Commissioner of Taxation of the Commonwealth v McDermott Industries (Aust) Pty Ltd

The Commissioner of Taxation of the Commonwealth (the Commissioner) appealed to the High Court of Australia against a decision of the Full Federal Court concerning the deductibility of certain payments made by McDermott Industries (Aust) Pty Ltd (McDermott) to its parent company, McDermott International Inc. The dispute centred on whether these payments, described as "management fees" and "royalties," were incurred by McDermott in gaining or producing its assessable income, or were otherwise necessarily incurred in carrying on a business for the purpose of gaining or producing its assessable income, within the meaning of s 8-1 of the *Income Tax Assessment Act 1997* (Cth).

The High Court was required to determine whether the Full Federal Court had erred in finding that the management fees and royalties paid by McDermott to its parent company were deductible. Specifically, the court had to consider whether the payments were genuinely incurred by McDermott for the purpose of its business operations, or if they were merely distributions of profit or otherwise not deductible under the general deduction provision. The central question was whether the Commissioner had discharged the onus of proof, which lay upon him to demonstrate that the payments were not deductible.

In their joint judgment, Hayne and Heydon JJ allowed the Commissioner's appeal. Their Honours found that the Full Federal Court had erred in its application of the principles governing deductibility under s 8-1. The High Court held that the Commissioner had discharged the onus of proof by demonstrating that the payments were not necessarily incurred in carrying on McDermott's business. The payments were characterised as being for the benefit of the global McDermott group rather than being incurred by McDermott for its own purposes. The court emphasised that the character of the expenditure must be determined by reference to the taxpayer's own business and its purpose, not the purposes of a related entity. The High Court therefore overturned the decision of the Full Federal Court.