CASE 26/94
Members:G Ettinger SM
Tribunal:
Administrative Appeals Tribunal
G Ettinger (Senior Member)
The applicant sought review of a decision of the Commissioner of Taxation, disallowing under section 51(1) of the Income Tax Assessment Act 1936 (``the Act''), the amount of $17,661 being interest and borrowing costs incurred by the taxpayer in borrowing moneys in regard to the applicant's 1990 tax year. The applicant had requested a ruling under section 169A of the Act (T3.3). The Commissioner had not allowed the deduction and accordingly had issued an assessment for 30 June 1990 (T5), dated 7 May 1991, reflecting this. The applicant appealed to the Administrative Appeals Tribunal.
2. The Tribunal had before it the ``T documents'' (T1-13) pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 as Exhibit R1, and statutory declarations of the applicant and his two brothers to be known as A and H, tendered on behalf of the applicant, all dated 13 December 1993 (Exhibits A1-A3). The applicant was represented by Mr B Walker, chartered accountant, and the respondent by Mr M Brabazon of counsel. The applicant gave oral evidence.
Issues before the Tribunal
3. The issues to be considered by the Tribunal are:
- (i) Whether the amount of $17661 or some lesser amount representing interest and borrowing costs incurred by the taxpayer, was incurred in gaining or producing the assessable income of the applicant; and
- (ii) Whether the whole or part of the amount of $17,661 was an allowable deduction under section 51(1) of the Income Tax Assessment Act 1936; and
- (iii) Whether the medicare levy payable should be calculated by reference to a
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taxable income of $16,193 or some other amount but less than $33,854 (T2.3).
Legislation
4. The applicable legislation is section 51(1) of the Act:
``51(1) All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall 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.''
Evidence before the Tribunal
5. The issue of the calculation of the medicare levy payable was not pursued by either party before the Tribunal. There is no evidence before the Tribunal about this issue, and it makes no finding with regard to it.
6. The applicant told the Tribunal that he is an insurance broker. His business to be known as X Insurance Brokers (``the partnership''), is a partnership business with his wife. The applicant told the Tribunal that he had not at any time carried on business as a money lender.
7. The applicant is also a director and shareholder of a family company to be known as G Pty Ltd (``the company''). The company was incorporated on 25 July 1985 with three issued shares, one each held by the applicant and each of his two brothers to be known as A and H. All three are directors of the company.
8. The company was described as ``property owners and developers'' (T2.1). The applicant told the Tribunal that the company commenced a development project known as N Towers in April 1988. Stage one of the project comprised of shops, motel and strata units; the second stage was to comprise of shops, an extension of the motel and some strata units. The first stage of the development was completed around Christmas of 1989. The second stage of the development commenced in April of 1988.
9. To finance the development of N Towers, the company gave a floating deed of charge to its bankers the R & I Bank of Western Australia. The applicant told the Tribunal that he also gave a director's guarantee to the bank but that the partnership was never involved. The amount owed in secured loans by the company at 30 June 1989 was $6,995,133 and some cents. In cross examination, when confronted with a document which purported to be his bank manager's diary of the time, the applicant agreed with the respondent that by way of security, he had agreed to execute a bill of sale over his insurance business.
10. The respondent referred the applicant to T2.2. It was agreed that even though the applicant could not agree or disagree with the figures on the document T2.2, when he saw it, he concurred that the company had suffered losses for the year 1986.
