Federal Commissioner of Taxation v Faichney

The Federal Commissioner of Taxation (the Commissioner) appealed to the High Court of Australia against a decision of the Supreme Court of New South Wales concerning the deductibility of certain expenses incurred by Mr. Faichney. The dispute centred on whether these expenses, incurred in relation to the acquisition and disposal of shares in a company, were of a capital nature and therefore not deductible under the income tax legislation.

The High Court was required to determine whether the expenses associated with the acquisition and disposal of shares in a company, which were part of a larger scheme to acquire and operate a business, were deductible as outgoings incurred in gaining or producing assessable income, or whether they were of a capital nature and thus non-deductible. Specifically, the court had to consider the application of section 26(a) of the Income Tax Assessment Act 1936 (Cth) (as it then stood) and the general principles governing the distinction between capital and revenue outgoings.

Mason J, applying established principles, reasoned that the expenses were incurred in the course of establishing or acquiring a business structure, rather than in the carrying on of that business. The acquisition and disposal of shares were integral to the overall scheme of setting up the business, and therefore the associated costs were capital in nature. His Honour distinguished between expenditure incurred in the process of setting up a business and expenditure incurred in the day-to-day operation of an established business, finding that the former is generally of a capital nature.

The appeal was allowed, and the decision of the Supreme Court of New South Wales was set aside.