Case V48

Members:
CJ Bannon QC

Tribunal:
Administrative Appeals Tribunal

Decision date: 25 February 1988.

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C.J. Bannon Q.C. (Deputy President)

This reference concerns a claimed deduction from income tax for the financial year ending 30 June 1985. The taxpayer claimed a deduction of $1,120, being $904.71 interest and $215 loan fee upon moneys borrowed to pay income tax as assessed for the financial years ending 30 June 1982 and 30 June 1983. The taxpayer paid those assessments in 1985 but lodged objections to them. These objections resulted in the issue of amended assessments reducing the taxpayer's liability. On 28 May 1986 the respondent issued a cheque in favour of the taxpayer representing the sums conceded to be overpaid, together with certain interest. The interest was paid pursuant to the Taxation (Interest on Overpayments) Act 1983 (Cth), assented to on 8 June 1983. By virtue of sec. 26(jb) of the Income Tax Assessment Act 1936 (Cth) (``the Act''), such interest when received forms part of the assessable income of a taxpayer.

The taxpayer argues, and by his Particulars of Objection, claims that the interest he paid and the loan fee he incurred in order to pay his taxes as originally assessed, should be available to him as allowable deductions from his assessable income, pursuant to sec. 51(1) and also pursuant to sec. 67(1) of the Act.

The taxpayer is either an employee or consultant of a business carried on by his

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ATC 381

family trust. His success in obtaining a reduction in his previous liability to tax appears to rest in part on his accountant's success in distinguishing the taxpayer's case from the ratio in
Tupicoff v. F.C. of T. 84 ATC 4851. The taxpayer's occupation is that of a marine surveyor.

There is a superficial attraction in the argument that just as interest on overpayments is brought into account as an addition in assessing taxable income, so too, interest and loan fees paid to meet excessive assessments, subsequently admitted to be erroneous, should be treated as deductible.

My attention was directed to the reasons for judgment in
Ure v. F.C. of T. 81 ATC 4100, particularly at pp. 4104, 4105 per Brennan J. and pp. 4109, 4110 per Deane and Sheppard JJ. dealing with the purpose and object of the borrowing. Reference was also made to the passage in
Cliffs International Inc. v. F.C. of T. 85 ATC 4374 in which Kennedy J., of the Western Australia Supreme Court, exercising Federal jurisdiction, discusses
Smith's Potato Estates Ltd. v. Bolland (1948) A.C. 508 and decides at p. 4397 that the reasoning of the House of Lords is applicable to the Act.

In my opinion, Lord Normand's reasons for decision at pp. 529-530 and at p. 531 express most accurately the correct basis for dealing with the present reference. As they are not set out in Kennedy J.'s judgment, I will repeat them here:

``The reason why income tax is not deductible in computing profits for income tax purposes is not merely the logical difficulty pointed out by Mr Grant that, if it were, the computation would inevitably drift through the repetition of the deduction into the eddy of an indefinite process. There is the more substantial reason, that income tax is an impost on profits after they have been earned, and that... a payment out of profits after they have been earned is not within the purposes of the trade carried on by the taxpayer.''

Further on, his Lordship said, concerning the costs of an appeal to correct an assessment:

``So, even if the correction of the assessment is within the purposes of the trade, the expenses and costs of the appeal are nevertheless laid out at least partly for a purpose which is not one of the purposes of the trade.''

In the present matter, the payments made in 1985 pursuant to the original assessments for the years 1982 and 1983 were not made in gaining or producing assessable income, nor were the payments necessarily incurred in carrying on a business for the purpose of gaining or producing such income. The payments were statutory imposts imposed by virtue of sec. 204 and 208 of the Act. The statutory provisions no doubt replace the Royal prerogative for payment of Crown debts, but the debts are truly debts due to the Commonwealth by taxpayers as such, and remain so, although the assessment may be later amended under Pt IV of the Act and overpayments refunded.

If the taxpayer's argument were correct, it would mean that taxpayers who paid excessive assessments out of their cash reserves would be penalised as against those who borrowed the money; paid interest and achieved a deduction from their taxable income.

The objections are disallowed.