11. A summary of the company's finances for the years ended 30 June 1986 to 30 June 1990 is at T2.2. It showed the following figures:
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Year Losses Assets Liabilities
1986 $ 40,235.64 $ 484,855.94 (Land & Buildings) $ 557,000.00
$ 45,850.15 (Unsecured loans)
1987 $ 50,079.96 $ 503,646.44 (Land & Buildings) $ 690,000.00
$ 62,625.15 (Unsecured loans)
1988 $135,655.03 $1,843,508.81 (Land & Buildings) $2,356,967.00
$ 92,275.50 (Unsecured loans)
$ 200,000.00 (Investment)
1989 $599,597.52 $5,776,213.98 (Land & Buildings) $6,995,133.26
$ 119,094.02 (Unsecured loans)
$ 100,000.00 (Investment)
1990 $451,598.00 $5,363,009.00 $6,641,687.00
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12. The applicant agreed with the respondent that no interest was paid by the directors to the company on the unsecured loans from the company to the directors in the tax years of
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1987, 1988 and 1989. At 30 June 1989, the company return also showed that G Pty Ltd had borrowed $30,111.64 from the applicant and his wife.13. By the end of August 1989, the company had an outstanding debt to its builder to be known as B Industries of $266,331.37. This is shown in progress claim No 22 dated 15 August 1989 (T10.6). As a result, B Industries had placed a caveat over the land comprising the N Towers development.
14. The applicant told the Tribunal that he had an overdraft facility at the ANZ Bank. He said that he could not remember if the limit on his overdraft at the beginning of July 1989 was $5,000 or not. However, he agreed with the respondent that in July 1989, he had asked for, and was granted a $10,000 limit.
15. The respondent drew the applicant's attention to a resolution made by the directors of the company and minuted on 1 September 1989 (T6.3) relating to advances made by directors or shareholders. The document before the Tribunal reads:
``It was resolved, that any advances made by the Directors or shareholders to the company be subject to interest payable by the company. It was further resolved that the interest is only payable when the company is in a position of profit earning and the rate of interest be determined according to market interest rates at the time of payment. It was further resolved that the advances made by the directors or shareholders be repayable at call.''
16. When questioned by the respondent as to the reason for, and timing of the above resolution, the applicant said:
``Well, I suppose it was because of the size of the loan that I was making to the company. I may have insisted on it at that particular time.''
17. Exhibits A1-A3, statutory declarations of the applicant and the other directors and shareholders of the company, contain similar clauses which refer to the resolution of the company relating to advances made by the directors and shareholders.
Clause 3 of Exhibits A1, A2 and A3 reads:
``At the time I advanced funds to the company I was of the opinion that I would ultimately receive interest from the company on that and other loans that I had previously made to the company as and when the company was in a position so to pay at a rate equivalent to the rate at which I borrowed those capital sums or in the case where the funds had come from my own resources, at an equivalent bank interest rate at the time funds were lent.''
Clause 4 reads:
``At the time of making the loans and for an extended period of time subsequent to that date I was of the opinion that the company would be in a financial position to make those interest and principal repayments to me and other lenders.''
Clause 5 reads:
``It was and still is my understanding that as a Director of the company I believe that all the lenders to the company would be repaid their principal and interest entitlements when the Company successfully finalised its development projects.''
18. On 7 September 1989, the company wrote to B Industries (T10.7) proposing to settle the outstanding account so that the caveat could be lifted immediately in order that settlement of the units could take place on 8 September 1989.
19. In cross examination, the applicant told the Tribunal that shortly after the letter of 7 September 1989, he approached the ANZ Bank to borrow $100,000. He said he had discussions with the bank manager Mr T, about a $100,000 loan to the partnership. He told the Tribunal:
``I spoke to Mr T about borrowing... the hundred thousand, the purpose of the loan being to lend it to the company... The money, I believe, was borrowed in the short term on the overdraft facility but that was never the intent... the intent was to lend, was for the ANZ Bank to lend the money on a bill of sale over my business.''
20. The respondent sought to tender evidence of the discussions of the applicant with the bank manager Mr T through photocopies of what purported to be Mr T's diary notes. This evidence was disallowed by the Tribunal on the basis that Mr T was not available to verify that the document was in fact his diary and give evidence about the discussions. He had retired and was said to be living in Queensland.
