CRAWFORD v FC of TJudges:
William John Crawford (``the applicant'') has applied to the Court by way of appeal pursuant to s. 44(1) of the Administrative Appeals Tribunal Act 1975 (Cth) from the decision of the Administrative Appeals Tribunal (``the Tribunal'') [reported as Case Z17,
92 ATC 188] affirming decisions made by the Commissioner of Taxation of the Commonwealth of Australia (``the respondent'') disallowing objections by the applicant against an amended assessment to income tax in respect of the year of income ended 30 June 1986 and assessments to income tax in respect of the years of income ended 30 June 1987 and 30 June 1988.
At all material times, the applicant carried on the practice of medicine as an orthopaedic surgeon. He carried on no other business. In each of the years of income ended 30 June 1986, 30 June 1987 and 30 June 1988 the income derived by the applicant from the practice of medicine was returned and assessed on a cash receipts basis. No issue arose for decision by the Tribunal in respect of the income derived from that source or in respect of deductions properly referable to the income so derived. The issues raised by the objections to the assessments in question concerned amounts claimed by the applicant as deductions under s. 51 of the Income Tax Assessment Act 1936 (Cth) in respect of the applicant's activities in relation to a development project on certain land at Gladstone on the central coast of Queensland which has been referred to as the Gladstone Industrial Park.
In July 1981, the applicant and Mr Kenneth Francis Harris, the managing director of K.F. Harris Pty Ltd, a building contracting company, entered into an arrangement for the development of the Gladstone Industrial Park. The land on which the development was to take place was purchased by Kymmead Pty Ltd, which had been incorporated on 25 May 1981. That company, of which the applicant and Mr Harris were then the sole shareholders and
ATC 4547directors, was the trustee of a discretionary trust known as ``The Mead Trust''.
The deed dated 19 November 1982 establishing The Mead Trust identified certain organizations as beneficiaries for the purposes of the deed and made provision for other persons and corporations to become beneficiaries, in some cases upon nomination by the trustee with the consent of ``the Guardian'' should there be a person or company holding that office and in other cases by appointment by ``the Appointor''. Mr Harris was identified in the deed as the first Guardian and the first Appointor. The deed conferred power on the Guardian and the Appointor to nominate or appoint their successors.
Under cl. 2.1 of the deed, the Appointor had power to declare that a person, corporation, trust or charity or any class thereof was to cease to be a beneficiary as from the date on which a notice to that effect was received by the trustee. By cl. 6, the trustee was to stand possessed of the income of the Trust Fund derived by it in any financial year upon trust for the beneficiaries or any one or more of them in such shares and proportions as the trustee in its absolute discretion determined prior to the 30th day of June in that year. In default of any such determination, the income was to be accumulated. There has been no relevant distribution of income by the trustee.
The Gladstone Industrial Park, which comprised some 43 acres zoned light industrial, was to be developed in three stages. There were to be 61 allotments in all, 27 in Stage 1, 10 in Stage 2 and 24 in Stage 3. At the relevant time, only Stage 1 of the development had been undertaken. Substantial completion of that stage had been achieved, apparently by December 1982, but none of the allotments had been sold despite efforts to do so.
Substantial funds to enable the project to proceed were progressively lent to Kymmead Pty Ltd by the applicant, by Mr Harris and by K.F. Harris Pty Ltd. Subsequently, and progressively, funds were obtained by Kymmead Pty Ltd by means of a series of commercial bills drawn by that company and accepted by Westpac Banking Corporation and sold by the bank at less than their face value. Immediately prior to 20 June 1986, the indebtedness of Kymmead Pty Ltd to the bank stood at $560,000.00. The loans made by the applicant to Kymmead Pty Ltd were non- interest bearing and were repayable on demand. Immediately prior to 20 June 1986, the indebtedness of the company to the applicant on account of such loans stood at $837,677.00.
