Federal Commissioner of Taxation v Ilbery

[1981] FCA 215

Re: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
And: JONATHAN RICHARD ILBERY (1981) 58 FLR 191
No. G.21 of 1981
Income Tax (Commonwealth)

COURT

IN THE FEDERAL COURT OF AUSTRALIA

WESTERN AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
Northrop(1), Toohey(2) and Sheppard(1) JJ.

CATCHWORDS

Income Tax (Commonwealth) - deductions - outgoings incurred in gaining assessable income - arrangement by taxpayer to borrow money for avowed intention of reducing liability for tax - arrangement involving prepayment of interest - whether prepayment constitutes allowable deduction - applicability of s.260 Income Tax Assessment Act 1936 - applicability of principles in W. T. Ramsay Ltd. v. Inland Revenue Commissioners (1981) 2 W.L.R. 449 (H.L.).

Income Tax Assessment Act 1936 ss.51(1), 260

Income Tax - Allowable deductions - Arrangement to borrow money - Prepayment of five years' interest - Whether prepaid interest allowable deduction - Whether s. 260 of Income Tax Assessment Act 1936 applicable - Income Tax Assessment Act 1936 (Cth), ss. 51 (1), 260.

HEADNOTE

The taxpayer borrowed $20,000 from an independent finance company at fourteen per cent per annum. He exercised his option under the loan agreement to pay five years' interest, namely $14,000, in advance. Pursuant to the agreement, the interest on the loan thereafter became four per cent per annum. The taxpayer borrowed the necessary $14,000 from a bank. After the prepayment of interest, the finance company assigned its interest in the $20,000 loan for $6,140 to a company associated with the taxpayer and his wife. The taxpayer subsequently used the borrowed $20,000 to pay for most of a house he intended to rent out. The taxpayer's purpose in making the $14,000 prepayment was to obtain a tax deduction for that sum. The taxpayer claimed the $14,000 as a deduction under s. 51 (1) of the Income Tax Assessment Act 1936. He also claimed seventy dollars borrowing expenses. The Commissioner disallowed the claims, the taxpayer successfully appealed to the Supreme Court of Western Australia, and the Commissioner appealed.

Held: Appeal allowed - (1) The taxpayer's purpose in paying the $14,000 was not to acquire property from which to derive income; it was to derive a tax advantage. Therefore, even though the expenditure was incurred, it did not fall within the terms of s. 51 (1).

(2) If s. 51 (1) were applicable, then s. 260 could not be employed to defeat the deduction.

W. T. Ramsay Ltd. v. Inland Revenue Commissioners,(1981) 2 WLR 449, and its application in Australia to nullify an arrangement, discussed.

HEARING

Perth, 1981, September 15-16; November 25. #DATE 25:11:1981

APPEAL.

Appeal from the decision of Smith J. of the Supreme Court of Western Australia allowing the taxpayer's appeal against the disallowance by the Commissioner of his objection to an assessment in respect of the year of income ended 30th June, 1977.

L. J. Priestly Q.C. and S.W. O'Sullivan, for the appellant.

S. E. K. Hulme Q.C. and A. J. Myers, for the respondent.

Cur. adv. vult.

Solicitor for the appellant: B. J. O'Donovan, Commonwealth Crown Solicitor.

Solicitors for the respondent: Jackson McDonald & Co.

J. H. TELFER

ORDER

1. Appeal allowed.

2. The order of the Supreme Court of Western Australia be set aside and in lieu thereof order that the assessment be confirmed.

3. The respondent pay the appellant's costs of the appeal and of the proceedings in the Supreme Court.

4. Liberty to the respondent to apply within 21 days to vary the terms of paragraph 3.

5. Liberty to respondent to apply under the Suitors Fund Act 1964 of Western Australia.

JUDGE1

We agree that this appeal should be allowed. We do so for the reasons given by Toohey J. with which we are in complete agreement. For ourselves we wish to say something concerning s.260 of the Income Tax Assessment Act 1936 and the decision of the House of Lords in W. T. Ramsay Limited v. Inland Revenue Commissioners (1981) 2 W.L.R. 449.