21. When asked how he was going to pay the overdraft of $100,000, the applicant said that he told Mr T that: ``I probably would have said
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that as a result of the re-financing or the further sales of stage two.''22. On 11 September 1989 the ANZ Bank agreed to extend the applicant's overdraft to $110,000 until 31 October 1989. The applicant told the Tribunal that he was unsure about the period of the overdraft extension but that ``... it was my understanding that... the overdraft facility was only a short term facility which would precede a loan period following''.
23. The overdraft was drawn as a cheque No 401586 for $100,024 and paid to a creditor of the company, B Industries (T2.3). Evidence regarding the urgency of the payment was elicited from the applicant. There had been an unexpected delay in completion of building work from 42 to 73 weeks and an unexpected increase in costs of some $500,000. A dispute culminating in an arbitration had taken place.
24. The applicant told the Tribunal that he attended at the ANZ Bank on 1 November 1989 to seek a further extension of the overdraft facility as a proposed refinancing package for the company had been delayed. There had been negotiations with various financiers none of which had been fruitful. In re-examination by his accountant, the applicant agreed that ``... refinancing was a very distinct possibility...''.
25. The Tribunal was told that by November 1990 the applicant had converted the overdraft facility to a fully drawn advance of $100,000 at the bank's insistence. The approval letter from the ANZ Bank dated 27 November 1990 is at T8.2.
26. The applicant's accountants Cowan, Walker and Lynch prepared his tax return for the year ended 30 June 1990 and on 8 November 1990, requested a ruling under section 169A of the Act in relation to the interest on the $100,000 (T3.3). It read, in part:
``The Taxpayer borrowed funds to on-lend to a family company which he has ⅓ shareholding. The loan was made to render the company more profitable thus ensuring the possibility of assessable dividends being derived...''
The Tribunal was told that all the interest was paid from the partnership funds but was not included in the partnership profit and loss account and had been claimed by the applicant as a tax deduction in the 1989 year.
27. A letter from the applicant's accountants to the Deputy Commissioner of Taxation dated 4 November 1991 (T8) sought to explain why the loan was in the applicant's name and not the company's name. It stated:
``The company did not have any capacity to borrow in its own name... Quite simply put, the only assets which were still available was the taxpayers own business and thus the loan had to be in the taxpayers name as it was secured over his own business... without financial support by the taxpayer, the companys [sic] financial success was doubtful, and due to economic pressures the company would have been forced into liquidation... Because the taxpayers [sic] loan had eased pressure from other lenders to the company, the taxpayer is in a position to ensure his future personal financial success i.e. not be forced into bankruptcy. Because he has been able to pay the interest on the loan himself he has been able to allow the company time to pay him interest and/or dividends. As stated in his objection, the interest on his loan to the company will be payable to him in future years.''
28. At the hearing, the applicant sought to deny that what was contained in T8 was completely true. In particular he denied that the company would have been forced into liquidation and that the directors may have had to face bankruptcy. In re-examination by his accountant, the applicant agreed that the value of the land and buildings in his balance sheet represented the cost to the company but that the market value in June 1989 or June 1990 would have been far in excess of that.
Mr Walker in re-examination asked as follows:
``At the time you applied for the loan were you conscious of the possibility of the company being forced into liquidation?''
The applicant replied:
``At the time of my lending the money to G [Pty Ltd], there was absolutely no indication to me in any way, shape or form that the company had a financial problem. Those problems arose at a later date.''
29. The applicant agreed that in the year ended 30 June 1990, the company did not pay any of the interest on the loan of $100,000 from the ANZ Bank. His explanation was:
``I was handling the interest payments at that time and after the end of 1989 you could see that we were experiencing some
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difficulties with re-financing so... I wouldn't have put any undue pressure on [the company] to pay me.''
The applicant agreed in cross-examination that the company had between 1 July 1989 and 30 June 1990 made a loss of the order of $357,352.
