Federal Commissioner of Taxation v Myer Emporium Ltd

The Federal Commissioner of Taxation (the Commissioner) appealed to the High Court of Australia against a decision of the Full Federal Court, which had allowed an appeal by Myer Emporium Ltd (Myer) from a judgment of the Federal Court. The dispute concerned the deductibility of certain expenses incurred by Myer in relation to a dividend stripping operation.

The primary legal issue before the High Court was whether the expenses incurred by Myer in acquiring shares in a company, which were then cancelled for a distribution, were deductible under section 51(1) of the *Income Tax Assessment Act 1936* (Cth) as outgoings incurred in gaining or producing assessable income, or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

The High Court, by majority, held that the expenses were not deductible. The majority reasoned that the dominant purpose of Myer in acquiring the shares was not to gain assessable income, but rather to obtain a tax benefit through the dividend stripping operation. The Court applied the principle that where an expenditure is made for the purpose of obtaining a tax rebate or deduction, it is not deductible under section 51(1) because it is not an outgoing incurred in gaining or producing assessable income, but rather an outgoing incurred in the process of claiming a deduction. The Court distinguished between expenditure incurred in the course of business operations to produce assessable income and expenditure incurred to obtain a tax advantage.

The appeal was allowed, and the judgment of the Full Federal Court was set aside. The Commissioner was entitled to the costs of the appeal.