Fletcher & Ors v The Commissioner of Taxation

[1991] HCATrans 116

--'81,r .i_j, AUSTlUJ.IA""°' -~» .... ~ ... ~

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Sydney No Sl33 of 1990

B e t w e e n -

REGINALD SYDNEY FLETCHER,
CORAL EMILY FLETCHER,

JAMES WARREN DUNLOP and

LILIAN ANN DUNLOP

Appellants

and

THE COMMISSIONER OF TAXATION

Respondent

MASON CJ
BRENNAN J
DEANE J

DAWSON J

TOOHEY J

GAUDRON J

McHUGH J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON TUESDAY, 7 MAY 1991, AT 10.19 AM

Copyright in the High Court of Australia

Fletcher(2) 1 7/5/91

MR D.H. BLOOM, OC:  May it please the Court, I appear with

my learned friends, MR B.R. PAPE and

MR M. CHRISTIE, for the appellants. (instructed by

J.W. Walker & D.K.L. Raphael)

MR D.F. JACKSON, OC:  May it please the Court, I appear with

my learned friend, MR D.B. McGOVERN, for the

respondent. (instructed by the Australian

Government Solicitor)

MASON CJ: Yes, Mr Bloom.

MR BLOOM:  Your Honours, might we hand up an outline of our

submissions. We begin with the facts as set out

in the first judgment of the Federal Court. Those were the facts upon which the matter proceeded the second time in the tribunal and the second time in the Federal Court without any of them being put

into contest by either of the parties.

We stress that the four appellants are

individuals, and this is important as Your Honours

will see, because it is their claim to deduct a

share equal to an individual interest in a

partnership loss, not the partnership's claim to a

deduction which was the subject of the matter

referred originally to the tribunal and then heard

by the court.

Your Honours, the essential facts are that the

partnership borrowed by an agreement $2 million

from a company called Doowarf Nominees Pty Limited

and contracted to pay interest 18 per cent per

annum annually in advance. The agreement was found

by the first Federal Court to create an obligation to pay this interest in each of the first 12 years

including the five years with which this Court is

concerned.

If Your Honours look quickly at the appeal

book page 6, at about point 3: 

The effect of this agreement was to

create an obligation to pay to Doowarf
interest, in each of the first 12 years, of

$360,000.

The partnership then entered into an annuity

agreement with Annuity Investments Pty Limited
whereby, in consideration of the sum of $2,020,000,

Annuity Investments agreed to pay to the

partnership $170,000 for five years, $600,000
per annum for a further five years, and over

$1,000,000 for five years thereafter. That is

dealt with at page 7 in the judgment.of the first

Federal Court commencing at line 5.

Fletcher(2) 2 7/5/91

There was a second loan agreement made by the partnership with a company called Eromdim Nominees

Pty Limited, whereby the partnership borrowed an

amount sufficient, when added with the annuity

payment, to pay its interest to Doowarf. The

$2,000,000 which was borrowed from Doowarf was used

to purchase the annuity. The first year's interest

of $360,000 was, as I have said, the $170,000 being

the annuity payment for the first year, and the

$190,000 borrowed from Eromdim under the second

loan agreement.

The partnership return, which the partnership

was required to lodge - although, of course, the

partnership is not a taxpayer - disclosed a

partnership loss. Each appellant claimed as a

deduction his or her individual interest which was

a quarter in that partnership loss for the 1982

year. Similar claims were made in the subsequent

years but Your Honours need not be concerned with

the detail of those. Each of those claims was

disallowed and each of them was the subject of an

objection and the decisions disallowing the

objections were what was referred to, and gave

jurisdiction to, the Administrative Appeals

Tribunal pursuant to section 187 of the Income Tax

Assessment Act and the Administrative Appeals

Tribunal Act.

We have given Your Honours a reference to the reasons of the tribunal but I do not need to take

Your Honours to those at first instance. What we

can tell Your Honours is that the tribunal after

hearing argument held that all of the transactions

were real and not sham transactions and that they

must, therefore, be given their legal effect, but

the tribunal affirmed the Commissioner's

assessments in the only way that it really could,
that is, the assessments which disallowed the

individual interests, by applying the provisions of

the general anti-avoidance Part IVA.

Unfortunately, they did so without hearing argument

on that subject from either of the parties and on

appeal to the Full Federal Court for the first

time, the Full Federal Court held that that was a

denial of procedural fairness.

Now, I should add, Your Honours, that on the

appeal from the tribunal to the Federal Court one

is now limited to appealing on a question of law.

It is not, as it was in the old days with the board of review, that one could appeal if there was a question of law involved in the board's decision

and have a rehearing in the court. The appeal in

the court is now limited to questions of law by
section 44 of the Administrative Appeals Tribunal

Act.

Fletcher(2) 3 7/5/91

Again, in the Federal Court the Commissioner

sought, by notice of contention, to raise the

question of sham and again the Federal Court

rejected that argument and that is dealt with at

appeal book page 31, at the bottom of 31:

In relation to the first two grounds,

that the transactions were shams and fiscal

nullity, it is sufficient for us to say that

we see no legal error in what was said by the

Deputy President, and adopted by Mr McMahon.

Limited as that court was to matters of legal error.

Now, the appellants unsuccessfully sought

special leave to appeal to this Court from the
decision of the Full Federal Court, in so far as

that court held that the board or the tribunal

could apply Part IVA of its own volition, after the

date of making of the assessment, even where the

Commissioner had not himself applied Part IVA and

made a determination in the making of that

assessment. This Court felt, as I understand it,

that that was a matter that was better addressed if

the matter went back to the tribunal, the tribunal

first found that Part IVA would apply. And that

may yet, if we are correct, be the course of these

proceedings.

So the matter was remitted to the tribunal for

consideration of three matters: firstly, whether the transactions fell within Part IVA; secondly, whether the specific anti-avoidance provisions of

section 82KL applied to deny deductibility of the

interest to the partnership; and, thirdly, whether

the interest was deductible from the partnership

under section 51(1).

If Your Honours glance briefly at page 89 of the appeal book - this is in the judgment of the
second Full Federal Court -	the last paragraph on

the page, talking about the first Full Court:

rejected the Commissioner's arguments on sham

and fiscal nullity; hence those questions

ceased to be relevant thereafter. It remained on the rehearing before the Tribunal for it to

consider the application of s. 51, Division 3

of Part III -

which is 82KL -

and Part IVA.

Fletcher(2) 4 7/5/91

Now, a differently constituted tribunal heard

the matter.	No further evidence was adduced by
either party.	The tribunal did not find it

necessary to deal with either section 82KL or

Part IVA but held that the partnership was not

entitled to a deduction under section 51(1) for the

interest outgoing because it did not constitute

outgoings incurred in gaining or producing

assessable income of the taxpayers.

If I could take Your Honours to the decision

of the tribunal, beginning at page 78,
paragraph 15:

Turning to the law, we are satisfied that

the appropriate test to be applied is not to
look for the subjective intention of the

taxpayers but to ask: what was the impugned

expenditure intended to achieve? When the

question is posed in that way, what the

Fletchers and Dunlops intended or believed

becomes irrelevant once it is found that the

clear purpose -

which seems to be something different from

subjective motive -

of the expenditure -

that is the interest -

as revealed by the evidence, was to obtain a

tax deduction.

That is, they say in paragraph 16, for the

taxpayers, because when they come to 16 they say:

Applying the test we have outlined above,

it follows that once we have concluded that

this scheme was just another vehicle -

that is the whole scheme -

promoted for the dominant purpose of reducing

taxable income -

that is of the individual partners by giving them

their deduction referable to their share in the

partnership loss -

it follows that the interest payments do not

constitute outgoings which were incurred in

gaining or producing assessable income of

these taxpayers.

Fletcher(2) 7/5/91

They then say that the test that they have
unearthed receives support from Their Honours in

John's case and they cite a passage from that case:

In Ronpibon Tin -

Your Honour said -

it was stated by the Court that "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". In Ilberry

Toohey J said ..... by reference to the above statement from Ronpibon Tin that "that was not

to exclude the notion of purpose". His Honour

added that "purpose may stamp the outgoing as

one having no relevant connection with the

gaining or producing of assessable income".

Although the first limbos sec. 51(1) speaks

of a loss or outgoing "incurred in gaining or

producing the assessable income", a loss or

outgoing may be so incurred notwithstanding

that no income has been gained or produced in

the period in which the loss or outgoing is

claimed to be deductible.

Now pausing there, what the tribunal did not do was to look to see whether, looking at the partnership

as a notional taxpayer, which the Act requires us

to do, the outgoing produced for it any assessable

income in any relevant period. That was what, of

course, they should have been doing, and that is

what Your Honours were saying - or this Court were

saying in John's case:

The test of deductibility under that limb, as

laid down in Ronpibon Tin, is that "it is both

sufficient and necessary that the occasion of

the loss or outgoing should be found in

whatever is productive of the assessable

income or, if none be produced, would be

expected to produce assessable income".

It is readily understandable that, if no

income has been gained or produced and a

question arises as to whether the occasion

would be expected to produce assessable

income -

and that, of course, is not this case, because on

the facts assessable income in the form of the

annuity did arise -

consideration of the purpose for which the

expenditure was outlaid might not be wholly

Fletcher(2) 6 7/5/91

irrelevant. It may be too that even where

income is produced "the purpose for which the advantage occasioning the loss or outgoing is

sought may evidence a sufficient relationship

with the income-earning process" - Handley v

FC of T. But the cost of a step taken in the

process of gaining or producing income must be

regarded as an outgoing or taken into account

in calculating the loss (if any) incurred,

whatever purpose or motive may have attended

all or any of the steps involved.

With respect to the tribunal, that passage

seems to suggest the contrary of what they have

concluded. They then say that they:

consider it highly significant that the High

Court referred to Justice Toohey's decision in

Ilbery with approval -

and refer to Your Honour's judgment elsewhere.

As Mr Justice Brennan pointed out (in the

Magna Alloys case ..... :

Though purpose is not the test of

deductibility, nor even a conception relevant

to a loss involuntarily incurred -

and just pausing there, that word "involuntarily"

has caused some disagreement in circles, the

question being whether all expenditure is voluntary

in the sense that every time somebody contracts

under a contract which at least is lawful, that is

a voluntary act, the entering into of that

contract. Therefore the expenditure under the
contract is voluntary or whether Your Honour

Justice Brennan meant voluntary in the sense that

expenditure which is not the subject of a contract

which is the subject of a contractual obligation to has been incurred, and involuntary, as expenditure incur it.

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.

Conversely, I would add, purpose may stamp the outgoing as one having no relevant connection

with the gaining or producing of assessable

income.

Fletcher(2) 7 7/5/91

Now, what they then go on to say makes it clear

that they, as did the Federal Court subsequently, take the view that, just from that passage in the

judgment of Justice Toohey, that an outgoing,

otherwise deductible under section 51(1), may be

taken out of that section by virtue of the

existence of a relevant purpose. If one goes to

paragraph 18, that is indeed what they say:

In the result, we are satisfied on the

authorities that once it has been shown - as

in this case - that the purpose of the

impugned outgoing -

that is the purpose of the scheme attributed to the

purpose of the impugned outgoing -

was to obtain a tax deduction -

for the partners, not for the partnership -

that fact sufficiently colours the outgoing to

take it out of section 51;

Then down at the end of 19, about five lines from

the bottom, after the reference to 177F in

Part IVA:

However, having concluded that the claimed

deductions were not incurred in gaining the

taxpayers' assessable income -

that is the individual appellant's -

so that section 51 does not apply -

and they never claimed a deduction under

section 51 -

no concluded opinion on ss 82KH-82KL is

required.

Then over to page 82, if Your Honours would,

paragraph 20:

TOOHEY J: Just before you leave that page, Mr Bloom, having

reminded us on a number of occasions of the need to

distinguish between the partners and the
partnership, in the precis of argument there is
reference in several places to payment to the

partnership, for instance, paragraph (c) on page 2

and again, I think, paragraph (d). Are we to read

that, on each occasion, as a reference to an

undertaking to pay to the individual partners or to

the partners collectively, a sum of money.

Fletcher(2) 8 7/5/91

MR BLOOM:  Your Honour, for income tax purposes the

partnership is treated as if it were a separate

taxpayer.

TOOHEY J: Yes, but I am merely directing my attention to

the terms of the agreements themselves, the way in

which they were structured?

MR BLOOM:  To those persons trading together as partners, if

Your Honour likes, yes, as a matter of the

legal - - -

TOOHEY J:  A lump sum. Not divided as between the

individual partners, but a lump sum payable to the

members of the partnership.

MR BLOOM: Certainly, as partners, yes, and Your Honour

knows from the Canny Gabriel decision and such

decisions that really the partners have no separate

interest in the individual assets but rather the

total of assets minus liabilities.

At page 82 in paragraph 20 they deal with

Part IVA, in the second sentence:

However, in the end - and hearing the matter de novo - we have decided that once we have

reached the conclusion that section 51
does ..... apply - a conclusion which has the

imprimatur of the Federal Court -

that shows a little prescients on the part of the

tribunal -

an examination of the specific anti-avoidance

provisions of Subdivision Dor Division 3

becomes the kind of lumber an administrative

tribunal can well do without. For much the

same reason, we have concluded that in this

case no decision on Part IVA is required.

MASON CJ:	What does the reference to "a conclusion which has the imprimatur of the Federal Court" mean?
MR BLOOM:	Your Honours, on the assumption it is not demonstrating prescients, it is something which the
tribunal seems to have taken from something that
the Federal Court said.  I will just see if I can
quickly find that.  What the Federal Court had said
the first time was, "We will send it back inter
alia for the tribunal to deal with section 51(1)"
and they added words to the effect, "If the
tribunal finds that this outgoing is not an
allowable deduction for the partnership under
section 51(1) then, obviously, there will not be
any need to go further". That is what I think they
were saying, Your Honour, but not demonstrating

Fletcher(2) 9 7/5/91

some view to the future, but we will find the exact

passage and identify it for Your Honour.

MASON CJ:  Yes, we will deal with it later.

MR BLOOM:  If Your Honour pleases. Your Honours, we then

go to the Income Tax Assessment Act and to those

sections with which we are all primarily concerned.

Division 5 is the division dealing with

partnerships. It is firstly important to note that

by section 91 a partnership, while required to

furnish a return of income of itself as a

partnership, is not liable to pay tax on it.

Section 92 then either includes as an item of

assessable income a partner's individual interest

in the net income of a partnership where that is a

positive result, or permits him, that is section 92

permits him, an allowable deduction for an amount
equivalent to his individual interest in

partnership loss where the net figure is a negative

figure.

The terms "net income" and "partnership loss" are important and defined in section 90:

"net income" in relation to a partnership,

means the assessable income of the

partnership, calculated as if the partnership

were a taxpayer ..... less all allowable

deductions except -

certain presently non-relevant ones.

"Partnership loss" in relation to a

partnership, means the excess (if any) of the
allowable deductions ..... over the assessable

income of the partnership calculated as if the

partnership were a taxpayer.

So once again, Your Honours, that individual

interest in the partnership loss was what each

appellant sought to deduct in his own return. That

was disallowed. The disallowance was objected to,

and the disallowance of the objection in relation

to that item was what was sent to the tribunal and

what was the subject of the matter before the

court.

BRENNAN J:  Mr Bloom, is there any significance in the

asymmetry between the position of the phrase -

calculated as if the partnership were a

taxpayer -

and the definition of "net income" and "partnership

loss"? In the former one it seems to qualify

assessable income. In the latter it just seems to

Fletcher(2) 10 7/5/91

...

qualify the excess. In other words, "net income", the phrase, does not qualify allowable deductions.

MR BLOOM: Well, Your Honour, we would respectfully submit

that when one looks to it, the definition of

"exempt income" that the intention of these

provisions is that you take the partnership, work

out its notional income as if it were a taxpayer by

working out - - -

BRENNAN J: That is what I have always understood but it

just struck me that there was a curious position of

the phrase there. There are no cases that deal

with it at all?

MR BLOOM:  Not that put it that way, with respect,

Your Honour, no. It is always worked upon the

basis that the deduction sought or the assessable item brought in is the individual interest in the resultant net figure.

DEANE J:  Mr Bloom, what was the position in relation to the

annuity?

MR BLOOM:	I am sorry, how does Your Honour mean?
DEANE J:	What was the tax position in relation to the annuity payments?
MR BLOOM:	Your Honour, for the year 1982 the relevant

Income Tax took off the assessable amount of the annuity an

provisions was section 26AA of the

amount equal to what was defined as the undeducted

purchase price which, essentially, is a capitalized

cost of the annuity. So that annuities have about

them the special item which is deducted from the

assessable component, being the capitalized cost

of the annuity which is capitalized over the period

of the annuity. That is, in essence, what the

provision is.

DEANE J:  And what was the result of doing that on the

$170,000?

MR BLOOM: Perhaps if Your Honour looks at page 44. It was

handed to the Federal Court on the first occasion

and formed part of the reasons - it was annexed to

the reasons of the Federal Court - and sets out a

statement of the net income and partnership losses

for income tax purposes.	Your Honours will see the
top line:

ASSESSABLE INCOME

Annuity

Less U.P.P. -

Fletcher(2) 11 7/5/91

for undeducted purchase price: $170,000, less

$134,667, producing $35,333.

DEANE J:  So, that bottom figure was treated as assessable

income?

MR BLOOM:	Yes, Your Honour.
DEANE J:	And included in the assessments of the taxpayers?
MR BLOOM:	It was included in the assessable income of a

partnership - - -

DEANE J:	The partnership.
MR BLOOM:	- - - for the purpose of working out the net loss of the partnership and then each partner included
his individual interest in that resultant figure.
DEANE J:	I see. Well now, in view of the capital

deduction, I do not quite follow why would there be

a deduction of interest in terms of money borrowed

and applied in the purchase of an annuity?

MR BLOOM:  Because the annuity produces assessable, albeit

there is part of that which is exempt. Does

Your Honour see also on that page the proportionate

interest claimed was apparently worked out on the

basis that some of the income was exempt income and some was assessable income, so an apportionment was

done under section 51(1) to get to the figures

which appear on this page.

DEANE J:  Even though you are getting spread over the years

a deduction of the capital, you also get a

deduction of the interest saved on money borrowed

to subscribe that capital?

MR BLOOM:  Yes, Your Honour.

DAWSON J:  So that you not only get the costs, you get the

cost of the cost?

MR BLOOM: Well, Your Honour, interest on the cost of buying

a factory is deductible. Interest is that sort of

expense.

DEANE J:  I was not suggesting it was wrong if there is no

dispute about it; I was just trying to understand

it.

MR BLOOM: There is no dispute about it, Your Honour, and

this page sets out the figures, although I should

say that the amounts claimed in the returns were
not in accordance with these figures~ These

figures represent the claims as adjusted when the

matter was first argued before the tribunal. I am

Fletcher(2) 12 7/5/91

sorry, I do not know if I have answered

Your Honour.

DAWSON J: ..... quite clear. If I were to buy an annuity

and borrow the money for the purpose of doing so, I
not only get deducted, over the length of the

annuity, the cost of the annuity, but also the

interest which I have to pay.

MR BLOOM: Well, one section gives you the undeducted

purchase price component off the to, if you like,

of the assessable income, but another section,
section 51(1), gives you an allowable deduction for
the interest to the extent to which it is incurred
in gaining or producing the assessable component of

the annuity.

DAWSON J:  So you could very easily make a loss on your annuity?

MR BLOOM: That was obviously the intention, Your Honour,

for the early years. That was obviously the

intention.

BRENNAN J:  Can I just have some explanation of note (a) on

page 44?

MR BLOOM: If I can, Your Honour. In essence the interest

paid for that first year was some $360,000.	By the
second year the interest was the $360 plus the
amount payable under the second loan agreement
whereby the $190,000 had been borrowed.	So the
figures change in subsequent years.	But just

dealing with that first year, as we understand it,

what was claimed was 78.6 per cent. Your Honour, I

do not know how that 78 per cent figure was arrived

at.

BRENNAN J: Well, that was really what my question was,

because I have assumed that we derived those

figures from the end figures, that is the total

column in assessable income at the top, where those

figures appear. So that the percentage of interest

which is attributable is being taken to be the

amount that is attributable to the excess of the

total annuity over the U.P.P.	I have not expressed
that correctly.	The figures are 7.425 and

9.445 and the difference between those is the

U.P.P.

MR BLOOM: Yes, note (a) actually sets it out. The:

interest has been apportioned at the rate of

total assessable of -

$7 million-odd -

Fletcher(2) 13 7/5/91

to total income

under the annuity of $9.4 million.

BRENNAN J:  And that is the proportions of the total which

is to be derived from this scheme over the

years 1982 to 1996?

MR BLOOM:  Yes, Your Honour.

BRENNAN J: It seems a curious thing that one would, when

the amounts which are being received and payable in
different years do not bear the same constant
relationship to the amounts that are being paid in
the first year, that that overall figure should be
applied to the interest in relation to the first

year.

MR BLOOM:  As unusual as it seems, Your Honour, that method

of apportionment has never been in dispute. It has

never been put in issue.

BRENNAN J: Yes.

MR BLOOM:  It is obviously some simple actuarial method of

doing it but it has never been put in issue.

DEANE J: Simply, so I can understand, the money paid for

the annuity was to produce income, only part of

which was assessable?

MR BLOOM:  Yes, Your Honour.