If, contrary to the conclusion at which Toohey J. has arrived, the view had been formed that the relevant expenditure was incurred in gaining or producing the taxpayer's assessable income, it would have been necessary to consider whether the taxpayer should nevertheless fail because of the operation of s.260. We agree with Toohey J. in thinking that the section could have had no application to this case because the expenditure would, contrary to the position as we in fact see it, have been incurred in gaining or producing assessable income. Considerations mentioned in Cecil Bros. Pty. Limited v. Federal Commissioner of Taxation (1964) 111 C.L.R. 430, if not the decision itself, would have militated against the section being afforded any operation.

That would have left for consideration the Commissioner's submission based on Ramsay's case. In that case Lord Wilberforce, after referring to the submission of the Commissioners that the schemes in question should be treated as fiscally, a nullity, not producing either a gain or a loss, restated a number of fundamental principles relating to motive and to shams. His Lordship made reference to Inland Revenue Commissioners v. Duke of Westminister (1936) A.C. 1 ((1981) 2 W.L.R. at pp.456-457). After further discussion his Lordship said (p.459):

"I have a full respect for the principles which have been stated but I do not consider that they should exclude the approach for which the Crown contends. That does not introduce a new principle: it would be to apply to new and sophisticated legal devices the undoubted power and duty of the courts to determine their nature in law and to relate them to existing legislation. While the techniques of tax avoidance progress and are technically improved, the courts are not obliged to stand still. Such immobility must result either in loss of tax, to the prejudice of other taxpayers, or to Parliamentary congestion or (most likely) to both. To force the courts to adopt, in relation to closely integrated situations, a step by step, dissecting, approach which the parties themselves may have negated, would be a denial rather than an affirmation of the true judicial process. In each case the facts must be established, and a legal analysis made: legislation cannot be required or even be desirable to enable the courts to arrive at a conclusion which corresponds with the parties' own intentions."

To a similar effect are the views of Lord Fraser. His Lordship referred to the detail of the schemes there in question and continued (p.471):

"Counsel for the taxpayer naturally pressed upon us the view that if we were to refuse to have regard to the disposals which took place in the course of these schemes, we would be departing from a long line of authorities which required the courts to regard the legal form and nature of transactions that have been carried out. My Lords, I do not believe that we would be doing any such thing. I am not suggesting that the legal form of any transaction should be disregarded in favour of its supposed substance. Nothing that I have said is in any way inconsistent with the decision in Inland Revenue Commissioners v. Duke of Westminster (1936) A.C. 1 where there was only one transaction - the grant of an annuity - and there was no question of its having formed part of any larger scheme. The view that I take of this appeal is entirely consistent with the decision in Chinn v. Hochstrasser (1981) 2 W.L.R. 14, and it could in my opinion have been the ground of decision in Floor v. Davis (1980) A.C. 695 in accordance with the dissenting opinion of Eveleigh L.J. in the Court of Appeal (1978) Ch. 295, 312, with which I respectfully agree. In that case the taxpayer wished to dispose of shares in a company to an American company called KDI at a price which would have produced a large chargeable gain. In order to avoid the liability to capital gains tax he adopted a scheme which involved the incorporation of another company, FNW, to which he transferred his shares in order that they could subsequently be transferred to (sic) FNW to KDI."

His Lordship went on to quote from the judgment of Eveleigh L.J. in Floor v. Davis (1978) Ch.295 at p.313.

The speeches of Lord Wilberforce and Lord Fraser were agreed in by Lord Russell of Killowen (p.471) and Lord Roskill (p.472). Lord Bridge agreed in the speech of Lord Wilberforce (p.472).

