Commissioner of Taxation of the Cth of Aust v Scully

The Commissioner of Taxation of the Commonwealth of Australia appealed to the High Court of Australia against a decision of the Full Federal Court concerning the deductibility of certain expenses incurred by Mr Scully. The dispute centred on whether these expenses, related to the acquisition of shares in a company that subsequently became insolvent, were deductible under section 8-1 of the *Income Tax Assessment Act 1997* (Cth) as outgoings incurred in gaining or producing assessable income, or alternatively, as losses or outgoings incurred in carrying on a business for the purpose of gaining assessable income.

The High Court was required to determine whether the expenditure incurred by Mr Scully in acquiring shares in a company, which he later claimed as a deduction, constituted a loss or outgoing of a capital, or of a capital, nature. Specifically, the Court had to consider whether the expenditure was incurred in the course of gaining or producing assessable income, or whether it was a loss incurred in carrying on a business for the purpose of gaining assessable income. A further issue was whether the expenditure was of a capital nature, thereby rendering it non-deductible under section 8-1.

The Court, by majority, held that the expenditure was not deductible. The majority reasoned that the acquisition of shares in a company, even for the purpose of gaining assessable income, was an investment of a capital nature. The expenditure was not an outgoing incurred in the course of carrying on a business, but rather an outlay to acquire a capital asset. The Court applied the principles established in cases such as *Sun Newspapers Ltd v Federal Commissioner of Taxation* and *FC of T v Brown*, which distinguish between outgoings on revenue account and outgoings on capital account. The nature of the expenditure, being the acquisition of a shareholding, was found to be capital in nature, and therefore not deductible under section 8-1 of the Act.

The appeal was allowed, and the orders of the Full Federal Court were set aside.