DEANE J: But, is what you say, that it is common ground

that the interest payable on the money borrowed to

buy the annuity which produced income, only part of

which was assessable, is all deductible against

that part of the annuity which was assessable?

MR BLOOM:  No, Your Honour. Only a percentage, being the

percentage asserted by the taxpayers and not

disputed by the Commissioner, as eking out, if one

likes, the interest referable to the earning of

exempt income over the total period. So the

interest that is claimed is that which, it is said

by application of this equation, gives one the
extent to which the outgoing is incurred in gaining

or producing assessable income and excludes the

extent to which it is incurred in gaining or

producing exempt income for the partnership.

DEANE J: So, it excludes the interest that is apportioned

to the UPP?

MR BLOOM:  Yes, Your Honour, on the basis of taking it over

the entirety of the period of the annuity and

Fletcher(2) 14 7/5/91

apportioning it on the basis set out in note (a) at

about point 7 of that page.

BRENNAN J: If you were to succeed in this appeal, Mr Bloom,

and the matter were to go back to the AAT, would

the question of whether the appropriate percentage

which should be allocated as an allowable deduction

be open to question?

MR BLOOM: Well, that is a difficult question, Your Honour,

as to the extent to which the decision of the first

Federal Court may have been thought to create issues estoppel between the parties. That first decision should be taken on the authorities to decide all such matters between the parties and while the appellant sought special leave to appeal

on the Part IVA question, the Commissioner

certainly did not seek special leave to appeal and

the matter went back to the tribunal to decide the

three issues only, really, 51(1), 82KL and

Part IVA. Your Honour, certainly no new matters of

fact were dealt with before the tribunal the second

time or the court and matters of fact could not be
dealt with before the court on appeal because the

court is limited to hearing questions of law.

BRENNAN J: It seems to me that the argument which you have

thus far advanced would support a deduction being a
deduction of the amount of interest paid in the

income year 1982, the proportion of it being

$35,000 over $170,000. Is that right?

MR BLOOM:  $35,000, yes, if it were correct, Your Honour,

to limit is to that one accounting period but, of

course, questions of assessable income and

outgoings occurred in deriving that assessable
income, as the Chief Justice said in AGC Advances,

are not confined to one accounting period, but extend over the relevant accounting periods in which the term "the assessable income" is derived.

DAWSON J:  Can I just ..... The figure of $283,000 under

1982, represents exactly what?

MR BLOOM: Seventy-eight per cent of $360,000, being the

interest paid in that year.

DAWSON J:	I see.
MR BLOOM:	And the next year, 78 per cent of the interest

paid in that year and so on, paid or payable,
because in some of the years we have not got to

those years. We are in about year 10, I think, at

this stage. Perhaps if I can move from the

difficult accounting questions to some law.

Fletcher(2) 15 7/5/91

Your Honours, we come now to the second

Federal Court's judgment and the argument about the
misapplication of the partnership provisions was
put to the Full Federal Court on the second

occasion, namely that the tribunal had misapplied

its task in relation to these partnership

provisions. That is dealt with in the decision of

the Full Federal Court, firstly at page 91:

In each of the years of income 1983, 1984

and 1985 similar "round robins" with bills of

exchange were carried out to effect the

payments required by the loan agreements and

the annuity agreement. The partnership was

known as "Annuity Investments Partnership

no. 18" which submitted an income tax return

for the year ended 30 June 1982. That return

showed income of $170,000 being the annuity

received, and expenditure of $494,667 being

interest paid of $360,000 and undeducted

purchase price of $134,667.

Just pausing there, those figures were adjusted to

the figures on page 44 by the time the matter went

to the first tribunal and a lesser claim was made.

The result was a net loss of $324,667. In

their personal returns of income each of the
applicants claimed as a deduction one-quarter
of this lastmentioned amount. In each case
these claims were rejected, objections lodged

but disallowed. Although the relevant sums

differed a little, the same course of events

occurred in subsequent relevant years, thus
giving rise to the fourteen appeals to the

Tribunal.

And then over at page 104, after referring at the

top of the page to:

the essential character of the scheme was not

to gain or produce assessable income for the partners but to reduce the taxable income of the applicants.

Not essential character of the expenditure, but

essential character of the scheme, being to not
produce or gain assessable income for the partners

but to reduce the taxable income of the applicants,

the individuals.	They say at the bottom of
page 104:

A further attack was made by the applicants

upon the findings of the Tribunal. Counsel

for the applicants submitted that the Tribunal

fell into error in that it purported to deny

to each applicant the deductibility of portion

Fletcher(2) 16 7/5/91

of the partnership loss attributable to

interest under subsection 51(1) rather than to

consider the appeals as appeals from the

Commissioner's disallowance of deductions

claimed by the applicants as partners pursuant

to subsection 92(2) of the Act.

It is clear that the Commissioner

disallowed the claim by each applicant for a deduction pursuant to sub-s. 92(2) of his or her individual interest as partner in the

partnership loss. It is true that the

Tribunal in its reasons discussed the appeals before it with reference to sub-s.51(1) of the Act, but it does not follow that the Tribunal misconceived the task before it. Plainly the

Tribunal's task was to consider the

correctness of the Commissioner's disallowance
of the objection of each applicant, which was

an objection against the disallowance by the

Commissioner of each applicant's individual

interest in the partnership loss -

well, so far that is correct -

that loss being calculated after taking into

account both the income derived by the

partnership and its liability for interest.

That is also correct, with respect.

But in our opinion it is understandable that the Tribunal expressed its reasons essentially with reference to sub-s. 51(1), because the

starting point for the availability of a

deduction under sub-s. 92(2) is the incurring

by a partnership of a partnership loss in the

relevant year of income.

We agree that that is the starting point, but not

that it leads to the result for which it is
contended.	The error is compounded, with respect

to the Court, in the next paragraph.

The partnership loss in this case is the

loss constituted by the interest paid -

well, it is not, with respect. It is interest

deducted from assessable income being the annuity.

The partnership loss in this case is the

loss constituted by the interest paid on the
moneys borrowed to pay for the relevant

annuity and on the moneys borrowed to pay the

interest. The partnership claimed this as a

loss in its partnership return and each of the

Fletcher(2) 17 7/5/91

applicants in turn claimed his or her

individual interest as partner in that loss.

It was not in that loss. It was not the 51(1) loss. It was the individual interest in the

partnership loss that was claimed which was the net

figure. It is a little like the difference between

taxable income and assessable income.

Sub-section 51(1) must be the source of the partnership loss arising from the payment of

interest -

well, it is certainly an integer in that but it is

not the source of the partnership loss. It is one

factor in the equation -

but it is obvious that a partner's entitlement

to a deduction arises under sub-s. 92(2) and

plainly does not have as its source

sub-s. 51(1) -

well, that is correct, with respect -

though that is an essential integer in the

claim by the partnership in its return that it

has incurred a partnership loss.

With respect, the Federal Court is there committing

the same error as had the tribunal in its reasons
by confusing the outgoing which the partnership
claimed with the individual deductions in the net
figure claimed by each of the partners.

We suggest that Your Honours could stop at this point in terms of Your Honours' judgment and

say, "They got that wrong. Really the proper task

is to send the matter back to the tribunal to

enable the proper decision on Part IVA", because it

is only by reference to Part IVA that one can

achieve the result that the Commissioner sought to

achieve by his assessments, namely, disallowance of
the individual interest in the partnership loss
being the net amount constituted by deductions from

assessable income in accordance with section 92.

And, Your Honours, we point out that the

result which both the Federal Court and the

tribunal came to is a result which leaves the

interest gone but the assessable income represented

by the annuity still there. That means that the

partnership has derived, if one likes, a net

income - a positive figure - and each partner is

liable to include, for these years in issue and the subsequent years, an amount equal to his individual

interest in that assessable income. That has not

gone. By taking away the deduction from it, it is

Fletcher(2) 18 7/5/91

only enlarged from a negative to a positive so that

each partner will now be assessable on his

individual interest in the net income of the

partnership, calculated upon the basis that the

annuity produces income but no offsetting

deduction.	And that is not, of course, the
Commissioner's assessment.	The Commissioner's

assessment was to disallow the individual interest

in a net loss as a deduction.

DEANE J:  What came from the Commissioner in response to the

partnership return?

MR BLOOM:  I do not know if there was an adjustment sheet,

Your Honour, for the partnership but certainly the only assessments which were able to be the subject of objection, that is those issued to the

individuals, the only adjustment sheets relevant to those disallowed the individual interest in the net

loss.

DEANE J: What, nothing at all came back in relation to the

partnership - - -?

MR BLOOM:  I do not know, Your Honour. We will make

inquiries to find out the answer to that and see if
there is an adjustment sheet in relation to the

partnership.

Your Honours, we have referred to Part IVA to

show Your Honours how the anti-avoidance provisions

deal with this sort of a matter. First of

all - - -

TOOHEY J:	Mr Bloom, sorry to interrupt you, but is it your proposition that when regard is had to the partnership return, the only footing upon which the outgoing represented by the interest could not constitute an allowable deduction, would be
through the operation of Part IVA?
MR BLOOM:	No, save - yes, I am sorry, it is a bit of a

hybrid answer to Your Honour's question. Part IVA

enables the Commissioner to cancel a tax benefit

and "tax benefit" includes under 177C "a

deduction", but if he does cancel such a deduction,

177F(3) gives him power to make a compensatory

adjustment to take out the assessable income

figure. Now, he could do that viz-a-viz as the

partnership with Part IVA or he could support his

assessment with Part IVA by saying to the

individual partners, "You went into this with the

intention of getting a tax benefit, namely, the

deduction under section 92 and I cancel that under

Part IVA".

Fletcher(2) 19 7/5/91

TOOHEY J:  I took you to be saying, perhaps wrongly, that

absent Part IVA there was no basis upon which the

Commissioner could disregard the interest payments

as an outgoing for the purpose of the partnership

return?

MR BLOOM:  What I was saying, Your Honour, is there is no

basis upon which he can support the assessment he

made which was to deny each partner deductibility

of his individual interest in the net loss.

TOOHEY J:  Yes. But that may be a matter of mechanics.

MR BLOOM:  I think not, with respect, Your Honour, because

the jurisdiction of the tribunal is to review the decision of the Commissioner on the objection and the decision of the Commissioner on the objection

is to disallow as a deduction each partner's

individual interest. That is the decision which

went to the tribunal and gave it jurisdiction.

That is what they were reviewing.

TOOHEY J: Yes, I understand that, but putting that to one

side just for a moment, is it your argument - or

you may say it is not necessary for the purpose of

your argument, but is it your argument that there

is no basis upon which the Commissioner could have

refused to accept the interest payment as an

outgoing of the partnership and, hence it is

reflected in the assessable income of the

partnership.

MR BLOOM:	Yes, because assessable income was produced to the partnership and one just cannot simply ignore
that.  I am not saying, with respect, that a court
could not, in working out whether there was a net loss, examine the question of whether the interest
was an outgoing incurred by the partnership in
gaining its assessable income; of course it could, but that is not what either the court or the
tribunal here have done. There has been a degree
of approbation and reprobation which is
countenanced by a provision such as Part IVA, but
is not otherwise countenanced by some general
desire on the part of the court and the tribunal
that the Act should inhibit tax avoidance and that
seems to be at the heart of what has happened in
this case.

TOOHEY J: Well, if the matter were to go back, you say it

should go back only in respect of Part IVA?

MR BLOOM:  No, it could go back on section 51(1) and

assessable income as well because it really goes

back to determine whether there was a net loss.

Fletcher(2) 20 7/5/91

TOOHEY J: It would have to, would it not, to get any sort

of satisfactory response from the tribunal, on your

argument?

MR BLOOM: 

Your Honour, the tribunal could come at the

matter, as I have submitted, simply by looking at
the deduction claimed by the individual partners

and applying Part IVA to that. And if that is a

scheme and relevantly otherwise within Part IVA, as

no doubt will be argued, that is an end of the

matter and the assessment actually made on each
individual partner can be supported.

TOOHEY J: Yes, but on that limited basis, the tribunal

would be precluded from examining whether, in terms

of section 51(1), the interest paid was expenditure

incurred in gaining the assessable income.

MR BLOOM:	On that limited basis it would, but the -
TOOHEY J:	Would it not be necessary, accepting your

argument for the purposes of this inquiry, that the

matter go back on a more general footing than you

suggest?

MR BLOOM:  Yes, I can see what Your Honour is putting to me.

The difficulty that one has is in seeing that one could ever get a result where interest on moneys

borrowed and used to purchase an income were

non-deductible while the income was assessable.

TOOHEY J: Yes, I can see the force of that but the purpose

of remitting the matter, if it ought to be

remitted, it seems to me that there are

difficulties in the way of the limited remission

that you speak of.

MR BLOOM:  Perhaps Your Honour is right. We hope that as we

go further we will persuade Your Honours that by

treating the partnership as a notional taxpayer and

looking at the outgoing vis-a-vis it, and bearing

in mind that it is hard to see that notional

taxpayers can have expenditure about them which is

private or domestic, that the partnership's

outgoing is incurred in gaining or producing its
assessable income and the matter would go back to

the tribunal upon that basis. That would leave,

for the tribunal, Part IVA, vis-a-vis, the

deduction claimed by the individual partners.

DEANE J: What is it that makes clear that the Commissioner

disallowed the partnership loss as distinct from

disallowing the partnership a deduction under

section 51?

MR BLOOM: Because, having just disallowed the partnership

the section 51 deduction, his amendment would have

Fletcher(2) 21 7/5/91

been to include in the assessable income an

individual interest in net income - a positive

figure. Because once one has the assessable income, takes away from it the claim for the

deduction, one ends up with a positive figure for

the partnership.

McHUGH J:	The $170,000 should have been ..... split four ways.
MR BLOOM:	Yes, less the undeducted purchase price.

DEANE J: Well, is there anything that indicates that he did

not confine the deduction to the amount of

assessable income on the basis that the outgoing

was a completely mixed one and that was the only

sensible way of doing it?

MR BLOOM:  He has never argued, on the basis of Ure's case

or Ilbery's case, that the deduction should be

limited to the amount of income. That is an

argument that may have been open to him given the

decisions that were reached in that case.

DEANE J: Well then, is there anything that makes it clear

that the Commissioner was disallowing the
partnership loss as distinct from disallowing a

deduction to the partnership?

MR BLOOM:	Only that he disallowed to each individual partner his claimed deduction for a share of the
partnership loss. That is all.
DEANE J:	And beyond that, it is speculation?

MR BLOOM: Certainly, Your Honour, certainly. But, not mere

speculation. One has had two tribunals and two

courts in which this matter of section 51(1) and
deductibility has arisen more recently. It has

arisen as a central issue and in neither case has

the Commissioner said, "Yes, I will allow the

deduction to the extent of the assessable income

that's produced", as in Ure, as in Ilbery. That

has not been any part of the respondent's case.

That is the speculation, aided a little, if you

like, Your Honour, by what has happened.

BRENNAN J: Mr Bloom, I am not sure that I follow this

exactly. There is an individual return and there

is an adjustment sheet and I presume the adjustment

sheet disallows the deduction which was in the

return being the amount of the partnership loss.

MR BLOOM:  The share of the partnership loss, yes,

Your Honour.

Fletcher(2) 22 7/5/91

BRENNAN J:  The share of the partnership loss, is that

right?

MR BLOOM:	Yes, Your Honour.
BRENNAN J:	Now, that share of the partnership loss was

calculated, as the return would have shown, by

reference to the partnership outgoing of interest

and the partnership income less the UPP.

MR BLOOM: Correct, Your Honour.

BRENNAN J:  Now, has the tribunal or the court ever proposed

that the Commissioner's deduction should be

amended, or at least that the assessment should be amended, by adding any component for net income of

the partnership, which does not take account of a

deduction?

MR BLOOM:  They have not come to grips with what has to

follow from their decision in any of the cases.

What they have said is that, "We simply deny, under

section 51(1), to the partnership the deduction for

interest in its entirety, not just up to the amount

of the assessable income produced - - -

BRENNAN J:  I appreciate they have said that, but what order

has been made?

MR BLOOM: Confirming the assessments in each case.

BRENNAN J: Well, the order is inconsistent with the

reasoning.

MR BLOOM:  But the difficulty- is, Your Honour, we have a

decision of the Full Federal Court with which we

have to cope in the years after the years which are

before this Court which says that the 51(1)

interest outgoing is not an allowable deduction and

says nothing about non-assessability of the income

and so for the years after 1985, as the income

indeed increases, there is assessable income and no

allowable deduction, if this Federal Court is

correct, and each partner will be bound to include

as assessable income a share of that. It is not

sufficient, with respect, particularly given the

amount of attention which is focused on the

Federal Court's decision in Fletcher's case generally in the community, to say, "Well look, they got the result right even if their reasoning

is completely wrong", because it is that reasoning

which is being relied upon in the community.

Your Honours, we then go on to deal with

section 51(1) upon the assumption - and we make

that assumption, although it is not clear, that the

Federal Court were really considering deductibility

Fletcher(2) 23 7/5/91

of the partnership of its section 51(1) outgoing for interest. Your Honours, a sole question for

the Court, in our submission, was whether the

interest incurred by the partnership was incurred

in gaining or producing assessable income. we have

given Your Honour a reference to a well-known

passage from the judgment of Sir Isaac Isaacs in

Munro's case, namely that interest paid follows

accessorily the purpose of the principal sum, and

if we could take Your Honours to a passage in the

judgment of Justice Brennan in Ure's case - we have

been told that the Court prefers the Australian Law

Reports to the Federal Court and Federal Law
Reports, Your Honour, so we take Your Honours to

that report.

MASON CJ:  I think at one stage we did indicate that we

preferred one reference to another, but I think we

have resiled from that position, Mr Bloom.

MR BLOOM:  Thank you, Your Honour. Your Honour, the passage

is at 241, in the judgment of Justice Brennan, who

was then on the Federal Court, line 20:

Section 51 requires that deductible

expenditure must be incurred "in" gaining
assessable income, that is to say, it must be

incidental and relevant to the gaining of that

income:  Ronpibon Tin. 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: FC of T v Munro; Texas -

and we rely on this next sentence:

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.

And His Honour then went on to consider the

disparity between the interest rate produced in

that case on moneys laid out, which indicated quite

the contrary - no sufficient connection - and

enabled one to examine the purpose of the

expenditure in that case. And this appears, I

think, a little later in the judgment of

Your Honour Justice Deane - it was a joint judgment

with Justice Sheppard, at 249 - while Your Honours

have Ure's case in front of you - line 36 on 249:

One of the most difficult aspects of the

problem of characterizing an outgoing is the

assessment of what, if any, weight is to be

Fletcher(2) 24 7/5/91

given to indirect objects which a taxpayer had

in mine in incurring the outgoing.

Bearing in mind, our taxpayer here, Your Honours,

is the partnership:

Such objects form part of the relevant

circumstances by reference to which the

problem of characterization must be resolved.

There is however no rigid principle which can

be applied in determining what, if any, weight

should be given to them. In the ordinary

case, such as, for example, where the

immediate object achieved by the outgoing is

the production of assessable income which is

commensurate with the amount of the outgoing

or where it is clear that the outgoing was for

the purchase of stock-in-trade or the

acquisition of services or hire of equipment

used in earning assessable income, indirect

objects or motives of a personal or domestic
character will plainly not prevent the

characterization of the outgoing as having

been incurred in earning assessable income:

see, for example, Cecil Bros. In other cases,

the immediate object or effect of an outgoing

will not suffice either to explain or to

characterize it. In such cases, indirect

objects or motives can assume a sometimes

decisive importance.

We say this is a case where there is an

outgoing to gain assessable income relevantly over
the period, commensurate with the outgoing, the claim only being made to deduct that proportion incurred in gaining or producing the assessable and

not the exempt income, and that therefore one does

not go to motive or purpose or confuse the two of

them and go to some hybrid notion of the two of

them.	One simply looks at an outgoing of interest
on moneys which are laid out to produce assessable

income and one has furnished the required

connection; motive and purpose are therefore - both
of them - irrelevant.

TOOHEY J: That was not the view of the Federal Court, was it? That is not to say that the view is not open to challenge, but the Federal Court took that view

that, as appears on page 103 at about line 19:

This is not a case where the relevant

expenditure was so clearly incurred in gaining

or producing assessable income -

MR BLOOM:  I am sorry, is Your Honour talking about this

case, or Ure's case?

Fletcher(2)	7/5/91
TOOHEY J:	I am talking about the present case.
MR BLOOM:	I am sorry, which page did Your Honour - - -?
TOOHEY J:	Page 103.

MR BLOOM:  Thank you Your Honour, yes. they said. Yes, one sees what

TOOHEY J:	I thought you were putting it to us, as it were, as a self-evident proposition, that the expenditure
incurred by way of interest on moneys borrowed was
so clearly attributable to gaining what was producing the assessable income, that there was no
room for any further inquiry.
MR BLOOM:	We do say they are wrong, Your Honour.
TOOHEY J:	I appreciate you say that. All I am putting to

you was that that was not the view of the

Federal Court and therefore it is a view which has

to be disturbed in argument in order for you to get

anywhere in this appeal.

MR BLOOM:  We invite Your Honours to reverse that finding

and to say, in effect, that the connection here is

sufficient and we do that in the next paragraph,

paragraph 18 of our outline, by relying upon what

the Chief Justice said in AGC (Advances). We have

given Your Honours reference to the pages, but it

is quite clear that an outgoing incurred in gaining

or producing assessable income is not limited to
the assessable income or a consideration of the
assessable income of the accounting period in which

the outgoing is outlaid, and one could look at the

assessable income to be produced from a particular

transaction over the period for which it is to be

produced, that is assessable income of future

accounting periods.

