Reference no: EM132641151

Question - Major limited carries on business predominantly in the areas of retail trading and property development. On 20 February 2018, Major Limited acquired Minor Finance limited which then undertook the greater part of the financing activities carried out by Major Limited. On 6 March 2019, Major Limited lent $80,000,000 to Minor Finance. The loan was made pursuant to a loan agreement which provided that the principal would be repaid to Major Limited on but not prior to the 30 June, 2027 and that, in the meantime, Minor Finance would pay interest to Major limited at the rate of 12.5% p.a. on the dates and in the amounts set out in the loan agreement.

The loan agreement also provided that Major Limited had the right during the term of the loan: to sell, transfer or assign the Principal Amount and/or the interest payable or prepayable... provided that it shall give written notice of such sale, transfer or assignment to the Borrower. On 9 March 2019, Major Limited assigned to Canterbury Limited absolutely the moneys due or to become due as the interest payments and interest thereon pursuant to the loan agreement. The consideration for the assignment was the sum of $45,370,000 which was paid by Canterbury Limited to Major Limited on 9 March 2019. The sum was calculated on the basis of the outstanding interest payable under the loan agreement which was then discounted at the rate of 16% p.a. The loan agreement and the related assignment of interest formed part of a wider reorganization within the Major Limited.

The motivating purpose of the transaction was for Major to obtain working capital to enable it to diversify. The ability of the company to obtain capital from public borrowings was limited the transaction was the most feasible way, in the view of the board of directors of Major Limited, for the company to raise the working capital it sought.

The Commissioner of Inland revenue assessed the sum of $45,370,000 as income in the hands of Major Limited. The Commissioner also argued that, the lump sum is the right of Major Limited to the future income stream arising from the loan. The Commissioner argued that a gain made by a taxpayer as the result of a business deal or a venture in the nature of trade is income of the taxpayer, even if the transaction that yields the gain is outside the ordinary course of business.

Required -

(i) What are the arguments in favour of treating the sum of $45,370,000 as capital in nature for Major Limited?

(ii) What are the arguments in favour of treating the sum of $45,370,000 as income in nature for Major Limited?

(iii) Explain whether assessable income arises for Major Limited.