30. The respondent drew the Tribunal's attention to T10, a further letter dated 16 March 1992, from the applicant's accountants to the Australian Taxation Office. In that, the accountants discussed the ANZ loan as follows:
``... approximately 12 months previous, i.e. September 1989, the funds in question were dealt with on an overdraft arrangement... The finance was initially sought only for a short term but due to financial pressures on G Pty Ltd and the ANZ Bank wanting a fixed instalment loan, the overdraft was paid out by the loan in November 1990...''
31. The thrust of the applicant's submission was that the interest and borrowing costs of the $100,000 loan was deductible under section 51(1) of the Act because it represented expenses incurred by him in the gaining of assessable income from the company. In particular he claimed that:
``The Company had borrowed the funds from the taxpayer for both capital expansion for construction of rent producing property, and the shoring up of debts from other lenders in order to ensure future profitability and success.''
(T6.5)
32. The applicant sought to rely on
Ronpibon Tin NL v FC of T (1949) 8 ATD 431; (1949) 78 CLR 47. He addressed the respondent's concerns with regard to the timing of income and expenditure. He said:
``... there are many many cases that have been referred to in past cases where it was not necessary for there to be a receipt of income in a year in which an expenditure was incurred. There are references in Ronpibon (supra), where the judge indicated that it would not be reasonable for there to be an expectation to produce income. I believe that the fact that there was not any income being derived in the 1990 year has no bearing on the deductibility of the interest as a reasonable expense or a loss in outgoing.''
33. The applicant cited the cases of
FC of T v Finn (1961) 12 ATD 348; (1961) 106 CLR 60 and
FC of T v Total Holdings (Australia) Pty Ltd 79 ATC 4279; (1979) 43 FLR 217 on the same point.
34. On behalf of the applicant
Ure v FC of T 81 ATC 4100; (1981) 34 ALR 237 was referred to in the following terms:
``... an outgoing of interest may be incidental and relevant to the gaining of assessable income where the borrowed money is laid out for the purpose of gaining that income. It would not necessarily be the case for the applicant to have as a sole purpose the borrowing of the funds to be able to earn income from it.... He had an investment he wished to secure and that in the short term he saw that by introducing further funds to the company that that future would be secured.''
35. The applicant referred the Tribunal to
The Texas Company (Australasia) Limited v FC of T (1940) 5 ATD 298; (1939-1940) 63 CLR 382 saying:
``In Texas Co v FC of T there is a statement by a judge who said the laying out of the borrowed money for the purpose of gaining assessable income furnishes the required connection between the interest paid upon it by the taxpayer and the income derived by him from its use.''
36. The respondent told the Tribunal that he concurred with the applicant that the agreement of 1 September 1989 documented that the company would reimburse its directors including the applicant for interest incurred by them in borrowing funds to on-lend to the company. He emphasised that what the Tribunal was called upon to do was to engage in an exercise of characterisation and referred the Tribunal to Ronpibon (supra).
37. The respondent cited the case of
Fletcher & Ors v FC of T 91 ATC 4950; (1991) 173 CLR 1, a case on the question of whether the whole or part of the alleged outgoings of interest should be treated as deductible under section 51(1) of the Act in calculating the net income or loss of the partnership for the tax years. At ATC page 4957; CLR page 16 the Full Court of the High Court of Australia said:
``... point to be made about s. 51(1) is that the reference in it to `the assessable income' is not to be read as confined to assessable income actually derived in the particular tax year. It is to be construed as an abstract phrase which refers not only to assessable
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income derived in that or in some other tax year but also to assessable income which the relevant outgoing `would be expected to produce'.''
