STEPHENSON & ALEXANDER

The parties to this proceeding were Stephenson & Alexander Pty Ltd (the applicant) and the Commissioner of Taxation (the respondent). The applicant sought judicial review of the Commissioner's decision to disallow its objection to an assessment of income tax for the 2017 income year. The dispute concerned the deductibility of certain expenses incurred by the applicant.

The primary legal issue before Newbrun J was whether the expenses incurred by the applicant, which were described as "management fees" paid to a related entity, were deductible under section 8-1 of the *Income Tax Assessment Act 1997* (Cth). This required the court to determine whether these expenses were incurred in gaining or producing assessable income, or were necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

Newbrun J reasoned that the deductibility of an expense under section 8-1 hinges on its characterisation. The court examined the nature of the services provided by the related entity and the commercial realities of the arrangement between the parties. His Honour found that the management fees were not genuinely incurred for services that produced assessable income for the applicant, but rather represented a distribution of profits or an artificial arrangement designed to reduce the applicant's tax liability. The court applied the principles established in cases such as *Placer (Grants) Pacific Pty Ltd v Commissioner of Taxation* and *FCT v Ilbery*, which emphasise the need for a clear nexus between the expenditure and the derivation of assessable income.

The application for judicial review was dismissed, and the Commissioner's assessment was affirmed.