WATERS & MASSANI

In *Waters & Massani*, the parties were the applicants, Waters and Massani, 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 Foster J of the Federal Court of Australia.

The primary legal issue before the court was whether the expenses claimed by the applicants were deductible under section 8-1 of the *Income Tax Assessment Act 1997* (Cth). This required the court to determine if the expenses were incurred in gaining or producing assessable income, or if they were necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. The court also had to consider whether the expenses were of a capital, private, or domestic nature, or otherwise not allowable deductions under section 8-1.

Foster J reasoned that the expenses were not deductible because they were not incurred in the process of gaining or producing assessable income. His Honour found that the scheme was designed to create tax losses rather than to generate assessable income. The expenses were therefore incurred in an attempt to obtain a tax benefit, which was not a legitimate purpose for incurring expenditure under section 8-1. The court applied the principles established in cases such as *FCT v. Roxy Pastoral Co Ltd* and *Commissioner of Taxation v. Ilbery*, which emphasise that the purpose of the expenditure is crucial in determining its deductibility.

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