It is our opinion that what their Lordships have said is as apt for the Australian legislation as it is for that in force in the United Kingdom. It follows that if, contrary to our opinion, the expenditure was incurred in gaining or producing assessable income, the arrangement pursuant to which it was incurred should be treated as fiscally a nullity, and thus not resulting in an expenditure incurred in gaining or producing the taxpayer's assessable income. We make it clear that what we have said is said in the context of a factual situation such as arises for consideration in this case. We do not intend it to apply otherwise than to cases of this or the Ramsay kind where there are, in the words of Lord Wilberforce, "closely integrated situations". We express no opinion as to whether the principles expounded in Ramsay's case may have some wider application.

We also make it clear that the legislation with which we have been concerned is that in force at the time of the transactions here in question. We have not considered what effect, if any, the provisions of Part IV A of the Act may have upon the application of Ramsay's case in Australia. Part IV A of the Act was inserted by Act No. 110 of 1981 which came into force on 24 June 1981. It applies to schemes (as therein defined) which have been or are entered into after 27 May 1981. It could be that a full consideration of its provisions would lead to the conclusion that in relation to such schemes there is no room in Australia for the operation of the doctrine espoused in Ramsay's case. That is a matter upon which we express no opinion.

For the reasons we have given, we are of the opinion that the appeal should be allowed.

JUDGE2

This appeal arises from an arrangement made by the taxpayer with the avowed intention of reducing his liability for income tax during the year ended 30 June 1977 by increasing his allowable deductions for that year.

The taxpayer, who is a junior partner in a firm of Perth solicitors, was told that his firm was unable to offer an adequate system of superannuation for its members and that he should consider acquiring income-producing assets which would in future years provide an income to supplement his superannuation or give him the benefit of capital appreciation. The taxpayer did not have enough money of his own to put this advice into effect. He may have been able to borrow money at standard rates and on standard terms from his bank, the ANZ Bank, but he was attracted to the money lending operations of Jas Curzon Pty. Ltd. ("Curzon"). This company was prepared to lend money unsecured, at a rate of 14% per annum repayable at the end of 30 years It was also prepared to offer a borrower a number of options whereby, on payment of interest in advance, there would be a substantial reduction in the interest rate for the balance of the term of the loan. To take an example, being the option selected by the taxpayer, if within 24 hours of the signing of the loan agreement the borrower paid to the lender 5 years interest in advance at the rate of 14%, interest for the balance of the term became payable at the rate of 4%

The advantage of this option, as seen by the taxpayer, was that if the prepayment of interest constituted an allowable deduction under s.51 of the Income Tax Assessment Act 1936, it would effect a dramatic reduction in his assessable income for the year under consideration. Correspondingly there would for the balance of the 5 year be no interest payments to be claimed as a deduction and thereafter interest only at the rate of 4%. But those prospects did not dissuade the taxpayer.

The steps taken by the taxpayer to bring about this result are detailed in the reasons for decision of the learned trial judge. In summary this is what happened. About May 1977 the taxpayer entered into negotiations for the purchase of a property in Galway Street, Leederville. On 21 June 1977 he made formal application to Curzon for an unsecured loan of $20,000, repayable at the expiration of 30 years with interest at the rate of 14%. Before submitting that application, the taxpayer arranged to borrow from the ANZ Bank on overdraft at normal commercial rates the sum of $14,000, being the amount he would need to make a prepayment of interest for the first 5 years of the loan. On 22 June he executed a loan agreement which in turn was executed on behalf of Curzon whose representative then handed to the taxpayer a cheque for $20,000. Immediately thereafter the taxpayer handed to Curzon a bank cheque for $14,000 in exercise of the option to prepay interest for a period of five years. In exercise of a right not an obligation contained in the loan agreement, Curzon then executed a deed whereby the loan was assigned to Futuro Pty. Ltd., a company of which the taxpayer and his wife were directors and shareholders. The consideration for that assignment was the sum of $6,140, which amount Futuro borrowed from the ANZ Bank under an arrangement guaranteed by the taxpayer. While Curzon was not bound to assign the debt to Futuro, it was the common understanding of all concerned that this would happen.

