Elements of Income Tax Law

Introduction:

Mr. and Mrs. Smith (hereby referred to as ‘the Smith's') ,as sole shareholders of Nolan's Irish Bar Pty Ltd (hereby referred to as ‘Nolans') will attempt to assert that the money and free legal services received throughout this ordeal are not assessable income to either the company they own (Nolans), or themselves. The payments and benefits in question is the $50,000 received as an ex gratia payment from Sydney Morning Bugle (‘hereby referred to as ‘the Bugle') and $50,000 in non-cash benefits received through the decision not to pursue costs made by both the Bugle, and Costmount legal. These payments will be analyzed separately in order to advice the Smiths on the best manner and practice to assert that these moneys and benefits are in fact non-assessable income, with careful attention to relevant case law, and the relevant statutory authority on the matter.

Ex Gratia Payment from the Bugle:

The Commissioner of Taxation (‘the commissioner') is attempting to prove that the $50,000 received by Nolans in this instance was an ordinary income receipt of the business.

Is Nolans a Business Activity?

The first step in identifying whether this is a correct assertion is to identify if Nolans is a continuing business. The Income Tax Assessment Act 1997 (ATAA) defines a business as "any profession, trade, employment, vocation or calling, but does not include occupation as an employee ". The case of Evans v FCT states that there is no single decisive factor in identifying a business, however other case law has identified criteria to look for. Ferguson v FCT states it is a business if it is "conducted systematically and… in a business like manner ". The commissioner will need to prove that Nolans is run systematically, and is "planned, organized and carried on in a businesslike manner ". The facts do not reveal the level of organization involved in Nolans, but advice would be dispensed to try and prove that Nolans is merely a pastime. However, this would appear to be a challenging argument on the part of Nolans. The motive of a business seem to have little effect on establishing Nolans as a business activity, since the case of Brajkovich asserts that the desire to make a profit does not mean a business. Furthermore, proving Nolans is a small establishment which fails to carry on regular activities will be a moot argument, as Thomas v FCT holds that "a man can carry on a business although he does so in a small way ". While an argument may be mounted that Nolans is not run for profit, is an occasional pass-time of the owners and is not run in a systematic way, it appears the criteria for the identification of a business activity is fairly lenient, and it appears on the facts that Nolans is a business activity.

Scope and Ordinary Course of the Business: Gift

The Nolans would have a better chance for success in this regard by mounting an argument that this particular transaction does not form part of the business, or is outside "the scope and ordinary course " of the business. If it can be proved that the $50,000 receipt was outside the scope of ordinary business, than the Commissioner would have no grounds for his assertions. In order to answer this question, "a wide survey and an exact scrutiny of the taxpayer's activities " must be conducted. While the ex gratia payment is clearly not within the scope of Nolans business of running an Irish pub, the characterization of the transaction will take on great importance. If it is characterized as a gift, in line with Federal Coke Co Pty Ltd v FCT , than it cannot form part of the business's ordinary income. Bowen CJ held in Federal Coke Co that it could not be income as it was "insufficiently connected to any recognized income-producing activity ". In this case, the payment made to Nolans was not related to any income related activity, and was simply a goodwill gesture. Unlike the ruling set out in FCT v Squatting Investment Co Ltd where it was found their was a sufficient connection to income related activities, here there is no such connection, and thus Nolans should mount an argument that the payment was a gift.

Scope and Ordinary Course of the Business: Extraordinary Transaction

Failing this, the transaction clearly meets the criteria of an extraordinary transaction, set out in FCT v Myer Emporium Ltd . This situation is clearly an extra ordinary transaction, as Nolans regular business does not involve the generation of income through lawsuits and receipt of large sums from defaming parties. However, the questionable motive with which the Smiths, as owners or Nolans, entered into