McEvoy and Commissioner of Taxation
[2001] AATA 191
•14 March 2001
CATCHWORDS – TAXATION – allowable deduction – whether carry forward loss an allowable deduction – calculation of losses – whether losses "incurred" or "necessarily incurred" in gaining or producing assessable income or carrying on a business for that purpose – whether evidence of link between gaining or production of assessable income and loss claimed – objection decision affirmed.
Income Tax Assessment Act 1936 – ss 6, 17, 23, 48, 50A, 51, 79E, 79F, 80, 80AA, 80AAA
Taxation Administration Act 1953 – s 14ZZK
AGC (Advances) Limited v The Commissioner of Taxation of the Commonwealth of Australia (1974-75) 132 CLR 175; (1975) 5 ALR 208; (1975) 75 ATC 4057; (1975) 5 ATR 243
Amalgamated Zinc (De Bavay's) Ltd v Federal Commissioner of Taxation (1935) 54 CLR 295; (1935) 42 ArgLR 67; (1935) 9 ALJR 342; (1935) 3 ATD 288
Evenden v Federal Commissioner of Taxation (1999) 99 ATC 2297
Federal Commissioner of Taxation v Brown (1999) 99 ATC 4600; (1999) 43 ATR 1; [1999] FCA 721
Federal Commissioner of Taxation v Ogilvy and Mather Pty Ltd (1990) 93 ALR 749; (1990) 90 ATC 4115; (1990) 21 ATR 108
Ferguson v Federal Commissioner of Taxation (1979) 26 ALR 307; (1979) 37 FLR 310; (1979) 79 ATC 4261; (1979) 9 ATR 873
Fletcher v Federal Commissioner of Taxation (1991) 173 CLR 1; (1991) 103 ALR 97; (1991) 66 ALJR 11; (1991) 91 ATC 4950; (1991) 22 ATR 613
Placer Pacific Management Pty Limited v Federal Commissioner of Taxation (1995) 95 ATC 4459; (1995) 31 ATR 253
Steele v Deputy Commissioner of Taxation (1999) 197 CLR 459; (1999) 161 ALR 201; (1999) 73 ALJR 457; (1999) 99 ATC 4242; (1999) 41 ATR 139
Ure v Federal Commissioner of Taxation (1981) 34 ALR 237; (1981) 50 FLR 219; (1981) 81 ATC 4100; (1981) 11 ATR 484
DECISION AND REASONS FOR DECISION [2001] AATA 191
ADMINSTRATIVE APPEALS TRIBUNAL )
) QT1999/55
TAXATION APPEALS DIVISION )
Re CHRISTINA McEVOY
Applicant
And COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal Miss S A Forgie (Deputy President)
Date 14 March, 2001
Place Brisbane
DecisionThe Tribunal affirms the objection decision of the respondent dated 24 December, 1998.
S A FORGIE
Deputy President
REASONS FOR DECISION
On 22 February, 1999, the applicant, Mrs Christina McEvoy, lodged an application for review of an objection decision, which was dated 24 December, 1998 and which was made by a delegate of the respondent, the Commissioner of Taxation ("the Commissioner"). That decision disallowed an objection dated 21 October, 1998 against an amended notice of assessment issued on 21 September, 1998 in respect of the year of income ending 30 June, 1997. The objection decision disallowed a loss of $50,508.00 claimed by Mrs McEvoy as incurred in gaining or producing assessable income or incurred in the carrying on of a business for the purpose of gaining or producing assessable income.
At the hearing, Mrs McEvoy was represented by her Tax Agents, Mr Ashley Best and Mr Denis Connole, and the Commissioner by Mr Bain, an officer in the Australian Taxation Office ("ATO"). The documents lodged pursuant to the President's direction under s. 37(1AB) of the Administrative Appeals Tribunal Act 1975 ("the T documents") were admitted in evidence on behalf of the Commissioner. Admitted in evidence on behalf of Mrs McEvoy were: letters from J. Dodds & Associates dated 27 July, 1999, 20 August, 1999 and 28 September, 1999; various contract and mortgage documents; a contract dated 4 October, 1989 between Rex Levette Decoster and Mr and Mrs McEvoy; a notice of default sent by Mr and Mrs McEvoy to Kibshire Pty Ltd dated 28 July, 1989; a partnership return in relation to Mr and Mrs McEvoy and their investment and property income returns for each of Mr and Mrs McEvoy in respect of the year of income ending 30 June, 1997; a departmental trading, profit and loss statement for the year ending 30 June, 1990 in relation to M and C McEvoy trading as National Car Rental in Rockhampton and Mackay, trading profit and loss statement for the same period, consolidated profit and loss account, expense sheet and balance sheet; a return for Twinfish Enterprises in which Mr and Mrs McEvoy are partners with three other entities; a statement by Kevin Ireland; a plaint by Esanda Finance Corporation Limited; a calculation of losses available; a reconciliation of financial statements to apportionment of losses between businesses; schedules setting out a calculation of the losses available and of the calculation of capital gains/losses incurred; and worksheets supporting Mr and Mrs McEvoy's claim for carry forward losses. In support of Mrs McEvoy's case, oral evidence was given by Mr Michael Joseph McEvoy, who is now a hotel manager.
THE ISSUE
The issue in this case is whether a carry forward loss of $551,557.00 is an allowable deduction under s. 79E of the Income Tax Assessment Act 1936 ("the Act").
BACKGROUND
In her return for the 1997 year of income, Mrs McEvoy showed an assessable income of $28,9089.00 and claimed a prior year loss of $50,508.00. After an audit was conducted in respect of her return and she was asked to supply further information as to the manner in which she calculated her loss, the loss was disallowed by the Commissioner. He issued an amended assessment.
In response to a letter written by an officer of the ATO on 27 April, 1998, Mrs McEvoy's accountants, Connole Carlisle, advised that they believed that the carried forward losses for Mrs McEvoy as at 30 June, 1996 would be $330,008.00 (T documents, page 37). They had arrived at that figure by using an Asset Betterment basis between 30 June, 1989 and 31 December, 1990. Mr and Mrs McEvoy's total assets as at 30 June, 1989, they wrote, amounted to $1,947,500.00 and as at 31 December, 1990, amounted to $2,238,500.00. The total liabilities in the same periods were $1,620,00.00 and $2,820,00.00 respectively. This meant that Mr and Mrs McEvoy's assets exceeded their liabilities by $327,500.00 as at 30 June, 1989 but that their liabilities exceeded their assets by $581,500.00 as at 31 December, 1990. Included in the liabilities were the amounts owed to Custom Credit, National Australia Bank, Esanda Finance Corporation Limited ("Esanda"), Bankcards and the like, Mercantile Credit, the war service home loans scheme and "creditors" (T documents, page 39).
