Defining Ordinary Income after McNeil

The High Court decision in Fer v McNeil (2007 HCA 5) decided that the market value ofput options issued to shareholders over their shares in the company, as a mechanism for carrying out a share bUyMback, was ordinary income at the time of issue in the hands of those shareholders who chose not to participate. The jurisprudential basis on which this decision was made is not manifestly clear, but the impact of the decision has the potential to set aside the traditional distinction which has been made between receipts which are on revenue account and those which are on capital account. This article seeks to establish that the approach which is manifest in McNeil is out of step with established principles and that the High Court provided no convincing reasons for setting aside the principles which have traditionally been accepted as detennining which receipts are to be regarded as being on revenue account. This article seeks to show that the approach which is manifest in McNeil was also apparent in the earlier majority High Court decision in Fer v MOJltgOllleJ)1 (1998) 198 CLR 639, although McNeil does not appear to have relied on MOII/gomeIY. However, the authors seek to establish that the principles which can be derived from the majority decision in MolltgolllelY are not sustainable. The problem which emanates from MOlllgomelY is identified and a return to the position which existed prior to MOlltgomelY is advocated as the solution to the problem which now exists. It is suggested that the legislative response of creating different tax treatment for call and put options is a disappointing response, with a preferable approach being the restoration of the previous tax treatment, which had been the undertaking given to industry and capital markets by the government