TOOHEY J: Yes, but that was not the - as I read the Full

Court of the Federal Court's judgment, those were

not the sort of considerations that prompted it to

disregard the interest on borrowed moneys, or have

I misunderstood the judgment?

MR BLOOM: Well, it is hard to understand, with respect,

what Their Honours were saying. They say that they

accept that - they talk about an essential

character test; a test, as we will subsequently

submit, is more relevant really to characterizing

expenditure as private or domestic, rather than

business. The Handley, Forsyth and Lunney's case

sort of thing, but they talk about the expenditure

on interest, firstly as voluntary expenditure and

say that therefore purpose can enter into the

question, whereas we would have submitted, with

Fletcher(2) 26 7/5/91

respect, within the judgments in the Magna Alloys

case that this is not voluntary expenditure, unless

it be the case that every contract into which a

taxpayer enters, being a voluntary contract, makes

the expenditure under it, voluntary expenditure.

So we say they were wrong in saying this was

voluntary expenditure, as opposed to involuntary
expenditure, the latter comprising, as we would
understand it, expenditure incurred pursuant to a
contractual obligation to make it the sort of thing

that was dealt with in the Europa Oil cases and

South Australian Battery Makers.

TOOHEY J: But I rather took the Federal Court to be saying

that there are cases in which it may be appropriate

to look at the purpose for which expenditure was

incurred. If I could just take it one step

further: that the present case is not one in which

the relevant expenditure is so clearly related to

the gaining of the assessable income as to

disqualify that consideration.

MR BLOOM: Well, we say it is, with respect.

TOOHEY J:  I appreciate you say it is. I am just trying to

understand the way in which the Federal Court put

its decision. But if it be such a case then, the

matter coming before the Federal Court on a
question of law, these considerations were

considerations the tribunal was entitled to take

into account and therefore there was no basis for

disturbing its decision. Now, I am not inviting

you to agree with that, but is that a reasonable

understanding of the way in which the Federal Court

dealt with the matter?

MR BLOOM:  No, with respect, it is not. The tribunal never

looked at the question of whether the partnership

derived assessable income for the outgoing in

question. It never sought the nexus. It never

sought to see whether the prima facie test as we

would put it were satisfied, namely, that the

interest was paid on money borrowed and used to

produce assessable income for the partnership.

They simply said this was interest on money

borrowed and used to produce a deduction for the

individual taxpayers, and that is how they

approached it, confusing the prima facie test or

not going to the prima facie test, and instead

going beyond it immediately to motive avoidance

purpose and confusing those two; and saying that

the authorities allowed them to do that.

TOOHEY J:  If the tribunal had said the partnership had

deliberately set about making a loss and had

entered into this transaction to borrow moneys to

Fletcher(2) 27 7/5/91

meet the annuity payments for the purpose of

creating a partnership loss, would that have been

an appropriate way of approaching the matter?

Again, I am not suggesting that you would concede

that the conclusion was correct, but would that be

an appropriate way of approaching the matter?

MR BLOOM: 

It would lead to some curious results in the case

of an ordinary trader who borrowed money at
interest and set out in the hope and expectation

that over numerous years he would make a profit,

but in those first few years it would be unlikely
he would do so, if that is the test, because it
again looks too much into the subjective motives
and that is the danger of it.

You see, Your Honour, what they did is they

took what Your Honour said in Ilbery and they said,

"Now, there is Justice Toohey saying that

expenditure otherwise within 51(1) can be dragged

out of 51(1) because of the existence of a

purpose''. We say that is back to front.

TOOHEY J: Well, that may be a misreading of the judgment.

MR BLOOM: We hope so, Your Honour. But what we submit is

that that is not the way you do it. You start at

the beginning and you look for the essential

connection between the outgoing and the income.

Once that connection is found to be absent, then

one can go to motive or purpose or whatever it is -

probably purpose and probably not motive, with
respect - but one cannot go to those if the

connection is, as a result of the first step, found

to exist.

TOOHEY J:  No, I understand that, Mr Bloom. What I am

having some difficulty with, I think, is the way in

which the argument that you present, at least

initially, fastened on to the Commissioner's

approach to the individual returns rather than

looking at the partnership return overall.

MR BLOOM:	Yes, Your Honour.
TOOHEY J:	I understand that, but that may in the end, may

be, simply a matter of approach and not really

touch upon the basic questions that are involved

here. So that in the end it may be necessary for

you to persuade the Court that although the

approach taken by the Commissioner was not the

correct one, nevertheless, the interest paid on

borrowed moneys fell properly within section 51(1).

MR BLOOM: It is fundamental to our submissions,

Your Honour, that I have to satisfy this Court that

the connection exists and that both the tribunal

Fletcher(2) 7/5/91

and the Federal Court were incorrect in not finding

it to exist, and were incorrect in going to the

second step and looking at purpose or confusing it

with motive.

McHUGH J: It is fundamental to your submission also, is it

not, that for the purpose of Division 5 the

partnership has to be treated as a hypothetical

legal entity separate from the taxpayers

themselves?

MR BLOOM: That is so, Your Honour, and it is with that

notional taxpayer that we are examining the
question of 51(1), and we are saying, "Did it, this
notional existence, incur an outgoing in gaining or

producing for it assessable income?"

McHUGH J: Its assessable income?

MR BLOOM:  Yes. And that is the question which really

neither the Federal Court, with respect, nor the

tribunal looked at because they kept looking

through the partnership veil, if one can adopt a

metaphor, and not con~entrating on really what it

was that they had to do.

McHUGH J:  To what extent would it be legitimate to take

into consideration, for the purpose of Division 5,
that the borrowing was entered into for the wider
purpose of ultimately gaining a tax deduction from

the taxpayer's point of view?

MR BLOOM:	In the context of 51(1), not at all, Your Honour.
McHUGH J:	The bottom line is the net loss?
MR BLOOM:	Yes.  The bottom line is whether the partnership,

as a taxpayer, leaving aside those who comprised

it, whether it incurred an outgoing in gaining or

producing for itself assessable income, and that is

how it has to be tested because the wider

transaction, if Your Honour likes, was not to just

produce the 51(1) deduction, it was to produce the

51 deduction and the assessable income and this is

where the approbation and reprobation comes in

because, in effect, 51(1) is being applied as an

anti-avoidance provision to knock out the negative

and leave the positive and that is not the function

of 51(1) as this Court has said in Patcorp and in

John's case, but that is what has happened here.

DEANE J:  Is that quite accurate here or would it be more

accurate to say that the purpose was to achieve the

deduction and the small amounts that would be

recovered net in year, what was it, 14 and 15?

MR BLOOM:  The purpose of the architect of the overall plan?

Fletcher(2) 29 7/5/91

DEANE J:	Yes.
MR BLOOM:	Yes, Your Honour.

DEANE J:  What were those amounts. They are quite - - -

MR BLOOM:  They go up to $1.2 million.

DEANE J: No, I am not talking about those, I mean, $50,000

was put in; $30,000 went to the promoter of the

scheme; $20,000 remained for investment? Now,

when you disregard all these extraordinary

transactions, at the end of the day a real amount

was to come back to the partnership - - -

MR BLOOM:  Yes.

DEANE J: - - - what was that real amount?

MR BLOOM:  I think it was $17,000, Your Honour.

DEANE J: In years, what?

MR BLOOM:  Your Honour, Mr Pape suggests we look at page 43.

This shows the cash flow. The bottom line,

Your Honour, is the bottom line on the right hand

side of this.

McHUGH J: That is $170,000?

MR BLOOM:  Yes.

BRENNAN J: That is secured by no other security than the

personal covenant of the annuity company?

MR BLOOM:  Yes, Your Honour. what just fell from His Honour Justice Deane, one We also say this, in view of

talks about these as a circuitous lot of agreements

but they have been held not to be shams.

BRENNAN J:  I was not suggesting they were, but what I was

suggesting really - or not suggesting, wondering,

as whether, if you take the approach that it is

unreal to see these outgoings as incurred for
earning assessable income but that they were

incurred for the purpose of tax advantages and that

was the only real object, there would be something

to be said for the view that you would disallow to

the partnership the 51 deduction and you would

treat as assessable income the profit finally

emerging from the overall complex of transactions.

MR BLOOM:	That may be what was done in Ure or Ilbery.
DEANE J:	If that were correct here it would conform with

what the Commissioner has done and would not

Fletcher(2) 30 7/5/91

involve your problem of assessable income with no

deductions.

MR BLOOM: That is so, except that Your Honour is being,

with respect, benevolent to the Commissioner in

suggesting that that is what he meant because, at

no stage in these proceedings, has he argued for

that result.

DEANE J:  I have delayed you too long already with it.

MR BLOOM:  No, Your Honour. I was not accusing Your Honour

of suggesting that these transactions should be

somehow treated as shams but the difficulty is that

the transactions are not and they are legally

effective according to their tenor. It follows

that only by the use of some anti-avoidance

provision can one get to the result that the

Federal Court and the tribunal have got to. And

the anti-avoidance provisions in not 51(1); they

have not tried to go to Part IVA or the specific

provisions of 82KL, but have contented themselves

with 51(1) and they have used it as an anti-

avoidance provision.

DEANE J: Except there must be circumstances where a

deduction under section 51 is inappropriate and the

appropriate thing is to talk in terms of net profit

being income rather than the gross receipts.

MR BLOOM: Well, Your Honour, can we put it this way? If

the connection exists - - -

DEANE J:  You will recall the old profit making undertaking

or scheme cases used to say that 26 added nothing -

or the particular provision probably added nothing

to what the ordinary provisions of the Act would

have achieved anyway.

MR BLOOM:	Yes, although that does not quite take account, perhaps, of the Chief Justice's comments in
Whitford Beach as to Jones v Leeming. One also has
the London Australian Investment case bringing
profits into the assessable income.  But what is
really, with respect, the question here is, is
there a sufficient connection between the interest
on the borrowed moneys or between the borrowed
moneys themselves and the gaining or producing of
assessable income. If that connection appears and, with respect, one cannot go to the purpose, be it
purpose of the outgoing, purpose of the partnership
- if a partnership can have a purpose - or purpose
of those who control the partnership or comprise it and one cannot ever, we say, go to motive. It is a
motive of tax avoidance.

Fletcher(2) 31 7/5/91

TOOHEY J: Cannot you go to the artificiality of the

scheme - if it be artificial - in order to

determine whether or not there is a connection,

which is .... the same thing as saying purpose?

MR BLOOM:  No, Your Honour, that is, with respect, a role

assigned to doctrine - sham or specific anti-

avoidance provisions such as 260 or Part IVA.

TOOHEY J:  Not necessarily. I do not really see that it has

much to do with sham, does it? Sham suggests that

the transactions are not intended to have the

effect that they appear to have on paper. Nobody

is suggesting in this case, as I understand it,
that the documents do not reflect what the parties

intended.

MR BLOOM:  That they cannot in that way it has been dealt

with, but it was suggested - - -

TOOHEY J: But that is the same thing, is it? Or perhaps I

should put in the form of a more open question: is
that the same thing, or does that preclude an

inquiry as to the connection between the outgoing

and the gaining of assessable income?

MR BLOOM: 

It does not preclude an inquiry into the

connection, but the connection is, we submit,
supplied by the derivation of assessable income

commensurate relevantly over the period, with the

outgoing. That is the only connection which the

cases say one goes to first, and if one finds it,
one does not then go to other considerations.

BRENNAN J: 

The question is, if it is non-commensurate and

the object of the expenditure is to be seen, in

part, as the earning of assessable income and, in
part, as the obtaining of a tax benefit, is there

any reason why consistently with Ure's case, for

example, one would not then apportion the outgoing

as between the assessable income and the extraneous

purpose?

MR BLOOM:  As long as one looks at obtaining the tax benefit

for the relevant taxpayer, yes, Your Honour - - -

BRENNAN J: Yes, of course.

MR BLOOM:  - - - that is what one would do. But the

taxpayer here is the partnership.

BRENNAN J: Well, be it so. The problem is, of course, the

commensurate qualification which you insert.

MR BLOOM:  The difficulty is this, that the money is

borrowed and used to buy an annuity. That is the

taxpayer's - the partnership's - transactions. One

Fletcher(2) 32 7/5/91

goes - and one finds in the Federal Court and

tribunal, that one goes to motive of those who set

up the partnership to perform those transactions in

the first place.	Now, that was decisive for the
Federal Court in John's case.	Mrs John got

together with some people with whom she had never

been in partnership, with the specific intention

that transactions should be entertained by that

partnership that would produce a partnership loss,

taking advantage of Curran's case as it was then

understood. However, this Court said those motives

of those individuals who comprised the partners

were completely irrelevant once it was found that

the outgoing were incurred in stock which was

trading stock. Now we put the outlaying of moneys

for a commensurate return on the same level for the purpose of this argument, but we say that if we are right then John's case is authority for the

proposition that one cannot go to artificiality, or to the individual motives of the partners or to the fact that the whole thing was designed to produce a loss which the individual partners would enjoy

their proportions of for tax purposes. That is

not the way that the Income Tax Assessment Act,

shorn of a principle such as fiscal nullity,

operates, unless it is by virtue of a specific

anti-avoidance provision.

DAWSON J: 

What would you say if the individual taxpayer,

without the intervention of a partnership, engaged
in the same exercise?

MR BLOOM: 

As to his intention; as to his purpose?

DAWSON J: 

What you would do with the outgoings, or what

could you do?

MR BLOOM:  If the individual taxpayer borrowed money and

used it to acquire an annuity which would produce a
loss, we would say the same thing.	As long as the

income is relevantly commensurate with the - - -

DAWSON J: But he could have purchased the same annuity for

a lot less, or a lot less expensively, without

incurring all these losses in the meantime.

MR BLOOM: But, Your Honour, there are many things that one

does guided by the tax effects in terms of

motivation. The question always remains, when is it proper or appropriate to bring motivation into consideration in determining deductibility under a

section like 51(1).

DAWSON J: That is a problem, of course, but because you

say, well whatever might - as I understand it -

whatever else you might do otherwise, here you

cannot say that of the partnership. The individual

Fletcher(2) 33 7/5/91

partners may have all sorts of things in their mind, but the partnership is just engaged in a

simple commercial transaction.

MR BLOOM:  I see what Your Honour is putting. You say the

same person is the person with the motivation and the outgoing. Well, Your Honour, we say it makes

no difference and particularly because the way it

has been dealt with in the Federal Court and the
tribunal here is to say, "Here is an outgoing
within 51(1) able to be taken out of 51(1) because

of purpose". That cannot be right, with respect.

It would mean that if my learned leased a motor

vehicle so he could drive to Canberra and come to

the High Court with a view to getting a tax

deduction that will be provided in relation to the

minds of those who represent the Commissioner

lease payments, that that might take his otherwise the

deductible expenditure out of section 51(1).

know no limitation. If purpose is sufficient to

take a deduction otherwise allowable under 51(1)

out of 51(1), then it does not end just with a case

involving, as this may obviously be said to be,

artificiality.

BRENNAN J: Well, the fallacy in your argument, as I take

it, is that it is not sufficient to look at the

purpose of the transaction, it is a question of

looking at the purpose of the outgoings and in this

case - and correct me if I am wrong - these are the

steps in your argument.

Here is an annuity which was bought for a

commercial sum, $2 million or whatever it might be.

To acquire that asset which was paid for at the

commercial sum you borrow that amount. The

interest is payable on that amount as a commercial

rate of interest. Therefore, that amount of

interest is shown to be deductible in respect of

the annuity. The way it works out year by year is

that you get very little out of the annuity in the

first years, a lot at the end, and you have the

interest allocated over the period.

MR BLOOM:  Yes, Your Honour.

BRENNAN J: Well, that is an understandable proposition.

MR BLOOM: That is our proposition.

BRENNAN J: Yes. The difficulty just seems to me to be the

allocation of the interest on a straight line basis

across the period, but that is something that has

not been argued, you say.

MR BLOOM:	No.
Fletcher(2)	7/5/91
TOOHEY J:	And, it may be that the case does not raise any

great question of principle. It may be that, on

your argument, the connection is so apparent that

that is really the end of the matter.

MR BLOOM: That is our argument and that one does not,

therefore, get to purpose and one never gets to

motive. That is certainly our argument.

Your Honours, we have tried to make that clear in the subsequent paragraphs in our outline. We

have referred, firstly, to what Justice Brennan

said in Magna Alloys. Do Your Honours have the

Federal Law Report of Magna Alloys or the

Australian Law Report?	We have the Federal Law
Report.

MASON CJ:	I have the Federal Law Report but we can - - -
MR BLOOM:	I have the Federal Law Report, Your Honour, thank you. It is at page 185. This is where Your Honour
Justice Brennan, of course, endeavoured to bring
all the cases together which dealt with motive and
purpose in relation to 51(1) and endeavoured to
ascertain where motive and purpose played a part.
At the top of 185, first full paragraph:

As I construe these findings, His Honour

rejected the claim under the second limb of

section 51(1) -

So Magna, of course, was a second-limb case,

whereas ours is a first-limb -

to deduct the appellant's expenditure on costs

because the dominant and principal reason why

the directors incurred the expenditure was to

satisfy the personal need of the directors.

His Honour was of the view that that finding

denied to the expenditure the character of

expenditure incurred in carrying on its
business, although "in a most indirect way"
the expenditure was incurred for the purposes

of the taxpayer's business. The question thus

raised by His Honour's judgment is whether the

reason why the taxpayer incurred the
expenditure determines whether the expenditure
was incurred for the purposes of the

taxpayer's business and thereby concludes the

issue of its deductibility. Motive and

purpose are not novel or alien concepts in

ascertaining deductibility under section 51(1)

though their meaning is not always clear, and

"purpose" is susceptible of ambiguity. As

Lord Wright said in Crofter Hand Woven Harris

Tweed Co Ltd v Veitch: "The words 'motive',

'object', 'purpose' are in application to

Fletcher(2) 35 7/5/91

practical matters difficult strictly to define

or distinguish."

As this case would illustrate, Your Honours.

It will nevertheless aid an examination

of principle if a meaning be given to these

terms in the context of a discussion of

section 51, not in definition of statutory

terms but in identification of concepts to
which reference has frequently been made in

applying the section. Motive means (to adapt

terms which His Honour used) the reason why a

taxpayer decides to incur the expenditure.

Purpose may be either a subjective purpose -

the taxpayer's purpose - where it means the

object which the taxpayer intends to achieve

by incurring the expenditure; or it may be an

objective purpose, meaning the object which

the incurring of the expenditure is apt to

achieve. Both motive and subjective purpose

are states of mind and they are to be

distinguished from objective purpose, which is

an attributed to a transaction. An objective

purpose is attributed to a transaction by

reference to all the known circumstances;

whereas subjective purpose and motive, being

states of mind, are susceptible of proof not

by inference alone but also by direct

evidence, for a state of mind may be proved by

the testimony of him whose state of mind is

relevant to a fact in issue.

Though references to motive and purpose

are to be found ·in cases arising under

section 51, neither motive nor either kind of

purpose is a criterion of deductibility. The

statutory criteria are expressed in the two

limbs of section 51, "incurred in gaining or

producing the assessable income" and
"necessarily incurred in carrying on a business for the purpose of gaining or
producing such income". The purpose mentioned
in the second limb is not a purpose imported
by the phradse "incurred in carrying on", but
the purpose of the business in the carrying on
of which the deductible expenditure is

incurred.

So, that is important, with respect, Your Honour.

Neither motive nor either kind of purpose is a

criterion of deductibility. The question is, is

the outgoing incurred in "gaining or producing the

assessable income", the words used in the first

limb of section 51(1) and Your Honour

Justice Deane, with Mr Justice Fisher, at pages 207

to 208 - last paragraph on page 207:

Fletcher(2) 36 7/5/91

Where an outgoing which was not

involuntary -

and this is not involuntary -

has actually achieved the purpose for which is

was incurred or where the connexion between an

outgoing and the relevant business is direct

and obvious, there will ordinarily be little

practical point in distinguishing between

characterization of the outgoing by reference

to what it achieved and characterization in

the light of the purposes and objects of those
responsible for incurring it. Thus, in the

ordinary case of the payment under a contract,
the nature of the outgoing will commonly be
determined by reference to the contractual

quid pro quo.

And I have reminded Your Honours of what

Justice Deane and Mr Justice Shepherd said in Ure's

case, that if the connection exists between the

outlaying of funds and the earning of assessable

income, purpose and motive are irrelevant.	One
just does not go to them.

MASON CJ:  What do you say the connection is here, that it

actually achieved the object, that it yielded

income?

MR BLOOM:  Yes, Your Honour, assessable income which we say

is relevantly, over the period, commensurate with
the outgoing and therefore there is no need for or

justification for further inquiry.

DEANE J:  I do not want to keep diverting you from what has

been decided below, but must not the first question
be, "What makes this a taxable matter, what is the

taxable or what is the assessable income?" before

you can come to a deduction?

MR BLOOM:	Yes, Your Honour.
DEANE J:	Now, when you look at the definition of "income",

and I am looking at page 601 of this publication

that I have got, what do you say it falls into?

MR BLOOM: In section 25, Your Honour?

DEANE J:  No, the definition of income - income from

personal exertion?

MR BLOOM:  Income from personal exertion. What if I say, is

income according to ordinary concepts, Your Honour?

