David Emporium operates a chain of successful retail stores. In order to obtain some finance for its operations, the company entered into a loan agreement with a subsidiary company in which it loaned the subsidiary a substantial sum in return for a right to large interest payments. Three days later (as was always the plan) it assigned the right to these interest payments to a finance company in return for a lump sum payment. Is the profit made from the assignment of these interest payments likely to be ordinary income?

Question 9Answer

a.

No, as the assignment of the interest was paid by way of a lump sum

b.

Yes, because all business receipts are likely to be assessable as ordinary income

c.

No, as the assignment of the interest is not part of the ordinary or usual course of business

d.

Yes, as the company had a profit making intention in this arrangement and even though the transaction is extraordinary it can be viewed as ordinary income