Further at ATC page 4957; CLR page 17 the High Court of Australia said:
``The question whether an outgoing was, for the purposes of s. 51(1), wholly or partly `incurred in gaining or producing the assessable income' is a question of characterisation... It has been pointed out on many occasions in the cases that an outgoing will not properly be characterised as having been incurred in gaining or producing assessable income unless it was `incidental and relevant to that end'... So to say is not, however, to exclude the motive of the taxpayer in making the outgoing as a possibly relevant factor in characterisation for the purposes of the first limb of s. 51(1). At least in a case where the outgoing has been voluntarily incurred, the end which the taxpayer subjectively had in view in incurring it may, depending on the circumstances of the particular case, constitute an element, and possibly the decisive element, in characterisation of either the whole or part of the outgoing for the purposes of the sub-section. In that regard and in the context of the sub- section's clear contemplation of apportionment, statements in the cases to the effect that it is sufficient for the purposes of s. 51(1) that the production of assessable income is `the occasion' of the outgoing or that the outgoing is a `cost of a step taken in the process of gaining or producing income' are to be understood as referring to a genuine and not colourable relationship between the whole of the expenditure and the production of such income.''
38. The High Court of Australia elaborated on the above reasoning at ATC pages 4957-4958; CLR page 18:
``Nonetheless, it is commonly possible to characterise an outgoing as being wholly of the kind referred to in the first limb of s. 51(1) without any need to refer to the taxpayer's subjective thought processes. That is ordinarily so in a case where the outgoing gives rise to the receipt of a larger amount of assessable income.
The position may, however, well be different in a case where no relevant assessable income can be identified or where the relevant assessable income is less than the amount of the outgoing... Where that is so, it is a `commonsense' or `practical' weighing of all the factors which must provide the ultimate answer.''
39. Still referring to Fletcher (supra), the respondent said:
``... that the reimbursement of interest at a later date by the company is not an adequate commercial explanation of the incurring of that interest outgoing.''
40. The respondent continued:
``In Ure's case there was a receipt which in fact occurred in the same year of 1 percent interest. In Munro's case there was no interest at all. In this case it is necessary to look beyond the reimbursement of interest, for if the transaction is nothing more than that - that is to say the reimbursement of interest at a later time - then what one has is a private or domestic capital outgoing not directed to the earning of income but directed to some ulterior purpose...''
41. The respondent referred the Tribunal to
The Federal Commissioner of Taxation v Munro (1926) 38 CLR 153 saying that there, neither the lending to the company in which Mr Munro was a shareholder, nor the financing of acquisition of shares by his sons was regarded as being a sufficient nexus to characterize the incurring of the interest as being directed to the gaining of the taxpayer's income.
42. The respondent then referred to Total Holdings (Australia) Pty Ltd (supra) saying:
``That is so far as I have been able to ascertain the only Australian case in which the earning of dividends has been recognised as a sufficient purpose to characterize interest on money borrowed to on-lend to another entity for the purpose of its business as falling within section 51(1)... There have however been a significant number of cases in which directors and shareholders of companies have provided benefits at their own expense to the companies with which they were associated... which have not satisfied the characterization test. Munro was the first of these.''
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In this connection, the respondent sought also to rely on
C.T.B.R. (N.S.) Case 75 and Case U134,
87 ATC 780.
43. Mr Brabazon then went on to discuss the situation in
Sheil v FC of T 86 ATC 4731; (1986) 17 ATR 1097 where he said the court had to consider a transaction which was very similar to the present one. In Sheil (supra), a man in America who was authorised to act on behalf of Dr Sheil, lent funds from Thumper Australia to Thumper America, and in part to acquire shares in Thumper America in the name of Dr Sheil. Derrington J in the Queensland Supreme Court held that the payments were incurred by the taxpayer to acquire funds to be lent ultimately to Thumper America on the basis that the company would ultimately repay both interest and loan, and he ruled that they were not deductible. Sheil (supra) was appealed to the Full Court of the Federal Court. The respondent emphasised to the Tribunal however, that this did not cast any doubt on that part of the findings of Derrington J on which the respondent would here rely.
44. The essence of the respondent's submissions was:
``... the correct characterization of this particular undertaking was that it was designed to provide temporary assistance to the business of the company... the connection, in my submission, between any dividends that he may ultimately have earned and this outgoing of interest is remote indeed and the immediate and obvious purpose of it is the true purpose.''
