Commissioner of Taxation v Linter Textiles Australia Ltd (In Liq)

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 Linter Textiles Australia Ltd (in liquidation) (Linter). The dispute centred on whether payments made by Linter to its holding company, Linter Holdings Pty Ltd, constituted dividends or loans, and consequently, whether they were deductible for income tax purposes.

The High Court was required to determine whether the payments made by Linter to Linter Holdings were properly characterised as dividends, which would render them non-deductible, or as loans, which might have allowed for a deduction under the relevant provisions of the *Income Tax Assessment Act 1936* (Cth). A key issue was the application of section 46 of the *Income Tax Assessment Act 1936* (Cth) and the principles of dividend stripping in the context of these transactions.

McHugh and Gummow JJ held that the payments were dividends and not loans. Their Honours reasoned that the transactions, viewed as a whole, were designed to strip profits from Linter without a genuine intention to repay the funds. They applied the principle that the character of a transaction is determined by its substance rather than its form, and that the Commissioner was entitled to look beyond the labels used by the parties to ascertain the true nature of the payments. The court found that the payments were made out of profits and were intended to be retained by the holding company, thus falling within the definition of dividends for the purposes of dividend stripping.

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