The letter from Connole and Carlisle was written on 11 June, 1998 but, on 29 June, 1998 they wrote a further letter to the ATO following discussions with it. They enclosed a Profit and Loss Statement for the partnership of M & C McEvoy for the years ended 30 June, 1990 and 30 June, 1991. That was intended to support their estimate of the losses incurred using the Asset Betterment basis. They calculated that the partnership's losses for the year ending 30 June, 1990 was $60,075.00 and for that ending 30 June, 1991 was $1,043,040.00. On that basis, Connole and Carlisle said, Mrs McEvoy's share of the losses would be half of a total loss of $1,103,115.00 i.e. $551,557.00. Mrs McEvoy's returns for the years of income ending 30 June, 1990 to 1993 were then being prepared and they proposed to amend those already lodged in respect of the years of income ending 30 June, 1995 and 1996 (T documents, page 40). A delegate of the Commissioner disallowed the claim for a prior year loss. The delegate specified the amount of the prior year loss as $50,508.00 (T documents, pages 43-44).
Connole and Carlisle forwarded the 1990 to 1993 returns on 16 July, 1998. They were prepared on the basis of the Profit and Loss Statements provided to the ATO in relation to the 1990 and 1991 years. Assessments were issued on 24 August, 1998 in relation to the 1990 to 1993 years.
On 24 November, 1998, Connole and Carlisle lodged financial statements for the partnership in relation to 1988 and 1989 and returns for Mrs McEvoy in relation to the same years. Mr and Mrs McEvoy signed a statement that they believed that their previous accountant, the late Mr Reedman, had lodged them together with returns for those years. They also lodged returns for the partnership in respect of the 1990 and 1991 years (T documents, pages 78-80).
On 11 December, 1998, Connole Carlisle sent the ATO what they described as a list of Mr and Mrs McEvoy's creditors as at September, 1993 after the realisation of their assets. Mr and Mrs McEvoy's only assets as at 30 September, 1993, they wrote, were household furniture and personal effects. They estimated that Mrs McEvoy had a carried forward capital loss of $217,000.00 and an income loss of approximately $290,057.00 (T documents, pages 118-122).
After further discussions regarding what the ATO saw as inadequacy in the material, a delegate of the Commissioner disallowed Mrs McEvoy's objection to the amended assessment and did so on 24 December, 1998 (T documents, pages 125-126 and 4-10).
THE EVIDENCE
Mr McEvoy's evidence
In the following paragraphs I will summarise the evidence as given by Mr and Mrs McEvoy at the hearing together with the relevant documentary evidence.
On 10 September, 1980, Mr McEvoy purchased a property at Slade Point for $55,000.00 and sold it for $85,000.00 in 1991 (Exhibits B and A).
A few years before 1987, Mr McEvoy said, he and his wife had purchased a piece of rural property. They had successfully applied for it to be rezoned to enable them to operate a car yard from it. A mobile office was placed on the property and they improved it by sealing it. The business did not carry a lot of stock but it was only part of Mr and Mrs McEvoy's interests in 1987. At the time, they also owned a fishing vessel, the Tsarina, which they had fitted out and leased to a fisherman for $3,000.00 per month.
J. Dodds & Associates, valuers and property consultants, were asked to compile transfer details regarding various properties which Mr McEvoy or which Mr and Mrs McEvoy have owned over the years. In relation to the property from which Big Rock Car Sales was operated, their searches show that Mr McEvoy and his late, former accountant, Mr Reedman, acquired it on 2 May, 1984 for $70,000.00. Mr McEvoy acquired sole ownership of the property on 11 January, 1991 for the sum of $80,000.00. He later sold it to a third party on 10 April, 1992 for $93,000.00 (Exhibit A).
In July, 1987, Mr McEvoy said, he and his wife purchased the Whitsunday Waterslide together with another couple with whom they were friends. All had agreed that what was then a broken down zoo, would make a great fun park. They obtained a loan from the Canegrowers' Building Society and paid $97,500.00 plus costs each for the property. A letter from J. Dodds & Associates shows that their searches reveal that Mr and Mrs McEvoy and their partners purchased the property on 27 November, 1987 for $190,000.00 (Exhibit C).
Mr McEvoy said that another gentleman, who owned a waterslide in another regional city, approached them suggesting that he would like to lease the property. When their partners said that they did not want to be involved in a waterslide, Mr and Mrs McEvoy bought their interest in the property for $125,000.00. In order to finance that purchase, they obtained a further loan from Mackay Community Credit. They paid interest on their loan at the rate of some 16 to 17%. Searches conducted by J. Dodds and Associates show that Mr and Mrs McEvoy purchased their partners' share of the property on which the waterslide was situated on 2 December, 1988 for $142,500.00 (Exhibit B). The searches of J. Dodds and Associates show that Mr and Mrs McEvoy purchased an industrial site in Harbour Road, in which the waterslide was located, on 11 October, 1988 for $54,000.00 (Exhibit B).
The lessee of the property converted it to a waterslide and paid rental amounting to $80,000.00 per year. The property was then valued at approximately $650,000.00. Rental was paid regularly until 1989 when the lessee fell behind in his payments. Solicitors acting for Mr and Mrs McEvoy issued a notice to the lessee of the waterslide to the effect that it was in default and that payment of arrears of rent amounting to $23,479.16 was required within seven days. The notice was dated 28 July, 1989 (Exhibit F). The waterslide was rarely opened in the winter but the lessee enjoyed a profitable school holiday period at the end of the year and made up the arrears. He then fell behind again in 1990. Just before Cyclone Joy struck on Boxing Day in December, 1990, the lessee owed Mr and Mrs McEvoy approximately $56,000.00.
After the waterslide opened, Mr and Mrs McEvoy felt that it had gone from an old farm to become a very nice property. They then owned a car yard and a waterslide and thought to open another car yard to sell new cars. In 1989, Mr and Mrs McEvoy had a set off arrangement with Custom Credit from whom they borrowed money. So long as Mr and Mrs McEvoy sold "lots of cars" through their existing car yard and their purchasers arranged "lots of finance" through Custom Credit, Mr and Mrs McEvoy did not pay any interest on the moneys they had borrowed.
In 1989, Mr and Mrs McEvoy had six or eight cars to sell on consignment for the National Car Rental ("National"). The local franchisee of National in Rockhampton said that, if they were to purchase the car rental business from him, they would have unlimited stock, in the form of rental cars, to sell. He wanted $140,000.00 plus stock for the business but they purchased it in September or October, 1989 for $100,000.00 in cash. The contract shows that Mr and Mrs McEvoy agreed to buy the property at 106 George Street, Rockhampton, used as the National office on 4 October, 1989. The purchase price was $120,000.00 and the date for completion was 20 November, 1989 (Exhibit E).