Fletcher(2) 37 7/5/91

DEANE J: What is the income here, I mean, on what basis is

it income. I mean the partnership does not really

seem to have been carrying on any business?

MR BLOOM:  The annuity is made assessable by 26AA so it may

not be income according to ordinary concepts, but

it is made assessable income by 26AA.

DEANE J:  I see, so it is that express inclusion that makes

it assessable?

MR BLOOM:  Yes, Your Honour. It may not be income according

to ordinary concepts although we would say, with

respect, that the cases on annuities would say that

an annuity and income are really synonymous. That

is income according to ordinary concepts.

DEANE J:  What if it comes in as income from personal

exertion, how does that lie with the specific

annuity provision?

MR BLOOM: It would probably, Your Honour, be more income

from property than from personal exertion if the

dichotomy is to be maintained.

DEANE J: Except, if you look at the definition of "income

from personal exertion" the relevant thing here

would be from the profit "from the carrying on or

carrying out of any profit-making undertaking or

scheme."

MR BLOOM:  Your Honour, if an annuity is, with respect,

income according to ordinary concepts representing

as it did in the 19th century, in particular, the

exchange of a capital sum which has gone for an

assured income over a period of years, is not that

income just income from property if the dichotomy

must be maintained, rather than any personal

exertion carried on by the taxpayer?

DEANE J: Yes, I see the force of that, yes.

MR BLOOM:  If Your Honour pleases. I think it is dealt with

in Professor Hannan's book in that context,

Your Honour.

Your Honour, to re-emphasize the point, we say

that where the connection to any outgoing and the
derivation of assessable income is not apparent,

then one may have regard to purpose in order to see

whether - and this is the way the purpose has

generally been looked at - to see whether purpose
can supply a connection where there is an apparent

lack of one. So, one starts with the apparent lack

of connection, one goes to purpose to see whether

purpose, as indeed in Magna, supplies.the

connection and it did in Magna and we have referred

Fletcher(2) 38 7/5/91

Your Honour Justice Brennan in Magna again at page 189, first full paragraph:

Though purpose is not the test of

deductibility nor even a conception relevant

to a loss involuntarily incurred, in cases

where a connexion between an outgoing and the

taxpayer's undertaking or business is effected

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.

Or as Your Honour Justice Toohey said, stamping it

as not that, the connection being absent, it being

permissible to look at purpose, purpose can either

supply the connection or make it clear that the

connection is not there.

Your Honour, this is picked up in John's case,

166 CLR 417 at pages 426 to 427, at the top of the

page:

A loss or outgoing is deductible under

s.51(1) only if it was:  (a) incurred in

gaining or producing the assessable income,

or -

second limb.

It cannot be seriously controverted that

assessable income was produced as a result of

the Compinge transactions.

That was the bonus share company.

Nor can it be disputed that the obtaining of the bonus shares was a step in the process of

acquisition of the shares that were ultimately
sold so as to produce that income.	As such,

any loss or outgoing associated with the

acquisition of the bonus shares seems to fall

naturally within the concept of a loss or

outgoing incurred in gaining or producing

assessable income. Nevertheless, it was

argued on behalf of the Commissioner that

motive or purpose is relevant to a

consideration of whether a loss or outgoing

was so incurred.

In Ronpibon it was stated by the Court

that "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". In

Federal Commissioner of Taxation v Ilbery,

Fletcher(2) 39 7/5/91

Toohey J. said by reference to the above

statement from Ronpibon that "that was not to

exclude the notion of purpose". His Honour

added that "purpose may stamp the outgoing as

one having no relevant connexion with the

gaining or producing of assessable income".

Although the first limb of s.51(1) speaks

of a loss or outgoing "incurred in gaining or
producing the assessable income", a loss or outgoing may be so incurred notwithstanding that no income has been gained or produced in

the period in which the loss or outgoing is

claimed to be deductible. The test of

deductibility under that limb, as laid down in

Ronpibon is that "it is both sufficient and

necessary that the occasion of the loss or

outgoing should be found in whatever is

productive of the assessable income or, if

none be produced, would be expected to produce

assessable income".

It is readily understandable that, if no

income has been gained or produced and a

question arises as to whether the occasion

would be expected to produce assessable

income, consideration of the purpose for which

the expenditure was outlaid might not be

wholly irrelevant. It may be too that even
where income is produced "the purpose for
which the advantage occasioning the loss or

outgoing is sought may evidence a sufficient

relationship with the income-earning process"

Handley's case.

But the cost of a step taken in the process of

gaining or producing income must be regarded

calculating the loss (if any) incurred,	as an outgoing or taken into account in
whatever purpose or motive may have attended
all or any of the steps involved.

We obviously place much reliance upon that passage,

and we say the interest was a cost of a step taken

to earn the assessable income, namely, the annuity,

and falls squarely within that passage.

We have given Your Honours references in

paragraph 22; again, while Your Honours have

John's case to passages at page 428, a passage not

irrelevant to this particular case, with respect,

the second paragraph on page 428:

It is not in dispute that the motive for the formation of the Malindi partnership and

Fletcher(2) 40 7/5/91

its activities was to obtain, by means of the

Compinge transactions, a partnership loss to

be divided between the individual partners and deducted from their income pursuant to s.92(1)

of the Act. Nor is it in dispute that the

dominant purpose of the Compinge transactions

was to obtain the benefit of a deductible loss

or outgoing conformably with the decision in

Curran.

At first instance, Yeldham J. found that

the motive of the partners was of little or no

relevance and concluded that the partnership

was engaged in the business of share trading.

His Honour made no express finding that the

Compinge transactions were part of the

business activities of Malindi, but that

finding is implicit in his holding that "the

fact that the appellant, and indeed the

partners collectively, sought a tax advantage

does not preclude them from relying upon

s.51(1) to obtain an allowable deduction.

In the Federal Court Bowen C.J. took the

view that the Compinge transactions were not

part of the business activities of Malindi as
a share trader, by reason that they were

prearranged, undertaken in the very early life

of the partnership and constituted the "fons

et origo of all that occurred''. A similar

view was taken by Fox J. who considered that

the Compinge transactions were "separate and

distinct dealing(s) of major importance" and

undertaken for the purpose of obtaining a

"painless taxation loss". Beaumont J. put the

matter in terms of s. 52(2) of the Act,

holding that the bonus shares could not be

characterized as trading stock because it was

not established that "the Compinge

transactions were embarked upon as an

adventure in the nature of trade".

And over at page 430, at the top of the page:

Whether or not a person is a trader seems

to us to be a question of fact, albeit that in

some cases the determination of that fact may

depend on questions of impression and degree.

If trading has not commenced -

and we say this is the same where assessable income

has not been derived in an equivalent but different

situation to this -

or if there is no discernible trading patter,

the question of intention or purpose may be

relevant in the sense that if there is an

Fletcher(2) 41 7/5/91

absence of intention or purpose to engage in

trade regularly, routinely or systematically

then the person may well not be a trader. A
fortiori if some contrary or inconsistent
intention or purpose is present. But if

trading has commenced and the activities

reveal a discernible trading pattern, then it

seems to us that the motive for undertaking

the activities or for undertaking a particular
transaction cannot serve to characterize the

person engaging in those activities as a non-

trader, or as a non-trader in relation to a

particular transaction.

And, likewise if the partnership earns assessable income commensurate with its outgoing then the

motives and the purposes cannot be used to

otherwise classify that outgoing or deny it

deductibility.

In the present case Malindi did trade in shares and its activities disclose a pattern

of trading activity rather than a series of

discrete transactions. Moreover, it was

formed to trade in shares. The fact that its

formation and activities can also be ascribed

to a desire to obtain a taxation advantage

cannot alter the fact that Malindi was at

relevant times a share trader.

And then to the bottom of the page:

Our view that the purpose of obtaining a

private tax advantage does not take the bonus

shares issued outside the description of

trading stock is consistent with the approach

adopted by this Court in -

IMFC and other cases.

None of those cases involved bonus shares.

However, all three cases concerned the

acquisition of shares for the purpose of

obtaining distribution of dividends and

subsequent sale in circumstances attracting a

taxation advantage. In none of those cases
did the purpose of obtaining a taxation

advantage serve to set the shares apart from other shares which were trading stock, or to characterize the taxpayer as other than a

trader in relation to the shares so acquired.

So, really, what the Court was saying, you

cannot use purpose or motive in relation to tax

avoidance to characterize something or give it a

character other than that which it has. So that if

the outgoing is properly characterized as an

Fletcher(2) 42 7/5/91

outgoing incurred in gaining or producing

assessable income, the existence of a purpose or

motive of tax avoidance cannot be used to give it

some other character; namely, expenditure, as the

tribunal here said, to get a tax advantage.

And, Your Honours, there is a passage at

pages 434 to 435, where Your Honours has to deal,

for the first time, with the question of the

construction, that principle. At the top of

application of fiscal nullity in this country, and

page 434:

The principle which has come to be known

as "the principle of fiscal nullity" derives

from the decisions of the House of Lords in

Ramsay. The principle was stated in Furniss

by Lord Brightman -

and the principle which seems, with respect, to

have been applied then under the guise of fiscal

nullity in this case -

"First there must be a pre-ordained series of

transactions; or, if one likes, one single

composite transaction. This composite

transaction may or may not include the

achievement of a legitimate commercial

(i.e. business) end .... Secondly, there must

be steps inserted which have no commercial

(business) purpose apart from the avoidance of

a liability to .tax - not 'no business effect'.

If those two ingredients exist, the inserted

steps are to be.disregarded for fiscal

purposes.

Now that is what the Court has done here. It had

disregarded, for fiscal purposes because of the

tax-avoidance motivation, the outgoing for

interest. That is the very thing which this Court

said in John's case you cannot do. At the bottom

of the page the Court - last paragraph - refers to

a passage from the judgment of Sir Harry Gibbs in

Patcorp. It says:

If any such or similar principle is to be applied in relation to the Act, it is one that

must be capable of implication consonant with

the general rules of statutory construction.

One such general rule, expressed in the maxim

expressurn facit cessare taxiturn, is that where

there is specific statutory provision on a

topic there is no room for implication of any

further matter on that same topic. The Act,

ins. 260 and now in Pt IVA, makes specific

provision on the topic of what may be called

Fletcher(2) 43 7/5/91

tax minimization arrangements and thereby

excludes any implication of a further

limitation upon that which a taxpayer may or

may not do for the purpose of obtaining a

taxation advantage. We would respectfully

adopt as correct that which was said by

Gibbs J. in Patcorp:

"The presence of s. 260 makes it impossible to

place upon other provisions of the Act a
qualification which they do not express, for
the purpose of inhibiting tax avoidance."

Notwithstanding the observations of Gibbs J. in Patcorp, it was argued on behalf of the

Commissioner that the principle described by

Lord Brightman in Furniss should be adopted in

construction and application of s. 51 of the

Act. By this we understand it to be argued

thats. 51 should be construed so as to

exclude therefrom a loss or outgoing that has

been artificially contrived by a preordained

series of transactions or composite
transaction into which there have been

inserted steps which have no commercial

purpose apart from the avoidance of a

liability to tax. If that construction is to

be reached as a matter of implication then,

for the reasons already given, the presence of

s. 260 precludes that approach. If it is

advanced as a matter excluded by the plain

meaning of s. 51, there is no occasion to

resort to any new principle of construction.

We should add that on ordinary principles of

construction there is no warrant for limiting
s. 51 by reference to the two quite specific

ingredients identified by Lord Brightman in

Furniss. We would thus reject the principle

of fiscal nullity as one appropriate to be

adopted in the construction of the Act

generally, or one appropriate to be adopted in

the construction and application of s. 51.

So, the Court is there saying, not only is

there no fiscal nullity but you cannot interpret

section 51(1) as achieving the same effect, or the

same result, as the doctrine of fiscal nullity

would achieve and that is because we have Part IVA,

or 260 at that time, and it is those provisions

which deal with tax avoidance. Yet, with respect,

that is what the Federal Court has done here.

I might just remind Your Honours what

Sir Harry Gibbs did say in Patcorp, 140 CLR 292.

His Honour was dealing at page 292 with the

question of whether certain English cases that had

held that various transactions which, for purely

Fletcher(2) 44 7/5/91

fiscal purposes, could be ignored and applying

those English cases, as he had been asked to do, to

the Australian Act.	He says about line 10, just
opposite his name:

In particular the English legislation does not

contain a provision like section 260 of the

Act which is aimed generally at tax avoidance.

The presence of section 260 makes it

impossible to place upon other provisions of
the Act a qualification which they do not

express, for the purpose of inhibiting tax

avoidance. In other words, it is not

permissible to make an implication which does

what section 260 fails to do in preventing the

avoidance of tax. If it is suggested that a
taxpayer has engaged in a device to secure a
fiscal advantage, and the relevant provisions

of the Act do not expressly deal with the

matter, the case depends entirely on

section 260 -

or Part IVA. That is why, Your Honours, earlier we

suggested that the appropriate thing was for the

tribunal did not set apart IVA on the basis that
the case must depend entirely upon the correct

application of that Part.

MASON CJ:  Mr Bloom, apart from this case, were there any

decisions of the Federal Court in which outgoings

have been entirely disallowed by reference to

purpose where the outgoing has produced assessable

income?

MR BLOOM:	Your Honour, there is a case - I think a decision of Mr Justice Wilcox called Anderson in which I
think that was the result.
McHUGH J: That is referred to in the Full Court's judgment.

MR BLOOM:  Yes, Your Honour, the reference is there. I

think also that was the result sought to be

achieved in a case called Riverside Road which went

to the Full Court and I think this Court - - -

TOOHEY J: Refused special leave.

MR BLOOM:  Refused special leave, yes, thank you,

Your Honour. The Full Federal Court there held

that, contrary to the argument, motive or purpose

could not be used to disallow an interest deduction

and that Munro's case and what Your Honour

Justice Brennan said in Magna and Ure was applicable in relation to that.

Your Honours, we have left till last the

essential character test upon which our learned

Fletcher(2) 45 7/5/91

friends placed so much reliance below.

Your Honours, if Your Honours are minded to look at

the argument again in John's case, will see that

essential character was the argument put there and

it was argued that the essential character was tax

avoidance and that was what my learned friend,

Mr Jackson, argued in the Federal Court.

But, Your Honours, we say that is clear from

Lunney's case and from John's case that the

essential character test is of no assistance in a

case such as this. It is really there to identify

expenditure which might be private or domestic and

essentiality is a test which is really limited to

that task. It was so used in Lunney - the case

involving the deductibility or a claim for

deductibility of fares for travelling to work - and

it was held that such expenditure is essentially

private not business and, therefore, non-deductible

and in Handley and Forsyth, they were the cases

dealing with barristers studies at home.

In John's case, at page 431 - if I could

trouble Your Honours to return to that case - at
the bottom of the page, the sentence commencing:

The purpose of its acquisition and the fact of its sale as intended must serve to deny the

possibility that the loss or outgoing is

essentially private in nature, essentiality

being the criterion adopted in Handley and

Forsyth to determine whether expenditure is of

a domestic nature and one which is equally
appropriate to determine whether expenditure

is of a private nature.

And that is the essential character test,

Your Honour. It is not something that replaces the

words of section 51(1). And we remind Your Honours

taxpayer, a partnership, about whom it might be	that really we are here dealing with a notional
difficult to say there exists expenditure of a
private or domestic nature, and for that reason, also, essentiality is not an appropriate test.

Your Honours, I should say something, before

sitting down, about our learned friends notice of
contention. Firstly, Your Honours, Order 70 rule 6

deals with notice of contention and one can employ

a notice of contention where the court below has,

it is alleged, decided a matter of fact or law

erroneously. Now whether the matters in the notice

of contention are matters of fact or law, and we
say, with respect, they are all matters of fact and

cannot be raised, the court below never decided

them because it was never called upon.to decide

them. The matter proceeded before the tribunal and

Fletcher(2) 46 7/5/91

the court upon the basis that the Federal Court had

made all relevant findings in relation to sham and

fiscal nullity and that the tribunal and the

Federal Court, between them, had found all the

facts and that was it. These matters were never

canvassed, either in the tribunal the second time,
or in the Federal Court. There was a notice of

contention in the Federal Court the second time,

but it dealt solely with section 82KL and Part IVA

and the court declined to entertain it.

Your Honours, the other thing we should say is

this, that they are all matters of fact that are
dealt with in the notice of contention and, of

course, the appeal from the tribunal to the court,

and therefore what this Court is dealing with, the

questions of law - it is limited to questions of
law by section 44 of the Administrative Appeals

Tribunal Act - and we also submit, with respect,

that this Court as a Full Court should not be

involved in findings of fact, that in so far,

anyway, as the notice of contention deals with

questions of whether payments were made or not, it

would be futile to entertain those matters, because

the question is one of whether outgoings were
incurred or income derived and the Federal Court,

having held that the agreements were not shams, but

real, and that the agreements had the effect for

which the taxpayers contended, there was an

obligation to pay interest, found, and a right to

income, found, and they must exist independently of

any question of payment.

We might just remind Your Honours of

Henderson's case, 119 CLR, particularly at page 650 about accessibility of taxpayer, such as a

partnership, who would derive income on an accruals

basis and Nelson Development Laboratories

Pty Limited, 144 CLR, especially at pages 623 to

624 and 627, as to the fact that deductibility

depends upon a liability being incurred, but does

not depend upon the actual payment or discharge of

that liability.

McHUGH J: Before you leave the notice of contention, what

about ground 4 in the notice of contention?

MR BLOOM:	Yes, Your Honour, that is flatly in the face of the finding by the Full Federal Court the first
time around. At page 6:

The effect of this agreement was to create an

obligation to pay to Doowarf interest, in each

of the first 12 years, of $360,000.

Now, that was never challenged. There was no

attempt to seek special leave from that decision to

Fletcher(2) 47 7/5/91

this Court and the case was conducted both before

the second tribunal and the second Full Federal

Court upon the basis that these facts and
conclusions were correct. They were never put in

issue below. But I appreciate Your Honour saying

to me that is not merely a matter of fact.

Your Honours, finally, we say there is a

matter of policy and in the interest of justice,

the Commissioner should not be allowed to raise

these points that he did not raise below at this

stage. We rely upon a passage in the judgment of

Lord Griffiths in Ketteman's case. We have a copy

of it, Your Honours, just the headnote, if I might

hand that up.

It was a case where counsel for the defendant,

before the case had finished, sought to raise for
the first time a statute of limitations and it was
held that he should not be entitled to do so,
notwithstanding it would have completely disposed
of the plaintiff's claim, because he had not done

at page 220, said this, just under D:

so before. It is a little different from

Whether an amendment should be granted is

a matter for the discretion of the trial judge

and he should be guided in the exercise of the

discretion by his assessment of where justice

lies. Many and diverse factors will bear upon

the exercise of this discretion. I do not think it possible to enumerate them all or

wise to attempt· to do so. But justice cannot
always be measured in terms of money and in my

view a judge is entitled to weigh in the

balance the strain the litigation imposes on

litigants, particularly if they are personal

litigants rather than business corporations,

the anxieties occasioned by facing new issues,

expectation that the trial will determine the	the raising of false hopes, and the legitimate
issues one way or the other. Furthermore to allow an amendment before a trial begins is quite different from allowing it at the end of the trail to give an apparently unsuccessful defendant an opportunity to renew the fight on
an entirely different defence.

MASON CJ:  But this is not a matter of discretion, is it?

MR BLOOM: With respect, Your Honours, in so far as the

matter has not been dealt with below, then yes, it

is a matter of discretion.	Your Honours can say
that these - - -

Fletcher(2) 48 7/5/91

MASON CJ: But·is not the respondent entitled to advance a

ground on which he did not succeed below and which

was not raised below in order to sustain the

judgment?

MR BLOOM:  As a notice of contention, no, Your Honour,

because that suggests, with respect - unless we are

wrong on this - that the court below wrongly

decided these points. It is different if the court

below must be taken to have wrongly decided them,
but the court below was asked to accept all these

matters in the manner in which the first Federal

Court had found them. That is even upon the

assumption that the first Federal Court had not in

its decision created an issue estoppel with respect

to those matters between the parties.

But we say Your Honour may be right. It may

not be a matter of discretion. It may be that

simply the notice of contention is bad because

these matters were not alive matters before the

Federal Court below or before the tribunal below.

McHUGH J:  Do they have to be? In an ultimate appellate

court the respondent can support the judgment on

grounds not taken below, particularly if they raise

question of law and provided evidence could not

possibly have affected - - -

MR BLOOM: Well, one takes into account, Your Honour,

questions such as evidence and the fairness or

propriety of being allowed to do it at this stage.

That is where we say discretion comes in.

BRENNAN J:  Mr Bloom, I cannot quite see how this problem

arises in the light of section 44 of the AAT Act.

I mean, there is no jurisdiction in any court to

find a fact different from that which the AAT has

found.

MR BLOOM:  Only on an error of law basis; in other words,

no evidence, or it is such an incredible finding

that it cannot be supported.

BRENNAN J: Yes, I mean if there is no hope, quite.

MR BLOOM:  These matters were not put that way in the

BRENNAN J: Well now, the questions for which the notice of

contention went were either assumed for the

purposes of the decision below, or they were not

found by the court below. Is that right?

MR BLOOM:  They were decided by the first Federal Court.

BRENNAN J:  They could not have been. It had no

jurisdiction to find them. It is only if the AAT

Fletcher(2) 49 7/5/91

has adopted those findings that one can say that

they are concluded.