Over the land comprising Stage 1 of the Gladstone Industrial Park, Westpac Banking Corporation had a first mortgage, the applicant a second mortgage and K.F. Harris a third mortgage. Over the land comprising Stages 2 and 3, the applicant and K.F. Harris Pty Ltd had Bills of Encumbrance, that in favour of the applicant having priority over that in favour of the company. Westpac Banking Corporation also held security over certain land, including the family residence, owned by the applicant or by the applicant and his wife jointly. Both the applicant and Mr Harris had given personal guarantees to the bank.
In April 1983, a provisional liquidator was appointed of K.F. Harris Pty Ltd. In view of their financial difficulties, neither Mr Harris nor K.F. Harris Pty Ltd was able to maintain contributions to Kymmead Pty Ltd to finance the Gladstone Industrial Park project.
In November 1984, Mr Harris withdrew from control of Kymmead Pty Ltd in favour of the applicant and his wife. This was effected by the following steps. On 1 November 1984, Mr Harris signed documents nominating the applicant, in substitution for himself, as Guardian and Appointor under the deed dated 19 November 1982 creating The Mead Trust. On 2 November 1984, Mr Harris transferred his share in Kymmead Pty Ltd to Elwyn Mary Crawford, the applicant's wife. On the same day, Mr Harris resigned as a director of the company and the applicant's wife was appointed as a director. Thereafter the applicant and his wife were the sole shareholders and directors of Kymmead Pty Ltd.
On 5 November 1984, the applicant, as Appointor under the deed, gave written notice that the following persons were appointed to be beneficiaries of The Mead Trust, namely the applicant, Elwyn Mary Crawford (his wife), Ross William Crawford, Scott Andrew Crawford and Neil Douglas Crawford (their children) and ``the spouse or natural children of any of the abovenamed beneficiaries''.
Discussions took place over a lengthy period between the applicant, Mr Harris, and the liquidator of K.F. Harris Pty Ltd (In Liquidation). These discussions concerned Mr Harris' personal guarantee to Westpac Banking
ATC 4548Corporation to secure the indebtedness of Kymmead Pty Ltd to the bank, the Bill of Encumbrance over the land comprising Stage 2 of the Gladstone Industrial Park in favour of K.F. Harris Pty Ltd (In Liquidation) and the debt of some $360,000.00 owed by Kymmead Pty Ltd to K.F. Harris Pty Ltd (In Liquidation). Agreement was reached between the applicant and Mr Harris that Mr Harris, in consideration of being released from responsibility for future financial support for the Gladstone Industrial Park project and from his personal guarantee to Westpac Banking Corporation, would relinquish any entitlement to future profits arising from the project and would transfer to the applicant's wife a one-half share in a nominated property owned by him and his wife. It was a condition of the agreement that the applicant would assume full personal responsibility for the amount owing to Westpac Banking Corporation. No agreement was reached at that stage concerning the debt owing by Kymmead Pty Ltd to K.F. Harris Pty Ltd (In Liquidation).
Negotiations with Westpac Banking Corporation commenced in March 1986 but the final details were not completed until June of that year. On 6 June 1986, the bank informed the applicant that it had agreed to provide finance to enable him ``to clear the existing liabilities of Kymmead Pty Ltd''. The bill facility made available to the applicant by Westpac Banking Corporation had a limit of $560,000.00.
Prior to the applicant taking advantage of the finance made available to him by Westpac Banking Corporation, the indebtedness of Kymmead Pty Ltd to the bank had been reduced to $460,000.00, the repayment of $100,000.00 being financed by the sale of shares belonging to the applicant's wife.
On 20 June 1986, the applicant drew commercial bills having face values totalling $460,000.00. Each bill had a term of 90 days. The bills were accepted by Westpac Banking Corporation which sold the same at less than their face value, resulting in a credit being available of an amount totalling $441,219.19. By arrangement with the applicant, that amount was credited to the account with the bank of Kymmead Pty Ltd, the transaction reflecting a loan of that amount by the applicant to Kymmead Pty Ltd. That amount, together with a further amount of $16,000.00 advanced to the company by the applicant by way of an interest- free loan, enabled the company to discharge its indebtedness to the bank of $460,000.00. An acceptance fee of $2,268.49 was payable, and paid, by the applicant to the bank.
