In FC of T v. The Myer Emporium Ltd (1987) 87 ATC 4363,163 CLR 199 the taxpayer carried on the business of retail trading and property development and also acted as a finance company for other companies in its group. In order to obtain funding to diversify its operations the taxpayer entered into the following prearranged series of transactions:

(a) On 6 March 1981, the taxpayer lent $80 million to Myer Finance Ltd (Myer Finance), a shelf company of the taxpayer, acquired on 20 February 1981. The loan agreement between the taxpayer and Myer Finance provided that Myer Finance was required to repay the loan 'on but not prior to' 30 June 1988 and that interest at the commercial rate of 12.5% per annum was to be payable on the loaned funds on dates set out in the loan agreement. The total interest to be payable amounted to $72 million. An initial payment of interest only, in the sum of $82,182, was paid on the date the loan was made.

(b) On 9 March 1981, the taxpayer assigned to Citicorp Canberra Pty Ltd (Citicorp) (which had accumulated tax losses) 'the money due or to become due as the interest payments and interest thereon' in consideration of Citicorp paying the taxpayer a lump sum of $45.37 million on the day The above transactions were interrelated in that the taxpayer would not have made the loan to Myer Finance unless Citicorp had agreed in advance to pay for the assigned interest. The High Court held the lump sum of $45.37 million was income according to ordinary concepts.

Required: Explain why the interrelationship between the two transactions was important given that each in isolation was an extraordinary business transaction for the taxpayer.

Answer rating: 100% (QA)

The interrelationship between the two transactions in the case of FC of T v The Myer Emporium Ltd 1987 87 ATC 4363 163 CLR 199 was crucial in determin... View the full answer