Decision impact statement
Willersdorf-Greene v Commissioner of Taxation
Venue: Administrative Appeals Tribunal
Venue Reference No: 2008/2147-2149; 2008/4832-4834
Judge Name: DP Forgie, AAT Member
Judgment date: 28 August 2009
Appeals on foot:
No.
Impacted Advice
Relevant Rulings/Determinations:
Subject References:
Income tax
Deductions
Guarantee
Interest
Depreciation
Penalties
Précis
Outlines the Tax Office response to this case, which primarily concerned whether interest on a loan used to satisfy a guarantee is deductible, where the later loan was taken out after the relevant income producing opportunity related to the guarantee had passed.
Decision Outcome:
Partially Adverse
Brief summary of facts
The taxpayer was approached by friends to secure an investor to finance their investment in a scheme to import fuel into Australia and distribute it. Under the belief that he could derive commission income from the scheme, the taxpayer procured an investor to lend money to his friends' company. The investor required the taxpayer and his friends to guarantee repayment of the loan by the company, and to agree to execute mortgages over their respective houses.
When the company did not honour the repayments, the taxpayer discovered that he had been the victim of a scam perpetuated by his friends. After the investor and the taxpayer had explored ways to recover the moneys lent, the investor instructed the taxpayer to mortgage his property in accordance with the guarantee agreement. The investor foreclosed on the mortgage, and the taxpayer took out two loans to pay the reduced amount that the investor agreed would fulfil the taxpayer's guarantee. The taxpayer claimed deductions for interest and borrowing expenses associated with these loans in the 2005, 2006 and 2007 years.
In the 2005, 2006 and 2007 years, the taxpayer also claimed deductions for work related travel, motor cycle and home office expenses.
On audit, the expenses were disallowed and penalties (25%) for lack of reasonable care were imposed. During the course of proceedings before the Tribunal, the Commissioner accepted that the various home office expenses were allowable.
Issues decided by the court or tribunal
While the Tribunal found that the taxpayer's involvement in the fuel 'scheme' did not amount to the carrying on of a business, it found that he was engaged in activities that were clearly directed to gaining or producing commission income for himself. There was a connection between the taxpayer giving the guarantee and the investor making the loan that would lead to the taxpayer gaining or producing income (paragraphs 75 and 76).
The entering into of the guarantee gave rise to a contingent liability that would become an actual liability if the repayment by the company did not occur. The taxpayer later borrowed money to meet his actual liability under the guarantee and to avoid proceedings being taken against him by the investor. The taxpayer was aware that the borrowing would not lead to the gaining or producing of any income at that time or in the future. The prospect of gaining any commission income under the fuel 'scheme' was long gone (paragraph 83).
However, the necessary connection that initially existed between the contingent liability under the guarantee and the activities directed at the prospect of gaining commission income remained when the investor exercised its rights under the guarantee, even though the prospect of such income, by then, had gone. The investor's claim was a necessary consequence of the loss of its investment, and of the taxpayer having given the guarantee. The foundation of the claim was in the original fuel scheme arrangements. The interest and the borrowing expenses incurred in relation to the guarantee were deductible. The Tribunal also distinguished two earlier Tribunal decisions about interest expenses incurred on moneys borrowed to honour guarantees on the basis that the guarantees given in those cases did not have the necessary connection with any income earning activities of the taxpayers (paragraph 92).
The Tribunal was not satisfied that the taxpayer had incurred the travel expenses, and was also not satisfied that the taxpayer had properly substantiated the interest and borrowing expenses incurred. The Tribunal affirmed the Commissioner's calculation of the depreciation allowable on the motor cycle and the imposition of penalties of 25% for failure to take reasonable care in relation to the deduction claims disallowed.
Tax Office view of Decision
In essence, the Tribunal has found that the occasion of the interest expenses was the giving of the guarantee, and that the giving of the guarantee was an important part of the arrangement that was likely to be productive of commission income for the taxpayer. The Tax Office accepts that this finding was open to the Tribunal on the particular facts as found, and that the case is distinguishable from cases in which the guarantees related directly to the income earning activities of the relevant companies, and only related indirectly, if at all, to the income earning activities of the guarantors (Re Pope and Commissioner of Taxation [2005] AATA 1085 and Re Applicant and Commissioner of Taxation [2001] AATA 831).