The following day, 23 June, the taxpayer deposited the loan of $20,000 in an interest bearing account with the Perth Building Society. On 25 June he entered into an agreement for the purchase of the property at Galway Street for $23,000. Payment of that purchase price was effected by the sum of $20,000 deposited with the Perth Building Society with accrued interest; the balance was largely provided under a loan arrangement with Esanda Ltd.

In his income tax return for the year ended 30 June 1977 the taxpayer returned as income interest from the Perth Building Society account and a small amount of rent received from the property. He claimed as deductions the interest of $14,000 paid to Curzon and an amount of $70 comprised of $25 stamp duty on the loan agreement and $45 stamp duty on the loan agreement with Esanda.

At the end of the day, so to speak, the taxpayer had received from Curzon the sum of $20,000 and had paid to Curzon $14,000 as prepayment of interest. Futuro had paid to Curzon $6,140. Curzon appears to have been better off as a result of the transaction to the extent of $140. It was said that the amount of $6,140 paid by Futuro to Curzon was the product of an actuarial calculation. That may well be although the workings which produced that figure were not disclosed. On the other hand it might be thought that Curzon had received an amount equal to 1% of the interest prepaid as a fee for the service provided. The point was not explored before this court and does not appear to have been explored in the Supreme Court. Counsel did not seek to make anything of it.

The taxpayer remained liable to the ANZ Bank for the $14,000 borrowed and became liable to pay to his family company, Futuro, the sum of $20,000 at the end of 30 years, with interest payable after the first five years of the loan. Futuro had borrowed $6,140 from the ANZ Bank but thereafter became a creditor of the taxpayer in respect of the loan originally obtained from Curzon. The taxpayer had $20,000 available for investment.

The relative position of the parties, before and after the series of transactions, is of some importance because of a submission put to this court on behalf of the Commissioner. It was an argument that while the steps taken by the parties were not a sham, in the sense that they were of no legal effect or of a legal effect different from that contained in the documents, in the end the taxpayer was in no different position than he would have been if he had borrowed money from his bank and had never entered into an arrangement with Curzon. As will appear, I am of the view that the appeal should be upheld without relying upon this submission.

The Commissioner disallowed the claim for interest paid to Curzon and also disallowed the stamp duty charges. The taxpayer objected to that disallowance; his objection was disallowed; he appealed to the Supreme Court which upheld his appeal. The Commissioner challenges that decision.

The learned trial judge accepted three propositions put to him on behalf of the taxpayer

1. Interest on monies which are borrowed for the purpose of acquiring an income-producing asset is deductible under s.51(1).

2. A payment made in a relevant year of income for the purpose of reducing payments which would otherwise have to be made in later years of income, where those payments themselves would be deductible, is deductible in the year of payment.

3. A payment made in the relevant year of income for the purpose of reducing payments which would otherwise have to be made in later years of income is deductible in the year of payment notwithstanding that the payment is made voluntarily.

His Honour's conclusion was "that the sum of $14,000.00 paid on the 22nd June 1977 by the appellant to Jas Curzon Pty. Ltd. by way of interest is within the category of outgoings incurred by the appellant in gaining or producing his assessable income and that such sum is deductible pursuant to s.51(1)". His Honour rejected the Commissioner's submission that s.260 of the Income Tax Assessment Act applied to the transaction between the taxpayer and Curzon. He therefore upheld the appeal in respect of the $14,000 and, on the basis that no different issues were raised regarding the $70 paid in connection with the loans from Curzon and Esanda, ordered the Commissioner to amend the taxpayer's assessment by allowing a deduction in the sum of $14,070.

Counsel for the Commissioner, in opening his address, said:

" . . . the question in the present appeal, broadly stated, is whether what the taxpayer claims happened pursuant to the act and in particular section 51 of the act, did happen under the act or whether section 51 has a different operation and one less favourable to the taxpayer".

Although counsel formulated their submissions along rather different lines, each took as his starting point the language of s.51 and it is to that section I now turn.

Section 51 identifies as allowable deductions

(i) all losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income or

(ii) are necessarily incurred in carrying on a business for the purpose of gaining or producing such income

(iii) except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income.

