This case summary seeks to give a brief analysis of the case of Ure v Federal Commissioner of Taxation.[1] The summary will entail; the material facts of the case; the legal issues and the challenges that the facts of the case give rise to; the relevant and applicable law that applies to the facts; and the circumstances, the application of the law to the relevant facts and the manner in which the Court resolved the disputes in the case.
Key facts and circumstances of the case
The appellant was an employed solicitor who borrowed three separate loans from different lenders on rates between 7.5% to 10% per annum. Later on, he lent the cash to his wife and the “family company” L S Pty Ltd, which was controlled by him and his wife at 1% per annum. The company used some of the money to offset an existing mortgage of property owned by it. The balance was then forwarded to another family company WPH Pty Ltd which was charged at 10 percent interest of the total and 1 percent per annum of the remainder. WPH Pty Ltd was considered as a trustee and it bought a house and leased it to the appellant and his wife at a nominal rent. This arrangement was justified in that the appellant borrowed money at a higher rate and lent the same money at a lower rate of interest to benefit his wife and the family trust and to also qualify for a tax deduction with regards to the interest he paid and the borrowing expenses such as legal costs.
The issue arose in the income year that ended on 30 June 1976 when the Commissioner of tax in his wisdom, allowed a deduction of $660, which was the interest on the loans he had advanced to his wife and the family company, under sections 55(1) and 67 of the Income Tax Assessment Act[2](the Act) but did not allow the balance of the appellant’s claim for interest and borrowing expenses, which amounted to $8736, citing that they were private expenses. The taxpayer tried to object this decision, but this not allowed, and his appeal was also dismissed by the Supreme Court of New South Wales.Mr. Ure then further appealed to the Federal Court of Australia.
Legal issues
The main legal argument was that the Commissioner, in his assessment, refused full deduction as the appellant expected. His main reason was that the balance was deemed to be expenses of a private nature hence did not qualify for deduction under the Act.
The appellant claimed to be entitled to a deduction of the whole interest and the fees paid in the taxation year. Mr. Ure contended that he was eligible for a deduction of the relevant proportion of valuation fees and legal costs, which he paid as part of the loans. The appellant, therefore, relied on these two provisions for deduction of the amount that he was to pay as taxes.
Relevant law
The main legislation, in this case, was the Income Tax Assessment Act, particularly sections 51(1), 61, and 67.
Ronpibon Tin NL and Tongkah Compound NL v FC of T[3]and Federal Commissioner of Taxation v Darcy Peter Smith[4]are the relevant cases for this summary
Application of the law
According to Deane and Sheppard JJ, section 51(1) of the Act states that deductions are allowable if a taxpayer experiences losses and outgoings in relation to gaining income that is assessable or is incurred while doing business that produces such income other than where such losses are of a private nature. According to the judges, Mr. Ure was not carrying on any business at the time, and the main issue between the parties was the extent to which the respondent allowed the deductions and refused to deduct the rest, which the appellant wanted stating that those were of a private nature. Hence the question before the Court was the extent of the deduction under section 51(1).
Lee J of the Supreme Court of New South Wales agreed with the Commissioner on the refusal of the deduction and stated that the payment of interest was considered to be of private nature and the payment of the guarantee which the appellant tried to rely on was an outgoing of a capital nature hence the Commissioner was fully justified to refuse the deductions. Therefore, according to the Honourable Judge, the only deduction that was allowed under section 51(1) was the total interest that he was paid from his wife and the family company as he received this from re-lending the money that he borrowed from the three lenders. The judge also held that the taxpayer could not enjoy a deduction under section 67 of the Act.
The appellant tried to rely on the fact that he re-lent the money at a lower rate of interest than the rate at which he had borrowed. However, the learned judge opined that this did not necessarily mean that the liability to pay the interest could not be seen as being incurred wholly in earning the income that was assessable and was neither of a private or domestic nature. This meant that the interest that the appellant earned from re-lending the money was subject to assessable income and, therefore, could not be deducted under the provisions of the Act.
Another question that the Court addressed was whether, for purposes of section 51(1), the liability to pay interest on money that was borrowed wasan outgoing wholly incurred in earning the income that is assessable which was not considered of a private nature regardless of the fact that the taxpayer received assessable income from re-lending money at a lower rate than that which he had borrowed. The Court relied on the case of Ronpibon Tin NL and TongkahCompund NL v Federal Commissioner of Taxation[5]where the High Court of Australia clarified on what the words “incurred in gaining or producing the assessable income” meantwith regards to section 51(1) of the Act. The Court stated that for an expense to qualify as a deduction, which is allowed as an outgoing incurred in gaining or producing the assessable income, it must be related and pertinent as such. The same reasoning was stated in the FederalCommissioner of Taxation v Darcy Peter Smith[6] case.
The Court in the case at hand relied on the decision of Ronpinbon and partly sided with Lee J of the Supreme Court, who held that what the taxpayer received from lending the loans could not be considered to be of a private nature. However, the balance of the interest that was payable by the appellant was deemed to be private. The judges in the present case decided not to interfere with this approach, and they concluded that the balance of the interest paid by the appellant was not acquired in earning assessable income and was of a domestic nature.
In deciding whether the appellant could rely on section 67 for a deduction, the Court held that the taxpayer was eligible for a higher deduction than $660. They stated that the appellant succeeded in proving that the respondent Commissioner’s assessment was excessive. The Court, therefore, gave judgment in favour of the appellant and consequently set aside the Supreme Court’s order. The Commissioner was ordered to amend the assessment and allow a deduction pursuant to section 67(1) of the Act.
Resolution Pathway
The Court resolved the dispute according to the law and interpretation of the relevant sections from various previous decisions by courts of the same nature. The ATO, however, disagreed with this decision and stated that expenditure of a private nature is not deductible under the Act and especially when it is not incurred in the course of earning assessable income.[7]
In my opinion, the Court made a wrong decision and could have upheld the finding of the Supreme Court of New South Wales. Based on the explanation and analysis of Lee J, the appellant’s expenditure was of a private nature because he re-lent the money to his wife and two companies. This could have been a tactic to gain an allowable deduction under the law, which is clearly tax evasion. If the courts allow these kinds of deductions, then people will start taking loans at the lender’s interests and later re-lend the money at lower interests for their own gain and to evade tax in the name of deductions[8]. It would be a common occurrence, and the courts will have already set precedents; therefore, it will be a challenge to reverse when the problem is discovered. Therefore, the appellant would have been ordered to pay tax upon the income that he received from re-lending the money.
References
Income Tax Assessment Act 1936
Ronpibon Tin NL and Tongkah Compound NL v FC of T(1949)78 CLR 47
Federal Commissioner of Taxation v Darcy Peter Smith(1981) ATC 4114
https://www.ato.gov.au/law/view/document?docid=ITR/IT2504/NAT/ATO/00001
Robin, W., Stephen, B., Shirley, M., Chris, E., Dale, P. Australian Taxation Law, 2020, 30th ed.
[1](1981) 34 ALR 237
[2]1936
[3](1949) 78 CLR 47
[4](1981) ATC 4114
[5](1949) 78 CLR 47
[6](1981) ATC 4114.
[7]https://www.ato.gov.au/law/view/document?docid=ITR/IT2504/NAT/ATO/00001
[8]Robin, W., Stephen, B., Shirley, M., Chris, E., Dale, P. Australian Taxation Law 2020 30th ed.
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