Clothco Ltd sells imported clothing by wholesale and holds 12 valuable import quotas which permit it to import stock. Clothco wishes to restructure its business and for that purpose, sells two of its quotas at a profit. To obtain additional funding for its restructuring, Clothco enters into an arrangement under which shares in Clothco’s subsidiaries are sold to an associate for $50 million, that amount is lent to another subsidiary (Stooge Pty Ltd), and later the right to receive the unpaid interest instalments from Stooge is assigned by Clothco to a finance company (Moneybags Ltd) in return for a lump sum payment of $30 million.
Clothco and Moneybags are not related, the transactions outlined above were not interlocked or interrelated and, in particular, Moneybags’ agreement to take the assignment of the unpaid interest instalments is on purely commercial grounds.
The Commissioner has assessed Clothco under s 6-5 of Income Tax Assessment Act 1997 (Cth) (ITAA 1997) on the basis that the lump sum payment of $30 million is income according to ordinary concepts.
Requirement: Advise the parties, ignoring any capital gains tax consequences.
You should support your answers by referring to the following Taxation Law Sections and Cases:
FCT v Merv Brown Pty Ltd (1985)
Kosciusko Thredbo Pty Ltd v FCT (1983)
FCT v Whitfords Beach Pty Ltd (1982)
FCT v Whitfords Beach, FCT v Myer and Bowden Investments Pty Ltd v FCT (1987) Scottish Australian Mining Co Ltd v FCT (1950)
Income Tax Assessment ACT 1936 - SECT 102CA