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The impact of this case on ATO policy is discussed in Decision Impact Statement: Guest v Commissioner of Taxation; Guest v Commissioner of Taxation (No 2) (VID 376 of 2004).
GUEST v FC of T
Judges:Heerey J
Court:
Federal Court
MEDIA NEUTRAL CITATION:
[2007] FCA 193
Heerey J
1. The applicant Mr John David Guest appeals against objection decisions by the respondent Commissioner of Taxation disallowing deductions claimed under s 8-1 of the Income Tax Assessment Act 1997 (Cth) for the tax years 1998 to 2001 (both inclusive). Mr Guest says the amounts claimed in each year were interest accrued under a loan agreement and were incurred in gaining or producing assessable income or in carrying on a business for the purpose of gaining or producing assessable income.
2. In June 1987 Mr Guest invested in a project for the growing of blueberries at Corindi, near Coffs Harbour in New South Wales. In very broad terms, the scheme (this term is not used in any pejorative or tax law sense) involved borrowing monies to fund his investment and paying back initially two relatively small payments with the expectation that the balance would be repaid out of the proceeds of the sale of fruit, without recourse to the borrower. However, if those initial payments were not made on time, which Mr Guest says was the case, he would become personally liable for the balance of the loan and interest thereon.
3. The project did not prosper. Receivers were appointed to the companies involved. Mr Guest no longer received proceeds from the sale of fruit. An assignee of the loan sued Mr Guest and other investors for the principal and interest alleged to be due. The assignee's claim was ultimately settled on Mr Guest's undertaking to pay a lesser amount by instalments.
Documentation
4. On 29 June 1987 Mr Guest, along with his wife Fiona Maree Guest, Mr Gregory Melloy and Mr Nils Jensen, entered into the following written agreements.
5. The joint venture deed. Mr Guest and the other individuals agreed with Corindi Blueberry Growers Pty Ltd to enter into a joint venture for the production of blueberries on land owned by the latter. Mr and Mrs Guest each had a one-sixth share and the other two investors one-third each. Corindi Blueberry Growers granted to Mr Guest and the other individuals a non-exclusive licence to occupy its land for the purpose of blueberry production. Five hundred trees were to be allocated to Mr Guest and the other individuals (the project as a whole involved hundreds of other investors). Mr Guest and the other individuals were entitled to receive the whole of the proceeds of sale of the fruit until 31 March 1992. Thereafter they would receive 70 per cent with the balance going to Corindi Blueberry Growers. The joint venture would continue until 31 March 1997 and was terminable thereafter on three months notice.
6. The maintenance agreement. Mr Guest and the other individuals agreed with Johnson Farm Management Pty Ltd for it to conduct the blueberry growing operations on their behalf in return for a fee which was to be discounted if prepaid by certain dates. If paid by 15 July 1987, the aggregate amount of management fees for the first three years was approximately $60,000. This prepayment would attract an immediate tax deduction.
7. The sale of fruit agreement. Mr Guest and the other individuals agreed to sell all their fruit to Kathleen Drive Stonefruit Growers' Syndicate No 1 Pty Ltd at a predetermined price for a period of five years. Under a term of this agreement the individuals directed the buyer to pay the proceeds to Rural Finance Pty Ltd (see [9] below).
8. The pooling agreement. Mr Guest and the other individuals and Corindi Blueberry Growers agreed with Johnson Farm Management that fruit grown by the joint venture could be pooled with fruit from other plantations managed by the latter.
9. The loan agreement. Rural Finance agreed to lend Mr Guest and the other individuals $55,000 to enable them to prepay the management fee due to Johnson Farm Management. The loan was for a period commencing on the date of the agreement and, subject to the provisions for periodic repayment, the balance of the principal sum and any other monies outstanding were payable on 31 March 1992.
10.
