Commissioner Of Taxation v Australian Building Systems Pty Ltd ACN 094 238 678 (In LIQUIDATION)

The Commissioner of Taxation (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 Australian Building Systems Pty Ltd (in liquidation) (ABS). The dispute centred on whether payments made by ABS to its parent company, a non-resident entity, were deductible as business expenses under section 8-1 of the *Income Tax Assessment Act 1997* (Cth). The Full Federal Court had found in favour of ABS, overturning a decision of a single judge of the Federal Court.

The High Court was required to determine whether the payments made by ABS to its parent company were incurred in gaining or producing assessable income, or were necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. Specifically, the court had to consider whether the payments were of a capital, or of a capital, nature, or were for the purpose of gaining or producing exempt income, which would render them non-deductible under section 8-1. The central question was whether the payments represented a genuine commercial transaction for services rendered or were instead a distribution of profits or a capital contribution disguised as a deductible expense.

Kiefel and Keane JJ found that the payments were not deductible. Their Honours reasoned that the payments were not made for services rendered by the parent company, but rather represented a distribution of profits by ABS to its parent. The court applied the principles established in cases such as *Sun Newspapers Ltd v Federal Commissioner of Taxation* and *Amalgamated Zinc (Australia) Ltd v Federal Commissioner of Taxation*, which distinguish between expenses incurred in the process of producing income and those that are part of the structure of the business or relate to the profit-earning apparatus. The payments were found to be of a capital nature, as they related to the funding of the parent company's operations and were not incurred in the day-to-day carrying on of ABS's business.

The appeal was allowed, and the orders of the Full Federal Court were set aside. The court remitted the matter to the Federal Court for determination of the quantum of tax payable by ABS.