Passey and Passey and Anor

The parties to this proceeding were the applicants, Mr and Mrs Passey, and the respondents, the Commissioner of Taxation. The dispute concerned the Commissioner's assessment of additional income tax against the Passey's for the 2015 and 2016 income years. The matter came before the Federal Court of Australia, constituted by Justice Loughnan.

The primary legal issue before the Court was whether the Commissioner had correctly determined that certain payments received by the Passey's from a company, P.T. Passey, were assessable income rather than capital amounts. Specifically, the Court had to consider whether these payments constituted dividends, or alternatively, were assessable as income under section 6-5 of the *Income Tax Assessment Act 1997* (Cth) as ordinary income derived from a business or other income-producing activity. The Court also considered whether the payments were non-assessable non-exempt income under section 118-20 of the *Income Tax Assessment Act 1997* (Cth).

Justice Loughnan reasoned that the nature of the payments was determined by the characterisation of the transaction from which they arose. His Honour found that the payments were not dividends, as they were not distributed out of profits of P.T. Passey. Instead, the Court determined that the payments were made in consideration for the Passey's relinquishing their rights to future profits from the business conducted by P.T. Passey. This relinquishment was considered a capital transaction, and therefore the payments received were capital in nature and not assessable as ordinary income. The Court further found that the payments did not fall within the scope of section 6-5, nor were they non-assessable non-exempt income under section 118-20.

The Court ordered that the assessments issued by the Commissioner be set aside and remitted to the Commissioner to be re-made on the basis that the payments in question were not assessable income.