Tuesday, March 5, 2019
Case Note on Fletcher Essay
The facts of this case were that the taxpayer (and three others in partnership) entered a interlocking scheme, which involved the partnership, and annuity and loan arrangements. The scheme was financed through a serial of round robin cheques and promised substantial discount rates in the first tail fin days of the 15-year political platform. A number of documents were exchanged but no cash payments were do. This was reckon to return neutral cash flows with heights tax deductions initi eachy and high assessable income, especially in the last five years. A consume of the scheme was that there was an opportunity to terminate it in the last five years. In the relevant year the partnership derived assessable income of $170,000 and claimed deductions of $360,000.The issue ahead the court was whether the taxpayers were entitled to a deduction for spare-time activity. A lot of matters were argued onward the case reached the High motor hotel but before the Full Court the Commiss ioners contention was that the interest deduction should apportioned and disallowed under s 51(1) to the extent that it conked the partnership income.Their Honours indicated that if a taxpayers costs in deriving income were less than the actual income, the deductions would be allowable. However, if the costs exceed the income derived, the taxpayers shoot for for making the expenditure may be relevant in characterizing and apportioning the expenditure for the purpose of the general deduction provision. This may embarrass the taxpayers purpose for incurring the expenditure. Manson CJ, Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ said (at ATR 622-3) The position may, however, well be different in the case where no relevant assessable income endure be identified or where the relevant assessable income is less than the keep down of the outgoingthe disproportion between outgoing and income, the whole outgoing is properly to be characterized as genuinely and not colourably in curred in gaining or producing assessable income, the correct outgoing leave alone fall within the first limb of s 51(1) unless it is somehow excluded by the exception of.Their Honours concluded that the issue of whether the taxpayers interest deduction would be allowable depended on the determination of whether the 15-year annuity plan would in fact runs its full course. The matter wasremitted to the Administrative Appeals Tribunal to determine, as a matter of fact, whether the scheme would run its full 15 years or whether it would be terminated before the last five years. In the former situation, the assessable income would exceed deductions and the interest would be an allowable deduction under s 51(1). In the latter situation, an interpretation must be sought for the excess of deductions of some $2.7m over assessable income and to the extent that the explanation lay in substantial tax advantages, the outlays were not incurred in gaining assessable income. On the issue of whos e purpose must be considered, the court made the following comments In the circumstances of the present case, its determination involves consideration not only of the purposes of the taxpayers but also of the purposes of those who advised them and acted on their behalf and whose acts (and intentions) as agents must, as the Second Tribunal expressly pointed out, be imputed to the principals.Reduced to its essential elements, if income exceeds outgoings, the taxpayers motives are largely irrelevant. If there is no assessable income or outgoings exceed income, a practical and common sense weighing up of all factors is warranted, including the taxpayers motive. As was anticipated in Phillips case, a inequality between outlay and income may trigger a more unmitigated examination of a contract or arrangement. As was suggested in Ures case, the absence of a commercial quid pro quo will raising questions about the purpose of the expenditure. Where there is a dual purpose, or a purpose ot her than income production, expenditure is to be apportioned and there will be circumstances where purpose may mean subjective purpose or motive.