Bank of New South Wales v Federal Commissioner of Taxation

The Bank of New South Wales (the taxpayer) appealed to the High Court of Australia against a decision of the Federal Commissioner of Taxation (the Commissioner) concerning the deductibility of certain expenses. The dispute centred on whether the taxpayer was entitled to deduct, for income tax purposes, interest paid on money borrowed to acquire shares in a company that was not itself carrying on a business.

The primary legal issue before the High Court was whether the interest expenses incurred by the Bank of New South Wales were deductible under section 82(1) of the *Income Tax Assessment Act 1936* (Cth) (the Act). This required the Court to determine whether the borrowed money was used for the purpose of producing assessable income, or for the purpose of gaining or producing assessable income, within the meaning of that provision, given that the shares acquired did not themselves generate assessable income but were held as an investment.

The Court, by majority, held that the interest was not deductible. The majority reasoned that the purpose for which the borrowed funds were used was to acquire shares, and the income derived from those shares was dividends. However, the Act required the expenditure to be incurred in gaining or producing assessable income, or in carrying on a business for the purpose of gaining or producing assessable income. The acquisition of shares, in this context, was seen as an application of capital, not an expenditure incurred in the process of producing income. The fact that the shares were intended to produce dividends did not, in itself, make the cost of acquiring them, or the interest on money borrowed for that acquisition, an allowable deduction.

The appeal was dismissed.