At the same time as they took over the National franchise, Mr and Mrs McEvoy opened a car yard, known as McEvoy Motors, selling new cars as a franchisee. They had a car and panel workshop as well as the sales business. The interest rates on their loans with Custom Credit increased and they no longer had the advantage of an off set arrangement if purchasers arranged their finance on new car purchases through Custom Credit.
Also in September, 1989, Mr McEvoy said, he and his wife purchased 7 acres of land at Andergrove for $35,000.00. The searches of J. Dodds & Associates states that it was purchased by Mr and Mrs McEvoy on 2 November, 1988 for $32,000.00 (Exhibit A). Mr McEvoy said that the property was then valued at $70,000.00 and they were able to borrow 90% of the valuation. At about the same time, they borrowed $80,000.00 from Esanda and put that towards the establishment of McEvoy Motors. Esanda also gave them a credit facility with a limit of $350,000.00 to enable them to purchase cars. A further loan of $750,000.00 was approved by Esanda. Mr and Mrs McEvoy used the money they borrowed to dress up the two car yards and to purchase vehicles. In the rental business, they did not confine themselves to cars but expanded to include buses and utilities. They purchased twelve month old buses from the government rental fleets for the rental business.
The report of J. Dodds & Associates shows that they purchased a property at Barnes Creek Road on 28 November, 1989 for $155,000.00 (Exhibit C).
Mr McEvoy said that he and his wife found that McEvoy Motors began trading fairly well in September/October, 1989. The National business was different. It appeared that it was making money but in fact it was not. By Boxing Day in 1990, they were finding things "tight" but manageable. The cash was coming in quite well. They were hoping to receive $30,000.00 from their fishing boat, $50,000.00 from the waterslide and $200,000.00 from the car rentals. When Cyclone Joy struck Mackay, they only took $13,000.00 in rentals and had to shift the rental cars three times. They did not sell a new car for three weeks and, after the fishing boat sank a few days before Christmas, they did not receive any money from its activities.
Mr McEvoy had to take a cheque for $46,000.00 to the manager of Esanda but it could not be honoured. He told the manager that he needed more time but he was not given it. As a result of action taken by their creditors, Mr and Mrs McEvoy were locked out of their franchises. The loans Mr and Mrs McEvoy had with Esanda and Mercantile Credit were lines of credit and so rose and fell over time. At the time of Cyclone Joy, they owed $250,000.00 to Mackay Community Credit, $180,000.00 to Mercantile Credit together with $20,000.00 to $30,000.00 in legal fees, $750,000.00 to Custom Credit for the car rental fleet, $400,000.00 for the car yards, approximately $300,000.00 to Esanda for the cars (although that rose and fell) and $200,000.00 on the property. They also owed $100,000.00 to Toyota Finance but it was later reduced to $40,000.00. On a personal level, Mr and Mrs McEvoy owed $10,000.00 to American Express.
The cars were seized, Mr McEvoy said, by Custom Credit and Esanda. The companies did so by locking them in the car yards. They then asked Mr McEvoy to sign documents which he did. On legal advice that she subsequently sought, his wife declined to sign those documents. Custom Credit and Esanda de-registered all of the rental vehicles and moved them to a paddock for some four or five months. They then sold them at auction in Brisbane. A signed statement by Mr Kevin Ireland, who was then employed by Custom Credit as its Area Manager, stated that Custom Credit seized motor vehicles from National and McEvoy Motors. Those motor vehicles were stored for approximately six months and then sold for approximately 50% of the value or debt owed to Custom Credit (Exhibit I).
Mr McEvoy later elaborated on the National business. He said that their previous accountant offered to purchase the National business, subject to Custom Credit's lending him money, but that offer did not proceed. Later, he explained that the business had been taken over by Mr Reedman, who operated it until June, 1991 when Esanda refused to finance him. In the five months he was operating it, he was allowed to have all the cars until the registrations ran out and he did not make any payments for the use of the building or the cars. At the time, Mr and Mrs McEvoy were liable for default interest at the rate of 23%.
The searches of J. Dodds & Associates show that:
the waterslide property was sold to Watermore Pty Ltd on 8 January, 1991 for $320,000.00 (Exhibit B) (In its earlier letter, J. Dodds & Associates stated that the property was sold on 14 November, 1991 for the same amount);
Mr McEvoy acquired sole ownership of the property on which the Big Rock Car Sales was operated on 11 January, 1991 for the sum of $80,000.00 (Exhibit A);
Mr McEvoy sold the Slade Point property on 29 July, 1991 for $85,000.00 (Exhibit A);
Mr and Mrs McEvoy sold the property at Barnes Creek Road for $160,000.00 on 15 August, 1991 (Exhibit C);
106 George Street, Rockhampton, from which the National business was operated, was sold by Mackay Community Credit as mortgagee on 16 September, 1991 for $90,000.00 (Exhibit B);
Mr and Mrs McEvoy sold the Andergrove property on 20 November, 1991 for $50,000.00 (Exhibit A);
Mr and Mrs McEvoy sold the industrial site in front of the waterslide property to Walgene Pty Ltd on 28 November, 1991 for $75,000.00 (Exhibit A); and
Mr McEvoy sold the Big Rock Car Sales property to a third party on 10 April, 1992 for $93,000.00 (Exhibit A);
Although Mr and Mrs McEvoy had decided to defend any claims made by Custom Credit and Esanda, Mr McEvoy was made bankrupt by virtue of a creditor's petition lodged by American Express. In 1993, Esanda had proposed to lodge a creditor's petition seeking Mrs McEvoy's bankruptcy. They then took no action on the petition, but reserved their position. Esanda also proposed to lodge a creditor's petition in relation to Mrs McEvoy's estate but she paid it $650.00. Mr and Mrs McEvoy paid money to a few people including the man that had the garage over the road. He was paid approximately $1,600.00. When Mr and Mrs McEvoy approached Esanda for a housing loan, they were asked to pay back all of the amounts owing on Mrs McEvoy's credit cards but they did not do so. Instead, they chose not to proceed with their loan application.