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The borrowers agreed to pay sums of $5000 on each of 30 September 1987 and 31 December 1987 in reduction of the principal sum. The balance and any interest thereon was to be paid by direct deductions from the proceeds of sale (if any) of the borrowers' fruit pursuant to the sale of fruit agreement.11. If the two $5000 payments were made on time, Rural Finance would have no rights against the borrowers personally for repayments of principal or interest; its only recourse would be against fruit sale proceeds. Clause 3B(iii) of the loan agreement provided:
"Subject expressly to the Joint Venturer [Mr Guest and the other individuals] entering into and duly performing his [sic] obligations under the Sale of Fruit Agreement and to the repayment by the Joint Venturer of each of the principal repayment sums referred to in B.(i) hereof [the two sums of $5000] by the due date for the repayment of each such sum (or such further time as the Lender shall at his sole discretion allow) the Lender shall have no right of recourse against the Joint Venturer and the Joint Venturer shall have no other personal liability for payment of balance of the Principal Sum or Interest owing under clauses 3a(ii) and (iii) or any other costs, charges or expenses whatsoever in respect of the balance of the Principal Sum other than out of the proceeds from sale of Fruit as provided in sub-clause 3 B(ii)."
12. Interest was to accrue at the rate of 19 per cent, reducible to 15 per cent if paid within seven days of the due date, on the balance of the principal sum from time to time outstanding, to be calculated annually in arrears on 31 March in each year of the agreement.
13. The loan agreement does not explicitly state whether or not the liability of the borrowers is joint and several.
14. The share option agreement. Johnson Farm Management granted options to Mr Guest and the other individuals to take up 1500 shares.
Payment of September and December 1987 instalments
15. There is a major dispute in this case as to whether or not Mr Guest made these payments by the due dates. While it is not in doubt that he made payments about this time, on the issue as to the precise dates of payment there is a contest as to the admissibility of certain evidence and the inferences to be drawn from such evidence as is admissible. If the payments were made on time, Mr Guest would not be personally liable thereafter to the lender for any amounts, including the interest payments for which he claims deductions. This case therefore presents the unusual picture of a borrower seeking to establish that he did not make repayments by the due date.
16. Disputes over admissibility concern the following documents, which are exhibits to the affidavit of Phillip Arthur Hennessy sworn 30 October 2006:
- 1. Rural Finance Loan Account Statements (2), exhibits PAH2 and PAH4
- 2. Letter from Rural Finance to Mr Guest and the other three individuals dated 9 October 1987, exhibit PAH3
- 3. Rural Finance Investors Ledger as at 30 June 1988, exhibit PAH5
- 4. Rural Finance Loans Spreadsheet November 1992, exhibit PAH6
- 5. Loan Recourse Register, exhibit PAH7
17. Mr Hennessy, a partner in KPMG, deposes that along with another partner he was appointed as Receiver and Manager of Rural Finance on 26 July 1991 (see [49] below). On appointment they took control of all of the business records of Rural Finance. Among those business records were documents 1, 2 and 3.
18. Loan Account Statements. The first Loan Account Statement is in these terms:
"RURAL FINANCE PTY. LIMITED
Incorporated in the Australian Capital Territory
REG. OFFICE: ADDRESS ALL CORRESPONDENCE TO: SUITE 13, RANGE ROAD CORINDI CRETONIA HOUSE, N.S.W. 2456 OATLEY COURT, COFFS HARBOUR
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BELCONNEN A.C.T. 2617 PHONE: (066) 492615 PHONE: (062) 51 5668 FACSIMILE NUMBER: (066) 492630
ATTN: Gregory Robert Melloy 11 Erasmus Street Surrey Hills Nils Reinholdt Jensen 7 Webbs Lane Somerville John David Guest 41 Thomas Mitchell Drive Endeavour Hills Fiona Marie Guest 41 Thomas Mitchell Drive Endeavour Hills LOAN ACCOUNT STATEMENT
JUNE 1987 LOAN ADVANCE $55,000.00 PRINCIPAL REPAYMENT DUE 30TH SEPTEMBER 1987 $5,000.00 PRINCIPAL REPAYMENT DUE 31ST SEPTEMBER 1987 $5,000.00 BALANCE $45,000.00 NOTE:
- 1. Interest discounts from 19% to 15% in consideration of receipt by due date of September and December 1987 principal repayments.