45. The respondent drew his case to a close by emphasising that there had been inconsistencies in the applicant's evidence particularly with regard to his knowledge of the state of the company's viability in 1989. He said that the respondent viewed the $100,000 as a short-term rescue package on the strength of the firm's account with the ANZ bank.
Conclusions
46. In arriving at a decision, this Tribunal must take into account all the evidence before it, and be guided by the case law on section 51(1). In the case of Ronpibon (supra) the Full Court of the High Court of Australia [at ATD pp 435-436; CLR pp 56-57] gave the following explanation of the words ``incurred in gaining or producing the assessable income'' in the context of sub-section 51(1) of the Act:
``For the expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to that end. The words `incurred in gaining or producing the assessable income' mean in the course of gaining or producing such income.
In brief substance, to come within the initial part of the subsection it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income or, if none be produced, would be expected to produce assessable income.''
47. Whether an outgoing should properly be seen as being wholly or in part ``incidental and relevant'' to the ``end'' of gaining or producing the assessable income is a question of characterization. In the case of Ure (supra) the process of characterization was described by Deane and Sheppard JJ [at ATC p 4109; ALR p 249] in the following terms:
``In the ordinary case where the income which is expected to flow from an outgoing offers an obvious commercial explanation for incurring it the relevant characterization can readily be determined by reference to the gaining or producing of that income. In the more complex case however, where there is no such obvious commercial explanation, the solution of the problem of characterization must be derived from a weighing of the many aspects of the whole set of circumstances including direct and indirect objects and advantages which the taxpayer sought in making the outgoing. Some of those circumstances may point in one direction, some in the other. In such a case, as was said by the Privy Council in
B.P. Australia Limited v. F.C. of T. (1965) 112 C.L.R. 386 at p. 397 in relation to the question whether a particular outgoing was of income or capital according to ordinary concepts, it is `a common sense appreciation of all the guiding features which must provide the ultimate answer'.''
48. There was no dispute between the parties, and the Tribunal accepts that the applicant has a partnership business of an insurance broker with his wife and that at the relevant time he was not carrying on a business as a money lender.
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49. The Tribunal accepts that the $100,000 borrowed by the applicant from the ANZ Bank was on-lent to the company (of which he is a director and holds one of the three issued shares), to pay B Industries, so that the caveat it had lodged on N Towers development would be lifted and sale of the properties could be completed. The Tribunal also accepts that the interest on that loan was paid for by the applicant.
50. Turning to the case law, the Tribunal notes that it has been held that where interest is incurred on funds borrowed for the purpose of deriving assessable income, the income may be deductible, Munro (supra), FC of T v Total (supra). It notes further that the deductibility of interest pursuant to section 51(1) of the Act in the case of Munro (supra), nevertheless was not allowed. Neither were interest payments allowed under section 51(1) in Sheil (supra), Case 75 (supra) and U134 (supra). As noted above by the respondent, Sheil (supra) was a case not dissimilar to the present one.
51. From the evidence before it, the Tribunal finds that the company had incurred losses in the tax years of 1986, 1987, 1988, 1989 and 1990. There were considerable inconsistencies in the evidence before the Tribunal with regard to the company's financial situation. The Tribunal finds that in relying on the information in T8, a letter from the applicant's accountants to the Deputy Commissioner of Taxation of 4 November 1991, it accepts that the company was in need of refinancing in 1989.
``The company did not have any capacity to borrow in its own name.''
and that
``... without the financial support by the taxpayer, the companys [sic] financial success was doubtful, and due to economic pressures the company would have been forced into liquidation. The consequences of liquidation and associated directors guarantees over the debts of the company would most likely have caused the directors to become bankrupt.''
52. Attempts by the applicant to arrange a re- financing package had been unsuccessful. It was this scenario, the Tribunal finds, that led the applicant to approach the ANZ Bank to extend his personal overdraft.