There are two matters arising under s.51 that should be mentioned now in order to dispose of them. It was suggested that the words "for the purpose" qualify both limbs of the section. But language and syntax are against such a construction. The opening formulation of the section is disjunctive and the reference to "purpose" is in relation to the immediately preceding words. That is not to say that purpose may not be relevant in considering whether losses or outgoings "are incurred in gaining or producing the assessable income"; it is simply to say that as a matter of language the express reference to "purpose" in s.51 is only in relation to the carrying on of a business.

The second matter concerns that very aspect of carrying on a business. Quite late in his address, Mr Hulme, Q.C., counsel for the taxpayer, said that his client relied upon both limbs of s.51. It is clear from the judgment of the learned trial judge that in the Supreme Court it was not argued that the taxpayer was carrying on a business. It is equally clear that the taxpayer put his case within the first limb of s.51 only, submitting that the prepayment of interest was an outgoing incurred in gaining or producing the assessable income. In my view the taxpayer should not be heard now to contend that he was carrying on a business, at least not without seeking leave to do so and the Commissioner being given an opportunity to address the court on that application. No such application was made. In any event it is clear enough that the taxpayer was not at the time of the prepayment carrying on any business with which the payment was connected. Even if the purchase of the property in Galway Street be regarded as part of a business of renting properties (which is debatable since there was no mention of any similar activity by the taxpayer), that business had not begun at the relevant time, that is when the prepayment of interest was made.

The argument reduces itself to these questions, at least so far as s.51 is concerned. 1. Was the prepayment of interest an outgoing? 2. Was it incurred? 3. Was it incurred in gaining or producing the assessable income? 4. Was it an outgoing of a capital nature?

The expression "outgoings" is not a term of art. It may be artificial to divorce it from the other components of s.51, in particular the reference to "incurred". But in that it suggests something paid out, something that has left the hands of the taxpayer, it is not in issue that the prepayment of interest was an outgoing.

Likewise it was not disputed that the prepayment was an outgoing incurred. The meaning of "incurred" has been considered in a number of authorities, mainly concerned with the need to find an actual disbursement. It is only necessary to mention the dictum of Latham C.J. in Emu Bay Railway Co. Ltd. v. Federal Commissioner of Taxation (1944) 71 CLR 596 at p.606.

"The words 'outgoings incurred' should not be limited to expenditure actually made. They include a liability presently incurred and due though not yet discharged . . . the possibility of a liability accruing in the future . . . cannot be regarded as an outgoing within the meaning of s.51 of the Income Tax Assessment Act. Not only has no outgoing been made, but no liability to make an outgoing has come into existence".

The dictum takes for granted that expenditure actually made is an outgoing incurred, as do dicta in a number of other cases. And the prepayment of interest was an outgoing incurred in the relevant tax year.

The primary issue in the present appeal is whether the prepayment of interest was incurred in gaining or producing the assessable income. If it was not, that is the end of the matter. If it was, a further question arises - was it an outgoing of a capital nature? If so, it is not allowable as a deduction under s.51. If the prepayment meets the requirements of the section, there remains the applicability and implications of s.260.

The predecessor of s.51 was s.23(1)(a) of the Income Tax Assessment Act 1922. Speaking of the earlier provision Dixon J. (as he then was) said :

"The expression 'in gaining or producing' has the force of 'in the course of gaining or producing' and looks rather to the scope of the operations or activities and the relevance thereto of the expenditure than to purpose in itself" (Amalgamated Zinc (de Bavay's) Ltd. v. Federal Commissioner of Taxation (1935) 54 C.L.R. 295 at p.309).

Two years later, speaking again of the same provision, the same judge commented:

"It does not require that the purpose of the expenditure shall be the gaining or production of the income of that year. The condition the provision expresses is satisfied if the expenditure was made in the given year or accounting period and is incidental and relevant to the operations or activities regularly carried on for the production of income." (W. Nevill and Co. Ltd. v. Federal Commissioner of Taxation (1936-1937) 56 C.L.R. 290 at p.305).

