were made to servicemen by one‘s former employers during the war, under either section 23 (s) of Income Tax Act 1936-1946 or section 23B of an Income Tax as well as Social Services Participation Assessment Act 1936-1951. The responding taxpayer had an assessable income worth PD104 for the such fiscal year that ended June 30, 1943, based on the circumstances provided in the case question.

The English Court of Appeal decision in Moorehouse v Dooland[1955] 1 Ch 284(Course Materials Book One at page 444) and the House of Lords decision in Seymour v Reed[1927] AC 554 (Course Materials Book One at page 457), concerned payments which had been made to professional cricketers and whether the respective amounts received, were income in the hands of the recipients.

(a) What determination did each of the respective Courts make in respect of the amounts received by the respective cricketers?

Seymour v. Reed 140 as well as Case V135141 established the threshold below which the revenues would not be considered gross income, despite the fact that there was a reasonable connection between the payments with Seymour as well as the Australian academic’s job. This decision was taken despite the fact that there was a plausible link between the payments as well as the Australian professor’s employment. The judgement in case Kelly, 142, however, saw a relationship between the two that was strong enough to draw the line on the gross income side of the receipt. Paying Kelly in the manner in which he was standard practice within the world of professional football.[7]

(b) What justification did the respective Courts provide in support of their decisions?

On August 27, 1949, Mr. Ell Higham, acting on behalf of the Ease Lancashire Club, and Mr. Dooland entered into a written contract in which Mr. Dooland promised to serve as the club’s cricket professional during the 1950 and 1951 seasons. In the contract, Mr. Dooland was given the responsibility of training the club’s cricket players. As for the second and third clauses, they are worded as follows: The club is obligated to pay the professional a salary of GBP 800 for each of the first two seasons, as well as GBP 150 for or towards the cost of one passage for the professional between Australia and England.[8] These payments are to be made in equal weekly payments throughout the aforementioned seasons, or in such another manner or at such other times as may be agreed upon. In addition, the club is responsible for providing the professional with a passage between 3. The club is required to pay the professional talent money at the rate of one guinea for every fifty runs he scores in any Langue or Wisely Cup match in which the club participates during the term of his engagement, and a like sum on every occasion on which he obtains six wickets or performs the hat trick in any with a match. The club is required to pay the professional talent money at the rate of one guinea for every fifty runs he scores in any Langue or Wi Particularly, I believe that the third and final sentence of clause 3 is really important.

(c) How did Lord Atkinson determine whether the receipt was income in the hands of James Seymour and what was the legal justification for his decision in Seymour v Reed?

It was determined that James Seymour will not have any command or control in any way over the Committee. Therefore, the Committee was free to either provide him with a benefit or not provide him with a benefit, and to request subscriptions in connection with it or not request them, and they had a completely free hand, when they got the money from those two sources, as to what they would do with it, with the exception of the fact that it appears that they ought to deal with it according to their own discretion in the interest of the beneficiary. They invested the money from the gate as well as a portion of the subscription money that was brought into their hands in trustee securities. Additionally, the money from the subscriptions was also invested.[9] They made interest payments to him on this money for a period of two years, during which time he, of course, deducted his income taxes from those payments in accordance with the standard practice. may have been successful in regaining possession of it. After that, an income tax assessment is made on him, and it would appear that he resigned from his profession shortly after that; the Trustees used these funds to purchase a farm for him that he had wanted all along. After that, an income tax assessment is made on him. After that, an income tax assessment is made on him. The appeal was then brought before the Commissioners, who decided that the assessment would not extend to the portion of the money that represented subscriptions but rather would be limited to the portion that represented gate money instead. This decision was made after the appeal was brought before the Commissioners.[10]

Question 4

(a) How did the House of Lords resolve these inconsistent determinations by the Special Commissioners, Finlay J, as well as by the Court of Appeal, and how did it characterise the nature of the payment for income tax purposes?

The appellant argued that the notion developed in British Insulated & Helsby Cables Ltd. V Atherton should be applied to determine whether a certain expenditure was a capital and revenue character. In that case, the manufacturing firm that made insulated cables also established a pension plan for its professional and technical staff, who were paid on a salary basis. A trust deed established the fund and required members to contribute a set proportion of their salary, with the agreement that the employer would match employee contributions at a rate of fifty per cent. In addition, the trust deed required the company to seed the fund with GBP 31,784 so that employees with qualifying years of service from before the company’s inception may receive pension benefits. An actuarial calculation was used as the basis for arriving at that number. The calculation was based on the assumption that the sum would eventually run out after the goal for which it was paid was accomplished. This payment was deemed to be of the kind of capital expenditure by the House of Lords, which meant that it could not be deducted as a legitimate business expense. Despite the fact that various members of the House of Lords have offered their perspectives on the matter.

(b) What was the reasoning of the House of Lords in support of its characterisation of the payment in question?

As to whether or not a particular expenditure is of a capital or income character, the Appellant’s counsel claimed that British Insulated & Helsby Cables Ltd. vs. Atherton should be used. Within this case, the insulated-cable maker also set up a retirement savings programme for its salaried professionals and technicians. Members and employers both make contributions to the fund, which are specified in a trust deed. Depending on their length of service, present and past employees may be eligible for pension benefits, and the trust deed stipulated that the company contribute GBP 31,784 towards the fund as a starting point.[11] That estimate is the result of an actuarial computation. The estimate presupposed that the money would run out once the intended outcome had been reached. The House of Lords ruled that this sum should not be considered an allowable operating expense because it constitutes a capital investment. However, numerous nobles have spoken out on the subject.[12]

Question 5

(a) What was the determination by the Court of Appeal on whether the payments in question, were income for the two petrol retailers?

