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In recent years, the Full Federal Court has considered a number of cases in which the central issue concerned whether profits arising from the sale of equipment by companies whose business included leasing such equipment constituted income. The leading cases in this area are Memorex Pty Ltd v FCT,(1) FCT v Cyclone Scaffolding Pty Ltd,(2) FCT v GKN Kwikform Services Pty LTD(3) and FCT v Hyteco Hiring Pty Ltd.(4)
Although there are clear similarities in the facts of these cases,(5) the court has made distinctions between them when reaching its decisions. For example, in Memorex and GKN Kwikform the court ruled that the profits were of an income nature, whereas in Cyclone Scaffolding and Hyteco Hiring the court ruled that the profits were of a capital nature.
The purpose of this article is to examine these cases to determine on what basis the court reached its different conclusions.
THE GENERAL PRINCIPLE DERIVED FROM THE MYER EMPORIUM DECISION
Before examining the cases listed above, it is appropriate to examine the celebrated decision of the Full High Court in FCT v Myer Emporium Ltd(6) as the decisions in the Full Federal Court cases are, in effect, merely applications of the principles developed by the High Court in that case.
In Myer Emporium, the Full High Court confirmed the well established canon of taxation law that a profit or gain realised by a taxpayer in the ordinary course of carrying on its business activities is income in nature.(7) This conclusion was justified on the following basis:
"Because a business is carried on with a view to a profit, a gain made in the ordinary course of carrying on the business is invested with the profit-making purpose, thereby stamping the profit with the character of income."(8)
The High Court went on to state that a profit or gain realised outside the ordinary scope of a taxpayer's business may also constitute income if the profits arose from a transaction "entered into by the taxpayer with the intention or purpose of making a profit". In a joint judgment the court stated:
"if the circumstances are such as to give rise to the inference that the taxpayer's intention or purpose in entering into the transaction was to make a profit or...