Administrative Treatment
Implications on current Public Rulings & Determinations
None
Implications on Law Administration Practice Statements
None
Court citation:
[2009] AATA 649
2009 ATC 10-102
(2009) 76 ATR 688
Legislative References:
A New Tax System (Tax Administration) Act (No 2) 2000
Bankruptcy Act 1966
82
Income Tax Assessment Act 1997
Division 4
Division 6
Division 8
Division 25
Division 40
Division 42 (repealed)
Division 900
Division 995
Income Tax Assessment Act 1936
23
51
226G
Income Tax (Transitional Provisions) Act 1997
Division 40
New Business Tax System (Capital Allowances) Act 2001
2
Sch 1
New Business Tax System (Transitional and Consequential Provisions) Act 2001
2
Sch 1
Taxation Administration Act 1953
Division 284
Tax Law Improvement Act 1997
2
3
Tax Laws Amendment (Repeal of Inoperative Provisions) Act 2006
3
Case References:
AAT Case 10,211
95 ATC 319
(1995) 30 ATR 1342
AGC (Advances) Ltd v Federal Commissioner of Taxation
(1975) 132 CLR 175
5 ATR 243
5 ALR 208
75 ATC 4057
Amalgamated Zinc (De Bavay's) Ltd v Federal Commissioner of Taxation
[1935] HCA 81
(1935) 54 CLR 295
Bank of New South Wales v Permanent Trustee Co of New South Wales Ltd
(1943) 68 CLR 1
[1943] HCA 27
Bolton v Stone
[1951] AC 850
[1951] 1 All ER 1078
Charles Moore & Co (WA) Pty Ltd v Federal Commissioner of Taxation
(1956) 95 CLR 344
[1956] HCA 77
Coal and Allied Operations Pty Ltd v Australian Industrial Relations Commission and Others
(2000) 203 CLR 194
174 ALR 585
Drake v Minister for Immigration and Ethnic Affairs
(1979) 24 ALR 577
2 ALD 60
46 FLR 409
Expile Pty Limited v Jabb's Excavations Pty Ltd & Anor
[2004] NSWSC 284
(2004) 22 ACLC 667
Federal Commissioner of Taxation v Brown
(1999) 99 ATC 4600
43 ATR 1
[1997] FCA 721
Federal Commissioner of Taxation v Day
[2008] HCA 53
(2008) 236 CLR 163
(2008) 70 ATR 14
2008 ATC 20-064
Federal Commissioner of Taxation v Jones
[2002] FCAFC 41
2002 ATC 4135
(2002) 49 ATR 188
Federal Commissioner of Taxation v Maddalena
(1971) 45 ALJR 426
2 ATR 541
71 ATC 4161
Federal Commissioner of Taxation v Payne
(2001) 202 CLR 93
[2001]HCA 3
2001 ATC 4027
46 ATR 228
Guest v Federal Commissioner of Taxation
(2007) 65 ATR 815
[2007] FCA 193
2007 ATC 4265
Inglis v Federal Commissioner of Taxation
(1979) 40 FLR 191
10 ATR 493
80 ATC 4001
Joselyn v Berryman
(2003) 214 CLR 552
77 ALJR 1233
198 ALR 137
Kidston Goldmines Ltd v Commissioner of Taxation
(1991) 30 FCR 77
22 ATR 168
91 ATC 4538
McHale v Watson
(1966) 115 CLR 199
[1966] HCA 13
39 ALJR 459
[1966] ALR 513
Molit (No 55) Pty Ltd v Lam Soon Australia Pty Ltd (Administrator Appointed)
(1996) 19 ACSR 160
(1996) 63 FCR 391
(1996) 135 ALR 280
Peco Arts Inc v Hazlitt Gallery Ltd
[1983] 3 All ER 193
[1983] 1 WLR 1315
Perry v Ellis
[1946] SASR 282
Placer Pacific Management Pty Ltd v Federal Commissioner of Taxation
(1995) 31 ATR 253
(1995) 95 ATC 4459
R & D Holdings Pty Ltd v Deputy Federal Commissioner of Taxation
[2006] FCA 981
2006 ATC 4472
(2006) 64 ATR 71
Re Applicant and Commissioner of Taxation
[2001] AATA 831
48 ATR 1107
2001 ATC 136
Re Arnett and Federal Commissioner of Taxation
(1998) 39 ATR 1095
98 ATC 2137
Re Confidential and Commissioner of Taxation
[2008] AATA 415
2008 ATC 1-002
(2008) 72 ATR 252
Re Drake and Minister for Immigration and Ethnic Affairs (No. 2)
(1979) 2 ALD 634
Re Gray and Australian Securities and Investments Commission
[2004] AATA 1235
(2004) 86 ALD 230
Re Pope and Commissioner of Taxation
[2005] AATA 1085
Ronpibon Tin NL v Federal Commissioner of Taxation
(1949) 78 CLR 47
[1949] HCA 15
Silbermann v One.Tel Ltd (In liq)
(2002) 167 FLR 274
Spriggs v Federal Commissioner of Taxation Riddell v Federal Commissioner of Taxation
[2009] HCA 22
72 ATR 148
2009 ATC 20-109
Steele v Deputy Commissioner of Taxation
(1999) 197 CLR 459
41 ATR 139
99 ATC 4242
Weyers & Anor v Federal Commissioner of Taxation
2006 ATC 4523
(2006) 63 ATR 268
[2006] FCA 818