The assesses and the private company Sungo Limited were shared directors. As far back as 1942, the assesses was engaged in business with Sungo Limited and providing interest-bearing loans in varying amounts to the latter. The assessed interest income from financing transactions was included in his or her taxable business income, except for the 1956–57 tax year, in which Rs. 5,000 was included in the assessed taxable income from “other sources” to account for interest. Later, however, a ruling under Section 35 reclassified the entire sum as “business revenue,” making the original classification obsolete. Interest due from Sungo Limited was calculated to be Rs. 30,172 as of March 31st, 1950. [13]As the assesses had previously resolved to forego receiving interest from Sungo Limited in the years 1951–1952, 1953–1954, and 1956–1957, the relevant assessment years saw an increase in their taxable income by an estimated Rs. 14,500. The assesses owned by Sungo Limited Rs. 56,300 as of April 1, 1956. The assesses, as of March 31, 1957, wrote off as an uncollectible debt the number of Rs. 55,040 remaining after the sale of Sungo Limited’s assets and adjustment for debts owed in the accounting year ending March 31, 1957. Revenue determined that the advances made by the assesses to Sungo Limited were not made in the ordinary course of business and hence dismissed the claim for reduction of this amount under section 10(2)(xi).[14]

(b) What was the basis for the unanimous decision of the Court of Appeal, in respect of the tax consequences, for the respective payments?

In the unanimous decision by the Court of Appeal, Myer received instant payment after selling his interest in the property. Myer paid $80,000,000 (comprised of $45,370,000 in cash and Finance’s $80,000,000 debt) to acquire the business from Finance. The company has made a profit of $45,370,000. Yes, Myer will miss out on the interest that would have accrued throughout the loan’s term, but that will only show up as a loss of income in the form of interest payments in the years to come. The $45,370,000 profit received by Myer during the 1981 financial year is included in the company’s taxable income for that year.[15] Considering the foregoing, it is clear that the amount at question was included in Myer’s income for purposes of section 25(1) of the Act. It follows from this line of reasoning that the sum in question is taxable under the second prong of Section 269a). There has been a lot of debate over the extent to which the second part of Section 26(a) supplements the first part of Section 25(1). However, it is unnecessary for us to investigate that issue here since, as we have already mentioned, we believe that the sum at issue in the present appeal was income of the taxpayer under both par. 25(1) and 26(a).[16] All appeals shall be granted with respondent to pay all associated costs.[17]


[1] R L Deutsch et al, Australian Tax Handbook 2009 (Australian Tax Practice, Sydney, 2001) 43

[2] Scott v Commissioner of Taxation (1935) 3 ATD 142 at 145; (1935) 35 SR (NSW) 215.

[3] Adrien J Sawyer, ‘New Zealand’s Tax Rewrite Program — In Pursuit of the (Elusive) Goal of Simplicity’ (2007) 4 British Tax Review 405.

[4] The Income Tax Act 2007 (NZ) and Tax Administration Act 1994 (NZ) represent the statutory source of taxation law in New Zealand

[5] John Prebble, ‘Can Income Tax Law Be Simplified?’ (1996) 2:4 New Zealand Journal of Taxation Law and Policy 187 at 190.

[6] S Ross and P Burgess (ed), Income Tax: A Critical Analysis (The Law Book Company, 1996) 31.

[7] Henry Simons (ed), Personal Income Taxation: The Definition of Income as a Problem of Fiscal Policy (University of Chicago Press, 1938) 49

[8] Simons, above n 17, at 50, as cited in Kevin Holmes, The Concept of Income: A Multi-Disciplinary Analysis (IBFD Publications BV, 2001) 66.

[9] Inland Revenue Department, ‘Income Tax Act’ (2004) 16:5 Tax Information Bulletin 46. Part C of Income Tax Act 2004 is equivalent to Part C ITA 2007. The Income Tax Act was rewritten in 2004.

[10] The Tax Information Bulletin also uses the phrase ‘exhaustive list’ at 48 and 54.

[11] Clinton Alley and Andrew Maples, ‘An Analysis of the Framework and Terms Used in Determining Assessable Income in the Core Provisions of the Income Tax Act 2004’ (2007) 13:3 New Zealand Journal of Taxation Law and Policy 462 at 463

[12] Craig Macalister and Therese Turner, The Income Tax Act 2004: The New Rules (Brookers Ltd, 2005) 287. If an amount arising from a transaction is not income under Part C, then it would be outside the scope of the Act

[13] Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215

[14] R W Parsons, Income Taxation in Australia: Principles of Income, Deductibility and Tax Accounting (The Law Book Company, 1985).

[15] Brent v FCT (1971) 125 CLR 418, 423.

[16] FCT v The Myer Emporium Ltd 87 ATC 4363, 4372; (1987) 163 CLR 199 at 215–16, 209

[17] Commissioner of Taxes (SA) v Executor, Trustee and Agency Co of South Australia Ltd (Carden’s Case)) (1938) 63 C.L.R.108, 155

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