But the 1922 Act contained s.25(e) which precluded a deduction in the case of "money not wholly and exclusively laid out or expended for the production of assessable income" (emphasis added). And the passage quoted above from Amalgamated Zinc continues:

"Purpose in itself may be the criterion expressed by the word 'for' which occurs in the correlative prohibition contained in sec. 25(e)."

As Brennan J. noted in a review of the legislative and judicial history of s.51:

"But when sec. 51 was introduced in 1936, 'the principle expressed by the former sec. 25(e) (was) abandoned' (Ronpibon Tin, supra, at p.55), and it became necessary to consider, according to the circumstances of each case, whether and to what extent reference to purpose is required or appropriate to determine deductibility under the first limb of sec. 51(1)" (Magna Alloys & Research Pty. Ltd. v. Federal Commissioner of Taxation (1980) 80 ATC 4, 542 at p. 4, 547).

When the High Court in Ronpibon Tin N.L. v. Federal Commissioner of Taxation (1949) 78 CLR 47 said at p.56 :

"For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to that end"

that was not to exclude the notion of purpose. As Brennan J. pointed out in Magna Alloys at p.4, 547 :

"Though purpose is not the test of deductibility nor even a conception relevant to a loss involuntarily incurred, in cases where a connection between an outgoing and the taxpayer's undertaking or business is affected by the voluntary act of the taxpayer, the purpose of incurring that expenditure may constitute an element of its essential character, stamping it as expenditure of a business or income-earning kind". (at p.4, 547).

Conversely, I would add, purpose may stamp the outgoing as one having no relevant connection with the gaining or producing of assessable income.

Ure v. Federal Commissioner of Taxation (1981) 81 ATC 4,100 concerned an employed solicitor who borrowed moneys at commercial rates of interest and on-lent them at 1% interest to his wife or to a family company wholly owned and controlled by the taxpayer and his wife. The Federal Court (Brennan, Deane and Sheppard JJ.) upheld the Commissioner's assessment which allowed the taxpayer no more than a deduction equivalent to the amount of interest received by him on the moneys lent to his wife and family company. In the course of his reasons, Brennan J. commented :

"An outgoing of interest may be incidental and relevant to the gaining of assessable income where the borrowed money is laid out for the purpose of gaining that income (F.C. of T. v. Munro (1962) 38 CLR 153 at pp. 170, 171, 197; Texas Co. (Australasia) Ltd. v. F.C. of T. (1940) 63 CLR 382 at p.468). The laying out of the borrowed money for the purpose of gaining assessable income furnishes the required connection between the interest paid upon it by the taxpayer and the income derived by him from its use" (at p.4, 104).

His Honour was concerned to examine the purpose for which the money was laid out by the taxpayer, concluding that it was laid out in part for the gaining of assessable income and in part for other purposes; hence an apportionment was necessary.

In a joint judgment Deane and Sheppard JJ. considered that it would be "a misleading half-truth" to say that the object which the taxpayer had in mind was the derivation of interest at the rate of 1% by re-lending the money which he borrowed. In their words :

"That was, no doubt, an object which the taxpayer had in mind: it was an advantage which he sought. In the circumstances however, characterization of the outgoing cannot properly be effected by reference to that object or advantage alone. The incurring of the outgoing can only be explained by reference also to less direct objects and advantages which the taxpayer sought to achieve and which plainly were of paramount importance. These indirect objects or advantages were, in so far as the taxpayer was concerned, not of an income-earning character in that they involved the provision of accommodation for the taxpayer and his family, the financial benefit of the taxpayer's wife and a family trust and a reduction in the taxpayer's personal liability to pay income tax" (at p.4, 110).

Deane and Sheppard JJ. joined with Brennan J. in allowing the taxpayer a deduction no greater than that referable to the 1% interest he received.

In the present appeal counsel for taxpayer stressed that there was a business reason for paying the interest early viz. " . . . it cuts down the rate of interest by $2,000 a year for 25 years. The payment of that $14,000 not only achieved the discharge of liabilities to $14,000 over the first five years but paid when it was reduced the future interest bill by $50,000" (transcript pp.146-147).