- 2. Loan balance shown above plus interest on full loan amount is repayable from part of sale of fruit proceeds per your Direction of Payment.
- 3. Lender has no right of recourse against borrower personally in regard to balance of principal shown above together with all interest, provided that terms of various agreements are met.
- 4. Please contact the company prior to due dates in the in the [sic] event that difficulties are experienced."
19. There is a handwritten notation in pencil to the right of the figures:
"cheque rec'd
2/10/87"
20. The second Loan Account Statement is in identical terms. It bears a handwritten notation in pencil, seemingly in the same handwriting, in the bottom right-hand corner:
"cheque rec'd 4/1/88"
21. Mr Hennessy says that Rural Finance kept copies of the Loan Account Statements that it sent to borrowers and that documents 1 and 2 are typical of such statements. He does not know who made the notations on the documents. Nor is there any other evidence as to the identity of such person.
22. On behalf of Mr Guest it is submitted that the Loan Account Statements and the notations thereon, although hearsay, are admissible under s 69 of the Evidence Act 1995 (Cth) and/or s 1305 of the Corporations Act 2001 (Cth).
23. Under s 69 the first question is whether the documents at any time formed part of the records belonging to or kept by Rural Finance in the course of or for the purposes of its business (s 69(1)(a)(i)). If so, were the representations constituted by the notations as to the receipt of the cheques made "by a person who had or might reasonably be supposed to have had personal knowledge of the asserted fact [i.e. as to the receipt of cheques on the dates indicated]" (s 69(2)(a))?
24. The Loan Account Statements on their face purport to be documents recording financial transactions, namely loans, involving Rural Finance. They are "records" in the sense that they are part of a repository of information in organised form which is accessible in the ordinary course of a business and for the purposes of that business:
Karmot Auto Spares Pty Limited v Dominelli Ford (Hurstville) Pty Ltd (1992) 35 FCR 560 at 565. The Receivers found the documents amongst the business records of Rural Finance when they took control of those records. I find that they were part of Rural Finance's records within the meaning of s 69(1)(a)(i).
25. The terms of s 69(2)(a) do not suggest that it is an essential precondition of admissibility that the "person" in question be identified. The ordinary meaning of the language is that it is sufficient that the person who made the representation, whoever he or she
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is, had or might reasonably be supposed to have had, personal knowledge of the asserted fact. The policy behind the provision is clear enough. Routine business records, made before any legal proceeding arises or is contemplated (cf the exception in s 69(3)), have an inherent likelihood of reliability which outweighs the common law's aversion to hearsay evidence where the maker of a statement cannot be tested by cross-examination. The utility of s 69 would be greatly diminished if it were necessary to locate among large organisations, perhaps over a long period of time, persons who made representations, often in circumstances where the practical needs of the organisation did not require any identification at the time the representations were made.26. Prior to the Evidence Act, all Australian jurisdictions had legislation based on provisions of the Evidence Act 1938 (Imp) which rendered admissible statements made in documents outside court where, inter alia, the document formed part of a continuous record. Examples were the Evidence Act 1898 (NSW) ss 14B-14C and the Evidence Act 1958 (Vic) s 5. Such legislation required the maker of the statement to be called as a witness, although that requirement could be dispensed with in certain circumstances, such as death or absence "beyond the seas". The present s 69, however, says nothing about calling the maker of the statement as a witness. It is therefore hard to see why one should read into the section an obligation to identify the "person" where there is no need for that person to be called.
