Reference no: EM132749411

Questions -

Question 1 -

(a) What does income of a person mean?

(b) What does ordinary income mean?

(c) What factors need to be considered in determining whether a receipt is of an income or of a capital nature?

(d) Are all receipts of a taxpayer that carries on a business income in nature?

(e) What is assessable Income?

(f) What are the characteristics of Income?

(g) What is the difference between economists and the common law definitions of financial gain?

Question 2 -

(a) Explain why pension is considered assessable income.

(b) John received a lump sum payment of $4,000 from his former employer to help him offset the effects of inflation on his pension. Explain if the lump sum payment is assessable income.

(c) Singh operates a shuttle business and has a fleet of 4 cars. One of his cars was badly damaged in an accident and was beyond repair. Singh received a compensation of $2,800 from a local insurance company for the car. Singh also received a vehicle with a second hand value of $15,000 from His uncle to help him in his shuttle service. Explain if assessable income arise for Singh.

(d) Mary enrolled for nurses training college and received a monthly allowance of $2,500. One of the conditions associated with the allowance was that allowance was to be repaid if Mary did not pass the course and complete three years of nursing practice after graduating. Explain if the allowance is assessable income for Mary.

(e) Hillcrest Limited was engaged in an isolated transaction of buying and selling a machine for production of cement bricks, with a view to making a profit, having no intention of using the machine or deriving income from it. The purchase price of the machine was $50,000 and the selling price $56,000. Does assessable income arise for Hillcrest Limited. Explain.

(f) 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.

(g) Alfred employed as the governing director of a company under a contract which specified his term to be of ten years' duration and that his remuneration was to be at the rate of 12.5% of net profits. The company disposed of its business and Alfreds' services were dispensed with. It was agreed between the company and Alfred that the sum of $25,000 being 12.5% of the company's estimated net profits in the unexpired term of ten years, should be paid to him, in monthly instalments, as compensation. Are the monthly instalment assessable income for Alfred? Explain.

(h) William sold wines manufactured by Nelson Winery in South Island New Zealand. Under an agreement Nelson Winery agrees to give to William retail distributing rights (but not a sole agency) for the sale of the wines in South island new Zealand. In the winter of 2019, William took a holiday of about a week's duration in an island in the Pacific Ocean. Nelson Winery paid for the charges for transportation and accommodation for the holiday. The holiday was a participation in a ''holiday scheme'' controlled by Nelson Winery and was a discretionary and gratuitous benevolence to those who satisfactorily performed agreements with the company. According to the agreement the holiday period is to be approximately one week taken during the months of June and July unless the Committee otherwise determines. No cash payment in lieu of the holiday trip will be made. William must be a fully effective Retailer at the time of the holiday trip and will receive one ticket for himself and one ticket for his wife for the holiday trip. He is not at liberty to transfer either ticket to any other person but must go himself and take his wife. William is expected to promote sales in the Territory franchised to him. The IR Commissioner added to the aggregate of assessable income in respect of William's holiday that amount which the manufacturer expended in payment for the transport and accommodation provided to the respondent in respect of that holiday. Is the holiday accommodation and transportation costs paid by Neson Winery assessable income for William? Explain.

(i) Farm Limited, the ultimate holding company of the companies in the Super Dairy Group, disposed of a number of its subsidiary companies, including the companies in the Super Dairy Group. Jean, a general manager of Minor Dairy Limited, a company in the Super Dairy Group, received an offer from Farm limited of a one-off payment of $110,000 (retention payment) to remain in her current employment with Minor Dairy Limited for a period of twelve months from the effective date of the forthcoming change of ownership of Super Dairy Group in which Jean was engaged and required to give full time attention, commitment and energy to the business of Super Dairy Group during that time. In the event that Jean resigns her employment with Super Dairy Group before the completion of twelve months' service following the change of ownership, she is to refund to the Company the amount paid to her, less an abatement of one-twelfth of the total retention payment paid to her for each completed month of service or part thereof. No such refund will be payable if Super Dairy Group terminates her employment or she dies or become permanently disabled before the expiry of the 12 month retention period. Jean accepts the offer and the retention sum was paid to her. Is the retention sum assessable income for Jean? Explain.

(j) The taxpayers Mr Grieve and his wife purchased a rundown farming property of 216 acres for $33,000 in 1969. They formed a partnership with the intention of carrying on a farming business. When they acquired the land, it was not in a suitable condition for farming as the land was heavily infested with gorse, the pastures had deteriorated and the fencing was not in place. They had problems to improve the land because it was surrounded by a forestry area and a wine yard. Mr Grieve put lots of efforts to improve the land slowly and established a Hereford stud herd (of a modest size in 1980 with the intention to bring some profit to them. He worked full-time in the farm and his son joined him as full-time worker from 1975 to 1977. The partnership had made losses from 1972 to 1977. However, only losses from 1972 to 1975 were allowed to be offset against their other income. The Commissioner disallowed the losses in 1976 and 1977 as they said the taxpayers were not carrying on a business in those years. Taxpayers claimed that they had put in time and efforts to slowly improve the land with the intention to make profit from it. Thus, he was carrying on a farming business and losses should be allowed. Discuss whether the partnership was carrying on a business activity in 1976 and 1977 and whether the losses should be allowed.