On 18 September 1986, when the bills having face values totalling $460,000.00 matured, further bills with face values totalling $360,000.00 were drawn by the applicant, accepted by the bank and sold by the bank at less than their face value. The net proceeds were credited to the applicant's account with the bank. Those bills had terms of 30 days. The process was repeated on the maturity date of those bills and of subsequently drawn bills. On each ``roll over'', an acceptance fee was payable, and paid, by the applicant to the bank. The total of the face values of the bills was further reduced to $320,000.00 in May 1988.
At some time after 30 June 1986, the one- half share in the nominated property owned by Mr Harris and his wife was transferred to the applicant's wife and the personal guarantee of Mr Harris to Westpac Banking Corporation was released.
The applicant forwarded to Kymmead Pty Ltd a letter dated 1 November 1986 reading as follows:
``I wish to put on record the terms pertinent to the financial arrangements which I entered in to in June, 1986, relative to the financial requirements of the Mead Trust. On the 20th June, 1986, I negotiated a Commercial Bill for $460000 with Westpac Banking Corporation to enable me to make a loan to you to clear your bank debt following completion of negotiations with K.F. Harris to sever his involvement with the operations of the Trust.
The continuance of my loan to the trust is subject to the payment to me of interest on the loan made to you, equivalent to the amount of interest which I have incurred and will in the future incur on my bank bill borrowings. The interest on my loan to you is to be payable by you periodically at the same time as interest is payable by me on my bank bill borrowings.
At the present time my borrowings are $360000 having been reduced from $460000 to that level, on the 20th October, 1986.
The loan principal will continue to be subject to repayment on demand.''
On the same day, the company acknowledged the arrangement, such acknowledgment being recorded in the minutes of a meeting of directors of the company (the applicant and his wife). The minutes read:
``The additional financial support of $460000 given by W.J. Crawford to The Mead Trust in June 1986 is acknowledged. It has been agreed that interest will be payable by the Trust to W.J. Crawford equivalent to the interest which he bears on the funds raised by him to make the loan.
To enhance the prospect of continuance of that loan facility to the Trust by W.J. Crawford, the company in its capacity as Trustee of the Mead Trust hereby RESOLVES that the first $500000 of profit derived by the Trust shall be allocated and distributed to William John Crawford.''
The letter and the minutes appear to have been drafted on the erroneous basis that the applicant had incurred, and would in future incur, a liability to pay ``interest'' to the bank on his ``bank bill borrowings''. What was apparently intended was that Kymmead Pty Ltd would reimburse the applicant for amounts paid by the applicant to the bank by way of acceptance fees and would pay to the applicant amounts equal to the differences arising from time to time between the face value of the bills drawn by the applicant and the net proceeds of those bills upon their being discounted. The amounts thus becoming due and payable to the applicant by Kymmead Pty Ltd were characterised in the letter and the minutes as ``interest'' on the loan made by the applicant to enable Kymmead Pty Ltd to discharge its liability to the bank.
No payments pursuant to the arrangements referred to were made by Kymmead Pty Ltd to the applicant during the period with which this proceeding is concerned, the company having no funds from which it would finance such payments. As the Tribunal observed [at 92 ATC p 191]:
``The reality of the matter is that the money lent to the trust is tied up in the development of the industrial estate which is not producing income to the trust and will not do so until the development is sold.''
During the years of income ended 30 June 1987 and 30 June 1988, the applicant continued to make, from time to time and from his own resources, cash advances to Kymmead Pty Ltd by way of loan to finance the Gladstone Industrial Park project. Those loans continued to be on terms that they did not carry interest and were repayable on demand.
There remained the debt owing to K.F. Harris Pty Ltd (In Liquidation) by Kymmead Pty Ltd, the amount of that debt being shown in the balance sheet of The Mead Trust as at 30 June 1986 as $364,198. By deed made on 9 June 1987, K.F. Harris Pty Ltd (In Liquidation), for a consideration of $1,000.00, assigned to the applicant ``all its right, title, estate and interest in and to all amounts owing by'' Kymmead Pty Ltd to K.F. Harris Pty Ltd (In Liquidation).
