Decision impact statement

Tanti and Commissioner of Taxation

Venue: Administrative Appeals Tribunal
Venue Reference No: 2009/2970
Judge Name: Senior Member Dunne
Judgment date: 23 July 2010
Appeals on foot:
No.

Impacted Advice

Relevant Rulings/Determinations:

• N/A

Subject References:
Income Tax
Allowable deductions
Interest expense

Précis

Outlines the Tax Office's response to this case which concerned whether interest incurred on funds borrowed by the taxpayer from his mother, and, in the main, on-lent interest free to a company of which he was the sole shareholder and director, was deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997).

Brief summary of facts

On September 2004, the taxpayer formed a company, of which he was sole shareholder and director. The company borrowed funds from a bank in carrying on its business and paid interest. The taxpayer borrowed funds from his mother, and, in the main, on-lent them interest free to the company. No written loan agreement existed between the taxpayer and the company. The company used the funds to repay the loans from the bank. The funds borrowed by the taxpayer from his mother were covered by written loan agreements that provided for the payment of interest at rates lower than bank interest rates. The taxpayer used part of the funds borrowed from his mother to repay the company moneys advanced to him to purchase shares in an unrelated private company.

The taxpayer sold the company's business in May 2006, and the proceeds were used to partly repay the loans that he made to the company. In his return for the 2007 income year, the taxpayer disclosed salary or wages received from unrelated employers, but did not disclose any income received from the company. In his objection to his assessment for the 2007 year, he claimed a deduction for the interest paid to his mother in that year.

Issues decided by the tribunal

The Tribunal agreed with the concession made by the Commissioner that a deduction was allowable for the interest paid on the funds borrowed by the taxpayer that related to the purchase of shares in the unrelated company (paragraph 15). That concession was made after the taxpayer provided further evidence during the conduct of the case.

However, he Tribunal decided that the remainder of the interest was not allowable under section 8-1 of the ITAA 1997 (paragraph 19). The Tribunal found that there was no relevant connection between the interest paid or payable by the taxpayer to his mother and the receipt of any income from his company during the 2006 or 2007 income years (paragraph 16). The decision in FC of T v Total Holdings (Aust) P/L 79 ATC 4279 is distinguishable because there was no prospect of the taxpayer deriving income from the company in the future. The company's business was not profitable and was sold prior to the 2007 income year (paragraph 18).

Tax Office view of Decision

Subject to the concession made by the Commissioner based on the evidence provided by the taxpayer during the conduct of the case, the Tribunal found that the interest incurred by the Applicant was not deductible. This case was decided on its own facts.

Administrative Treatment

Implications on current Public Rulings & Determinations / Implications on Law Administration Practice Statements

None

Court citation:
[2010] AATA 549
2010 ATC 10-144
(2010) 79 ATR 740

Legislative References:
Income Tax Assessment Act 1997
8-1

Taxation Administration Act 1953
14ZZK(b)

Case References:
Fletcher & Ors v FC of T
[1991] HCA 42
91 ATC 4950
22 ATR 613

FC of T v JD Roberts & Smith
92 ATC 4380
37 FCR 246
23 ATR 494

FC of T v Total Holdings (Aust) Pty Ltd
[1979] FCA 30
79 ATC 4279
9 ATR 885

Case U134
87 ATC 780
18 ATR 3646

Case 26/94
94 ATC 258
28 ATR 1133

Case 48/97
97 ATC 500
37 ATR 1208

Case 51/97
97 ATC 543
38 ATR 1019