HORVATH & HORVATH

The parties to this proceeding were the applicants, Horvath & Horvath, and the respondent, the Commissioner of Taxation. The dispute concerned the Commissioner's assessment of income tax against the applicants for the income year ended 30 June 1983. The applicants sought to object to this assessment, but the Commissioner disallowed their objection. The matter came before Young J in the Supreme Court of New South Wales.

The primary legal issue before the court was whether the applicants were entitled to deduct certain expenses incurred in relation to the acquisition of shares in a company. Specifically, the court had to determine if these expenses constituted outgoings incurred in gaining or producing assessable income, or alternatively, if they were outgoings necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income, within the meaning of s 51(1) of the *Income Tax Assessment Act 1936* (Cth).

Young J reasoned that the expenses in question were incurred in the process of acquiring the shares, and not in the carrying on of the business of the company itself. His Honour applied the principle that for an outgoing to be deductible under s 51(1), it must have a sufficient connection to the gaining or producing of assessable income. In this instance, the expenses were antecedent to the commencement of the income-producing activity, and therefore, were not deductible. The court found that the expenses were of a capital nature, relating to the establishment of an investment, rather than being part of the ongoing operations of a business.

The court therefore dismissed the applicants' appeal and affirmed the Commissioner's assessment.