Federal Commissioner of Taxation v Levy (No 2)

The Federal Commissioner of Taxation (the Commissioner) appealed to the High Court of Australia against a decision of the Supreme Court of South Australia concerning the assessment of income tax against Mr. Levy. The dispute centred on whether certain payments received by Mr. Levy constituted assessable income under the *Income Tax Assessment Act 1936* (Cth).

The primary legal issue before the High Court was whether the payments received by Mr. Levy, which arose from a settlement agreement following a dispute over a contract for the sale of shares, were of a capital or revenue nature. Specifically, the court had to determine if these payments were in substitution for income that Mr. Levy would have otherwise earned, or if they represented a capital receipt for the loss of a capital asset or advantage.

Menzies J. held that the payments were of a capital nature. His Honour reasoned that the settlement agreement resolved a dispute concerning the sale of shares, which were a capital asset. The payments received were not in the nature of income derived from the use of those shares, but rather compensation for the loss of the opportunity to receive the full purchase price for the shares as originally agreed. The court applied the principle that where a payment is made to compensate for the loss of a capital asset or a capital advantage, it is generally of a capital nature, even if it arises from a contractual dispute.

The appeal was allowed, and the assessment of the Commissioner was upheld.