Lane and Arthurs

In *Lane and Arthurs*, the parties were the applicants, Lane and Arthurs, and the respondent, the Commissioner of Taxation. The dispute concerned the deductibility of certain expenses incurred by the applicants in relation to their participation in a tax avoidance scheme. The matter came before Justice Moore of the Federal Court of Australia.

The primary legal issue before the Court was whether the expenses claimed by the applicants were incurred in gaining or producing their assessable income, or alternatively, whether they were necessarily incurred in carrying on a business for the purpose of gaining or producing their assessable income, within the meaning of s 8-1 of the *Income Tax Assessment Act 1997* (Cth). The Court also considered whether the expenses were of a capital, private or domestic nature, or otherwise not deductible under s 8-1.

Justice Moore reasoned that the expenses were not deductible under s 8-1. His Honour found that the scheme was artificial and lacked commercial reality, and that the expenses were not incurred in the course of gaining or producing assessable income. Instead, the expenses were incurred in an attempt to create a tax loss that had no genuine connection to the applicants' income-producing activities. The Court applied the principles established in cases such as *FCT v. Roxy Pastoral Co Ltd* and *Commissioner of Taxation v. Ilbery*, emphasizing the need for a direct and discernible connection between the expenditure and the assessable income.

The Court ordered that the applicants' objection to the amended assessments be disallowed.