53. At the hearing, the applicant denied that in 1989 the company faced liquidation and the directors faced possible bankruptcy. Having considered the fact that the company had incurred losses in the years 1986-1990 and that what the accountants wrote in T8 may be imputed to the applicant, the Tribunal finds that the primary purpose for the applicant to obtain an increase in his overdraft which was later converted to a loan from the ANZ Bank of $100,000, was to temporarily assist the company out of its financial difficulties. In particular, it was to enable the caveat on N Towers to be lifted by B Industries.
54. The Tribunal also notes that unsecured loans had been made to the directors, and that no interest was paid by the directors on the loans. Further that at 30 June 1989, the company return showed it had already borrowed $30,111.64 from the applicant and his wife.
55. The Tribunal accepts that there was a resolution made by the directors of the company on 1 September 1989 relating to advances made by directors or shareholders. The Tribunal also accepts Exhibits A1-A3 as a reflection of the directors' opinions as to interest payable on any loans they would make to the company, and to the deferred payment of interest and principal. It notes from the case law, Ronpibon (supra), Finn (supra) and Total Holdings (supra), that the timing of the income and expenditure need not necessarily be in the same year.
56. The Tribunal accepts the applicant's submission that the fact that there was no income being derived by the applicant in the 1990 year does not necessarily bar deductibility of the interest under section 51(1) of the Act. This is in line with the decision of Fletcher & Ors (supra).
57. However, section 51(1) of the Act presupposes that for the outgoings to qualify as a deduction there must be a nexus between the incurring of the outgoing and assessable income being derived or a business being carried on for the purpose of deriving assessable income of that taxpayer.
58. The applicant submitted that the loan was to generate future income in the form of dividends from the company. The Tribunal is prepared to accept that one of the applicant's objectives in lending the $100,000 to the company was to ensure profitability so as to derive future dividends from the company. It was not argued before the Tribunal how much
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that would be. The Tribunal accepts that it may not have been possible to give an estimate of dividends which could be received, nor when that might occur. The Tribunal finds the connection between the payment and the future income to be derived in this case so remote as to render the interest not a deduction under section 51(1) of the Act.59. In the case before this Tribunal, the outgoings of interest in the tax year 1990 were incurred in the borrowing of money. The funds borrowed did not produce assessable income. To the extent that the outgoings of interest incurred in borrowing can properly be characterized as of a kind referred to in section 51(1) of the Act, they must draw their character from the use of the borrowed funds. On the evidence available to the Tribunal, that use was to pay off a creditor, B Industries, to enable a caveat on the N Towers to be lifted so that settlement of the phase one units could be completed.
60. Following Fletcher & Ors (supra), the Tribunal in a case such as this has to approach the characterization upon a ``commonsense'' or ``practical'' weighing of all the factors including the applicant's subjective thought processes.
61. The Tribunal notes that in Ure (supra), Deane and Sheppard JJ looked to Mr Ure's purpose in incurring an interest outgoing, and notes that the applicant told the Tribunal that there did not need to be a sole purpose for a consideration of a deduction under section 51(1) of the Act to be made. The Tribunal is mindful that the applicant's purpose in incurring the expenditure can be taken into account.
62. The Tribunal finds that the amount of $17,661, being interest and borrowing costs incurred by the taxpayer, was not incurred in gaining or producing the assessable income of the applicant. Rather it was to assist the company to avoid liquidation by providing a short-term rescue package.
63. After consideration of all the evidence before it, the Tribunal concludes that the applicant's claim is not a genuine but only a colourable relationship between the whole of the expenditure and the production of such income under section 51(1) of the Act.
64. In the light of the decision in Fletcher & Ors (supra) and the finding of the Tribunal that there was in this case no relevant assessable income arising out of the interest expenditure, the submissions of the applicant cannot succeed.
65. It follows then that the amount of $17,661 was not an allowable deduction under section 51(1) of the Act. The application before this Tribunal must fail.
66. No evidence was led by either side with regard to the basis of the medicare levy payable. The Tribunal makes no finding with regard to it.
67. The Tribunal affirms the decision under review.
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