27. In
Lee v Minister for Immigration and Multicultural Affairs [2002] FCA 303 there was an issue as to whether a notice of a decision was sent by the Minister to the applicant by a certain date. One piece of evidence relied on by the Minister was a copy, produced from the departmental files, of a letter addressed to the applicant advising of refusal of the application and enclosing the reasons for that refusal. The copy letter bore a handwritten notation
"20/3/01
Scanned in
delivery centre
20/3/01
Aust Post says"
Hely J observed at [22] that the notation was made by a person unknown, apparently as a result of a communication with an unknown person at Australia Post. He inferred that somebody at Australia Post informed somebody at the Department on 20 March 2001 that the letter was in the delivery centre of Australia Post on that date. His Honour admitted the notation under s 69(2)(b) as being made in the course of the Department's business on the basis of information directly supplied by a person from Australia Post who might reasonably be supposed to have had knowledge of the asserted fact, namely that on 20 March an envelope containing the letter was in the delivery centre of Australia Post. On appeal it was not necessary for the Full Court to consider this particular ruling:
Lee v Minister for Immigration and Multicultural and Indigenous Affairs [2002] FCAFC 305.
28. Hely J's reasoning applies equally in the present case where s 69(2)(a) is relied on and it is the person who made the notation who is the one who must reasonably be supposed to have knowledge of the relevant asserted fact, viz that the cheques were received by Rural Finance on the dates indicated. The receipt of a cheque in the mail is a routine event. In the present context, the actual date of receipt would be an important matter for Rural Finance, calling for a contemporaneous note to be made. It might reasonably be supposed that the person who made the notation had personal knowledge of that fact.
29. Other authorities supporting the proposition that the "person" need not be identified are
Duke Group Ltd (in liq) v Arthur Young (1990) 55 SASR 11 and
Australian Securities and Investments Commission v Rich (2005) 216 ALR 320 at [197]. To the extent that Nicholson J in
Maritime Union of Australia v Geraldton Port Authority [1999] FCA 685 at [52] held that identification of the person referred to in s 69(2) is an essential prerequisite for admissibility I would respectfully disagree.
30. Senior counsel for the Commissioner referred to the detailed discussion of recent authorities by Austin J in Rich at [95]-[118]. However, that analysis rather focussed on the question of authentification, in the sense of provenance, and whether, as Bryson J held in
National Australia Bank Ltd v Rusu (1999) 47 NSWLR 309
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, authentification cannot be achieved solely by drawing inferences from the face of the document itself where there is no other evidence to indicate provenance. Whether that be correct (as Austin J points out, there has been subsequent criticism of such a view) there is adequate authentification here in the evidence of the Receiver who physically located the document among the business records of Rural Finance; see Evidence Act s 58.31. In this context I note that senior counsel for the Commissioner referred to various criticisms of the quality of Rural Finance's accounting systems. Whether valid or not, such criticism does not affect the admissibility of the document under consideration. Section 69 is not confined to business records kept in accordance with the best accounting standards. At most, such defects as there may be in record-keeping go to weight. Whatever shortcomings there may otherwise have been in Rural Finance's accounting systems, the particular documents in question here are simple ones which record simple facts, basic to any money-lending business. If otherwise admissible, there is no ground for rejecting them, as senior counsel urged, under the discretion conferred by s 135(b) of the Evidence Act. The evidence that the cheques were received on 2 October 1987 and 4 January 1988 is not misleading or confusing; on the contrary, it is straightforward and direct.
32. The documents are also admissible as books kept by a body corporate under a requirement of a predecessor of the Corporations Act and are admissible under s 1035 of that Act; see ss 5(1) and 267 of the Companies (New South Wales) Code.
33. Rural Finance letter 9 October 1987. The business records of Rural Finance contained a photocopy of the following letter on the letterhead of Rural Finance and bearing the signature of its Managing Director Mr Anthony Johnson:
"9th October, 1987
Messrs Melloy, Jensen, Guest & Guest
c/-Mr. Gregory Melloy
11 Eramus Street
SURREY HILLS VIC. 3127
Dear Messrs Melloy, Jensen, Guest & Guest,
We take this opportunity to draw your attention to certain terms and conditions of the Loan Agreement (dated 29.06.897) between yourself and rural Finance Pty Ltd.