Mr McEvoy said that they had two boats and that both sank. One sank before Christmas, 1990 and it appears from Mr McEvoy's letter attached to his accountants' letter dated 3 September, 1999 that the second boat, in which they had a 25% interest, sank at the end of February, 1991. Their insurer paid them about $100,000 in respect of the boat that sank at the end of 1990. That sum represented the cost of repairing it, he said. Some of that money was paid to their lawyers, approximately $50,000.00 to Mackay Community Credit and some to Mercantile Credits. When asked what had been the written down value for tax purposes, Mr McEvoy said that he had purchased the boat for $70,000.00. It had been a charter boat. He and his wife refitted it for the purposes of fishing. That meant that he spent $30,000.00 on the installation of freezers and a further $15,000.00 on the installation of an auxiliary freezer. Taking into account the money they spent on the installation of electronics on board, they spent $70,000.00 in all. The boat owed them $130,000.00, he said. The wreck of the boat was valued at $7,000.00. Mr McEvoy's brother purchased it from the insurance company for that sum.
The second boat, which was only 6 months old, had been insured but the insurance company would not pay. It sank in 15 to 20 feet of water when the crew was attending a party on another boat. The boat had a faulty bilge pump and pumped water in rather than out. Although all the necessary checks had been performed and repairs carried out to comply with the surveyor's report, the boat's skipper had not lodged the necessary paperwork with the Department of Transport. The boat, therefore, was out of survey and the insurer would not pay on the claim. The boat was sold by Mercantile Credit at auction for $26,000.00, Mr McEvoy said at the hearing.
All of the loans were taken out in the names of both Mr and Mrs McEvoy and they jointly owned most of the property. One property, situated at Slade Point, was in Mr McEvoy's name only.
On 15 July, 1993, Esanda issued a plaint in the District Court. It was later amended on 29 November, 1994 and claimed the sum of $101,177.89, which Esanda said was owed to it as at 13 July, 1993, together with interest at 23.25% per annum. Esanda's claim was based on a loan contract dated 5 February, 1990.
After the plaint was served on her, Mrs McEvoy wrote to Esanda's solicitors on 30 July, 1994. She advised them that the debt related to McEvoy Motors and referred to another debt owed by her and her husband in relation to National. She then wrote:
"Even though I am co-signer for these loans, I had nothing to do with the running of these businesses, other than some bookwork and banking etc. I had three very young children at the time, and everything seemed to be going smoothly." (Exhibit J)
Mrs McEvoy then referred to the effect that Cyclone Joy had in stopping their income from National, McEvoy Motors and the waterslide. Due to this, they were unable to make their floor plan payment to Custom Credit and Custom Credit took immediate action to close their businesses. Until that time, she and her husband had maintained an impeccable repayment record with both Esanda and Custom Credit. Mrs McEvoy said that her husband had thought that they had sufficient assets to cover their debts but their proposal to take steps to realise their assets and pay their debts was rejected by Custom Credit.
Mrs McEvoy went on to detail the proposals refused by Custom Credit and the subsequent steps that she said were taken by Custom Credit in relation to Mr and Mrs McEvoy's assets in the months following Cyclone Joy:
"1. Custom Credit refused an offer by Noel McEvoy for the stock in the car yard at cost price, they were sold later for a much lower price.
2.Noel McEvoy also offered to lease the car yard until it could be sold at a later date. The property was later sold to Noel for $90,000, when at a poorly advertised auction, only two bidders were present. The property was valued at $320,000 and is currently returning $36,000 per annum.
3.The tenant from the Waterslide complex was paying $80,000 per annum rental and was in his 2nd year of a 50 year lease when Custom Credit evicted him, to auction the property with vacant possession. With legal action threatening Custom Credit sold the same property to the tenant providing legal action was dropped and a non disclosure pact was entered into. The property was sold for $280,000, which was about 25% of its valuation.
4.Esanda was offered by Mr V Reedman, an accountant in Mackay the payout figure on the car rental fleet at National Car Rental. Esanda took four months to eventually decide not to accept the offer. During this time Mr Reedman was allowed to keep this business running, paying no payments on any of the vehicles, adding 20,000 kms to each vehicle, until all the registrations had expired. He was also allowed free rent in the building for four months, whilst Esanda was still CHARGING US INTEREST.
5.The National Car Rental Franchises for Mackay and Rockhampton cost us to purchase over $200,000 in cash, we were not allowed to sell these businesses, nor did Custom Credit as receivers try to dispose of them to recoup funds." (Exhibit J)
On 31 August, 1999, Connole Carlisle wrote to the ATO setting out a copy of the calculation of the capital losses incurred on the sale of various properties owned by Mr and Mrs McEvoy. They reported that they had been unable to obtain copies of the franchise agreements. As to the majority of the liabilities listed by the Insolvency and Trustee Service Australia as outstanding as at September, 1993, Connole Carlisle contended, they related to trading activities of the various businesses conducted by Mr and Mrs McEvoy and would not be of a capital nature (Exhibit N).
On 12 January, 2000, Connole and Carlisle sent the ATO a copy of a table setting out Mr and Mrs McEvoy's assets and liabilities as at 1 September, 1993, 30 June, 1991 and 1 July, 1987. In summary, their table showed:
01/01/1993 31/06/1991 01/07/1987
TOTAL ASSETS (at cost) 0 $2,952,010 $511,044
TOTAL LIABILITIES $2,372,448 $5,259,000 $579,000
EXCESS OF LIABILITIES OVER ASSETS $2,372,448 $2,306,990 $67,956
(Exhibit N)
On 17 January, 2000, Connole Carlisle again wrote to the ATO, attaching a document setting out their calculation of Mr and Mrs McEvoy's capital gains and losses. That document showed the capital gain or loss on each property together with other capital expenditure. Other capital expenditure included sewerage works and a car park at the waterslide, the costs of the National franchises at Rockhampton and Mackay and improvements to certain properties. The net capital losses were calculated to be $480,761.00 (Exhibit N).
Connole & Carlisle then calculated the losses available to be claimed by Mrs McEvoy as follows:
"NET ASSET POSITION AS AT 1/7/87 -67956
NET ASSET POSITION AS AT 1/9/93 -2372448
NET LOSSES INCURRED 2304492LESS CAPITAL LOSSES PER WORKSHEET 480761
NET TRADING LOSSES 1823731CHRISTINA'S 50% ENTITLEMENT WOULD THEREFORE BE AS FOLLOWS
CAPITAL LOSSES 240380
TRADING LOSSES 911865" (Exhibit N)
A further calculation adopted the same basis but allowed for the deduction from the net losses incurred a sum of $185,000.00. That figure represented private living expenses calculated to be $30,000.00 per annum. The net trading losses then became $1,638,731.00 and Mrs McEvoy's share of the trading losses became $819,336.00 (Exhibit L).
CONSIDERATION
In relation to each year of income commencing on 1 July, 1965, and including that commencing on 1 July, 1997, s. 17 of the Act provides that income tax is levied upon the taxable income derived by a person during that year. Income tax is levied at the rate declared by the Parliament in relation to that year. In so far as it is relevant in this case, the expression "taxable income" is defined in s. 6(1) of the Act to mean:
"(a) …the amount remaining after deducting from the assessable income all allowable deductions; …" (and see also s. 48(1)).
