May v Deputy Comm of Taxation

May (the taxpayer) appealed to the High Court of Australia against a decision of the Federal Court of Australia, which had affirmed a decision of the Administrative Appeals Tribunal. The dispute concerned the deductibility of certain expenses incurred by the taxpayer in relation to a property development project. The Commissioner of Taxation (the respondent) had disallowed these deductions.

The primary legal issue before the High Court was whether the expenses incurred by the taxpayer were of a capital nature, and therefore not deductible under section 8-1 of the *Income Tax Assessment Act 1997* (Cth), or whether they were incurred in gaining or producing assessable income, making them deductible. Specifically, the court had to consider the application of the "profit-making undertaking or scheme" principle in determining the character of the expenditure.

McHugh and Gummow JJ, in their joint judgment, applied established principles for distinguishing between capital and revenue outgoings. They referred to the tests laid down in cases such as *Sun Newspapers Ltd v Federal Commissioner of Taxation* and *CPC (Australia) Pty Ltd v Federal Commissioner of Taxation*, which focus on the nature of the advantage sought by the expenditure and the means adopted to obtain it. Their Honours found that the taxpayer's activities constituted a profit-making undertaking or scheme, and the expenses incurred were in the nature of capital expenditure to establish that scheme, rather than outgoings incurred in the course of carrying on a business or in gaining or producing income from an existing source.

The appeal was dismissed.