Specifically, we draw your attention to Clause 3 B (iii) which deals with the non-recourse nature of the loan. This clause states clearly that the continuing non-recourse nature is conditional upon the principal repayments being made by the due date. Our records indicate, in fact, that you were late in effecting your repayments and accordingly we advise that the non-recourse provisions are no longer in effect. The result is that the company holds you personally liable for the remainder of the loan principle and interest accruing thereon.
Should you wish to further discuss the above, please do not hesitate to contact the writer.
Yours faithfully
(sgd) Tony Johnson
ANTHONY J JOHNSON
Managing Director"
34. I find, on the basis of the Receiver's evidence, that this copy letter was part of the records of Rural Finance. Mr Guest denies having received it. That may be due to the fact that it appears to have been sent to the address of Mr Melloy. But its admissibility, and indeed its relevance, does not depend on whether or not Mr Guest received it but rather its presence among the business records of Rural Finance. There is every reason to suppose that the Managing Director would have personal knowledge of the date the first cheque was received since this would have important consequences for Rural Finance's rights. The letter is admissible under ss 69 and 1035. The s 135(b) discretion should not be exercised.
35. Rural Finance Investors Ledger. This document is headed "Rural Finance Investors Ledger as at 30.06.08 Joint Venture June 1987". There are a number of columns and details under each column in respect of many investors. The entry for Mr Guest's investment is included in the line identified by the name of his fellow investor Mr Melloy and the number
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of trees (500). The other column headings and the line relating to the loan to Mr Guest and the others are as follows:| LOAN | DATE | REPAID | DATE | REPAID | ||
| 30/06/87 | BANKED | 30/09/87 | BANKED | 31/12/87 | ||
| 29/6 | 55,000 | 8/10 | 2/10/87 | (5,000) 4.1 | 5/1/88 | (5,000) |
36. All the handwritten entries in the Investors Ledger appear to have been made by the same person although probably a different person from the one who made the notations on the Loan Account Statements; in the latter, but not the former, the figure seven is written in the European style with a horizontal line through the vertical part of the figure. Again, the identity of the person who made the entries in the Investors Ledger is not known. As a whole, the Investors Ledger appears to be a document in which routine, and indeed meticulous, entries are made by a person who would have personal knowledge of the relevant facts. It is admissible under ss 69 and 1035. There is no basis made out for discretionary exclusion.
37. Rural Finance Loans Spreadsheet. This document and the following one were compiled in November 1992 by employees of KPMG after the appointment of the Receivers. They are nevertheless records kept by Rural Finance for the purposes of ss 69 and 1035: Rich at [266]-[272]. The document records the payments in question as being due on 30 September and 30 December 1987 and paid on 2 October 1987 and 4 January 1988.
38. It was argued that the document was prepared for the purpose of conducting, or in contemplation of or in connection with, a "proceeding" and thus excluded from the operation of s 69 by virtue of subs (3). "Proceeding" is not defined in the Act . Presumably it means litigation. The identity of the person who compiled the document is not known. There is no evidence as to what he or she in fact contemplated; cf Lee in the Full Court at [27]. There is no reason to conclude that such persons contemplated litigation at the stage the entries were made. The more natural inference is that the document was prepared as a matter of routine to assist the Receivers in an understanding of the financial position of Rural Finance and to seek payment of amounts due. Whether or not litigation might ensue in respect of any particular debtor was a matter for the future.
39. In any case, the s 69(3) exclusion does not apply to documents admissible under s 1305.
40. Loan Recourse Register. This document, which includes details of the dates of payments, is admissible for the same reasons.
41. Findings as to dates of payments. Argument proceeded on the implicit assumption, with which I agree, that Mr Guest would have satisfied his obligations under the loan agreement if his cheques were received by Rural Finance on or before the stipulated dates.
42. Mr Guest deposes that he believes that the money for the first payment due 30 September 1987
"was withdrawn from my account before the due date for payment, but I am uncertain as to whether the payment was received by (Rural Finance) by the due date. I no longer have my bank account statements for that period, so I am not able to say for certain on what date I made the payment."