MR BLOOM:  And the AAT did, Your Honour, yes.

BRENNAN J: If, on the other hand -

MR BLOOM:	The AAT did adopt them.
BRENNAN J:	- - - nobody has adopted them, then the whole

matter seems to have gone off without any findings

of fact to support the argument one way or the

other.

MR BLOOM:  But the AAT did adopt the findings of fact of the

Federal Court and there was no challenge made to those.

BRENNAN J: 

Can you demonstrate that to us?

MR BLOOM: 

Yes, Your Honour, certainly. In the reasons of

the tribunal at page 48 where Dr Gerber with a
usual metaphor commences and describes the task as

one that

can be likened to reconstructing the Old

Testament from the Dead Sea Scrolls -

and then says at paragraph 4:

We commence this "reconstruction" by

repeating gratefully what their Honours of the

Federal Court, in their joint judgment, adopted as the material facts.

And then the facts are all set out, taken precisely

- they added to those facts some extracts from the

transcript which they said went to show that the

things tax motivated - the whole transaction was

tax motivated and that the taxpayers could not be

as naive as they appeared to be there, but there

was no contest as to any of these facts neither

before the tribunal nor before the court and it

would be unfair, with respect, to allow such

factual matters to be regurgitated here in this

Court. If Your Honours please, those are our

submissions.

MASON CJ: Yes, thank you, Mr Bloom. Yes, Mr Jackson?

MR JACKSON:	Your Honours, may I hand to the Court copies of our outline of submissions and promise,
Your Honours, in so doing, that I shall not
regurgitate all the facts which have been mentioned
by my learned friend.

Fletcher(2) 50 7/5/91

Your Honours, may I just say something as

Your Honours are about to look at those documents

that, in the light of the course which my learned

friend's argument has taken, there are some
additional submissions I wish to make in response

to some of the things he said.

MASON CJ: Yes.

MR JACKSON:  Thank you, Your Honours. Your Honours, the

matter with which I first wish to deal concerns the
effect of a matter much relied upon on behalf of

the appellants and that is the effect of the

finding that there was no sham. Your Honours, the

pages setting out the finding do not form part of

the material which Your Honours have, but I have

arranged to have copies of that made and I will

give it to Your Honours tipstaves during the

luncheon adjournment. Your Honours, the finding

simply is to the effect that the parties intended

the documents to have the effect which they have.

Your Honours, could I deal with that matter

immediately, that is, the effect of the finding of

no sham and, Your Honours, in that regard to form

the view that a transaction or series of
transactions was not a sham is to say no more than

that the parties to them intended the transactions

to be effective according to their terms. It

means, on the positive side, that the transactions cannot be disregarded, that is that they cannot be

treated as if they had not occurred but that is its

effect. It does not mean, of course, that they are

to be given a legal consequence more favourable to,

for example, a taxpayer than they would have had if

there had been no suggestion that they were a sham

and, Your Honours, it also does not mean that one

must disregard the fact that, as is not

infrequently the case in matters relating to the

revenue, the facts which are found not to be a sham

tend yet to partake of the exotic. Your Honours,

one is not obliged to leave out of account that

fact simply because the transactions, though

exotic, are not shams.

And, Your Honours, in short we would submit,

on the one hand a finding of no sham means that the

subject of intentions of the parties included the

intention that the transactions should take effect

according to their terms, but it means nothing more

than that, and in particular, it does not mean that

one is then precluded from observing upon the fact

that the transactions, for example, are atypical,
or are unusual, or are commercially inexplicable or

indeed, commercially absurd, or can only be

justified as transactions entered into because a

taxpayer will obtain a taxation deduction to which

Fletcher(2) 51 7/5/91

the taxpayer's private affairs would not otherwise

entitle him or her.

And, Your Honours, if I might come now to the

second matter with which I wish to deal initially,

and it is that the transactions into which the

parties entered in the particular case were of a

nature which was certainly commercially atypical,

certainly curious - indeed, one might say,

bizarre - and indeed of such a nature that it is

obvious, we would submit, that the entry into them

was only in order to obtain the very significant

taxation advantages available during the

first 10 years.

And, Your Honours, after that period of

10 years, that is, during the five years when, in

theory, money might actually have come into the

hand, the further participation was, in fact,

optional. Now, Your Honours, I wonder if I might

take Your Honours, first of all, in that regard to
the documents which appear at pages 43 and 44 of

the appeal book. If I could go, Your Honours, to

page 43, Your Honours will see that document is a

document which indicates what money there was

available in each of the years. Now, Your Honours,

I say "what money there was available" - I am, of

course, not speaking really of cash, I am speaking
of transactions one side and the other, which do

not result in there being cash; except to a very

limited extent.

Now, if Your Honours look at page 43,

Your Honours will see that the annuity, substantial

though it is described as being, namely $170,000 in each of the first five years, that is 1982 to 1986,

and $600,000 in the five years 1987 to 1992, and

rising indeed to $1.119 million in the last five

years, in fact provides no cash surplus until the

11th year, that is 1992 and, Your Honours, it does	not provide a cash surplus because the dollars to	interest payments, to that company, must be met.
Your Honours will see that, for example, by a happy
coincidence, the interest payments in the first ten years are matched by the moneys which come in.
Your Honours, that appears again at page 43 and if
one takes, for example, the year 1983, the money
which comes in is the annuity of $170,000; the
amount which also comes in is a further $190,000
from Eromdim and Your Honours, those two sums
together go to make up the $360,000 necessary,
under the documents at least, to make the payments of interest to the two lenders, Doowarf and
Eromdim.

buy it are borrowed from the Doowarf, and the

Fletcher(2) 52 7/5/91

If Your Honours look at the bottom line of

page 43, Your Honours will see that in reality the

cash surplus only comes about in the last five

years and Your Honours, that cash surplus is a sum

of $34,000-odd in each of those five years.	Now
Your Honours -

McHUGH J: That minus is a mistake, is it?

MR JACKSON:  I think so, Your Honour, yes. That is between

1992 and 1993, Your Honour, yes.

McHUGH J: Yes.

MR JACKSON:  And the last column, the $170,000, is the sum

of the five figures.

BRENNAN J: That is real money, is it, that last line,

Mr Jackson?

MR JACKSON:  Your Honour, it just might be and, Your Honour,

it just might be if the parties do not exercise the

right which they have to bring the transaction to

an end at the end of any year up to the 11th year.

The reason why they would bring it to an end is

because - if Your Honour looks at the next page,

one sees - could I ask Your Honour to look at the
years 1992 to 1996 - that there is a very

considerable increase in the amount of the annuity.

It goes up to $1.19 million.

Now, what one sees in those years,

Your Honours, is that for the first time there is a

profit, as it were, rather than a loss. That is in

the column, the side~note "Income/(Loss)". So, for

the first time there is money which, in the result,

would, however one might quite describe it, be

taxable; taxable by the distributions, which

Your Honours will see in the next few lines down

after the reference to each of the names.

But, of course, whilst the amounts in those

years which would be the subject of tax - if I can
put it loosely for the moment - are very high, half

a million dollars or more in respect of the various

persons involved, one goes back to the preceding

page to see the money available to pay the tax that

might fall upon those sums and, of course,

Your Honours, the cupboard would be somewhat bare.

McHUGH J:	Do the buy-back figures appear?
MR JACKSON:	Yes, Your Honour, I will come to them in a

moment, if I may, but the highest they get to

is 80,000 - they range - Your Honour I cannot quite

remember the first figure, but I think it may go

from 24,000 to 80,000 - and the persons who are the

Fletcher(2) 53 7/5/91

partners have the right to require the annuity to
be bought back, and I will take Your Honours to the
provision of the document that gives that right

shortly.

DEANE J:  Mr Jackson, has anybody done the compound interest

calculation of how $20,000 invested in 1982

produced $34,000 for five years.

MR JACKSON: 

Your Honour, that is what I am about to come to

next, and Your Honour will see - and I will come to
the passage in a moment - that the reality of the
transaction, if I could use that expression again,

in commercial terms, is that an investment of the

$50,000 which was the only amount paid, $30,000 of
which went, of course, to the promoters, in the

first place would have achieved at least the same

result.  The page at which one sees that is

page 10, and the last paragraph on the page:

Evidence was given by Mr CJ R Latham -

and what Mr Latham's evidence was that:

$20,000 invested free of tax at the rate of
14% per annum for a period of 15 years would
provide ..... $18,945 in each of the final five

years.

Now, Your Honour, if one goes - that would get

$18,945 - if one put in the $50,000 obviously you

get a figure in excess of the $34,000 that is in

the bottom of - - -

DEANE J:  On the basis of $30;000 fee, $34,000 a year seems

a quite extraordinary return on the $20,000 that

remained.

MR JACKSON:  Yes.

DEANE J:  I did it on 20 per cent compound interest and it

came nowhere near it.	I was just wondering how
much it was.

MR JACKSON: Yes. Your Honour, I suppose it depends really

essentially the rate of interest one chooses, but

at any event, Your Honour, the point is made, with

respect, in gross, as it were. It is obvious that

if one invested $50,000, and one could buy an

annuity that would pay sums in the last five years,
annually that were in excess of those which were

provided under the scheme - and there is not a

hugely significant difference between the amounts

in question -

BRENNAN J: That is if you neglect tax on the income derived

from the investment in the intermediate years?

Fletcher(2)	54	7/5/91
MR JACKSON:	Yes.	Your Honour, one is working on the

assumption that if one invests the money now, gets

nothing in the interim, in the 10 years, but then
gets these sums in each of the succeeding five

years.

BRENNAN J: Well somebody gets something in the intermediate

years.

MR JACKSON:  Your Honour, presumably the person who has the

benefit of the capital sum used to purchase the

deferred annuity.

BRENNAN J: Yes.

MR JACKSON:  But the person who purchased the annuity would

not be obtaining any income during that period of

10 years.

BRENNAN J: Just looking at the bottom of page 10, there it

seems to me that the assumption that is made there

that it is free of tax is an assumption which
rather takes away from the force of the figures

that are there displayed.

MR JACKSON:  Yes, Your Honour.

DAWSON J: That is not saying that you could purchase an

annuity of $47,000, a deferred annuity, by

investment of $50,000, is it?

MR JACKSON:  Your Honour, the words "free of tax" - I may

have to go the part where he gives the evidence to

see precisely what he meant by that because the
court seems just to be recounting what the witness
had said, but it may be that the "free of tax" is
intended to refer to the result, that is to say,

the result is so much free of tax, perhaps after

tax.	Your Honour, it is not clear and I need to go
to it but, Your Honour, whatever it be we would

submit that it shows that a great deal of work was

done to achieve an economic result not very

significantly different from that which might have

been achieved by a rather simpler transaction.

Your Honour, that is not the test necessarily, of course, but it is a factor, we would submit, that can be taken into account.

Your Honours, the next feature is that no money ever did change hands apart from the in~tial

$50,000 and no money ever was to change hands.

Could I in that regard, Your Honours, go to page 90

and at the bottom of page 90 the court sets out the

facts and Your Honours will see at the last four

lines that in 1982 they:

Fletcher(2) 55 7/5/91

invested a total of $50,000 under the fifteen year plan. They signed documents including a

partnership agreement, two loan agreements and

an annuity agreement ..... A great deal of

activity occurred in relation to the signing

of documents including drawing, endorsing and

accepting bills of exchange, the net result of

which was ..... that all three bills ended up in

the hands of the original drawee with no

payment actually passing under the bills.

Now, Your Honours, what occurred, and I will

come to this a little later, was that the bills

were made out and completed and endorsements by all

other parties on the bills when Mr Tucker, on

behalf of the partnership as drawer, signed the

bill. Now, Your Honours, whilst that may have

given life to the bill the bill died at that moment

because, to the extent to which it gave any life to

the bill, the bill was then in the hands of the
acceptor and by virtue of section 66 of the Bills

of Exchange Act was discharged at the moment it

came into being.

McHUGH J:	Was he acting in any separate capacities?
MR JACKSON:	No, Your Honour, he was acting on behalf of annuity investments but it was not a situation
where the bill of exchange was one that was drawn
by him, then accepted, then endorsed. What it was
was a situation where the bill of exchange had had
all those things done already, or a piece of paper had had all those things done already, the piece of
paper was not a bill of exchange because no one had
drawn it.  He drew it, Your Honour, and thus, in
theory, giving life to it, but I can only use the
expression that it was stillborn because at the
moment he did that the person who was the acceptor of the bill was the person who was the holder in due course of the bill because of the endorsements,
And, Your Honours, that had the result that even if and the bill was discharged at the same moment. one treated the transactions as not involving any
actual passage of money but as being the creation of obligations, in fact that never happened.
BRENNAN J:	If he had drawn it first and then just passed it

around the table, it would have been different?

MR JACKSON:  Yes, Your Honour, if it passed around the table

with the parties endorsing it, yes, it would have

the effect that the bill of exchange had come into

being but when it got back in the hands of the

acceptor it would then be discharged.

DEANE J: But does it matter? I mean, would not one say

that the outcome of it all was that the relevant

Fletcher(2) 56 7/5/91

amounts had all been set off to extinguish

indebtedness any way?

MR JACKSON:  Your Honour, from some points of view the

answer might be yes but, Your Honour, that is not

the precise point I was seeking to make. I was

seeking to do two things: one was to say that if

one looked at what had occurred - and I have not

come to the detail of that yet - it had an air of

high artificiality about it, but the second thing

was that it did not even have the result that the

document was effective and, if one treats a

liability to pay interest as a liability to pay

interest on money that has been advanced, even if

the advance is to take place by a crediting or a debiting, that did not even occur. No money was ever, in fact, advanced pursuant to the

transactions and there was nothing upon which

interest could be calculated.

BRENNAN J:  Does that mean that there were liabilities under

the contract that were never discharged?

MR JACKSON:	Yes.
BRENNAN J:	Then what has happened to those liabilities?

MR JACKSON: Your Honour, they remain, presumably. There is

nothing in the case to suggest that Doowarf has

attempted to lend another $2 million or that the

transactions have taken place again; they have
taken place, in effect, on the assumption that the

first ones were effective.

MASON CJ:  Mr Jackson, we will adjourn now and resume at

2.15.

AT 12.47 PM LUNCHEON ADJOURNMENT

UPON RESUMING AT 2.16 PM: 

MASON CJ: Yes, Mr Jackson.

MR JACKSON:  Thank you, Your Honour. Your Honours, may I

deal with a matter that was raised by Your Honour point in the evidence at which the calculation by

Mr Latham appears. Could I say two things,

Your Honour? First, Your Honour was right about

the 20 per cent. That appears in the evidence of

Mr Latham at page 339 of the record in the

Fletcher(2) 57 7/5/91

Federal Court.	Your Honours have that but I do not
think Your Honours know that.	I intend to give two

references. That is the first, page 339. The

second is, so far as the calculation which is

referred to in the reasons for judgment is

concerned, that appears at page 356 in Mr Latham's

evidence.

Your Honour, I still have a little difficulty

in trying to explain the tax free part of it but he

seemed to understand it was a question put to him

by a member of the tribunal who said, "Assume it is

tax free" and he seemed to be able to work it out

and came up with that answer. But the black art of

actuaries is something I would not be able to
explain further in that regard, but that is what he

said. The pages are at page 339 and page 356.

Your Honours I do not propose to go to those pages

myself, but may I give Your Honours the reference.

The second matter in a somewhat similar vein

is that I said I would give Your Honours references

to the findings as to the sham. Your Honours, the

first finding, and that is the finding that

remained and has remained the finding, appears in

the reasons for decision of the tribunal. Since
the Court adjourned, Your Honours' tipstaves have

been given a copy of those reasons. It appears at

page 9 and it is the first new paragraph on that

page.

Your Honours, it is right to say, that is a

finding that there was no sham. It is not,

however, a glowing endorsement for the proposal.

That is the finding which is referred to in three

passages in the record book, which Your Honours

have, in this Court. Could I give Your Honours the

references first:  15, 31 and 89. At page 15,

about line 18; at page 31, lines 24 to 27; and

page 89, the last paragraph on the page.

Your Honours, when the Court adjourned, I was

in the course of referring Your Honours to some

passages in the findings and, in relation to the

events which had in fact occurred, I just want to

give Your Honours one or two further references to

that and then I propose to deal with the first of

two further matters, that first matter being the

relevance of the fact that there was a partnership

involved, a matter on which my learned friend

placed some emphasis this morning. Having done

that, may I then come to what we would submit is

the test which is apposite.

Your Honours, could I, returning then to the record, take Your Honours to page 90. I had

referred Your Honours, I think, to the last few

Fletcher(2) 58 7/5/91

lines on page 90 and the last paragraph on that page and had got to the top of page 91 and Your

Honours will see a reference to the activity of the signing of documents and so on:

all three bills ended up in the hands of the

original drawee with no payment actually

passing under the bills. The only money which

did pass by the end of June 1982 was the

$50,000.

Your Honours will see, in the next paragraph that:

"round robins" -

of a similar nature -

with bills of exchange were carried out -

in relation to the interest payments.

BRENNAN J:  Do we need to know the precise steps that were

taken to implement this arrangement?

MR JACKSON:  Your Honour, so far as our one submission is

concerned that I referred to earlier, and that is

the way in which the original few, if I can put it
loosely for the moment, bills of exchange were
concerned, the answer is yes, and I had intended to

take Your Honours to that a little later.

Your Honours, so far as the case is concerned

otherwise, Your Honours do not need to go beyond

the findings in the tribunal.

BRENNAN J: In the tribunal.

MR JACKSON:  In the tribunal. Your Honours, I was going to

go to those findings now. Your Honour, I should

say before doing so, so there is no misapprehension

about what I am doing, that I intend to come back,

at a later point in my argument, to dealing with

the part I referred to earlier concerning the

detail of the endorsement of the bills of exchange.

But may I come generally first to the findings of

the tribunal, at page 49.

Now, Your Honours, perhaps one should start

really at page 48 where the material facts were set

out there. Your Honours, I shall not read them

out, of course, but I would refer Your Honours to

the whole of paragraph 4 of the tribunal's reasons

for decision and, in particular, Your Honours, to

the paraphrase of the terms of the documents which

appear in the first new paragraph on page 49 and go

through to page 50. The summary of the effect of the agreements - the effect of the loan agreement say, at page 50, the paragraph in the· middle of the

Fletcher(2) 59 7/5/91

page and, Your Honours, going on then to page 51 to

the end of the paragraph continuing over.

Your Honours, at about point 2 or 3 on page 51

Your Honours will see a reference to the redemption price being set out in the appendix to the

agreement. I said I would give Your Honours a

reference to that, and may I take Your Honours to

the page numbered 510 in the Federal Court record,

which should be headed "Appendix A". It is the
third page of the annuity agreement and the annuity

agreement consists of the first page, page 508,

which is the operative part of it, and if I could

take Your Honours to that, Your Honours will see

that it has a paragraph, about point 4 on the page,

commencing:

The Grantor hereby undertakes to redeem this

annuity in whole or in part at any time after

the expiration of twenty three (23) months

from the date of this agreement such

redemption to be within a period -

et cetera -

The redemption price is to be the amount as

set out in Appendix "A". And if one goes over two pages the buy-back prices

are there set out and they are - as I indicated to

Your Honour Justice McHugh earlier, they range

from $24,000 to $80,000.

Now, Your Honours, if I could return then to

page 51 of the record book in the Court, findings about the evidence continues. There is a reference at the top of page 52 to the absence of

there being any money payment and that is

elaborated upon, Your Honours, in the next

paragraph. I would refer Your Honours to the

remainder of that page and the passage also quoted

on page 53. Then, Your Honours, in the numbered

paragraphs which follow there is a discussion of a

number of matters leading to the tribunal's
decision, and one matter which is set out at length

in paragraph 8 is a document headed "Details for

Professional Advisors". The document, as I said,

is set out, but the tribunal, in our submission, is

correct in forming th~view, or it had plenty of

material on which it could form the view, to which

it refers at page 54 point 2 that -

tax deductions loomed large in the minds of

the advisors who led the "annuitants" into

this arrangement.

Fletcher(2) 60 7/5/91

And, Your Honours, at page 57 paragraph 9,

they say that they:

are satisfied ..... that the promoters viewed
the success of this scheme as dependent on the

interest payments being tax deductible -

et cetera, and then counsel's opinion is set out,

and that goes for quite some pages and Your Honour

will see, for example, page 61 question 2:

Would the payments ..... be an allowable deduction.

And, Your Honour, that goes over until one gets to

the top of page 68 and, Your Honours, in

paragraph 11, the tribunal expresses a view about

the extreme artificiality of the scheme. They then

refer to evidence and impressions formed on the

evidence and, Your Honours, at paragraph 13

page 75, they say:

The bare bones of the transcript makes it

difficult for us to determine to what

extent - if any - the taxpayers, or which, if

any of them, genuinely believed that they were

embarking upon a superannuation scheme -

et cetera, and, Your Honours, paragraph 14 page 78,

there is some further reference to the evidence and

then paragraph 15, the middle of the paragraph, the

test is posed:

what was the impugned expenditure intended to

achieve?

and they apply the test in paragraph 16:

just another vehicle promoted for the dominant

purpose of reducing taxable income.

BRENNAN J: Is there a finding which I have not picked up as

you have gone through that there was expenditure

incurred?