That may well have been a consequence of the prepayment of interest but it was not suggested by the taxpayer as his reason for doing so nor as the purpose sought to be achieved; nor in my view does it say anything about the character of the payment. The taxpayer never tried to conceal that his object in paying five year's interest in one year was to obtain the tax advantages thought to flow from that course. To the extent then that purpose is relevant to throw light upon the character of a payment, no purpose can be discerned here other than that of gaining a tax advantage.

It is, I think, necessary to distinguish between the prepayment of interest in the present case and the character that payment would have if spread over a number of years as interest on money borrowed for the purpose of purchasing a property as a source of income. The character of one does not necessarily determine that of the other. The Commissioner did not contest the proposition that so long as the Galway Street property was held for an income-producing purpose, interest paid on a loan to acquire that property was deductible under s.51. But if, for instance, the taxpayer decided in later years to occupy the property himself, payments of interest made thereafter would not be deductible. Whether some apportionment would be required in respect of the first year of personal occupation is a matter that does not have to be resolved.

While it may not be for the Commissioner to tell a taxpayer how much he should spend on outgoings in the course of gaining an assessable income or whether he should incur those outgoings in one or more than one tax years, a question may still arise whether in respect of a particular year an outgoing incurred by a taxpayer can truly be said to have been incurred in gaining or producing the assessable income.

In my view the second of the three propositions accepted by the learned trial judge and referred to earlier in these reasons needs qualification. It should read that a payment made in the circumstances there mentioned may be deductible in the year of payment, not is deductible. As it happens, such a payment will in many circumstances be deductible.

W. Nevill v. Federal Commissioner of Taxation (supra) concerned the deductibility of an amount of $5,000 paid by a company to a managing director in consideration of cancelling his service agreement. The payment was described in this way by Latham CJ at p.301:

"Its character can be determined only in relation to the object which the person making the expenditure has in view. If the actual object is the conduct of the business on a profitable basis with that due regard to economy which is essential in any well-conducted business, then the expenditure (if not a capital expenditure) is an expenditure incurred in gaining or producing the assessble income".

That dictum focused attention upon the object with which the expenditure is incurred. When Latham CJ spoke of "the object which the person making the expenditure has in view", I do not understand him to have been saying that the matter is to be resolved on the basis of the taxpayer's own statement without regard to the surrounding circumstances. In the present case however the taxpayer's own statement and the surrounding circumstances point unequivocally to a payment made for the purpose of securing a tax advantage and no other.

At the time of the prepayment of interest the taxpayer had not acquired any property from which he hoped to derive income. There was no relevant income-earning undertaking or business in existence. That is not necessarily fatal to an argument that an outgoing incurred is "incidental and relevant" to gaining or producing the assessable income. But what is under consideration here is a prepayment of interest made at a time when no relevant income-producing activity had begun and not made for any purpose connected with such an activity. The money was not outlaid to gain income; it was not incidental or relevant to the gaining of income.

If this conclusion is right, it is unnecessary to consider whether the prepayment of interest was an outgoing of a capital nature. Counsel for the Commissioner referred to a dictum of Dixon J. in Texas Co. (Australasia) Ltd. v. Federal Commissioner of Taxation (1939-1940) 63 CLR 382 at p.468:

"Some kinds of recurrent expenditure made to secure capital or working capital are clearly deductible. Under the Australian system interest on money borrowed for the purpose forms a deduction. So does the rent of premises and the hire of plant".

Counsel submitted that this dictum was authority for the proposition that a prepayment of interest, lacking a recurrent character, must be on account of capital rather than revenue. But I do not understand his Honour to be saying that expenditure must be recurrent in order to be on account of revenue; rather he is pointing to instances of recurrent expenditure about which there can be no doubt.