In the context of this case, the term "assessable income" is defined to mean "… all the amounts which under the provisions of this Act are included in the assessable income" (s. 6(1)).
Deductions are the subject of Division 3 of Part III of the Act. In relation to the year of income ending 30 June, 1997, the general provision relating to deductions is found in Subdivision A of the Act. Section 51(1) of that Subdivision provides:
"All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income."
Section 79E, which also comes within Subdivision A, is concerned with general domestic losses in relation to the years of income ending 30 June, 1997 and in the preceding years. That section only applies if the taxpayer comes within ss. 79E(1) or (2). As Mrs McEvoy is not a company, Subdivision B of Division 2A cannot apply (s. 50A(1)) and so s. 79E(2) cannot draw her within the operation of s. 79E. Only s. 79E(1) is relevant and it provides:
"(1) For the purposes of this section, a taxpayer incurs a loss in a post-1989 year of income equal to the amount (if any) by which the taxpayer's non-loss deductions for the year of income exceed the sum of the taxpayer's assessable income and net exempt income for that year."
The expression "non-loss deduction" is defined in s. 79E(12) to mean "… an allowable deduction other than one allowable under this section or section 79F, 80, 80AAA or 80AA". As s. 79F is concerned with film losses, s. 80 with general domestic losses of pre-1990 years of income, s. 80AAA with film losses of pre-1990 years of income and s. 80AA with primary production losses of pre-1990 years of income, none is relevant in this case. The effect of s. 79E(1) in this case is that, before it may be applied, I must be satisfied that Mrs McEvoy has an allowable deduction pursuant to a provision of the Act other than s. 79E. As no reliance was placed on other provisions relating to allowable deductions, I have returned to the general provisions, which are set out in s. 51(1) (see paragraph 43 above).
There are two limbs to s. 51(1). The first relates to the allowance of losses and outgoings incurred in gaining or producing assessable income. This limb may apply in a case in which the second limb of s. 51(1) does not apply and may lead to an apportionment of the losses and outgoings. The second limb of s. 51(1) raises for consideration the question whether the losses and outgoings were necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.
It is clear that under both limbs, a finding must be made of the purpose for which the losses and outgoings were incurred. If that purpose is to gain or produce assessable income, the losses and outgoings will then be deductible except to the extent that they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income. As Brennan J said in Ure v Federal Commissioner of Taxation (1981) 34 ALR 237 (Brennan, Deane and Sheppard JJ):
"Section 51 requires that a deductible expenditure be incurred 'in' gaining assessable income, that is to say, it must be incidental and relevant to the gaining of that income: (Ronpibon Tin NL and Tongkah Compound NL v FC of T (1949) 78 CLR 47 at 56); 4 AITR 236 at 244. 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 (1926) 38 CLR 153 at 170, 171, 197; Texas Co (Australasia) Ltd v FC of T (1940) 63 CLR 382 at 468; 2 AITR 4 at 44. 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." (page 241)
This aspect was also considered by the High Court in Fletcher & Ors v Federal Commissioner of Taxation (1991) 173 CLR 1 (Mason CJ, Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ). Although there was some suggestion that the appellants might have engaged in a sham, the High Court put that suggestion to one side in considering the principles relating to the application of s. 51(1).
The High Court began by confirming that it is plain that the provision contemplates apportionment and what is an appropriate apportionment is a question of fact. It went on to say that the reference to "the assessable income" is not a reference only to the assessable income derived in the particular tax year but also to that derived in other years or to assessable income which the relevant outgoing would be expected to produce. Reference was made to the Ronpibon case, to which Brennan J referred to in Ure, in support of these principles.
Their Honours then went on to consider the first limb of s. 51(1). They pointed out that whether or not an outgoing is made for the purposes of gaining or producing assessable income is a question of characterisation. In answering that question they said that the motive of the taxpayer may be an element to be taken into consideration. They continued:
"Nonetheless, it is commonly possible to characterise an outgoing as being wholly of the kind referred to in the first limb of s.51(1) without any need to refer to the taxpayer's subjective thought processes. That is ordinarily so in a case where the outgoing gives rise to the receipt of a larger amount of assessable income. In such a case, the characterization of the particular outgoing as wholly of a kind referred to in s.51(1) will ordinarily not be affected by considerations of the taxpayer's subjective motivation. If, for example, a particular item of assessable income can be earned by making a lesser outgoing in one of two possible ways, one of which is a loss or outgoing of the kind described in s.51(1) and the other of which is not, it will ordinarily be irrelevant that the taxpayer's choice of the method which was tax deductible was motivated by taxation considerations or that the non-deductible outgoing would have been less than the deductible one. In such a case, the objective relationship between the outgoing actually made and the greater amount of assessable income actually earned suffices, without more, to characterize the whole outgoing as one which was incurred in gaining or producing assessable income. If the outgoing can properly be wholly so characterized, it 'is not for the Court or the commissioner to say how much a taxpayer ought to spend in obtaining his income, but only how much he has spent'. [See e.g., Ronpibon Tin (1949), 78 C.L.R., at p.60; Cecil Bros. Pty. Ltd. v. Federal Commissioner of Taxation (1964) 111 C.L.R . 430, at p.434]
The position may, however, well be different in a case where no relevant assessable income can be identified or where the relevant assessable income is less than the amount of the outgoing. Even in a case where some assessable income is derived as a result of the outgoing, the disproportion between the detriment of the outgoing and the benefit of the income may give rise to a need to resolve the problem of characterization of the outgoing for the purposes of the sub-section by a weighing of the various aspects of the whole set of circumstances, including direct and indirect objects and advantages which the taxpayer sought in making the outgoing. [See, e.g., Robert G. Nall Ltd. v. Federal Commissioner of Taxation (1937), 57 C.L.R 695, at pp. 699-700,706,708-709,712-713] Where that is so, it is a 'commonsense' or 'practical' weighing of all the factors which must provide the ultimate answer. [See, e.g., B.P. Australia Ltd. v. Federal Commissioner of Taxation (1965), 112 C.L.R. 386, at pp. 396-397; [1966] A.C. 224, at p.264; Hallstroms Pty. Ltd. v Federal Commissioner of Taxation (1946), 72 C.L.R. 634, at p.648; Federal Commissioner of Taxation v. Foxwood (Tolga) Pty. Ltd. (1981), 147 C.L.R. 278, at pp.285, 293] If, upon consideration of all those factors, it appears that, notwithstanding the disproportion between outgoing and income, the whole outgoing is properly to be characterized as genuinely and not colourably incurred in gaining or producing assessable income, the entire outgoing will fall within the first limb of s.51(1) unless it is either somehow excluded by the exception of 'outgoings of capital, or of a capital, private or domestic nature' or 'incurred in relation to the gaining or production of exempt income'. If, however, that consideration reveals that the disproportion between outgoing and relevant assessable income is essentially to be explained by reference to the independent pursuit of some other objective and that part only of the outgoing can be characterized by reference to the actual or expected production of assessable income, apportionment of the outgoing between the pursuit of assessable income and the pursuit of that other objective will be necessary." (pages 18-19)