MR JACKSON: Except as to the initial $50,000, Your Honour,

no. Your Honour, what my learned friend referred

to, I think, that Your Honour may have in mind was

a paraphrase of the agreements and that appears - if Your Honour would give me just one moment - at

page 6. What one sees, Your Honour, is the reasons

for judgment of the first Full Court and in that

Their Honours say at page 5:

The first of the loan agreements was

made -

Fletcher(2) 61 7/5/91

et cetera. This is in the first new paragraph on

page 5 about line 9 and they then, having referred to the clauses of the agreement, say at page 6

line 12:

The effect of this agreement was to create an obligation to pay to Doowarf -

and, Your Honour, one has to read that in the

context of what appears at the top of page 9 in the

first three lines on the top of that page and then

the next two lines following that, where they

say - - -

BRENNAN J:  I am not sure that I understand the passage that

you have drawn our attention to from the bottom

of 78 to the top of 79. What expenditure is the

tribunal now directing its attention to?

MR JACKSON:  Your Honour, the expenditure to which the

tribunal seems to be directing its attention to
there, as we would understand it, is what is the

amount paid - I use the expression in inverted

commas, of course - in respect of the interest.

BRENNAN J: Well now, there is an underlying problem here,

is there not? Did the tribunal find that money was

paid which might amount to an outgoing, or did it

not?

MR JACKSON:  Your Honour, the tribunal's findings really

seem to be - and I can take Your Honour back to the

passages in just a moment, but the passages to

which I referred in the first judgment of the

Full Court really, I think, summarize probably exactly what the tribunal had said; that is, that

the transactions were not a sham but no money

passed under the bills of exchange. They also

referred, of course, to the fact that the only

money which did pass was the $50,000.

Now, Your Honour, I think it is right to say

that the tribunal, in the passage at page 78-79 to

which Your Honour was referring, does not identify

precisely what it is referring to. But it could

really only be in the context, one would think, one

or both of two things. One being the initial

payment of the $50,000 and the other being the

amounts that were or were notionally the amounts

claimed as deductions by way of interest payments,

Your Honour.

BRENNAN J: Is not the problem this: were there items in account which were discharged by set-off or were there never any items in account? Because if the

former then there is room for section 51 to apply;

Fletcher(2) 62 7/5/91

if the latter then I should have thought there is

not.

MR JACKSON:  Yes, Your Honour. The only finding in relation

to what occurred which might satisfy the former of
those things, Your Honour - as I understand what

Your Honour put to me - would seem to be the

findings to which I have referred already and those
paraphrased by the Full Court in the first

Full Court. There does not seem to be any finding

that there was any actual attempt to set off, as it

were, except, I suppose, to the extent necessary to

demonstrate that in a partnership return.

So, Your Honour, if one is looking for

anything which, apart from the particular passages
recounting what happened initially and then

recounting what happened in later years, apart from

that and apart, I suppose, from whatever is

represented by the accounts which one would expect

to accompany at least the partnership return and

perhaps the others, one does not see anything else.

Your Honour, I am sorry, it is a very long answer

to Your Honour's question.

BRENNAN J: Well, Mr Jackson, just one further question and I will not delay you further, but if the view that

was taken by the first Full Court was that there

was no payment made to which section 51 or Part IVA

may apply, then it would have been a futility to

remit the matter to the tribunal, would it not?

MR JACKSON:  Yes. Your Honour, the first Full Court did not

really decide the section 51 point.

BRENNAN J:  No, of course not, but if there was nothing on

which section 51 could operate, why send it back?

MR JACKSON: Well I suppose, Your Honour, because that was a

matter on which the Full Court had not expressed a

view and it was, in a sense, a matter for the

tribunal to make a finding one way or the other.

Now, Your Honour, all that was being done by the

first Full Court, in the passage to which I

referred, seems to have been to do no more than to
recite, in effect - I do not mean recite in any bad

sense, but simply to recount what the first

tribunal's finding or view had been, but the case

then went back to the tribunal, because the ground

upon which the tribunal had in the end found

against the appellant was a ground, the finding of

which was vitiated for other reasons but, having

taken that view the Full Court sent the matter back

to the tribunal and the second tribunal started

again, in effect.

Fletcher(2) 63 7/5/91

McHUGH J:  But is not the fact that a tribunal said, in

paragraph 3 of its findings, that it was compelled

to make its findings of fact and conclusions from

what emerged from the address of the Full Court and

fact contain statements that the

then they, in effect, adopted as their finding of those findings of

factsA:t49may7.cl what had been described by the

effect of the agreement was to create an obligation

to pay the $360,000 and at page 51, at about point

7 on the page, they speak of Mr Tucker endorsing a

bill which had been drawn on Doowarf, thus paying

the bulk of the annuity purchase price, and then in

relation to Eromdim, in the next paragraph, they

talk about endorsing it:

by way of payment of the first year's

interest.

MR JACKSON:  Yes, Your Honour.

McHUGH J: Well, do they not constitute findings of fact?

MR JACKSON:  Well, to some extent, Your Honour, I suppose,

but if one looks at, for example, that at page 50

to which Your Honour first referred, there what the tribunal seems to be doing is not so much to find a

fact but to express a view on the construction of

an agreement, and that probably is something that

one would not disagree with in terms of the

construction of it. A finding of fact one sees a

few lines further down:

But it was not intended that the partners

should themselves find the money -

and so on. That is a finding of fact. When one

comes to the next page at page 51, the particular

passages to which Your Honour referred, we would

submit, simply do no more than record what appeared

on the face of the documents and what was intended

to be the result of them.

Now, Your Honour, we would not cavil with that

except to the extent to which we would say that

whilst it might be right to say that that was the

result that the parties were seeking to achieve, in

one respect at least they did not achieve it

because of what had occurred on the, in effect,

uncontradicted evidence on the point.

So, Your Honours, where I had got, I think,

was page 78 and I had gone then to page 79.

Your Honours have, I think, been referred to the remainder of the reasons for judgment in so far as

they are material.

Fletcher(2) 64 7/5/91

Your Honours, could I move from that to the

matter that was raised by my learned friend this
morning concerning the effect of the fact of

partnership. May I deal with that first from two

points of view: the first is generally, and the

second is to show the way in which the matter came

before the tribunal and the court.

Your Honours, so far as the position generally

is concerned, one has a situation where the term

"partnership" is defined in the Act in section 6,

and it is defined to mean -

an association of persons carrying on business

as partners or in receipt of income jointly,

but does not include a company.

Now, Your Honours, it does three things: the

first is simply to declare that a partnership is an

association of persons carrying on business as

partners. It adds to that some cases which might

not otherwise be ones of partnership under the

general law, that is, an association of persons in

receipt of income jointly, and then it goes on to

emphasize that that does not include a company.

Your Honours, the partners who are members of

a partnership for the purposes of the Income Tax

Assessment Act remain individuals, of course, and a

partnership does not have, either generally or for

the purposes of the Act, a legal personality

distinct from that of its members and,

Your Honours, nor does Division 5 of Part III bring

about such a result. Could I, in that regard, give

Rose v Federal
Your Honours a reference to is not on the list we have given Your Honours, I am

afraid, but at page 124, commencing about point 4

on the page, Justices Dixon, Fullagar and Kitto

after referring to the fact -

A partnership is not a distinct legal entity

according to English law. In Scots law a firm

is a legal person distinct from the partners of

whom it is composed. But in our law it is far

otherwise with partnerships. "The members of

these do not form a collective whole, distinct

from the individuals composing it; nor are

they collectively endowed with any capacity of
acquiring rights or incurring obligations":

Lindley on Partnership.

And, Your Honours, if one goes through the

remainder of the page referring to the definition

into section 6, Their Honours go on to say:

But an examination of that Act -

Fletcher(2) 65 7/5/91

namely, the Income Tax Assessment Act -

discloses no ground for construing it as

requiring that such an assumption should be

made.

The assumption to which they are referring being

one that somehow, under the Income Tax Assessment

Act, a partnership has a distinct legal

personality.	May I give Your Honours the reference
in that regard.	And one simply has a situation,

Your Honours, where the terms of Division 5 require

that each partnership have its income and

expenditure, if I can use a word which has become

fashionable to some extent, quarantined for some purposes. That is, they are quarantined for the purposes of the Act from the remainder of the

affairs of each of the partners and then the result

of the calculations contemplated by the

sections 90, 91 and 92 are taken into the

individual returns and assessments in respect of

each of the partners.

Your Honours, a partnership may not lodge a

return, and there is no reason, in our submission,

why the calculations made by the partners

themselves, when lodging their own returns, should

not be subject to challenge by the Commissioner,

nor is there any reason why a partner is bound to

accept the determination of the net income or loss of a partnership if one of the other partners make

a calculation of it with which that partner does

not agree, and it is in respect of each individual

partner's return and assessment, in due course,

that the various rights, both of the taxpayer and

of the Commissioner, exist because the partnership

does not pay any tax, Your Honours, under the Act.

The partnership lodges a return.

Now, Your Honours, it is possible, of course,

that one might find partners who disagree about

what the result of the partnership's activities in financial terms, for the purposes of the Act, have

been. There is no reason why they cannot lodge

their own returns, each claiming that the

partnership had a particular result brought over

into their affairs. Your Honours, the scheme of

the Act, so far as partners are concerned, in

requiring that there be a partnership return, is

that it has a practical effect and that is that it

will usually avoid the need for different returns

by each of the partners. Your Honours, one could -

if one has a situation where there were four

partners as in the present cases, the situation,

were it not for the provisions of Division 5, would

be that each of the partners would derive income

from the partnership.

Fletcher(2) 66 7/5/91

The Act requires one to divide up, or to

separate out, income from the deductions that may

be made from it. Each of the partners would

otherwise have to include, probably, the whole of the income of the partnership; take off the whole of the deductions otherwise attributable to the

partnership and then take account also of a

liability in addition to account to the other

members of the partnership. The Act seeks to avoid

the plethora of views about the state of the

partnership by requiring there be a partnership

return.

Your Honours, our learned friends go on from

that and say, in some way not, with great respect,

entirely defined that because a partnership is a

body, to put it inexactly, which has to put in a

separate return, therefore, in some way that means

that one cannot really take into account in

relation to a partnership the question whether

particular outgoings are or are not of a business -
to put it loosely - nature as distinct from being

of a private or domestic nature. Well,

Your Honours, if one were to add up the

partnerships in Australia, one would be very likely to find, if I might suggest with respect, that most of the partnerships were partnerships which were

family partnerships, often husband and wife. It

would be very surprising if one did not find in

determining what the net income of the partnership

was, or net loss, at any time, that the question to

which attention had to be devoted was whether there

was an outgoing which was of a domestic or private

nature somehow caught up in the affairs of the

partnership.

Your Honours, could I come back then in

relation to a partnership to the more narrow matter

to which I sought to direct attention earlier, and

that is the way in which the matter came before the
tribunal and the court.	Now, Your Honours, in that

regard I need to take Your Honours to the

Full Court record and to page 2 of it and if

Your Honours - I am sorry, Your Honours. It is not

included. It has been handed loosely, I am sorry.

There should be a group of pages containing at least pages 2 and 4.

The documents that Your Honours should have,

one of which should be an adjustment sheet which

has the number 2 at the bottom of the page. The

other should be a document which is dated

24 November 1983 and has B.F. McGrath and Co at the

top and a letter addressed to the Deputy

Commissioner of Taxation, a notice of objection

against assessment.

Fletcher(2) 67 7/5/91

Your Honours, the adjustment sheet shows that what was added was described as being "income loss from annuity investments, partnership no. 18,

reduced to nil". Then, if one goes to the other

document, you will see it is a typical notice of

objection and then one of the issues that was put

appears in paragraph 7: that the partnership was

entitled to deduct, et cetera, thus giving rise to

a net loss to the partnership for the year ended

30 June 1982 of so much.

So, what was done was to take off the net

loss. What was objected to was the taking off of

the net loss and, Your Honours, that is where the

matter stands. But, Your Honours, it would be a

perfectly appropriate course for the Commissioner

to follow in a number of circumstances. One is if

the contention that the transactions were shams had

been made out; secondly, are not pursuant to

section 82KL, something which has not yet been

resolved and may, of course, never have to be

resolved; thirdly, if the transaction should be

treated as giving rise to net assessable income;

or, fourthly, if only so much was allowed as

equalled the amount of the annuity.

Your Honours, it is possible, of course, that there are really two circumstances in which a

different result might follow. One would be if it

is right to say that only the deduction is

disallowed it may be as a logical result that the
taxpayers might, in the end, be up for more because

the amount of the annuity might form part of

assessable income. The second approach might be

if, pursuant to Part IVA, the transactions or the

tax benefits were treated as set aside, then there

might be some net result.

Your Honours, I think I said the wrong thing

about 82KL.	I think it should be the other way
around. Pursuant to section 82KL the result might

be that the taxpayers lose the deduction, but

retain assessable income, but there is certainly

bases upon which, at the time the Commissioner made

his assessment of the matter, the result which he

achieved was one which he was entitled to achieve,

or, at least, potentially entitled to achieve and

the matter still has not been completely resolved.

And Your Honours have been given separately also a

copy of the relevant part of the tax return.	It is
the page numbered at the bottom, 658, and that
shows the deduction at the start. That shows a
claim, of course, for a net partnership loss.

So, Your Honours, in short, we would submit

that there is nothing wrong in looking at the

return of a partner with a view to determining

Fletcher(2) 68 7/5/91

whether a deduction claimed by a partner is one
which is sustainable and it does not matter that

the particular deduction claimed is one which is

described as being a net partnership loss.

Your Honours, may I move then - - -

McHUGH J: Well, is not the problem though that

section 92(2) says that:

Where a partnership loss is incurred buy

a partnership in a year of income, there shall

be allowable as a deduction to a partner in

the partnership -

MR JACKSON:  Yes.

McHUGH J: Well, you do not go to section 51, do you?

MR JACKSON: Well, you have to see if a partnership loss is

incurred, Your Honour.

McHUGH J: Well, you do, but that is a separate question.

MR JACKSON: But, Your Honours, between the same people,

this is how it arises.

McHUGH J: Well, not necessarily. I mean, the payment of

this interest, prima facie, was a step in earning
this income. To use the words in John's case, it

was part of the cost of incurring the income.

MR JACKSON:  May I take issue with that, with respect, or flayed, may I take issue with that, with respect.

McHUGH J: But you seem to use the wider transaction then to

change the character of what the partnership did.

MR JACKSON: Well, Your Honour, may I say a number of things

in response to that. If I could deal first with

section 92(2), Your Honour, one must bear in mind

section 91. Section 91 says the partnership is

liable to lodge the return -

but shall not be liable to pay tax thereon.

Now, Your Honour, so far as anyone having to pay

puts in a return in which the partner, let us say, utilizes section 92(1) or section 92(2). If the partner uses section 92(1), Your Honour, there is no especial reason, in our submission, why the

tax in respect of it, it is one of the partners.

Commissioner is not entitled to say, "Your interest

in the net income of the partnership was bigger

because the net income was higher".

Fletcher(2) 69 7/5/91

Now, that is an issue between the taxpayer

partner and the Commissioner. That is how it is

resolved. Similarly, in the case of a partnership

loss - - -

McHUGH J:  It has to be resolved by reference to Division 5.

MR JACKSON: Well, Your Honour, by reference to Division 5

does not take us, with respect, beyond

section 92(1) and section 92(2). Section 92(2)

does not say whatever sum is in a partnership

return as being the partnership loss is the amount

that a partner is entitled to - what it says is - Where a partnership loss is incurred.

Now, Your Honour, it may be the partner who says

the partnership loss is so much. It usually will

be. Your Honour, I am sorry to multiply examples,

but if one had a case where there were two

partners, let us say a husband and wife whose

marriage had broken up, each has an accountant

attending to their affairs. The accountants do not

agree about something: should a particular item be

an item which is or is not a deduction in the

partnership accounts?	One says yes, the other says
no.	Now, Your Honour, neither of them has the

capacity to bind either partner nor the

Commissioner, and the issue arises at the time the

two former partners put in their returns.

Your Honour, the short fact is, and I say so

with respect, that sections 92(1) and 92(2) do not

bind anyone, and by that I mean the

Commissioner - - -

McHUGH J:  But they direct you how you work out if there is

a net income or a loss.

MR JACKSON:  Yes, Your Honour, of course, but it does not

tell you how much the loss is.

MCHUGH J:	No, I know.
MR JACKSON:	And it does not tell you that what the partner

says is the loss is the loss, and that is really

the point.

McHUGH J:  Is it not really the point that it is the

partnership - you have to determine whether the

partnership has made a loss.

MR JACKSON:  Your Honour, I accept that.

McHUGH J: Well, that is not the way the matter seems to

have been approached in the courts below and the.

tribunal.

Fletcher(2) 70 7/5/91

MR JACKSON:	Your Honour, it has because no distinction really seems to have been drawn and the reality of
the matter is that the partnership consists of four
partners.  Now, so far as those four partners are
concerned, the amount of - the question really is,
"Was there or was there not a partnership loss?".
Now, that is exactly the same question as, in every matter of substance, as the question whether they are entitled to the deduction of the partnership
loss.

McHUGH J: But it has a much narrower focus when you

distinguish between the two, the partnership entity

and the taxpayer's entity?

MR JACKSON:  Your Honour, I am not, with respect; I am

saying one cannot. All one sees in sections 90, 91

and 92 is a method whereby, so far as partnerships

are concerned, it is possible to identify what is
the income or what are the losses of that
partnership in any one year. Now, one carries over
what is the partnership loss but one does not carry

over a notional figure, one carries over the right

figure, otherwise each partner would be bound by

the competence of the accounting persons.

DEANE J: But, Mr Jackson, what do you say is the outcome of

what has happened in this case. Is the partnership

entitled to any deduction at all?

MR JACKSON: In our submission, no.

DEANE J: Is it assessable in respect of any income at all?

MR JACKSON:  Your Honour, our· primary submission would be

that it is not, but our second submission would be

that it is.

DEANE J:  I am asking you, what is the result of the

outcome. Did it receive any assessable

income -

MR JACKSON:  I am sorry, Your Honour, I misunderstood what Your Honour said. The result of the outcome,

Your Honour, is simply that the net figure, which

was a net loss, has been disallowed and if matters

stand that is it, that is all that goes. What has

not been done has been to seek to say that the

$170,000 in each of the first five years forms part

of assessable income.

DEANE J: But how can you say none of these outgoings are or

will be deductible without first addressing the

question whether any of the receipts are or will be

assessable, subject to deductions?

Fletcher(2) 71 7/5/91

MR JACKSON:  Your Honour, one could do it in a number of

ways I suppose, but the course which we would seek

to adopt - - -

DEANE J: Let us assume that the answer to the question is,

"Yes, all the receipts of annuity over and above

the UPP are assessable income". Do you really suggest that none of the interest payments are deductible against that?

MR JACKSON:  Yes, Your Honour, because one is not dealing

with something that one could regard as being a step in getting the income, one is dealing with

something outside that. May I illustrate what I

mean by that and, Your Honour, I use the word step

because it is the expression that was used by

members of the Court in John's case.	Now, what was
said by the Court there - - -

DEANE J:  I do not want to make the position even more

complicated but can I just ask you this: if you

adopt that position must that not be the only basis

on which this Court can approach it and that is,

that the courts below are wrong if, on the basis

any of this income is assessable, none of the

outgoings are deductible because if that be not so

the court below has never addressed that question

and it cannot determine deductibility unless and

until it does address that question.

MR JACKSON:  Your Honour, in one sense what Your Honour says

would be correct but may I add this qualification

to it. What appears to have happened below is that

the courts and tribunal appear to have taken the

view that if one assumes that the amount that would

come in, to put it loosely, from the annuities is

assessable income, leaving whatever amount it might

be on working out, the question yet remains whether

money borrowed to buy the annuity is money which

falls within section 51(1).

DEANE J:  Or the interest payable on the money?

MR JACKSON:  Yes, I am sorry, Your Honour. And,

essentially, they have held that the answer is no.

DEANE J:  I follow that, but the only basis on which you can

justify that finding below is on the assumption

that it matters not whether part of the annuity is
or is not assessable income because unless your

argument succeeds on that basis, the court below has not addressed the question, one, whether the

annuity or part of it is assessable income; two, if

it is, what effect does that have on our cutting

out any deductions at all?

Fletcher(2)	72	7/5/91
MR JACKSON:	Yes.	Your Honour, it is right to say that one,

I think, does not see the question dealt with in

any detail in the reasons both of the tribunal and

of the court. But the reason for that is, no
doubt, that they were working in a context where -

and the context was that, in effect, a net sum, of

course, was the sum that was being claimed. Now,

Your Honour, the courts and tribunal could not have

been unaware of the potential relevance of the

question whether it was or was not assessable

income, had it rammed down their throats,

Your Honours, with respect, and the courts were

perfectly aware of that but deciding the case on

the basis that, in the end, the nature of the

transaction was such that the amount of interest

was not one which was deductible, ergo, that is the

end of the matter.

TOOHEY J:  The adjustment sheet itself, of course, has the

effect of converting a very small taxable income

into a much more substantial income but, on the

face of it, simply by the addition of the amount

disallowed, is an outgoing. I suppose it is

possible to marry that with the partnership return

and see how that is dealt with but at the moment I

cannot quite make that conversion myself. But, on

the face of it, one assumes that there is an

assessable income of $170,000, less - there may be

other outgoings.

MR JACKSON:  I do not think the partnership return is

amongst the documents, Your Honour. I think

Your Honour might have the individual returns.

TOOHEY J: No, I think it is a partnership return. That

shows $170,000 and then various other calculations.

