Federal Commissioner of Taxation v Myer Emporium Ltd [1987] HCA 18;

Federal Commissioner of Taxation v Myer Emporium Ltd [1987] HCA 18; - HCA 1987 case summary — Zoe

[42]

28. The periodicity, regularity and recurrence of a receipt has been considered to be a hallmark of its character as income in accordance with the ordinary concepts and usages of mankind. Likewise, the need to distinguish capital and income for trust purposes and other purposes has focused attention on the difference between the right to receive future income and the receipt of that income, a difference which has given rise to the analogical difference between the fruit and the tree (see Shepherd v. Federal Commissioner of Taxation [1965] HCA 70; (1965) 113 CLR 385, at p 396). Both the "ordinary usage meaning" of income and the "flow" concept of income derived from trust law have been criticized - see Professor Parsons, "Income Taxation: An Institution in Decay?" (The 1986 Wilfred Fullagar Memorial Lecture). For present purposes it is sufficient for us to say, without necessarily agreeing with these criticisms, that, valuable though these considerations may be in categorizing receipts as income or capital in conventional situations, their significance is diminished when the receipt in question is generated in the course of carrying on a business, especially if it should transpire that the receipt is generated as a profit component of a profit-making scheme. If the profit be made in the course of carrying on a business that in itself is a fact of telling significance. It does not detract from its significance that the particular transaction is unusual or extraordinary, judged by reference to the transactions in which the taxpayer usually engages, if it be entered into in the course of carrying on the taxpayer's business. And, if it appears that there is a specific profit-making scheme, it is pointless to say that it is unusual or extraordinary in the sense discussed. Of course it may be that a transaction is extraordinary, judged by reference to the course of carrying on the profit-making business, in which event the extraordinary character of the transaction may reveal that any gain resulting from it is capital, not income.

[49]

35. That is not to say that a right to interest is not an existing chose in action. It is an existing chose in action unless, perhaps, the borrower can avoid any liability for interest by repaying the loan: see Norman v. Federal Commissioner of Taxation [1963] HCA 21; (1963) 109 CLR 9; Shepherd, at pp 395-396. But the interest which becomes due is not the produce of the mere contractual right to interest severed from the debt for the money lent. Interest is regarded as flowing from the principal sum (Federal Wharf Co. Ltd. v. Deputy Federal Commissioner of Taxation (1930) 44 CLR 24, at p 28) and to be compensation to the lender for being kept out of the use and enjoyment of the principal sum: Riches v. Westminster Bank Limited (1947) AC 390, at p 400. A covenant to pay interest on a principal sum may, according to the terms of the lending agreement, be independent of or accessory to a covenant to repay the principal sum or the covenants may be integral parts of a single obligation, but it is of the essence of interest that it be referable to a principal sum: per Rand J. in Reference as to the Validity of Section 6 of the Farm Security Act, 1944, of the Province of Saskatchewan (1947) S.C.R. 394, at pp.411-412. The source of interest is never the mere covenant to pay. Interest is not like an annuity. Annuity payments are not derived from the money paid for the annuity; they are derived solely from the annuity contract. And so, when a contractual right to be paid an annuity is sold for a price, the proceeds of sale are ordinarily capital in the hands of the vendor: Paget, at pp.35, 44-45; cf. Kelsall Parsons & Co. v. Commissioners of Inland Revenue [1938] ScotCS CSIH_1; (1938) 21 TC 608, at p 624. The vendor receives the price in exchange for a capital asset - the contractual right which produces payment of the annuity. If a lender who sells a right to interest severed from the debt were regarded as disposing of an income-producing right, Paget would indicate that the price should be treated as capital. But the contractual right is not the source of the interest to which it relates: a contractual right severed from the debt is not the structure which produces that income.

[51]

37. In Paget, Lord Romer said (at p.45) that the proceeds of the sale for a lump sum of an annuity are capital in the hands of the vendor and not income. That case bears some similarity to the present case, for Miss Paget sold interest coupons attached to foreign bearer bonds to dealers in those coupons, and the question was whether the price she received for the coupons was "income arising from securities in any place out of the United Kingdom". Had she received the interest to which the coupons related that interest would have been brought to charge, but the authorities which had issued the bonds - the City of Budapest and the Government of Yugoslavia - had defaulted in due performance of their interest obligations. The purchase price of the coupons was not interest nor were the benefits which purchase of the coupons conferred on the dealers. What Miss Paget sold was, as MacKinnon L.J. described it (at p.48), "the possibility of making some money abroad" by accepting in lieu of the promised interest certain payment in local currency or a mixture of U.S. dollars and funding bonds. The coupons were the sole source of the possibility of making some money abroad; they were the sole source of the expectation of substitutionary payment. The substitutionary payment offered by the defaulting borrowers (or the expectation of obtaining that payment) on production of the coupons was not regarded as interest and the sale of the coupons was not by way of assignment of a right to interest but by way of transfer of the instruments of title to the substitutionary payment. The coupons had come to represent, like a contract to pay an annuity, the sole source of the expected payments. Lord Romer drew that analogy (at pp.44-45), treating the sale for a lump sum of an annuity as an instance of a sale of a right to receive income in the future, the proceeds of which are not treated as income. Unlike the sale of the coupons in Paget, the sale of a right to interest severed from the debt is not a sale of a tree of which the future payments are the fruit. The present case may thus be distinguished from the view of the facts which was the foundation of the decision in Paget. If Paget is not to be distinguished in this way, we should be unable to accept its authority for the purposes of the Act.

At a glance

Court

Decision date

Before

Source

Judgment (56 paragraphs)

Federal Commissioner of Taxation v Myer Emporium Ltd [1987] HCA 18; (1987) 163 CLR 199 (14 May 1987)

Parties

Legislation Cited (2)

Cases Cited (13)