In each of the years of income in question the applicant claimed to deduct from his assessable income amounts representing the acceptance fees paid to Westpac Banking Corporation in respect of the commercial bill facility to which reference has been made and amounts representing the losses resulting from the sale of each of the commercial bills at less than its face value. The applicant was assessed to tax on the basis that the deductions claimed were not allowable under s. 51(1) of the Income Tax Assessment Act 1936 (Cth) (``the Act'') which relevantly provides that all losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income are to be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income. Objections lodged by the applicant were disallowed and the matters referred to the Administrative Appeals Tribunal.
When the matter was before the Tribunal, a submission was made by counsel for the applicant that the amounts properly allowable as deductions under s. 51(1) of the Act differed from those claimed in the applicant's income tax returns and in the notices of objection. With the respondent's consent, the Tribunal allowed appropriate amendments to enable the issue to be determined if that should become necessary. When the matter came before the Court, counsel for the applicant conceded that the amended figures that had been placed before the Tribunal were not correct and, after some discussion, the Court suggested that the parties might confer with a view to reaching agreement upon the figures. Following the conclusion of
ATC 4550argument, counsel for the parties reached agreement, in respect of each of the commercial bills drawn by the applicant, upon the issue and maturity dates of the bill, its face value, its discounted value and the acceptance fee paid by the applicant. The figures agreed between the parties are reproduced in the schedule to these reasons.
During the course of argument before the Court, the question arose whether, if the applicant was entitled to deduct from his assessable income the losses incurred by him being the differences between the face value of the discounted bills and their net proceeds arising from their sale, the year of income in which each such loss was incurred was the year of income in which the bill was drawn and accepted or the year of income in which the bill matured. In this connection reference was made to the judgment of a Full Court of this Court in
Coles Myer Finance Ltd v FC of T 91 ATC 4087; (1991) 28 FCR 7 which was then under appeal to the High Court of Australia, special leave to appeal having been granted.
It was thought appropriate to defer giving judgment in this matter until the High Court had delivered judgment on that appeal. Following upon the delivery of judgment by the High Court on 29 April 1993 (see
Coles Myer Finance Ltd v FC of T 93 ATC 4214; (1993) 112 ALR 322), counsel for the parties were afforded an opportunity to make further written submissions in relation to the matter. Written submissions were subsequently received, those of the applicant on 14 May 1993 and those of the respondent on 6 July 1993. As will subsequently appear, I have not found it necessary to consider the issue to which that judgment relates.
It is appropriate now to turn to the decision of the Tribunal which affirmed the decisions disallowing the applicant's objections. After referring in the reasons for decision to the history of the matter, the Tribunal drew certain conclusions as to the manner in which the amounts becoming due to the applicant under the arrangements evidenced by the letter and the minutes of 1 November 1986 to which reference has already been made had been treated in the financial records relating to The Mead Trust. It will be necessary to refer to some of this material later in these reasons. The Tribunal then recorded that counsel for the applicant had submitted that the amounts in question were deductible under s. 51(1) of the Act either on the basis that they were ``incurred in the course of deriving assessable income, namely the interest agreed to be paid by the trustee'' or, alternatively, on the basis that they were incurred ``for the purpose of deriving assessable income from the trust in the applicant's capacity as a beneficiary of that trust''.
After referring to
FC of T v Total Holdings (Australia) Pty Ltd 79 ATC 4279 at p. 4283; (1979) 24 ALR 401 at p. 406 and
Ronpibon Tin NL v FC of T (1949) 8 ATD 431; (1949) 78 CLR 47, the Tribunal set out at some length what was said by the High Court in
Fletcher & Ors v FC of T 91 ATC 4950 at pp. 4957-4958; (1991) 173 CLR 1 at pp. 17-19. The Tribunal's reasons for decision proceed [at 92 ATC p 195]:
``40. Adopting that guidance from the High Court I must first decide whether the applicant has or may be expected to derive assessable income. The answer to that is to my mind quite simple. The trustee decided on 1 November 1986 that interest would be payable to the applicant equivalent to the `interest' which he incurs on the bank bill facility...
