Federal Commissioner of Taxation v The Myer Emporium Ltd
High Court of Australia · 1987
Federal Commissioner of Taxation v The Myer Emporium Ltd (1987) 163 CLR 199
A retailer lends $80 million to its own subsidiary, then sells the right to the interest for a $45 million lump sum. Income, or capital?
What happened?
As part of a reorganisation of the Myer group, Myer lent $80,000,000 to a subsidiary, Myer Finance, at interest. Three days later it assigned to Citicorp its right to receive that interest over the seven-year term, for a lump sum of $45,370,000. The loan and the assignment were planned together from the start: the loan "would not have been given to Myer Finance if Citicorp had not been in a position to take the assignment of the right to interest", and the board papers treated the two as one financial arrangement.
The Commissioner assessed the $45,370,000 as income under s 25(1) of the Income Tax Assessment Act 1936 (Cth). Murphy J found that Myer had intended throughout to assign the income stream for a lump sum, and that the motivating purpose was to raise working capital to fund diversification. The Supreme Court of Victoria and the Federal Court held the receipt was capital, largely because the assignment was not made in the ordinary course of Myer's business.
What did the Court decide?
The Commissioner's appeal was allowed. The receipt was income.
The Court did not treat the case as a departure from earlier law. It reasoned from Californian Copper Syndicate v Harris and Ducker, finding the principle it applied already stated in them ([14], [17]) — which is why the case is authority rather than a new rule.
And it took two independent routes to the same result. Besides the profit-making route, it held that in selling the right to the future interest while keeping the principal, Myer had turned future income into a present receipt of income.
On these facts neither limb was difficult. The loan and the assignment were planned together and made three days apart, so the relevant intention existed when the right was acquired; and a trading company deploying $80,000,000 to convert an income stream into a lump sum was a commercial transaction whatever else it was.
Proposition
What is the principle?
A receipt may be ordinary income even though it arises from an isolated transaction outside the taxpayer's ordinary business, where the taxpayer entered into it "with the intention or purpose of making a relevant profit or gain" by the means that produced it. The authorities establish that the profit is income "if the property generating the profit or gain was acquired in a business operation or commercial transaction for the purpose of profit-making by the means giving rise to the profit" ([14]).
Two limits are built into that sentence and are easy to read past. Intention alone is not the test: without the business-operation or commercial-transaction context a profit-making desire will not carry the characterisation. And the intention must exist at acquisition — where a decision to sell is taken afterwards, then "if the asset be not a revenue asset on other grounds, the profit made is capital because it proceeds from a mere realization" (at 213). The qualification is part of the rule, not a footnote to it: an asset can be a revenue asset for some other reason, and Whitfords Beach is the standard example of one brought into a business later. It is one route and not the only one: the Court held independently that in selling the right to future interest while retaining the principal, Myer converted future income into a present receipt of income — reasoning that would have applied even if the decision to assign had been taken independently of the loan.
Why does this case matter?
Because of what the evidence looked like. Myer's intention was not inferred from commercial instinct or reconstructed after the event; it was on the file. The loan was structured so that the assignment could follow, the board papers treated the two steps as one arrangement, the advice was given on that instruction, and the internal summary quantified the after-tax benefit. That is why the case is so often cited in practice: it is an argument about documents.
It is also a good illustration of a taxpayer's commercial purpose being unimpeachable and beside the point. Murphy J found the motivating purpose was to raise working capital for diversification. Myer still lost. If your answer establishes that the taxpayer had a sound commercial reason for the transaction, you have not yet said anything that helps them.
Exam and application relevance
Fix the taxpayer's intention at the time of entering the transaction, and prove it from what they did: how the steps were sequenced, what the documents say, whether the later step was contemplated when the first was taken. Then run the other-grounds qualification rather than assuming it away: ask whether the asset was a revenue asset for some reason independent of this transaction, because if it was, the absence of a profit-making intention at acquisition decides nothing.
Prove both limbs from the facts, separately. Myer itself is the model: the loan of $80,000,000 to Myer Finance on 6 March 1981 and the assignment of the interest entitlement to Citicorp on 9 March for $45,370,000 supply the intention — three days apart, with the Citicorp proposal already before Myer's advisers the previous year — and the character of the dealing, a trading company deploying $80,000,000 to convert an income stream into a lump sum, supplies the business operation. Neither limb is established by asserting the other.
On consequences, do not present ordinary income and a CGT event as alternatives. The same transaction can be both: the amount is assessable as ordinary income, and s 118-20 of the Income Tax Assessment Act 1997 (Cth) then reduces the capital gain so the amount is not taxed twice. Say that, rather than choosing between them.
And do not treat "isolated" as a conclusion. It is a description of frequency, and after Myer it decides nothing.
Check your understanding
Your client buys land intending to hold it, and four years later decides to subdivide and sell at a profit. Why is "there was no profit-making intention at acquisition" not the end of the analysis?