But would it be right to say the adjustment sheet,

when it is read with the partnership return, would

show that there is an income of $170,000 and no

outgoing referable to the interest payments?

MR JACKSON:  Your Honour has the advantage of me because I

had not myself been able to find the partnership

return.

TOOHEY J: Well, we got them from you, I had thought.

MR JACKSON: It must have been by mistake, I think,

Your Honour. Yes, I am sorry, Your Honour.

TOOHEY J: All I was picking up was Justice Deane's question

to you and asking whether the adjustment sheet, if

it is read with the individual return of

Mr Fletcher and for that matter the partnership

return, would show that the Commissioner has

treated $170,000 as being assessable income of the

partnership with no relevant outgoings so far as ·

Fletcher(2) 7/5/91

interest is concerned or has he done no more than

simply disallow the income loss and convert that

loss to assessable income?

MR JACKSON:  Your Honour, as I had understood the matter,

what had been done was represented by the pages to which I referred earlier, and, Your Honour, in the

return of the partners, which of course is the

return that was the subject of the proceedings in

the courts and tribunals, what had occurred was

that the partners had claimed a share of a loss as

a deduction. Now, that share of a loss was then

the subject of the assessment, including the

adjustment sheet which Your Honours have, and then

there was the notice of objection objecting to that

course having been followed. Now, Your Honour, what does not appear, I think, in the material,

that I can easily answer, is to say what more

happened apart from that. But that seems to be the

position so far as the individuals are concerned.

Your Honours, all I can say is that the

figures worked through in the partnership return is
the loss which is a net loss, in effect, of four

times the $81,000 and the $81,000 is the figure

that then was disallowed in the individual returns.

Your Honour, I do not think I can - - -

TOOHEY J: Well, is it implicit in that approach that the

annuity payment was treated as part of the
assessable income of the partnership and, in turn,

played its part in determining the assessable

income of the taxpayer?

MR JACKSON:  Your Honour, that has not been done. been done has been simply to disallow the result. What has

Now, Your Honour, it may well be that what should have happened, on one view of the case, was that

there is then an increase in the assessable income.	But of course, as I was submitting earlier, that is	not the only possible result of the case, and if,
for example, the Commissioner had succeeded on the issue of sham, then all the transactions would have
gone and what he did would be exactly correct.

BRENNAN J:  We do not need to worry about the sham, though,

do we?

MR JACKSON:  No, Your Honour.

BRENNAN J: If we look at the partnership account, it is

clear that the $170,000 was brought in as

assessable income. That then leads to the

$324,667, which is said to be the partnership loss,

and in the return of the individual partners, they

accepted that the $170,000 was assessable income

Fletcher(2) 74 7/5/91

because they claimed a loss limited to $81,000, and

it was that which was disallowed.

MR JACKSON:	Yes, Your Honour.
BRENNAN J:	So that the basis - and the adjustment sheet did not suggest that there was anything different from
that figure which ought to be either added or
subtracted. Well, does that not indicate that the
point at issue between the taxpayer and the
Commissioner is whether, for the purposes of 51(1),
if that is the basis of argument, there was an assessable amount of $170,000 and a deductible
amount of the interest paid?

MR JACKSON: Well yes, it does, Your Honour, but I do - - -

BRENNAN J:	What is it all about?
MR JACKSON:	Your Honour, we, as I submitted earlier, would

submit that a perfectly open view of the matter -

and this is the one we submitted in the

Full Court - was that whilst the Commissioner is

entitled to treat the $170,000 as assessable

income, he was not obliged to treat the amount

claimed in respect of interest as an allowable
deduction and, Your Honour, that is essentially

what the case is about. Now, Your Honour, the

argument on the other side, of course, says, if

this is assessable income, therefore it follows,

because of their connection between the two, that

the amount claimed for interest must be an

allowable deduction and we say, that is not right,

Your Honour.

DEANE J: But the Commissioner may have been perfectly

entitled to take the approach he took and that is

to say, "I am not satisfied about this loss; I will

disallow it as a claimed deduction". But once one

reaches the Full Court stage, one is entitled to be

told on what basis has the Commissioner succeeded
in the Full Court.	Now, that brings me back to

what I am asking you: has he succeeded on the

basis that no part of the deduction is allowable

regardless of whether the whole $170,000 is

assessable income, or has he succeeded on the basis

that so much of the deduction is allowable that

cancels out the $170,000, or has he succeeded on

the basis that you look at it as a profit-making

scheme and only assess profit?	On what basis has
he succeeded?

MR JACKSON: Well, Your Honour, as we understand it, on the

first of those bases -

DEANE J:  On the first basis?

Fletcher(2) 75 7/5/91

MR JACKSON:  On the first basis, that assuming that the

$170,000 is assessable income, the amount claimed

in respect of interest is not an allowable

deduction. Now, Your Honour, that is the basis on

which we would understand him to have succeeded

but, Your Honour, may I say in respect of it, that

is the argument which was advanced to the Full

Court of the Federal Court. Of course, it is a

matter for that court how it approached the matter.

That is what we would understand those contentions to have been adopted by the court and that was why,

Your Honours will see, the discussion about John's

case in the reasons for judgment.

DEANE J: Can I ask you this:  are you approaching the case

then on the basis that we assume that the $170,000

was assessable income because it is on that basis

that the taxpayer puts it, namely, the Full Court
has said, "Even if I'm liable to be assessed on the

basis of $170,000 assessable income, I'm not

entitled to a deduction"?

MR JACKSON:  Your Honour, puts it to me that that is what

the taxpayer says - that is what the taxpayer and

both counsel asserts is what the Full Court

decided. We would understand the position to be

that the Full Court probably did decide on that

basis. That was the matter that was argued before

the Full Court. However, may I say this,

Your Honour, that if that basis is incorrect but

the Court were of the view that one of the other

bases that Your Honour put to me before was open,

we would still seek to maintain the decision of the

Full Court on that basis.

DEANE J: But, why should we get involved in the question

whether the $170,000 was assessable income if the Full Court, as it were, has decided the matter on

that assumption and you assert that assumption is

right?	Why should we not simply assume it is right
and then address the question whether, assuming

that $170,000 is assessable income, is the

Full Court correct in saying that not one dollar of

the deduction is allowable?

MR JACKSON:  The reason why, Your Honour, would be, we would

submit, that it would be appropriate for the Court

if it took a view against us on the first basis,

then to consider another basis upon which we would

seek to maintain the same result. Your Honour, the

Full Court decides the case on the basis it

chooses. We seek to maintain that judgment on that

basis and others.

DEANE J:  You might add that I am putting these questions to

you as if you were the appellant and that you are

here as the respondent would be a fair comment.

Fletcher(2) 76 7/5/91

MR JACKSON:	Yes.
GAUDRON J:	Does that mean - I might have got very badly

lost at that stage - that part of your argument is

that there was no income?

MR JACKSON:  Yes, Your Honour, on one basis.

GAUDRON J: Forget about it being assessable; there was

simply no income. Well now, that must be a

question of fact, must it not? It is the

assessable aspect that makes it a question of law,

does it not?

MR JACKSON: Well, Your Honour, so far as - I suppose what

Your Honour has put to me is right; there are

questions of fact involved.

GAUDRON J:  I just do not understand how the Full Court

could have decided that anymore - and if they could

not, how we could, given the nature of the

proceedings before the Full Court.

MR JACKSON: Well, Your Honour, I do not know that they did.

GAUDRON J: But if you ask us to take the step of saying

there was no income, it must be because that step

should have been taken by the Full Court. What I
do not understand is how it could in any event have

taken that step, given the nature of the

proceedings before it - - -

MR JACKSON:  The Full Court, Your Honour, was dealing with

an appeal - - -

GAUDRON J: Unless you put it on the basis that there was

simply no evidence on which it could be found that

there was income.

MR JACKSON:  I am not seeking to ramble through the evidence. I am simply saying if one looks at the

findings, that is the only conclusion which could

have been drawn.

GAUDRON J: Well, then you are saying it is not a question

of fact. You are saying it is simply not open to

make a finding that there was income.

MR JACKSON:  Yes, on that argument.

GAUDRON J: It was not open to the tribunal to find it.

Now, does the decision on a question of law enable you to agitate whether or not it would have been

open to the tribunal to find something that perhaps

it did not because it proceeded on an assumption

which, for its purposes, was sufficient to dispose

of the case?

Fletcher(2) 77 7/5/91

MR JACKSON: Well, Your Honour, it is really a question of

the legal complexion of facts which are not now in

dispute. Now, if it appears that there is some

further matter on which it would have been

necessary for there to be a finding, well then so

be it, the Court cannot decide it. But we would

submit there is not. All one has is a series of

events which occurred, and from those events

conclusions are to be drawn whether there was or

was not something which was assessable income or

was or was not an allowable deduction. I suppose,

Your Honour, it is possible to say on the way some

further factors material -

GAUDRON J: But you have to say two things: there was no

income, and there was no outgoing, do you not? As a matter of fact there was no income and there was no outgoing.

MR JACKSON:  Yes, Your Honour, on one of those arguments,

yes.

BRENNAN J: That comes back, does it not, to your argument

that you opened up before lunch that there was

nothing ever arising by way of debt owing from one

party to the other?

MR JACKSON:  Your Honour.

BRENNAN J: Well, if that is not the basis on which the case

was run in the tribunal and in the court, is it a

basis which is open to you now?

MR JACKSON: Well, Your Honour, if it is a question of law,

and we would submit it is, it is just a question of

what the effect of the events which occurred was,

the legal effect, then we would submit that is

something that is open.

BRENNAN J: It is a question of whether the bill was signed

before it received the endorsements or not?

MR JACKSON:	Yes.
BRENNAN J:	So it comes back to section 66 of the Bills of

Exchange Act?

MR JACKSON:	Yes.
BRENNAN J:	It is curious that one searches in vain for any

reference to that provision in the judgments thus

far.

MR JACKSON:  Your Honour, the particular point of the

reference to that Act, as I understand the

position, was not taken below. I was in the case

in the Full Court of the Federal Court on the last

Fletcher(2) 78 7/5/91

occasion and the point was not taken, I say that

immediately, and I do not believe it to have been

taken earlier.

BRENNAN J: Well, then, it must have been conducted in the

courts below on the basis that not only were they

not shams but they must have given rise to the

liabilities mutually.

MR JACKSON:  Your Honour, in the sense that the point was

not raised and that one might perhaps say, "Well,
no point was taken about that" the answer no doubt

is "Yes", but questions were asked dealing with the

particular point; the evidence seemed not to be in

issue.

BRENNAN J: But there are no findings which are other than

that there were mutual liabilities.

MR JACKSON: There is no finding, Your Honour, except to

describe what happened when Mr Tucker, I think it

was, went to Canberra and signed the bill.

TOOHEY J:	I suppose the Full Court's role was largely dictated by the form of the questions served up to
them because of the operation of section 44 of the Administrative Appeals Tribunal Act and the
questions themselves, as they appear on page 86,
really do not assume anything in relation to
income, but they are almost - unless perhaps question (i) does in its reference to gaining assessable income.
MR JACKSON:	I am sorry, Your Honour, I missed Your Honour's

reference there?

TOOHEY J: Page 86, where the three questions are formulated

for the Full Court, and it may be that none of

those questions requires the court to direct its

attention in any way to whether there was any

income, but simply to the question of whether there

was a deduction available to the taxpayer which is

a bit unreal, divorced from the question of
assessable income, but maybe that is the way that

it was presented to the court.

MR JACKSON: Yes, Your Honour. Your Honour, paragraph (i)

at the top of the page does refer to the gaining of

assessable income and it and the two succeeding

questions, as Your Honour rightly said, really pose

the issue for the Full Court of the Federal Court

and that is what the court was dealing with, and

then the arguments, of course, proceeded on the

basis of saying, largely, "If there is assessable

income then it must be an allowable deduction"; on

the other side, "No, that is not right" and that is

what Your Honours will see - or "That· is not right

Fletcher(2) 79 7/5/91

in every case" and that is why Your Honours will

see a discussion in the judgments of the Full Court

of the extent to which it was germane to look at

the desire to obtain the tax deduction.

Your Honours, I should say, it is obvious, no

doubt, from what has been said already that the
annuity was something that could have been bought

by someone without borrowing the money. The only

purpose of borrowing the money, one would think,

would be either to supply funds one did not have or

to obtain the tax deduction. One is not talking

about something where you are selling something you

have to first buy and you have a step in the

acquisition costs of that, as in John's case.

So, Your Honours, I do not know if I can advance on what I have been saying any further but

so far as the several issues Your Honours have been

asking me about, what I was proposing to do, if I

may, was to deal with what we would submit is the

principal issue in the case which is the one to

which I have just been referring.

Your Honours, what I was going to say in that

regard - what I was going to take Your Honours to,

was to deal with the various cases which, in our

submission, do demonstrate the proposition I was

mentioning a moment ago; namely, that it does not

follow that because there is assessable income

which is gained from a transaction that there is

necessarily an allowable deduction in respect of

it.

Your Honours, one starts in that regard, of course, from the Court's decision in Ronpibon

Tin NL v Commissioner of Taxation,

(1949) 78 CLR 47. Your Honours will see the

relevant test, namely that the expenditure must be

incidental and relevant for the end of gaining or

producing the assessable income, at the bottom of

page 56 going through to the top of page 57.

Your Honours, that test was referred to by the

Court in John v Commissioner of Taxation,

(1989) 166 CLR 417 at page 426, about half-way down

the page. And, Your Honours, at the same part of

the page, the five members of the Court whose joint

judgment that was, referred to the observation of

Your Honour Justice Toohey in Ilbery's case that

the statement in Ronpibon:

"was not to exclude the notion of purpose" -

and that:

Fletcher(2) 80 7/5/91

"purpose may stamp an outgoing as one having

no relevant connexion -

et cetera.

Now, Your Honours, to say that the expenditure

must be "incidental and relevant", as Ronpibon

says, does not define the manner in which that test

is to be satisfied, and we would submit that to

determine whether an expenditure is incidental and

relevant it is necessary to identify what has been

described in the cases as its essential character.

Your Honour, may I just say something about

that? Our learned friends say, "Oh well, that only

applies really if you are determining whether

something is private or domestic, or perhaps

capital". But, of course, Your Honours, that is

how the issue arises. The issue that one is

looking at is to determine what is the nature of a

particular expenditure, meaning by that, does it

fall within the terms of section 51(1)? The usual

reasons why it will not fall within section 51(1)

are because its character is not of that kind, and

its character, if it is not of that kind, will very

often be that it is private or domestic or

something of that kind.

Your Honours, we would submit that the

essential character test is a well-established

test. We will also submit that in determining the

essential character of an expenditure one is

entitled to examine a number of matters, the weight

of them and the relevance of them varying from
instance to instance. One of those is the apparent
purpose derived from the transactions themselves; a
second is the subjective purpose of the person

incurring the expenditure; the third is the

commercial reality, or appropriateness of the

expenditure and the fourth, related to the third,

is the extent to which it is intended to reflect a

tax benefit.

Now, Your Honours, in that regard, what I

intend to do, if I may indicate it, is to go to a

number of cases, both in the Court and in the

Federal Court, in which those considerations have

been regarded as material, including particularly,

commercial reality and the extent to which a tax

benefit is reflected. Your Honours, may I commence

with what we would submit is the modern, if I can

use that expression, starting point, that being the

judgment of three members of the Court in Lunney's

case, (1958) 100 CLR 478. Your Honours, that was a

case in which it was held that a taxpayer's fares

to a place of employment or business were not

deductible under section 51(1). Your Honours, the

Fletcher(2) 81 7/5/91

relevant part of the reasons is at page 497, in the

joint judgment of Justices Williams, Kitto and

Taylor, and Your Honours will see at about point 7
on that page, that Their Honours said, after

referring to Ronpibon:

In the context in which they have been used

the expressions relied upon by the appellants

have been intended as a reference, not

necessarily to the purpose for which an item

of expenditure has been incurred, but, rather,

to the essential character of the expenditure

itself.

And Their Honours go on to expand upon that towards

the end of the page and to the top of the next

page.

Your Honours, at page 498, the paragraph

commencing towards the bottom of the page and going

to the top of the next page, Your Honours will see

particularly at page 499 about point 2:

Whether or not it -

meaning, by that, expenditure on fares -

should be so characterised -

that is, characterised as falling within

section 51(1) -

depends upon considerations which are

concerned more with the essential character of the expenditure itself than with the fact that unless it is incurred an employee or a

person -

et cetera. Now, Your Honours, that is a reference

to the essential character of the expenditure.

Your Honours, the need to look at the

essential character of the expenditure was

exemplified in the approach taken by Your Honour

the Chief Justice in Lodge v Federal Commissioner

of Taxation, (1972) 128 CLR 171 and, in particular,

Your Honours, at page 175. Now, Your Honour had

referred at the bottom of page 174 to the passages

from Ronpibon and then at the top of page 175,

refer=ed to the fact that the decision in Lunney's

case:

was based on the proposition that it was not

enough to show that the expenditure was an

essential prerequisite to the derivation of

assessable income. The decisiort denied the

notion that an expense was incidental and

Fletcher(2) 82 7/5/91

relevant ..... merely because it was necessary

in that sense. The decision turned rather

upon a view of the character of the
expenditure incurred.

And Your Honour's reasons for judgment went on throughout the remainder of that page and in the last paragraph on that page, Your Honour proceeded

to identify the essential character of the

expenditure in question and saying that the:

character as nursery fees ..... was neither

relevant nor incidental to the preparation of

bills of cost -

The lady being employed to do bills of cost.	And
then Your Honour proceeded to say, at page 176,
about half-way down the page:

However, I should express my view that

the expenditure in question was of a ''private

or domestic" nature and for that reason -

in effect also was -

excluded by section 51(1).

I would refer Your Honours to the whole of that

paragraph.

Your Honours, if I could move from that case

to a number of decisions of the Federal Court

which, in our submission, are material, including

decisions to which some members of the Court have

been party. Could I, in that regard,

Your Honours - I will do so as briefly as

possible - start with Magna Alloys and Research Pty

Limited v Federal Commissioner of Taxation,

(1980) 33 ALR 213.

Your Honours, that was a case where the

taxpayer had claimed the costs of fund~ng the
defence of employees accused of bribing public

officials and the principal judgment was that of

Your Honour Justice Deane and Mr Justice Fisher.

It commences at page 232 about point 6.

Your Honours, I hope I have not fallen into the

minefield of the Australian Law Reports or the
Federal Court Reports but may I take Your Honours
to page 232 point 6 of the Australian Law Reports.

In the paragraph commencing:

The taxpayer placed primary reliance -

Your Honours will see that the issue - and this is

in the last two or three sentences on the page

that:

Fletcher(2) 83 7/5/91

What was in dispute ..... was whether the

outgoings were necessarily incurred in

carrying on that business.

Now, that is the state of the issues and then

Your Honours proceeded on the next page - page 233

about line 19 to refer to the fact that the issues: require the definition with some precision of

the relevance of the subjective purpose or

motive -

and then set out the arguments and the arguments

are set out down to about line 30. Then, at

line 40 Your Honours said:

It is clear from the authorities that

there are circumstances in which the
subjective purpose or motive of the taxpayer

will be of little assistance in determining

whether an outgoing was necessarily incurred

in carrying on a business -

and there are some examples then given. At the top

of the next page in the second line:

The subjective purpose or motive of a taxpayer

either in incurring an outgoing or in engaging

in an activity ..... is not however irrelevant

to the question whether the outgoing was

necessarily incurred in carrying on the

relevant business.

Your Honours then proceeded in the next paragraph

to elaborate upon that proposition, including at

about line 15 that in some cases:

the taxpayer's subjective purpose or motive or

assessment of appropriateness to the ends of

the business is of critical importance -

and that proposition is then expanded upon,

including to the end of that paragraph:

"it is the advantage which the expenditure was
intended to gain, directly or indirectly, for
the taxpayer that is relevant in determining

the character of the expenditure".

Then, the passage to which I think Your Honours

have already been referred today at the bottom of

the page. Your Honours, the passage continues to

page 235 about line 28 and at about line 13 on that

page:

The controlling factor is that, viewed

objectively, the outgoing must, in the

Fletcher(2) 84 7/5/91

circumstances, be reasonably capable of being
seen as desirable or appropriate from the

point of view of the pursuit of the business

ends -

and so on.	Your Honour then dealt between lines 30
and 40:

To the extent that the subjective element is

relevant, what is important in the case of a

voluntary outgoing is the identification of
the advantage or advantages which the outgoing

was intended to achieve on behalf of the

taxpayer regardless of whether that advantage
or those advantages were seen -

et cetera. Your Honours, those, I think, are the passages in the joint judgment to which I wish to

refer. Your Honour Justice Brennan in the same

case at page 215 referred at line 21 to:

The question thus raised by his Honour's

judgment -

being -

whether the reason why the taxpayer incurred
the expenditure determines whether the
expenditure was incurred for the purposes of
the taxpayer's business and thereby concludes

the issue of its deductibility.

Your Honour referred to the fact that:

Motive and purpose are not novel or alien concepts in ascertaining deductibility under

section 51(1) -

And then, Your Honours, in the next paragraph,

Your Honour distinguished between motive and

subjective purpose and so on, and one goes then to

the reference to Lunney's case at page 217, about

the middle of the page, and Your Honour quoted the

passage to which I have referred earlier, and

Your Honour in the next paragraph, the one

commencing about line 29 refers to the fact that

the -

taxpayer's state of mind -

can be -

evidentiary material.