41. For these reasons I have come to the view that the applicant did incur the charges for the purpose of deriving assessable income and those charges are therefore deductible in terms of the first limb of sub- section 51(1). I think the principles enunciated by the High Court in Fletcher's case make this result inevitable.''
The Tribunal noted, however, that that was not the end of the matter as it remained for the applicant to show that the assessments under consideration were excessive. The Tribunal continued [at pp 195-196]:
``43. In the present case the taxpayer has not returned the interest derived from the trust but has claimed the charges incurred in deriving that interest. In view of the resolution of the trustee these amounts should be equal and offsetting. It may be, however, that the interest is derived earlier than the discounts fructify into an allowable deduction - although I doubt that is the case.
44. Given that no amounts of interest derived have been included in the making of the assessments and given that the amounts
ATC 4551of interest derived approximate the charges incurred, I cannot be satisfied that the assessments are excessive. I do not understand how the taxpayer can succeed before this Tribunal unless the Tribunal is satisfied that the assessment is excessive.
45. In my view the Commissioner should have allowed deductions for the charges incurred and assessed as income the amounts of interest payable by the Trustee.
46. If the assessments had been correctly made the taxable income would be the same (subject to the possible qualification mentioned above) as the assessments as made by the Commissioner.
47. For these reasons I cannot be satisfied that the assessments are excessive and I will therefore affirm the objection decisions under review.''
For the applicant it was submitted that the Tribunal had erred in law in holding, in effect, that the amounts payable to the applicant by Kymmead Pty Ltd pursuant to the arrangements evidenced by the letter and the minutes of 1 November 1986 were income derived by him in the relevant years of income with the consequence that his assessable income in respect of those years had been understated. For the respondent it was contended that the Tribunal erred in law in holding that the amounts, being acceptance fees paid by the applicant to Westpac Banking Corporation in the circumstances to which reference has been made and the amounts representing the differences between the face values of the commercial bills and the net proceeds arising from their sale, were deductible under s. 51(1) of the Act.
It is convenient to deal first with the contention raised by the applicant. As has already been mentioned, the Tribunal concluded that the applicant had, during the relevant years of income, derived assessable income in excess of that returned, being the amounts which became payable to the applicant by Kymmead Pty Ltd pursuant to the letter and the minutes of 1 November 1986. In reaching that conclusion, the Tribunal found that Michael Trethewie Weil, Chartered Accountant, who had acted as accountant to the applicant for some years and was engaged by the applicant to look after the accounting affairs of Kymmead Pty Ltd and The Mead Trust, ``made calculations of the amount due to the applicant by the Trust and credited those amounts to an account in the applicant's name in the books of the Trust''. The Tribunal continued [at p 192]:
``Although, because of oversight or error he failed to do so, the intention was to credit the applicant with interest equivalent to all charges including discounts incurred by the applicant in maintaining the bill facility.''
Reference was then made to the items appearing in the balance sheets of The Mead Trust as at 30 June in the years 1985, 1986, 1987 and 1988 under the heading ``Liabilities'' and the sub-heading ``Loans - W.J. Crawford''. The items referred to were as follows:
Year ended 30 June Amount $ 1985 590,236 1986 837,677 1987 1,681,332 1988 1,720,892
The Tribunal noted that, in the balance sheet of The Mead Trust for the year ended 30 June 1986, there also appeared under the heading ``Liabilities'' an item styled ``Loans - W.J. Crawford No. 2 Account'' against which appeared the amount $441,219. The Tribunal's reasons continue [at p 192]:
``There is no reason to doubt the evidence of [Mr Weil] to the effect that a payment in the nature of interest was made to the applicant each year by crediting an amount to the applicant's loan account. That amount is based upon the charges incurred in relation to the Westpac Bank bills.''
After setting out part of the oral evidence given by Mr Weil, the reasons for decision of the Tribunal continue [at pp 192-193]:
``27. That evidence confirms the documentary evidence and the applicant's evidence that an amount of interest was payable to the applicant by the trustee. The quantum of that interest was determined by the charges incurred by the applicant in respect of the bill facility.
