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LAWCOMM 403 long notes.docx
LAWCOMM_403_long_notes.docx
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LAWCOMM 403 long notes.docx-CONTENTS Tips ...........
LAWCOMM_403_long_notes.docx-CONTENTS Tips ......................................................................................................................................................................................... 4 Introducon ............................................................................................................................................................................
LAWCOMM 403 long notes.docx-CONTENT...
LAWCOMM_403_long_notes.docx-CONTENTS Tips ......................................................................................................................................................................................... 4 Introducon ............................................................................................................................................................................
Page 69
If they purchase commercial premises for the purpose of occupying it, the expenditure in
buying the building is not deducble as it is of a capital nature, but it is depreciable (but
residenal buildings are not depreciable)
If they purchase it for the purpose of selling it, it will be deducble as it is of a revenue
nature
Symmetry – the building is a revenue/capital item from both pares’ point of view
Asymmetry – the building is revenue for one and capital for another, so the tax treatment is
different for each
o
There is an incenve for pares to transacons to arrange it so that the vendor does not have the proceeds of
sale assessable to tax (i.e. get a capital receipt) and the purchaser gets a deducon (i.e. incur a revenue
expense)
Easy Cases and Difficult Cases
o
The overwhelming majority of transacons (receipts and payments) are easy and enrely uncontroversial – the
only cases that get ligated are the difficult ones
o
In parcular, monies received from sales of trading stock and the provision of services are generally of a
revenue nature and therefore taxable. Monies received from the sale of premises and plant (by persons who
do not sell such premises and plant as a business) are generally of a capital nature and therefore not taxable.
The cost of trading stock; wages; electricity; rent; mortgage interest (on money borrowed to purchase
business premises) are expenditure that is typically deducble
The cost of buying premises (for the purpose of using them) is generally of a capital nature (and
therefore not deducble). Likewise the cost of plant and machinery (which, however, is typically
depreciable)
RELEVANT CASE LAW
The Relevance of the Cases
o
The cases on the capital/revenue disncon (like all tax cases) are law only to the extent that they are relevant
to the interpretaon of the legislaon. In parcular, these cases are relevant to the interpretaon of:
secon BB 1 (which imposes tax on taxable income);
secon CA 1(2) (which provides that income includes “income under ordinary concepts”); and
secon DA 2(1) (which provides that expenditure “of a capital nature” is not deducble).
Statutory Definions
o
The Income Tax Act 2007 does not aempt to define the disncon between “income” and capital gains. Nor
does it aempt to define the disncon between expenditure of a revenue nature and expenditure “of a
capital nature”
o
This is probably a good thing, because these concepts are inherently very difficult to define
The flexibility and subtlety of judge-made law is probably superior to what Parliament could achieve –
the cases are problemac in some respects, but it is probable that legislave definions would be
worse
Note, however, that Part C contains a number of rules providing for various receipts that would
tradionally have been counted as capital gains (and therefore non-taxable) to be treated as income
(with the result that they are taxable) – see in parcular secons CB 6A to CB 23 (which deal with
gains made on the sale of land)
Eisner v Macomber
252 US 189 (1919)
;
Ryall v Hoare
[1923] 2 KB 447
o
Facts
A farmer owned land with crops, and had a tree that grew fruit – he earned money by selling the fruit
and crops
o
Judgment
Income means “the gain derived from capital, from labour, or from both combined.”
The tree is a capital asset, but the fruit produced by the tree is in the nature of a trading stock –
therefore, it counts as income
The land is a capital asset, but the crops produced by the land is income
Glenboig Union Fireclay Co Ltd v Commissioner of Inland Revenue
(1922) 12 TC 427
o
Facts
GUF had a licence to mine fireclay from land that was owned by the railway
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