The second limb of s. 51(1) has also been the subject of a number of cases. The general principles are set out in Ferguson v Federal Commissioner of Taxation (1979) 26 ALR 307 (Bowen CJ, Franki and Fisher JJ). Bowen CJ and Franki J set out the definition of "business" in s. 6(1) of the Act. It is that:
"`business' includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee;"
Their Honours then summarised the effect of the authorities at the time:
"... This does not afford much assistance in the present case. It is necessary to turn to the cases. There are many elements to be considered. The nature of the activities, particularly whether they have the purpose of profit-making, may be important. However, an immediate purpose of profit-making in a particular income year does not appear to be essential. Certainly it may be held a person is carrying on business notwithstanding his profit is small or even where he is making a loss. Repetition and regularity of the activities is also important. However, every business has to begin, and even isolated activities may in the circumstances be held to be the commencement of carrying on business. Again, organization of activities in a business-like manner, the keeping of books, records and the use of system may all serve to indicate that a business is being carried on. The fact that, concurrently with the activities in question, the taxpayer carries on the practice of a profession or another business, does not preclude a finding that his additional activities constitute the carrying on of a business. The volume of his operations and the amount of capital employed by him may be significant. However, if what he is doing is more properly described as the pursuit of a hobby or recreation or an addiction to a sport, he will not be held to be carrying on a business, even though his operations are fairly substantial. See generally, Trautwein v. FC of T (No 2) (1936) 56 CLR 196; Tweddle v. FC of T (1942) 7 ATD 186; 2 AITR 360; Fairway Estates Pty Ltd v FC of T; (1970) 123 CLR 153; 1 ATR 726; Thomas v. FC of T (1972) 46 ALJR 397; 3 ATR 165; especially at 399-401; (67-71) in all of which cases it was held the taxpayer was carrying on business; and Martin v FC of T (1953) 90 CLR 470; 5 AITR 548, in which it was held the taxpayer was not carrying on business." (pages 311)
In support of their arguments that Mrs McEvoy is permitted to claim losses as allowable deductions, Mr Best and Mr Connole relied on the judgements of the Full Court of the Federal Court in Placer Pacific Management Pty Limited v Federal Commissioner of Taxation (1995) 95 ATC 4459 (Davies, Hill and Sackville JJ) and Federal Commissioner of Taxation v Brown (1999) 99 ATC 4600 (Lee, RD Nicholson and Merkel JJ) as well as a decision of Senior Member Beddoe in Evenden and Federal Commissioner of Taxation (1999) 99 ATC 2297. Each case considered, among other matters, whether certain amounts were allowable deductions under s. 51(1).
At issue in Placer Pacific was an amount of $383,379.00 Placer Pacific Management Pty Ltd had paid in the accounting period ending 31 December, 1989 in settlement of a claim made against it under a contract it had entered in 1978 to supply a conveyor belt. Placer Pacific had sold the conveyor belt division of its business in July, 1981 but remained liable to complete the contracts it had entered before it sold and in relation to any actions arising under those contracts. The Full Court considered the earlier authority of Amalgamated Zinc (De Bavay's) Ltd v Federal Commissioner of Taxation (1935) 54 CLR 295 (Latham CJ, Rich, Starke, Dixon, Evatt and McTiernan JJ), which considered the predecessor of s. 51(1); namely s. 23(1)(a). It also had regard to the later authority of AGC (Advances) Limited v The Commissioner of Taxation of the Commonwealth of Australia (1974-75) 132 CLR 175 (Barwick CJ, Gibbs and Mason JJ) in which the High Court considered s. 51(1) in its modern form. It did so in determining whether losses written off by AGC (Advances) Limited at a time when it had ceased to carry on its financing business were deductible.
In a joint judgement in Placer Pacific, the Full Court said of the AGC case:
" In our view AGC should be taken as establishing the proposition that provided the occasion of a business outgoing is to be found in the business operations directed towards the gaining or production of assessable income generally, the fact that the outgoing was incurred in a year later than the year in which the income was incurred and the fact that in the meantime business in the ordinary sense may have ceased will not determine the issue of deductibility. There is no relevant distinction to be drawn between losses and outgoings. Provided the occasion for the loss or outgoing is to be found in the business operations directed to gaining or producing assessable income, that loss or outgoing will be deductible unless it is capital or of a capital nature." (page 4,464)
In relation to the particular facts of the case before it, the Full Court said:
" On the facts of the present case the occasion of the loss or outgoing ultimately incurred in the year of income was the business arrangement entered into between Placer and NWCC for the supply of the conveyor belt which was alleged to be defective. The fact that the division had subsequently been sold and its active manufacturing business terminated does not deny deductibility to the outgoing. A finding to the contrary would lead to great inequity. Many businesses generate liabilities which may arise in the considerable future. Such liabilities are sometimes referred to as 'long tail liabilities'. To preclude deductibility when those liabilities come to fruition on the basis that the active trading business which gave rise to them had ceased would be unjust.
The approach we take is consistent with that taken by another Full Court of this Court in FC of T v EA Marr & Sons (Sales) Ltd 84 ATC 4580; (1984) 2 FCR 326 where the Court comprising Bowen CJ, Toohey and Lockhart JJ unanimously allowed a deduction to a company in liquidation at a time when it might have ceased to carry on business of amounts owing to leasing financiers. The Court regarded De Bavay's case as plainly distinguishable, as indeed it was. However, what is more important is that the payments were deductible because the occasion of the outgoings was to be found in the carrying on of the taxpayer's leasing activities." (pages 4,464-5)
That brings me to the case of Brown, which involved a claim by Mr Brown that he was entitled to allowable deductions for his proportion of interest paid by a partnership during the years of income ending 30 June, 1993 and 1994 on monies lent by a bank to the partnership. The partnership comprised Mr and Mrs Brown. It had borrowed the monies in order to acquire and operate a delicatessen and had agreed to repay them in 120 monthly repayments. The first repayment occurred on 28 December, 1988. Mr and Mrs Brown sold the business before the 1993 and 1994 years of income but their commitment to make the repayments continued.