28. However, Exhibit V purports to tell an entirely different story. It is a document which sets out movements in the applicant's loan account from 1983 to 1989. That document recognises funds contributed by the applicant but makes no reference to
ATC 4552interest payable to the applicant. I have not been able to reconcile on their face the details of that exhibit with the summary in Exhibit U. In the circumstances I have decided that the balance sheets lodged with the respective tax returns reflect the true position as established before this Tribunal.
29. Notwithstanding those balance sheets [Mr Weil] said in evidence that the interest due to the applicant had been treated as an accrual and was not credited to the applicant's loan account. He took the view that if the amounts had been credited to the applicant's loan account it would constitute constructive receipt of the interest. By crediting the amount to another account that constructive receipt did not arise. There is no doubt, on the evidence, that the amount credited each year was payable on demand by the applicant and on the accountant's evidence was payable at each time the applicant incurred charges on the bill facility. It is also clear that the trustee lacked any cash flow that would permit actual payment of the interest.
30. It is the essence of accounting that it provides an historical record of what actually happened. The treatment of a transaction in a particular way by the accountant does not thereby alter the character of that transaction. If, therefore, the applicant derived certain amounts of interest each year from the trust, the designation of those amounts as `accruals' by an accountant does not in any way change the essential character of the amounts in question.''
In my opinion, it was not open to the Tribunal, on the material before it, to conclude that the amounts payable to the applicant by Kymmead Pty Ltd pursuant to the letter and the minutes of 1 November 1986 were assessable income derived by the applicant in the years of income in question. In particular, the material before the Tribunal provided no basis for the finding that the amounts in question had been credited to the applicant's loan account in the books of The Mead Trust.
I do not propose to set out in these reasons extracts from the relevant documents that were in evidence before the Tribunal. Suffice it to say that a detailed examination of those documents establishes beyond any doubt that the amounts shown in the balance sheets of The Mead Trust as at 30 June in each of the years 1985, 1986, 1987 and 1988 under the heading ``Liabilities'' and the sub-heading ``Loans - W.J. Crawford'' and in the balance sheet as at 30 June 1988 under the sub-heading ``Loans - W.J. Crawford No. 2 Account'' represented cash payments made to Kymmead Pty Ltd by the applicant by way of loan. I am further satisfied beyond any doubt that the amounts shown in the balance sheets in respect of those items did not include any amounts payable to the applicant pursuant to the letter and the minutes of 1 November 1986. The latter amounts were included in the amounts shown in the balance sheets of The Mead Trust as at 30 June 1987 and 30 June 1988 under the heading ``Liabilities'' and the sub-heading ``Accruals''. The relevant amounts were $69,285 and $116,138, the latter amount being part of the amount of $118,061 shown in the balance sheet as at 30 June 1988. It is clear that those amounts represented debts acknowledged to be due to the applicant pursuant to the arrangements mentioned but not paid because Kymmead Pty Ltd lacked funds to enable payment to be made.
Contrary to the assertion of the Tribunal, Exhibit ``V'' does not tell an entirely different story. That document does no more than summarise, and summarise accurately, the movements in the Loan Account and the Loan Account No. 2 of the applicant in the books of The Mead Trust. Exhibit ``U'', on the other hand, is a summary of the amounts due and payable by The Mead Trust pursuant to the letter and the minutes of 1 November 1986 though it would appear that some of the figures shown are incorrect. It is not possible to reconcile the two documents as they deal with different subject matters. It is correct, as the Tribunal said, that Exhibit ``V'' ``makes no reference to interest payable to the applicant'' and one would not expect it to do so.
It is abundantly clear that no payment was made to the applicant on account of the indebtedness of Kymmead Pty Ltd to him. The circumstance that the amounts were recorded in the books of The Mead Trust and in the balance sheets as debts due and owing to the applicant, who was not engaged in a business of lending money and was being assessed on a ``cash receipts'' basis, provides no support for the conclusion that the amounts represented
ATC 4553assessable income derived by the applicant in the relevant years of income. The Tribunal was clearly in error in regarding Mr Weil's evidence as supporting the proposition that a payment in the nature of interest was made to the applicant each year by crediting the amount to the applicant's loan account. His evidence was to the contrary. Nor does the material that was before the Tribunal provide any support for the view advanced on behalf of the respondent that the relevant amounts were, in terms of s. 19 of the Act, ``reinvested, accumulated, capitalized, carried to any reserve, sinking fund or insurance fund however designated, or otherwise dealt with on [the applicant's] behalf''.