43. As to the payment due 31 December 1987, he only says that he has been informed by the assignee of the loan that Rural Finance received the payment "a few days after the due date of 31 December 1987". I note in this regard that the terms of the loan agreement would make Mr Guest personally liable even if only one of the two payments were late.
44. The reference to withdrawing money before the due date rather suggests payment in cash. This seems unlikely, given that Mr Guest lived in a Melbourne suburb and Rural Finance was based in provincial New South Wales. Perhaps Mr Guest withdrew cash and gave it as his contribution to a fellow investor who sent a cheque. In any event, there is no evidence at all of the payments being received by Rural Finance by the due dates. The documentary evidence, and in particular documents 1, 2 and 3, is consistent and persuasive to the contrary. (The second payment seems to have been received on 4 January 1988 and banked the following day.) The fact that Mr Guest for a time resisted, or at least did not admit, the claim by the assignee does not logically tend to show that the payments were in fact made by the due dates. Indeed it appears from recital F of the
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deed of settlement of the litigation (see [57] below) that Mr Guest had not been required to file a defence to the claim of the assignee of the lender and had not done so.45. I am satisfied that both amounts of $5000 were paid after their due dates.
46. Further time allowed? At a late stage of the case senior counsel for the Commissioner advanced the argument that Rural Finance had, in its discretion, allowed further time for payment, as contemplated by the terms of cl 3B(iii). In support of this he said that the payments "were no more than a couple of days late", that it was "never intended that amounts other than the two initial payments would be paid" and that the two columns in the Investors Ledger are headed "Repaid 30/09/87" and "Repaid 31 /12/87".
47. Since there is no suggestion that Mr Guest was notified of, let alone relied on, any such exercise of discretion, no question of waiver or estoppel could arise. The supposed exercise of discretion would presumably have to constitute an election by Rural Finance to accept late payment and forego its contractual right to personal recourse against Mr Guest. Such an election would, as senior counsel said, have to be inferred from all the circumstances.
48. There is no logical reason why Rural Finance would want to extend such a major indulgence to Mr Guest, especially as he never asked for it. The contemporary documents, and in particular the Rural Finance letter of 9 October 1987, are flatly contradictory of the suggested election. The headings "Repaid 30/09/87" and "Repaid 31/12/87" have the obvious function of indicating what amounts are due to be paid on those dates. They cannot sensibly be read, as the Commissioner's argument maintains, as a predetermined, typed statement that all payments, however late, will be treated as having been paid on those dates.
Receivership
49. As already mentioned, on 26 July 1991 Equuscorp Pty Ltd (Equus), which held a first ranking charge over Rural Finance and numerous associated companies, appointed Receivers and Managers of Rural Finance and other companies associated with the Corindi project.
50. The Receivers took over the total control of the project on behalf of Equus. They ceased applying the proceeds of fruit sales in reduction of Mr Guest's loan with Rural Finance.
51. Under the Receivers the project ultimately proved to be profitable. In December 1995 they sold it to a publicly listed company.
52. In 1993 and again in 1996 the Receivers advised Mr Guest that he was liable for repayment of principal and interest under the Rural Finance loan.
53. On 22 August 1996 the Receivers offered Mr Guest and the other three individuals a complete discharge of the loan on payment of 20 per cent of the amount then owing. This would have been some $7,698. The Receivers warned that if the offer were not accepted they were proposing to sell the entire loan book to a third party which would be likely to pursue vigorously the entire amount owing. The offer was not accepted. There is no evidence as to the reason why.
Equus obtains assignment of Rural Finance loan and demands payment
54. On 14 November 1997 Rural Finance assigned its loan to Equus. On 20 November Equus notified Mr Guest of the assignment and demanded payment of the amount outstanding.
55. On 27 March 1998 Equus commenced proceedings in the Supreme Court of Victoria against Mr Guest and the other three individuals seeking principal and interest due pursuant to the loan agreement in the amount of $47,145.
