The Full Court has recently held that a payment made by the taxpayer to a related company for indemnifying the taxpayer company against loss under an anterior forward exchange contract with another related company was an allowable deduction under the general deduction section. The anterior forward exchange contract was found to have been entered into for the purpose of profit-making and in the course of taxpayer’s business even through that was not in the ordinary course of that business.
The Full Court relied on the High Court decision in Myer Emporium and emphasised the following passage in that decision:
“[A] gain made otherwise than in the ordinary course of carrying on the business which nevertheless arises from a transaction entered into by the taxpayer with the intention or purpose of making a profit or gain may well constitute income. Whether it does depends very much on the circumstances of the case. Generally speaking, however, it may be said that 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 gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary judged by reference to the ordinary course of the taxpayer’s business”
Therefore any loss incurred as a consequence of entering into this contract was on revenue and not capital account.
Because the indemnity payment was of the same character as the loss incurred by the taxpayer, the payment was deductible in the year in which it was incurred. The deductibility of that payment was not to be denied on the basis that it was to be taken into account in some later year as part of the cost of a wider profit-making transaction.
The Full Court also said that if an item is income, its derivation is not deferred or denied until a profit can be determined in a subsequent year by reference to some wider transaction of which the item of income forms part. Further the Full Court said that equally, if an outgoing is an allowable deduction in a year because it was incurred in that year, its deductibility is not denied or deferred until a profit can be determined in a subsequent year by reference to a wider transaction of which the outgoing forms part.