It follows that, in my opinion, the Tribunal erred in law in reaching the conclusion that there had been a failure on the part of the applicant to return the whole of his assessable income in respect of the years in question and that, in consequence, there had been a failure on his part to discharge the onus of showing that the assessments under review were excessive.
I turn now to the question whether the Tribunal erred in law in concluding that the applicant had incurred the losses and outgoings ``in gaining or producing the assessable income'' within the meaning of s. 51(1) of the Act.
The ground - and the sole ground - upon which the Tribunal concluded that the applicant was entitled in each of the years of income to deduct the amounts representing such losses and outgoings (referred to in the Tribunal's reasons for decision as ``charges'') was that the applicant had incurred those ``charges'' for the purpose of deriving the ``interest'' that would be payable to the applicant pursuant to the letter and the minutes of 1 November 1986. The Tribunal expressly declined - and in doing so committed, in my view, no error of law - to accede to the submission advanced on behalf of the applicant that the applicant had a right to the first $500,000 of profit arising from the realisation of the Gladstone Industrial Park project and that that right provided a sufficient nexus between the losses and outgoings and the derivation of assessable income. The Tribunal did not expressly deal with the further alternative submission that the losses and outgoings were incurred by the applicant for the purpose of deriving assessable income from the trust in his capacity as a beneficiary of that trust but it is plain that it did not accede to that proposition.
The Tribunal expressly referred to the correspondence between Kymmead Pty Ltd and Westpac Banking Corporation as making it clear that ``the applicant took over, in effect, the bank bill facility previously provided by the bank'' to Kymmead Pty Ltd. The Tribunal also referred to the applicant's evidence to the effect that the change in the financial arrangements came about because of advice from his accountant. The Tribunal explained [at 92 ATC p 191]:
``That advice, on the applicant's understanding, was to the effect that, by taking over responsibility for the bill finance, the charges would become an immediate deduction in the applicant's hands for income tax purposes. If, however, the trustee continued to incur the charges they may only become deductible for tax purposes at some indeterminate time in the future as the development was sold.''
The Tribunal went on:
``However, the applicant was clear that he did not refinance the project only because of tax considerations. He needed to reduce the commitment to the Bank and also improve the Bank's security. He was of the view that the continuing facility would only be provided if the Bank's security was improved and its doubts about the payment of the charges assuaged. Those problems were solved by using $100,000 provided by his wife to reduce the facility and by committing his own assets as security and his own income to meet the charges. These changes were caused by the decline in the property market and the extension by several years of the original sales program.''
The relevant evidence given by the applicant was that the arrangements he made with Westpac Banking Corporation, evidenced by the bank's letter to him dated 6 June 1986, were made so that he could discharge the debt of Kymmead Pty Ltd to the bank, which he did on 20 June 1986. His expectation was that, if he had not made the arrangements with Westpac Banking Corporation, the bank ``would have ended up as mortgagee in possession''. He also said that the money he had expended on behalf of Kymmead Pty Ltd was to keep the project going so that he would eventually attain a profit.
Although the applicant said his perception was that the bank was ``getting a little bit fed up with the whole situation'', he agreed that there was nothing in writing from the bank pressuring him to rearrange the financial arrangements. He also agreed that it was he who made the approach to the bank, in March 1986, that the borrowing be transferred from Kymmead Pty Ltd to himself and that he did so on his accountant's advice, informing the bank that the accountant had suggested the change ``for tax purposes''. He agreed that it was a fair summary of the accountant's advice to say-
``that [under the then existing arrangements] the company eventually would be able to claim a deduction for the interest and the bank charges as against its future income if it ever realised any future income, but there was no sense in that situation continuing because, if you took over the facility yourself, then you would be able to claim the interest and the bank charges as a deduction against your present income and that would place you in a better position now as opposed to what might or might not happen in the future.''
