Case V3

Members: CJ Bannon QC

BJ McMahon SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 23 December 1987.

---

B.J. McMahon (Senior Member)

I have had the benefit of reading the reasons for decision of Deputy President Bannon. I agree with the conclusions he has reached and with the decision he proposes. I would merely add a few brief observations on the role of ``purpose'' in its application to sec. 51(1) of the Act and the consequences of such an application to the claims of the present applicants.

2. In order to succeed, the applicants must show that the payments, the subject of these claims, constitute outgoings and that to their fullest extent they were incurred in gaining or producing the assessable income. To the extent that they were incurred ``in'' something else, they would not fall within the terms of the subsection. In the case of some, but not all, claims made under this section, it can be helpful in characterising an expense as relevant and working by identifying the purpose of the expense even though the word ``purpose'' does not appear in the subsection. It follows that if it can be shown that, upon a proper consideration and analysis of the evidence, the moneys in question were paid for the purpose of gaining substantial tax deductions, then they would not constitute eligible outgoings under sec. 51. Identifying purpose is not always helpful in considering particular types of outgoings or losses. For example where a loss is suffered as a result of the action of some third person who has deprived the taxpayer of his property, little is to be gained in seeking to identify a purpose. Where however the taxpayers' own expenditure is the subject of the loss then identification of purpose is useful. Such a process of analysis has a long and respectable history in the High Court and later in the Federal Court. Although there has been a variety of judicial opinions, these have always seemed to me to be directed to deciding whether an objective or a subjective approach should be adopted in determining purpose.

3. The earlier cases appeared to favour an objective approach. In
Amalgamated Zinc (De Bavay's) Limited v. F.C. of T. (1935) 54 C.L.R. 295 at p. 309 , Dixon J. said that sec. 51 looked ``rather to the scope of the operations or activities and the relevance thereto of the expenditure than to purpose in itself''. He would determine as the purpose of expenditure what a reasonable man would impute to the taxpayer, were he to look at the surrounding circumstance, and were he denied any direct evidence of the taxpayer's state of mind. A similar approach was taken by the High Court in
F.C. of T. v. Finn (1961) 106 C.L.R. 60 .

4. In his book Income Taxation in Australia, Professor Parsons (at para. 6.6) sees a development of the opposite approach beginning with Cecil Bros Pty. Ltd. (1962-1964) 111 C.L.R. 430 and culminating in the decision of the Privy Council in
Europa Oil (N.Z.) Ltd. (No. 2) v. Commr of I.R. (N.Z.) 76 ATC 6001 . He goes on:

``That development may be seen as adopting a subjective approach, and then limiting the evidence that is relevant to a conclusion as to the taxpayer's purpose. The insistence that it is not for the Commissioner or Court

---

ATC 122

to tell the taxpayer how to run his business adopts a subjective approach. A taxpayer whose subjective purpose makes his expense wholly relevant to the derivation of income cannot be told that an objective inference from the circumstances - in particular the excessive amount of the expense - is that the outgoing was at least in part not relevant and, to this extent, must be denied deduction.''

5. In more recent times, the courts appear to have resorted to evidence both of an objective and a subjective nature in order to determine purpose. Certainly a purposive approach to sec. 51 has been consistently followed, even though with different results in different types of cases. The Federal Court considered the purpose of the payments in
Ure v. F.C. of T. 81 ATC 4100 and concluded that they were of a private or domestic nature. Brennan J. adopted the objective approach. At p. 4104 he said:

``The purposes for which money is laid out is an issue of fact, turning upon the objective circumstances which human experience would judge to be relevant to the issue.''

He went on to point out that there was an unreality about the proposition that the moneys that were laid out in the claims then under consideration were wholly for the purpose of earning a stated return. In the context admittedly of a sec. 260 case, Lockhart J. in
F.C. of T. v. Gregrhon Investments Pty. Ltd. & Ors 87 ATC 4988 at p. 5006 preferred the objective approach in determining purpose. He considered that the terms of an arrangement should be established only from the overt acts by which it operated or was implemented. He would not resort to ``an analysis of subjective states of mind of the persons concerned''.