Among other matters, the Commissioner submitted that, once the business had ceased, the payment of the outgoing was not to be found in the carrying on of the business but in the voluntary decision of the partnership not to repay the loan when it sold the business and in its voluntary decision to continue to pay the interest in instalments. The nexus between the partnership's carrying on business and the payment of the interest had been broken.
The Full Court referred to the case of Steele v Deputy Commissioner of Taxation (1999) 197 CLR 459 (Gleeson CJ, Gaudron, Gummow and Callinan JJ, Kirby J dissenting) in which the High Court considered s. 51(1). It drew from the judgement of Gleeson CJ, Gaudron and Gummow JJ (with whom Callinan J agreed on these aspects) the following propositions:
"1. The reference in s 51(1) to 'the assessable income' is to be construed as an abstract phrase referring not only to assessable income derived in any particular year but also to assessable income the relevant outgoing 'would be expected to produce'. Thus, the test of deductibility under the first limb 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': see Fletcher & Ors v FC of T 91 ATC 4950 at 4957; (1991) 173 CLR 1 at 16-17 and Steele at par 22.
2. Interest paid on ordinary commercial terms for the use of money expended to acquire property held for an income producing purpose is a recurrent payment which secures, not an enduring advantage, but rather, the use of borrowed money during the term of the loan. Therefore, in the usual case, where interest is a recurrent payment to secure the use for a limited term of loan funds, it is proper to regard the interest as a revenue item and its character is not altered by reason of the fact that the borrowed funds are used to purchase a capital asset. Once it is determined that the interest paid during a relevant year is an outgoing incurred in gaining or producing a taxpayer's assessable income generally then, even though no assessable income is derived during that year and no such income may ever be derived, the circumstance that the capital asset has produced no income is not a reason to conclude that the interest is an outgoing of a capital nature: see Steel pars 25-29.
3. In deciding whether, in a case such as Steele, the interest was an outgoing 'incurred in gaining or producing the assessable income' it is unnecessary to distinguish between the purpose of the taxpayer in borrowing the money and the use to which the borrowed funds were put. The reason for that is that even though no assessable income may be produced in the year in which the outgoing is incurred, where the purpose of the taxpayer in borrowing the money is immediately satisfied by the use of the borrowed funds to acquire the capital asset for income producing purposes, the necessary connection exists.
4. The temporal relationship between the incurring of an outgoing and the actual or projected receipt of income may in other cases, but not Steele, be one of a number of factors relevant to a judgment as to whether the necessary connection might in a given case exist. However, contemporaneity is not legally essential and whether it is factually important may depend upon the circumstances of a particular case: see Steele par 44. In that context their Honours said (at pars 45 and 46):
'As Lockhart J said in FC of T v Total Holdings (Aust) Pty Ltd [(1979) 24 ALR 401 at 406; 79 ATC 4279 at 4283]:
'… [I] If a taxpayer incurs a recurrent liability for interest for the purpose of furthering his present or prospective income-producing activities, whether those activities are properly characterised as the carrying on of a business or not, generally the payment by him of that interest will be an allowable deduction under s 51.
…
I say 'generally' as some qualification may be necessary in appropriate cases, for instance, where interest is paid by a taxpayer as a prelude to his being in a position whereby he may commence to derive income. In such cases the requirement that the expenditure be incidental and relevant to the derivation of income may not be satisfied.'
This is consistent with cases which have decided that a taxpayer may be entitled to a deduction after a business as ceased, provided the occasion of a business outgoing is to be found in the business operations directed towards the gaining or production of assessable income generally [AGC (Advances) Ltd v FC of T (1975) 132 CLR 175; 75 ATC 4057; Placer Pacific Management Pty Ltd v FC of T (1995) 31 ATR 253; 95 ATC 4459]. However, cessation of business may be of factual importance [Inglis v FC of T (1979) 28 ALR 425; 80 ATC 4001].' (Emphasis added)" (pages 4,605-6)
Applying these principles, the Full Court concluded that the occasion for the loss or outgoing in question was the payment of interest that the partnership was obliged to pay under the contract of loan. It agreed with Carr J that:
"… there may come a period of time between cessation of business and the payment of interest which is such that, in all the circumstances of the case, the payment is no longer sufficiently proximate to the activities of the business to be deductible under s 51(1) with the consequence that those activities no longer provide the occasion for the outgoing. However, the evidence in the present case did not establish that that point had been arrived at during the 1993 or 1994 financial years. Answers to such questions depend upon a 'commonsense' or 'practical' weighing of all the factors: see Fletcher at ATC 4958: CLR 18.
26. Accordingly, the present case was determined against the Commissioner because the cessation of business did not have the consequence that the 'occasion' for the liability to pay interest no longer remained the original liability to pay that interest under the Bank loan." (page 4,608)
In Evenden payments were made by a partnership after it ceased carrying on business. Senior Member Beddoe applied the principles in cases such as De Bavay, Placer Pacific, and Brown.
The first step in Mrs McEvoy's submission is that she and her husband were partners. The term "partnership" is defined in s. 6(1) of the Act to mean "… an association of persons carrying on business as partners or in receipt of income jointly, but does not include a company". Even though Mrs McEvoy said that she had nothing to do with the businesses, other than doing some bookwork and banking, I am satisfied that she and her husband were partners in various businesses in the relevant years.
The second step is that the partnership, and so Mrs McEvoy, incurred losses. Those losses have been calculated on a basis somewhat akin to that adopted in the preparation of an asset betterment statement. Mr Best and Mr Connole have prepared various documents in which they have calculated the excess of Mr and Mrs McEvoy's liabilities over the cost price of their assets at various times. They have, for example, prepared them as at 1 July, 1987 and as at 1 September, 1993 and found that the excess had increased by $2,304,492.00 as at 1 September, 1993 (i.e. the difference between $2,372,448.00 on 1 September, 1993 and $67,956.00 on 1 July, 1987). This figure then became the net losses incurred. After deduction of capital losses amounting to $480,761.00, which they calculated separately, they then reached a figure of $1,823,731.00 in respect of the net trading losses for the partnership and $911,865.00 in respect of Mrs McEvoy's share of those losses (Exhibit O).
A problem with this approach is that s. 51(1) of the Act requires that there be a "link", as it were, between the losses and outgoings claimed and the gaining or producing the assessable income. That link may be that the losses and outgoings were incurred in gaining or producing the assessable income or it may be that they were necessarily incurred in carrying on a business for the purpose of gaining or producing that income. An asset betterment type of statement shows neither a link nor an occasion. It simply points to a discrepancy between a person's assets and their income or, in this case, an excess of their liabilities over the value of their assets at particular points in time. The statement does not go further and point to losses' being incurred in particular years of income as required by s. 51(1). It does not identify the losses and point to the manner in which they were incurred in gaining or producing assessable income or to the manner in which they were incurred in carrying on a business for the purpose of producing that income.