Asked whether he had other reasons for approaching the bank, the applicant said he had a lot of reasons, one being to keep the project going. He did not elaborate further.
In my opinion, it was not open to the Tribunal to conclude, on the material before it, that the purpose of the applicant in incurring the losses and outgoings which were claimed to be deductible under s. 51(1) of the Act was the purpose of earning interest on the amount of $441,219.19, being the net proceeds of the discounted commercial bills that were loaned to Kymmead Pty Ltd in order that it might discharge its obligation to the Westpac Banking Corporation. While it must be accepted that part of the arrangement between the applicant and Kymmead Pty Ltd was that the company would reimburse him for the acceptance fees paid to the bank and pay to him amounts equivalent to the difference between the face value of the bills and the discounted proceeds, that was not the purpose in making the necessary arrangements to refinance the Gladstone Industrial Park project. The applicant's evidence provides no support for the conclusion reached by the Tribunal. Neither does the evidence of the accountant, Mr Weil.
The applicant's evidence clearly establishes that the negotiation of the refinancing arrangements with Westpac Banking Corporation in 1986 was occasioned, at least in part, by his perception of a reluctance on the part of the bank to continue to provide finance directly to Kymmead Pty Ltd. His purpose in negotiating that facility was to ensure that Kymmead Pty Ltd remained firmly in control of the Gladstone Industrial Park project in the hope and expectation that the project would eventually generate sufficient funds in the hands of Kymmead Pty Ltd to enable it to discharge its liabilities, including the repayment of the loans made to it by the applicant (which, at 30 June 1986, amounted to $837,677.00 and were expected to increase), and to make distributions to the beneficiaries of The Mead Trust.
The ultimate decision of the Tribunal was that the decisions disallowing the applicant's objections to the relevant assessments be affirmed. In my opinion, that was the correct decision upon the material before the Tribunal. Indeed, in my opinion, it was the only decision open to the Tribunal on that material. In those circumstances, the Court is not bound to send the matter back to the Tribunal for further consideration. The appropriate course is to dismiss the application and affirm the decision (though not the reasons) of the Tribunal. The applicant must pay the respondent's costs of the application.
THE COURT ORDERS THAT:
1. The application be dismissed.
2. The applicant pay the respondent's costs of the application.
THE SCHEDULE PARTICULARS OF BILL TRANSACTIONS Date Face Maturity Acceptance Net issued Value Date Discount Fee Amount 20.6.86 460000 18.9.86 16512.32 2268.49 441219.19 18.9.86 360000 20.10.86 5653.99 631.22 353714.79 20.10.86 360000 19.11.86 5047.12 591.78 354361.10 19.11.86 360000 19.12.86 4932.03 591.78 354476.19 19.12.86 360000 19.1.87 4737.15 611.49 354651.36 19.1.87 360000 18.2.87 5277.11 591.78 354317.94 18.2.87 360000 20.3.87 5090.28 591.78 354317.94 20.3.87 360000 22.4.87 5323.06 650.95 354025.99 23.4.87 360000 26.5.87 4801.02 650.95 354548.03 26.5.87 360000 25.6.87 4138.70 591.78 355269.52 25.6.87 360000 27.7.87 4118.47 631.223 55250.31 27.7.87 360000 26.8.87 3704.49 517.803 55777.71 26.8.87 360000 25.9.87 4236.78 * 355763.22 25.9.87 360000 26.10.87 3617.04 535.063 55847.90 26.10.87 360000 25.11.87 3747.97 517.803 55734.23 25.11.87 360000 31.12.87 4488.20 621.363 54890.44 31.12.87 360000 2.2.88 4401.55 * 355598.45 2.2.88 360000 3.3.88 3917.71 * 356082.29 3.3.88 360000 5.4.88 3688.56 569.583 55741.86 5.4.88 360000 4.5.88 3442.01 500.54 356057.45 4.5.88 320000 3.6.88 3202.69 394.51 316402.80 3.6.88 320000 11136.21 1442.00 307421.79 * Acceptance fee and discount consolidated -- evidence does not permit dissection