Defining Business Profits: Westfield v FCT (1991) 28 FCR 333

Caselaw in taxation: Westfield v FCT (1991)

  • The case:
    • The taxpayer’s main activity was the design, construction, letting and management of shopping centres.
      • In April 1981, the taxpayer exericised its option to purchase an area of land for $450,000 because its competitor wanted to buy the area
      • In December 1982, the land was sold to AMP for $735,000. The taxpayer was subsequently engaged by AMP to design and construct the shopping centre.
    • The Commissioner included the profit from the sale in the taxpayer’s assessable income for the 1983 income year.
      • The taxpayer objected and appealed.
  • The decisions:
    1. The taxpayer’s appeal was dismissed:
      • the profit on the sale of the land was incidental to and part of a whole transaction carried out in the ordinary course of the taxpayer’s business and was part of an overall profit-making venture.
      • As the taxpayer had acquired the land to use it in a way which would achieve for it participation in the development of it, the profit was assessable income
    2. The taxpayer then appealed to the Full Federal Court. The appeal was allowed:
      • Although a profit or gain made in the ordinary course of carrying on a business constitutes income, it does not follow from the decision in FC of T v Myer Emporium Ltd 87 ATC 4363 that every profit made by a taxpayer in the course of his business activity will be of an income nature. To so express the proposition would eliminate the distinction between an income and a capital profit. It is necessary that the purpose of profit-making must exist in relation to the particular operation.
      • In a case where the transaction, which gives rise to the profit, is itself a part of the ordinary business of the taxpayer, the identification of the business activity will stamp the transaction as one having a profit-making purpose. In the present case, the resale of land was not part of the taxpayer’s ordinary business activity or a necessary incident thereof (Agus: “thereof” refers to “of the business activity”), since the taxpayer’s business activity was the construction of shopping centres, their leasing or management on their own land, on the land of others or on joint venture land.
      • Where a transaction occurs outside the scope of ordinary business activities, it will be necessary to find, not merely that the transaction was “commercial” but also that there was, at the time the transaction was entered into, the intention or purpose of making a profit. The profit-making purpose must exist in relation to the particular operation by which the profit was in fact made and not simply in a temporal sense. Although at the time the land was acquired a possibility open to the taxpayer was its subsequent sale to AMP, the taxpayer’s preference was to develop the land itself. The taxpayer therefore lacked the necessary profit-making purpose at the time of acquisition.
      • The sale of the land to achieve participation in the development of a shopping centre was not part of a profit-making scheme and did not therefore reflect the necessary profit-making purpose. Obtaining the contract to construct and manage the centre was not, of itself, a scheme of profit-making. It was a scheme for deriving income from the performance of work under the building and management contracts.

Notes:

  1. Profit making purpose exists if:
    1. the transaction is a part of the ordinary business of the taxpayer (In this case, reselling the land is not part of Westfield’s ordinary business); or
    2. despite the transaction is not a part of the ordinary business, the intention of profit making must exist at the time of the transaction
  2. Compare with these cases:
  3. In Westfiled’s case, the Full Federal Court held that the reselling of the land is not part of its ordinary business of designing shopping centre. Therefore, the court examined whether the intention of profit making exists at the time of the acquisition.
    • In other words, just because the business exists, it doesn’t mean that all receipts within the business are income from business.

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