In B.P. Australia Ltd. v. Federal Commissioner of Taxation (1965) 112 CLR 386 at p.394, the Privy Council, in considering whether payments were of a capital or a revenue nature, adopted the approach of Dixon J. in Sun Newspapers Ltd. v. Federal Commissioner of Taxation (1938) 61 CLR 337 at p.363.

"There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment".

It may well be that the payments of interest required under the agreement between the taxpayer and Curzon would be, in the ordinary course of events, on account of revenue. Counsel for the taxpayer pointed out that the prepayment involved no acquisition of assets. In his words: "If you make a list of his assets on that day before and after the transaction there would be no change". But that very proposition may fairly be urged against the taxpayer. The prepayment of interest was related to a loan which the taxpayer had just made. It was a loan which had the effect of putting money in the hands of the taxpayer, which no doubt he intended to use for the purchase of a property but which was an unsecured loan and one the taxpayer was free to use as he chose. It seems to me that this is a consideration telling against any suggestion that the prepayment was an outgoing incurred in the course of gaining or producing the assessable income. It was an expenditure the taxpayer was under no obligation to make in order to acquire the loan; it played no part in the acquisition of the loan and no part in the acquisition of the property from which the taxpayer expected to derive income.

The appeal was argued before this Court on the basis that the sum of $14,000 was either allowable in full as a deduction or failed to qualify at all. For this reason it is unnecessary to consider the question of apportionment or deductibility of an amount equal to one year's payment of interest. Likewise the deductibility of the $70 paid in connection with the loans from Curzon and Esanda was treated in argument as standing or falling by the deductibility of the $14,000. I shall abide by that course without necessarily accepting that different considerations do not arise.

As to the operation of s.260 of the Income Tax Assessment Act, I would just say this. In Cecil Bros. Pty. Ltd. v. Federal Commissioner of Taxation (1962-1964) 111 CLR 430, members of the court expressed their difficulty in seeing how s.260 could apply to defeat or reduce any deduction otherwise truly allowable under s.51. In a number of decisions the High Court has pointed to "the very restricted operation conceded to sec. 260 by the course of judicial decision" (Mason J. in Cridland v. Federal Commissioner of Taxation (1977) 77 ATC 4,538 at p.4,541). On the assumption that the prepayment of interest was an outgoing incurred in the course of gaining or producing the assessable income, it was a transaction the taxpayer was entitled to enter into, a particular course of conduct he was entitled to adopt. There was no purpose or effect such as is described in s.260.

But for the reasons already given, I am of the opinion that the sum of $14,000 represented by the prepayment of interest was not an outgoing incurred in the course of gaining or producing the taxpayer's assessable income and that the Commissioner was right in refusing to treat it as an allowable deduction. It follows that the appeal should be upheld, the judgment of the Supreme Court set aside and the assessment confirmed.

These reasons make it unnecessary to examine a submission made on behalf of the Commissioner based upon the decision of the House of Lords in W.T. Ramsay Ltd. v. Inland Revenue Commissioners (1981) 2 WLR 449. In brief their Lordships held that when analysing a transaction and its implications for revenue purposes a court is not "bound to consider individually each separate step in a composite transaction intended to be carried through as a whole" (Lord Wilberforce at p.457). The court may view the transaction as a whole, in determining for instance whether there has been a gain or a loss. The authority of the judgments is of course unquestioned; their application to s.51 of the Income Tax Assessment Act and to the facts of this appeal are matters that do not have to be considered.

Before leaving these reasons there is one matter I wish to refer to. The appellant's list of authorities mentioned 31 cases; the respondents cited 24. Neither list made any attempt to comply with Practice Note No. 1 that a list of authorities should be divided into two parts, Part 1 containing only those authorities which counsel definitely intend to cite and Part 2 containing those which counsel consider might be called for but which they do not intend to cite. A number of cases on the lists were referred to only in passing and sometimes counsel sought to draw no more from an authority than a dictum expressed in general terms. Yet cases were listed as if relevant in their entirety, thereby causing a considerable expenditure of time and money in photocopying, much of which proved to be unnecessary. It is timely to remind solicitors and counsel of the practice note and of the need to comply with it.