6. The subjective approach was preferred by Toohey J. in
F.C. of T. v. Ilbery 81 ATC 4661 where his Honour said at p. 4668:

``The taxpayer never tried to conceal that his object in paying five years' interest in one year was to obtain the tax advantages thought to flow from that course. To the extent then that purpose is relevant to throw light upon the character of a payment, no purpose can be discussed here other than that of gaining a tax advantage.''

7. In
F.C. of T. v. John 87 ATC 4713 , Beaumont J. characterised the events there under consideration not so much as ``an adventure in the nature of trade'' as ``an adventure in the nature of tax minimisation'' (p. 4736). In doing so, he took account of evidence of planning prior to the events in question. Fox J. at p. 4720 considered it relevant to refer not only to the purpose of the taxpayer but even to his motive (``a painless taxation loss, not profit'').

8. A similar impression of the evidence led to a similar conclusion in
F.C. of T. v. Just Jeans Pty. Ltd. 87 ATC 4373 . At p. 4384 their Honours said:

``The point seems to be free of direct authority but, in our view, where a taxpayer expends moneys in a way which is entirely divorced from the day to day conduct of its business, where the transaction involved has an artificial air about it, where the primary purpose of the transaction is, as a matter of law, incapable of achievement, and where a significant (though subordinate) consideration is a reduction in the incidence of tax, then the requirements of sec. 51 have not been satisfied. We say this having regard to the place of sec. 51 in the general scheme of the Act, including the provisions of sec. 260. The Act must be construed as a whole in order to determine where the incidence of tax was intended to fall, see
F.C. of T. v. Gulland 85 ATC 4765 ; (1985) 60 A.L.J.R. 150 , Dawson J. (with whom Wilson and Brennan JJ. agreed) at ATC pp. 4794-4795; A.L.J.R. p. 170.''

9. Their Honours reached that conclusion notwithstanding that the tax avoidance purpose was merely a subordinate consideration. I would respectfully agree that, on the authorities, merely a relevant purpose is required to alter the characterisation of the payment. It is not necessary that tax avoidance be the dominant purpose.

10. The conclusions reached by the Federal Court in
F.C. of T. v. Janmor Nominees Pty. Ltd. 87 ATC 4813 do not, in my view, detract from these observations. Their findings of fact indicated that the arrangements they considered were effectual, were intended for the purpose reflected in their objective nature and were motivated by familial considerations. The Court in effect found as a fact that the payments did not have that necessary artificial, unreal or fanciful quality so as to take them completely

---

ATC 123

out of that category of payments attracting sec. 51 deductibility.

11. In the present circumstances we are considering, it seems to me irrelevant whether an objective or a subjective test is applied in determining the purpose of the payments and their consequent character. On either view, there can be no purpose other than the purpose of avoiding tax. The applicants wanted the ``icing'' and were not at all concerned with the ``cake''. Not only was this a significant element of purpose, it was, in my view, the predominant element. The actions of the applicants are inconsistent with any other conclusion and their oral evidence as to their subjective intentions, to the extent that it is inconsistent with the objective facts, I would reject. Why did they not check with their accountant as to any enquiries he may have made about the group? Why did they entrust their moneys to an entirely unknown group of companies? Why did they play no part in the partnership affairs? Why did they not ask about the completed documents when they were returned to their accountant? Why did they make no enquiries concerning the company that was to lend them extraordinarily large sums of money? These and many other questions raised by the evidence can be answered only by asserting that the applicants were in no way interested in annuities. They were interested in obtaining tax deductions at high levels for the initial years of the scheme. To that extent the moneys which they paid were not incurred in gaining or producing assessable income and were accordingly not deductible under sec. 51.

12. I too would affirm the objection decisions under review.