Your Honour, that perhaps is not qui~e what

Your Honour was saying, but what Your Honour said

accepts that the:

Fletcher(2) 85 7/5/91

taxpayer's state of mind -

can be -

evidentiary material.

And, Your Honours, at page 218 in a passage

commencing at about line 15, the paragraph:

The distinction thus drawn between the

criteria was one of emphasis.

The passage goes on, Your Honours, from there to

the top of the next page and the conclusion that

Your Honour arrives at is at the bottom of

page 218:

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 effected

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.

Your Honours, at page 220 Your Honour referred in the first new paragraph on the page to

contractual arrangements, for example, being -

but part of the background in which the

character of expenditure falls for

consideration.

And Your Honour refers again to the character of

expenditures and the need to ascertain -

what expenditure is for -

and that appears in the paragraph commencing on

page 220 about half-way down the page, and the
particular reference is immediately before and

after the reference to South Australian Battery

Makers. Your Honour then proceeded to elaborate

upon that in the passage at about the last ten

lines on the page:

The role of the advantage in the

income-earning undertaking requires

examination.

That passage goes on to the top of the next page.

Fletcher(2) 86 7/5/91

Your Honour then goes on at page 222 to deal,

for example - I refer Your Honours to the whole of

the page, but may I refer to a couple of matters

particularly: one is about a third of the way down

the page where Your Honour says:

What the taxpayer has in mind may bear

upon "the character of the business or

undertaking" ..... The taxpayer is at liberty to

determine for himself -

et cetera. And then in the next paragraph:

Similarly, the taxpayer's state of mind

may be relevant evidence to show what

expenditure is for in cases where the Europa

approach does not give adequate guidance.

And Your Honour, at page 223 about line 30:

However, the evidentiary effect of a

taxpayer's state of mind is to be

distinguished from the objective purpose of

expenditure incurred.

Your Honours, could I refer finally to page 225,

the first two new paragraphs on that page.	Now,
Your Honours, that case, although it directs

attention to the role of various states of mind or
matters which can be deduced from conduct, does not

deal specifically with the relevance of an

intention however it be ascertained objectively or

subjectively to obtain a taxation advantage and

nothing more. But, Your Honours, that issue was

referred to by members of the Federal Court in

Ure v Federal Commissioner of Taxation, (1981)

34 ALR 237.

Your Honours, that case was an interest case

in the sense that the taxpayer had borrowed at

commercial rates but had onlent at 1 per cent and

was seeking to obtain a deduction in respect of

loss occasioned by the difference between the two

interest rates.

Could I go first, Your Honours, to the reasons for judgment of Your Honour Justice Deane and

Mr Justice Sheppard, at page 246. Your Honours

said, at about point 2 on that page, that:

It is clear that the moneys which were borrowed ..... were borrowed for the objects to

which they were applied. The explanation of

why the appellant should borrow at rates of

interest up to an average 12.5% pa to lend at a rate of interest of 1% pa is to be found in

the appellant's desire to benefit his wife and

Fletcher(2) 87 7/5/91

the family trust at the same time as obtaining

for himself the benefit of a tax deduction in

respect of the legal expenses, guarantee fees

and valuation fees incurred in relation to the

loans and in respect of the interest which he

paid on the borrowed moneys.

So, one of the explanations for the transaction was

to obtain a tax deduction in respect of the

interest. Your Honours, section 51 was then set

out at the bottom of that page and the primary

issue is referred to about six lines from the

bottom of the page as being:

to what, if any, extent the interest and the

guarantee fees were ..... losses or outgoings
incurred by the taxpayer in gaining or

producing the assessable income not being

losses or outgoings of capital or of a

capital, private or domestic nature.

Your Honours, at page 247, commencing about half-

way down the page, Your Honours said:

The fact that money is re-lent at a lower

rate of interest than the rate at which it was

borrowed does not necessarily mean that the

liability to pay the interest cannot properly

be seen as having been incurred wholly in

earning the assessable income -

et cetera. Then some reasons were given for that

throughout that paragraph. Then, having disposed

of possibilities of that kind, Your Honour then

said, in the next p~ragraph:

In the present case however, there is

neither suggestion of miscalculation or lack

of business understanding -

et cetera -

The money was borrowed -

at, in effect, the higher rate -

with the object of being lent at -

the lower rate.

The explanation of the lending at the lower

rate is to found in private and domestic
considerations.

Which Your Honour referred to, and in the fourth line on page 248, they included:

Fletcher(2) 88 7/5/91

the reduction of the taxpayer's taxable

income. On the assumption that the

Commissioner's concession thats 260 of the

Act has no application in the circumstances is correct and in the absence of any relevant

business being carried on, the appeal raises for consideration a question of principle of

some importance.

Now, that question is then set out - it follows

immediately - and Your Honours will see that the

way in which it is posed is to refer to the:

prima facie improvident conduct of the

taxpayer -

where the explanation of that:

is to be found in private or domestic

considerations including a desire to minimize

liability to pay income tax.

Your Honours, after referring to Ronpibon and

Amalgamated Zinc, and at the bottom of the page in

the last paragraph commencing on that page,

Your Honours refer to the fact the issue was one of characterization; "the object" in mind:

the "result aimed at" ..... "the advantage
which the expenditure was intended to

gain ..... for the taxpayer".

And then, Your Honours, on page 249, the fourth

line on the page:

In the ordinary case where the income which is

expected to flow from an outgoing offers an

obvious commercial explanation for incurring

it the relevant characterization can readily

be determined by reference to the gaining or

producing of that income.

Your Honours will see the reference to a

"commercial explanation":

In the more complex case however, where there

is no such obvious commercial explanation, the

solution of the problem of characterization

must be derived from a weighing of the many

aspects -

et cetera -

including direct and indirect objects and

advantages which the taxpayer sought in making

the outgoing. Some of those circumstances may

point in one direction, some in the other.

Fletcher(2) 89 7/5/91

And then, after the reference to BP Australia Ltd:

In a case such as the present where the

outgoing claimed as a deduction is interest

paid on borrowed money, one cannot ordinarily

look to the direct object or advantage which

the outgoing was intended to achieve for the

reason that that will ordinarily be the

receipt of the borrowed money which is likely

to be neutral in character. One must, of

necessity, look more to the objects or

advantages which the application and use of

the borrowed money were intended to gain: FC

of T v Munro.

And then Your Honours, about line 36, Your Honours

refer to the fact that one of the more difficult

aspects was the assessment of what weight was to

be:

given to indirect objects which a taxpayer has

in mind in incurring the outgoing.

And, Your Honours, that is expanded upon throughout

the remainder of that page, and at the first new

paragraph on the next page:

In the present case, it would be a

misleading half-truth to say that the object

which the taxpayer had in mind -

and, Your Honours, discussion of that proceeds
through that paragraph and through the next
paragraph and Your Honours say particularly, about

half-way down the page:

The predominant, though indirect, objects were

not concerned with earning assessable

income ..... but were, for the purposes of s

51(1), of a private and domestic nature.	The
object of earning assessable income ..... was

present in a subordinate role.

If ..... apportionment were not possible ..... we

would conclude that the interest could not be

characterized as having been incurred in

earning assessable income.

And, Your Honours, there was then an apportionment

on page 251.

Your Honours, in that case Your Honour

Justice Brennan at page 242 referred to section 51

at about line 20 and then said, about line 28, or

made the observation about the laying out of the

borrowed money, to which my learned friend has

referred, but then went on to say:

Fletcher(2) 90 7/5/91

In the present case the question arises as to whether it can truly be said -

and so on.

The answer to that question does not turn

directly upon the disparity in interest rates,

but upon an examination of the purposes for

which the money was laid out. The disparity

in interest rates is itself eloquent to

suggest the existence of purposes ulterior to
the earning of interest to the rate of 1%pa,

and the evidence confirms the existence of

further purposes.

And, Your Honour, at the top of the next page, the

second line, Your Honour said:

but where a question arises as to the purpose for which money is laid out by a taxpayer, it

is erroneous to exclude as irrelevant evidence

of the use of that money, albeit by others, in
conformity with arrangements made by the

taxpayer.

And that continues on, Your Honour, to the end of

that paragraph. Your Honour then said:

The purposes for which money is laid out

is an issue of fact -

and then the next paragraph:

If the borrowed moneys had been laid out

solely for the purpose of gaining assessable

income, the interest would be wholly

deductible; but as they were laid out in part
for that purpose, and in part for other

purposes, the interest charges must be

apportioned.

MASON CJ: Is it necessary to read all these passages from

these cases, Mr Jackson?

MR JACKSON:  Your Honour, I am sorry. What I am seeking to

do was to indicate to the Court that the aspects to

which I am referring had been taken into account

and Your Honour, the two cases to which I have

referred are the longest of any to which I wish to
refer and I will do so as briefly as I may with the

others.

MASON CJ: Yes.

MR JACKSON:  Your Honours, I intended to go next, if I may,

to Ilbery's case, The Commissioner of Taxation

v Ilbery, (1981) 38 ALR 172. Now, Your Honours,

Fletcher(2) 91 7/5/91

that was a case in which the principal judgment was

that of Your Honour Justice Toohey, to which the

other members of the Court agreed relevantly.	Your
Honours judgment commences at page 175.
Your Honours, about line 26 through to about

line 41 is where the likely advantages were set out

and it is obvious from them, from Your Honour's

statement of the facts, that they had distinct
taxation advantages. That appears too from the

bottom of page 176, the last three lines and

Your Honours, at the bottom of page 178 - perhaps

Your Honours that is an unnecessary reference.	At
the top of page 179, about line 7:

The primary issue in the present appeal

is whether the prepayment of interest was

incurred in gaining or producing the

assessable income.

Then, Your Honours, there is a reference to

Ronpibon at the bottom of the page and then

Your Honours will see on the next page, page 180,

the reference to Ure's case and that continues
through to about line 43. Your Honour refers again

to the taxation advantages sought in the particular

case at page 181, the paragraph commencing at

line 4. Then, after those matters, at line 25 on

page 181, Your Honour referred to the fact that:

While it may not be for the Commissioner

to tell a taxpayer how much he should

spend ..... a question may still arise whether,

in respect of a particular year, an outgoing

incurred by a taxpayer can truly be said -

et cetera. Your Honours, at the top of the next

page, page 182, Your Honour referred to the fact

that there was tax advantage in the third line and

no other and that continues on to the next

paragraph.

Your Honours, what those cases demonstrate is

that in determining the characterization of an

outgoing, it is legitimate to look to the purposes

which it is engaged in, and one of them may be the

obtaining of a tax advantage.

Your Honours, the professional men study cases

to which our learned friends have referred, namely,

Forsyth and Handley, adopt a rather similar approach, in our submission. Could I take

Your Honours to Forsyth's case, (1981) 148 CLR 203.

It was conceded, Your Honours, as appears in

Justice Stephen's reasons for judgment at about point 4 that:

Fletcher(2) 92 7/5/91

the licence arrangement was genuine and

effective -

but, Your Honour the Chief Justice, at the bottom
of that page and the top of the next page and in

particular about point 2 on the page referred

particularly to the artificiality of the

arrangements in question.

Your Honours, it is apparent, if one looks at that case, and in particular at page 209 about

point 4 where the question is set out, and then at

page 210 about point 3, the reference to Lunney's

case and to the earlier reference, the fact that it

was a question of fact and degree, that the tests being applied were the tests of characterization.

Your Honour, that appears throughout the judgment

of Justice Wilson and, in particular, at page 213

at the commencement of the last paragraph.

Now, Your Honours, at page 214 His Honour

referred specifically to the essential character

test at about point 6, and then indicated it was a

question of facts of the particular case in a

passage commencing in the last paragraph on
page 214 and going through to about page 216

point 5. He referred again to the essential

character test at page 217 at about point 2.

Now, Your Honours, to the same effect was, of

course, Handley's case, 148 CLR 182. Could I give
Your Honours the references in that regard:

pages 190, 193, 196, 199 and 202. Your Honours, what we would submit is that John's case did not change or change in any significant way that

approach, and John's case, Your Honours, is

166 CLR 417. If I could take Your Honours to

page 426.

MASON CJ:  Has any relevant part of John's case not been

read?

MR JACKSON:  Your Honour, I do not know, but could I just

say I want to point to a particular passage in it

and it is this:  Your Honours will see at page 426

about point 2 or 3 where it is said by the members
of the Court:

Nor can it be disputed that the obtaining of the bonus shares was a step in the process of

acquisition of the shares that were ultimately

sold so as to produce that income.

Your Honours, of course, without the shares there

was nothing to sell, and that is the point which we

would make. And there is that step referred to in

Fletcher(2) 93 7/5/91

that passage to which reference is also made at

page 427 about point 2 where after referring to

Handley's case Your Honours say:

But the cost of a step taken in the process of gaining or producing income must be regarded

as an outgoing -

et cetera, and Your Honours were saying whatever

purpose or motive was there. And Your Honours

that, of course, in our submission, is correct. If

that is the step then it must be taken into

account, but if you do not have shares you cannot

sell them and you do not have the assessable income
obtained from selling them unless you first bought

them.

I would refer also, Your Honours, to page 429

and page 430 and then, importantly, Your Honours,

at page 431, about point 8, where there is the

particular reference to:

loss or outgoing incurred in the acquisition

of stock for the purpose of sale -

and then -

The purpose of its acquisition and the fact of its sale as intended must serve to deny the

possibility that the loss or outgoing is

essentially private in nature, essentiality

being the criterion adopted in Handley.

Your Honours, could I also say in relation to that

case that the reference at page 435, to which my

learned friend referred, simply seems to be a

rejection of the notion of fiscal nullity but, in

our submission, nothing further than that.

Could I give Your Honours the reference to

what seemed to be the decisions in the

Federal Court, apart from the present case, which have dealt with John's case since it was decided.

One is Anderson v Federal Commissioner of Taxation,

(1989) 89 ATC 4982 at page 4990. The two decisions

which my learned friend referred earlier, Mr

Justice French, at first instance, in Riverside

Road Pty Ltd v Commissioner of Taxation,

90 ATC 4031 at pages 4041 to 4042 and in the same

volume at page 4567, the Full Court did not find it

necessary to deal with the point. That appears at

page 4577.

MR JACKSON:  So what we would submit from that is that one

is entitled to look at the events which occurred -

in a case such as the present, one is entitled to

look at the character of those events; one is

Fletcher(2) 94 7/5/91

entitled to look at the fact that the only purpose

of borrowing the money was to obtain what must have

been a very large tax deduction. And in so far as

those questions of fact are involved in that, they

have all been found by the tribunal, it would only

be if that is a matter which cannot be taken into

account at all or which it is not appropriate for

the tribunal, I should say, to take into account,

that one could then say that the tribunal had erred

in arriving at that view. In our submission, such

an approach is one which is just not justified by

the decisions to which we have referred.

BRENNAN J: But if one looks at the purpose of borrowing the

money one would look, primarily, at what the money

was used for, and what was the money used for?

MR JACKSON:  Your Honour, the money was used, we would

submit, to obtain the deduction, that is what the

tribunal seems to have found. The purpose of it

was not to obtain an annuity, the purpose of

borrowing was to expend the money - perhaps I am

overstating it a little bit - the purpose of it was

to utilize the transactions - and I use the

transaction, Your Honour, because no money actually

passed - was to utilize the transactions as

transactions resulting in a taxation deduction.

BRENNAN J: Well, that is where it seems to me there is a

certain confusion of thought. If there is a

question of what was the purpose of the borrowing, one might then look to the question of how was the

money borrowed used or applied, and one cannot even

get to the stage of thinking about tax deductions
unless one says, it was applied for the purpose of

acquiring assessable income.

MR JACKSON:  Your Honour, with respect, one can do so by

saying what occurred.	One sees the events which
occurred and looking at those events, including the

borrowing of the money and the crediting of the
money towards the acquisition of the annuity, that
those events were all events which were directed

towards the obtaining of a taxation deduction.

Amongst the events so directed was the incurring of

the payment of interest, making the payments for

interest.

McHUGH J: Suppose you sold all your books to your wife and

she borrowed money to purchase those books from you

and then leased the books back to you, surely both
your lease payment and her interest payment would

be deductible, would it not?

MR JACKSON:  Yes, Your Honour, I would hope so.

Fletcher(2) 95 7/5/91

McHUGH J:  The sole purpose of the transaction is really to

reduce your income?

MR JACKSON: Well, Your Honour, it may have a number of

purposes. It may have a purpose of, on the one

hand, seeking to make some provision by way of
movement of assets from one person to another; it

may have, as one of its purposes, the purpose of

reducing income; it may also, Your Honour, have a

number of things, but with all that, the question

would be, "What in the end was the essential

character of the borrowing?" and, Your Honour, if

the essential character of it were so that the

person buying the books reduced their income, that

would be one thing, but to reduce .... income might

be a different thing. I am sorry, I am answering

that badly, but what one has here is a finding that

the purpose was not to obtain an annuity in later

years, the purpose was, in effect, just to reduce

income.

DAWSON J:  What happened was that they did acquire an

annuity of the sort that they set out to acquire.

MR JACKSON:	Yes, Your Honour.
DAWSON J:	And, in doing so, they employed financial

arrangements with that end in view.

MR JACKSON: Well, that and other ends in view.

DAWSON J:  I mean, their ultimate desire was to derive a tax

advantage, but the fact is they made financial
arrangements to acquire a particular sort of

annuity, which they did acquire by the use of those

financial arrangements.

MR JACKSON: Well, Your Honour, the tribunal, of course,

took the view that that really was not, in a sense,

what happened. What they were doing - - -

DAWSON J: But it was what happened, because the income

which they derived was derived from just that

annuity.

MR JACKSON: Well, Your Honour, may I put it this way? What

occurred was that they entered into transactions

which one treats as having entered into, because of

the fact they were held not to have been a sham,

and entering into those transactions, the finding

made by the tribunal - Your Honour, I am sorry to

harp on that really, but there is an element of

fact involved in what the tribunal found that they

entered into it for, and they found they entered

into it for - why they entered into it,

Your Honour, was to obtain the tax deduction -

obtain the advantage of it.

Fletcher(2) 96 7/5/91

Now, Your Honour, in doing that they were

entitled to look at things such as the fact that it

was commercially an extraordinary transaction to

enter into. Now, it is alright to say,

Your Honour, they got it. In fact, they got

nothing. No money changed hands. I am not talking

about the legalities - - -

DAWSON J: Yes, they got an annuity.

MR JACKSON:	I am sorry, Your Honour?
DAWSON J:	They did get something, they got an annuity.

MR JACKSON: Well, Your Honour, if Your Honour means by that

that they got a legal right to obtain some money,

but money which it was expected they would never

get, then, Your Honour, it is right to say they got
an annuity, but, Your Honour, that is not, in our

submission, the right analysis of the character of

the transaction. The character of the transaction,

as the tribunal held, in our submission, was a

transaction simply in order to obtain a taxation

advantage.

BRENNAN J:  They were getting an annuity from A in order to

discharge their debt to B. How does one conflate

the income on the outgoing in order to say there

was nothing coming in?

MR JACKSON: Well, Your Honour, one could equally say the

reverse, that they had the deduction; they had to
have something to set off against it, to some

extent.

BRENNAN J: Why? They borrowed money; they had to pay

interest on it so they invested it to get a return.

MR JACKSON: Well, Your Honour, they had to pay interest on

it. If Your Honour looks at what happened, of

course, that really is not what happened at all.

What happened was they they undertook liabilities

to do those things, but they did not, in fact, do

them; it was never contemplated they would. So,

Your Honour, our submission is that the tribunal's

finding was that the tribunal were entitled to look

at those matters, and in looking at them they were

entitled then to take the view that there was a

particular purpose and the was as they found.

Your Honour, I do not know if I can take that any

further. I think I have made my submissions in

that regard, but -

DEANE J:  Mr Jackson, while you are on this line of

territory, the first tribunal found that, looking

at the documents and so on, the transactions appear

to indicate that the profits at the end of the

Fletcher(2) 97 7/5/91

rainbow are a mirage together with the paper debts.

To what extent does that finding stand or did it

fall with those parts of the first tribunal's

decision that fell? I was looking at page 18. It

is the second half of the central paragraph on that

page.

MR JACKSON:  I am sorry, Your Honour has the advantage on me

for just a moment.

DEANE J:  You do not have to deal with it now. I would just

be interested to know though whether the mirage

part still stands because if it does it is

certainly relevant to - - -

MR JACKSON:  Yes, Your Honour. I am sorry, Your Honour gave

me a reference before.

DEANE J: Page 18 of the first tribunal's decision, the

second sentence of the middle paragraph.

MR JACKSON:  Yes, Your Honour, I would have to check that

through to see whether it survived but,

Your Honour, the tone of it certainly survives in the second tribunal's approach to it in the sense

that what the first tribunal seemed to be saying

there was that if you look at what was to happen,

of course what was to happen was that there would

not be the payments in the end because of the fact

that they would attract taxation.

DEANE J:  They also say there is no indication on the

evidence of any fund from which the projected

profits could have come.

MR JACKSON:  Yes. Well, Your Honour, that seemed clearly to

be established by the evidence on any view but I

suppose if it is not the finding there then it has not specifically been made by the second tribunal.

MASON CJ:  We will adjourn now and will resume at 9.45 am

tomorrow.

AT 4.25 PM THE MATTER WAS ADJOURNED

UNTIL WEDNESDAY, 8 MAY 1991

Fletcher(2) 98 7/5/91