There is no clear evidence as to when Mr and Mrs McEvoy ceased to conduct their businesses. Connole Carlisle sent the ATO a list of creditors. They said that the list named those who were creditors after the realisation of any assets owned by Mr and Mrs McEvoy. The list itself states that it names the creditors in the estate of Mr McEvoy. Whether Mr McEvoy became bankrupt at that time or at some earlier time is not clear. There is no indication as to those debts incurred solely by Mr McEvoy and those incurred jointed by Mr and Mrs McEvoy. On the basis of the material sent by J. Dodds & Associates, I find that by the end of April, 1992 Mr McEvoy, or Mr and Mrs McEvoy, had sold all of the properties upon which the waterslide business, the car rental business and the car sales business were conducted and in respect of which they had gained assessable income. In the case of the waterslide, that assessable income was received in the form of rental paid by the operator of the waterslide who leased it from Mr and Mrs McEvoy. Rental from that property would have ceased in either January or November, 1991 when they sold the property. The date of sale is not clear from the correspondence of J. Dodds & Associates. In the case of the car rental business and car sales business, Mr and Mrs McEvoy conducted the businesses from premises they owned. In respect of their business activities, I am satisfied that they ceased early in 1991 when Custom Credit seized the cars which were essential for the operation of each.
The fact that Mrs McEvoy is no longer conducting a business or deriving assessable income from it does not mean that a loss or outgoing may not be an allowable deduction under s. 51(1) of the Act. As the authorities show, a business need not be ongoing when the loss or outgoing is incurred. It does mean, however, that the "occasion" for the loss or outgoing must be found in the business operations directed to gaining or producing assessable income (Placer Pacific, see paragraphs 55-56 above). A list of creditors as at 30 September, 1993 and a claim based on an asset betterment statement does not establish that occasion on the balance of probabilities.
Apart from this, I am not satisfied that the amounts claimed as losses have been "incurred" by Mr and Mrs McEvoy in gaining or producing assessable income or have been "necessarily incurred" in carrying on their business or businesses for the purpose of gaining or producing that income. They may well have incurred the liability to pay the amounts but it does not automatically follow from the fact that a liability to pay an amount of money has been incurred that there has been a loss or outgoing of a type specified in s. 51(1).
The meaning of the expression "losses and outgoings" in the context of s. 51(1) was considered by Jenkinson J in Federal Commissioner of Taxation v Ogilvy and Mather Pty Ltd (1990) 93 ALR 749. His Honour considered a situation involving the publication of advertisements. Under rules promulgated by the Media Council of Australia, two separate contractual obligations arose when an agent arranged the publication of an advertisement for a client. When the agent entered the contract with the publisher, he or she had a contractual obligation to pay the publisher and the client had a contractual obligation to pay the agent. The contract to publish could be terminated without penalty within a certain time frame.
Jenkinson J said:
"The evidence did not justify, and the tribunal did not make, a finding that in any substantial proportion of cases payment of the price by the respondent to the publisher preceded receipt of the price by the respondent from the client. What was declared in the passage last quoted to be 'fundamental' and 'essential' was what ordinarily happened. Accordingly, at the time when the contract for publication of an advertisement was made, at which time there was made also the contract between publisher and accredited agent under which the agent promised to pay the price, the expectation of the respondent was that when in performance of his promise he should pay the price he would have previously received from his principal payment of that amount. The same statement may be made in respect of the time at which the 'non-cancellation period' commenced. While the liability of the agent, like the liability of his client the advertiser, to pay the price may, for the reasons I have stated, be said to have been incurred when the 'non-cancellation period' commenced, no loss or outgoing can in my opinion be said to have been by the agent then incurred within the meaning of s 51(1). The expression 'losses and outgoings' in that section, in my opinion, requires that the payment in contemplation should at least involve a diminution, even if only momentarily, of the payer's funds by the payment. The incurring of a liability to make a payment which is expected to involve no such a diminution does not, in my opinion, satisfy the requirement for deductibility expressed in s 51(1). That the word 'outgoings' does not comprehend a payment which involves no expense to the payer was laid down by the Court of Appeal in Dependable Upholstery Ltd v Brasted [1932] 1 KB 291. Such a conclusion must be drawn also, in my opinion, about the word 'losses'. It is not, in my opinion, a legitimate application of s 51(1) to accept as an allowable deduction the amount of a pecuniary liability to which a taxpayer has subjected himself by reason only of the circumstance that it cannot certainly be known until a later time after the end of the income year that the liability will not result in a loss or outgoing. All that could have been said, if so much, of any of the claimed deductions in this case at the time when the deduction is claimed to have become allowable, or at the end of the income year in respect of which the deduction was claimed, was that it might later appear by reason of events later occurring that the pecuniary liability was within the statutory description. It must have been said of the liability at the end of the income year that it was not probable, and the taxpayer did not expect, that a loss or an outgoing would result from the liability. Nor was there evidence before the tribunal to justify a finding that any of the amounts constituting the aggregate claimed to be deductible had in the event answered the statutory description 'losses and outgoings'." (pages 758-759)
What is clear is that it is not enough to take a global view, as it were, of Mr and Mrs McEvoy's situation. Evidence needs to be produced to show that a loss was incurred in particular years of income and not simply that she was under a liability to pay global sums at a later stage. Appropriate evidence is required to establish the "occasion" linking the production of assessable income (or the business conducted for that purpose) with the loss within the meaning of s. 51(1) of the Act.
There may be losses that are allowable deductions under s. 51(1) or under some other provision that were not claimed at the hearing or in the papers. They may, for example, arise from payments of interest on the loans obtained to purchase the properties on which the businesses were conducted or from which rental income was obtained. I am simply unable to identify them on the material given to me. In view of the fact that Mrs McEvoy bears the burden of proof pursuant to s. 14ZZK(b) of the Taxation Administration Act 1953, I am not satisfied that the amounts claimed and totalling $551,557.00 are allowable deductions under the Act. Consequently, I am not satisfied that they are carry forward losses or that they are an allowable deduction in the year of income ending 30 June, 1997 within the meaning of s. 79E of the Act.
For the reasons I have given, I affirm the objection decision of the respondent dated 24 December, 1998.
I certify that the seventy one preceding paragraphs are a true copy of the reasons for the decision herein of Miss S A Forgie (Deputy President)
Signed: ................................................
A R Horne AssociateDate of Hearing 11 February, 2000
Date of Decision 14 March, 2001
Representatives for Applicant Mr A Best; Mr D Connole
Officer of the Respondent Mr S Bain
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