56. On 14 March 2002 Equus sent an invoice to Mr Guest and the other three individuals asserting an interest rate of 19 per cent, a balance as at 31 March 1991 of $17,302.21 and interest amounts to 31 March in each of the subsequent years. The total balance owed as at 31 March 2002 was stated to be $117,251.42.
Settlement of Supreme Court proceedings
57. On 18 November 2002 Mr Guest entered into a deed of settlement with Equus and the Receivers. By cl 7.2, in exchange for a full and final settlement of all of Equus' claims against him, Mr Guest admitted that the amount owing under the loan agreement as at 31 March 2002 including accrued interest, was $117, 251.42.
58. Mr Guest agreed to pay $17,000 by 31 December 2002 and six subsequent payments of $7,000 on 31 December in each of the
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following years. In default of any such payment, the full amount then owing would become due and payable.Mr Guest's tax returns
59. For the tax years 1988 to 1991 (both inclusive) Mr Guest declared as taxable income the proceeds received from the sale of fruit and claimed interest on the Rural Finance loan as an allowable deduction. The Commissioner allowed such deductions.
60. From 1992 onwards Mr Guest received no income from the Corindi project.
61. For the tax years 1992 to 1997 Mr Guest made no claim for deductions in relation to the Rural Finance loan.
62. For the tax years 1998 to 2001 (both inclusive) Mr Guest claimed, and the Commissioner has disallowed, the following deductions for interest accrued on the Rural Finance loan:
| 1998 | $4,668 |
| 1999 | $5,555 |
| 2000 | $6,610 |
| 2001 | $7,865 |
63. However, since these amounts are for interest on the whole loan amount of $55,000 taken out by Mr Guest and the other individuals it is agreed that if he succeeds in the present appeal the appropriate deduction for him would be for one-sixth of these amounts. Other issues may arise in relation to the calculation of interest. These are to be the subject of further submissions.
64. During the years 1998 to 2001 Mr Guest made no payment of interest or principal to either Rural Finance or Equus and made no admission of liability to make any such payments to Equus as claimed in the Supreme Court proceedings.
Issues
65. The issues under s 8-1(1) raised in the appeal are as follows:
- 1. Was the interest a loss or outgoing incurred by Mr Guest?
- 2. Was the interest liability incurred by him in gaining or producing assessable income?
- 3. Was the interest liability incurred by him in carrying on a business for the purpose of gaining or producing assessable income?
Issue 1 - loss or outgoing "incurred"?
66. By reason of the failure to pay the two $5000 instalments on time Mr Guest became legally liable for repayment of the full amount of the loan and interest thereon. The interest which accrued under the loan agreement during the relevant years was therefore "incurred" by him. In those years they were presently existing liabilities:
Nilsen Development Laboratories Pty Ltd v Federal Commissioner of Taxation (1981) 144 CLR 616 at 627.
67. Senior counsel for the Commissioner argued that following the maturity of the loan the amounts due were not interest but damages for the loss of use of money:
Cook v Fowler (1874) LR 7 HL 27.
68. As a matter of construction of the loan agreement, this argument fails at the outset. By cl 3A(i) the parties agreed:
"that the Loan is for a period commencing on the date of this Agreement and subject to the provisions hereinafter contained as to periodic repayment, the balance of the Principal Sum (if any and any other monies outstanding) shall be paid by the Joint Venturer to the Lender on the 31st March, 1992."
The Principal Sum is the sum of $55,000 and the provisions as to periodic repayment are the provisions for the payment of the two amounts of $5000 (cl 3B(i)) and the deductions from the sale of fruit proceeds (cl 3B(ii)). As to interest, cl 3A(ii) provides:
"subject to clause 3A(iii) [which provides for a rate of 15% when payments are made within seven days of the due date] interest shall accrue at the rate of nineteen (19%) per centum on the balance of the Principal Sum from time to time outstanding such interest to be calculated annually in arrears on the 31st March in each year of this Agreement." (19%)
Accordingly, the liability to pay interest does not cease if all or any part of the Principal Sum has not been repaid by 31 March 1992. The case is to be distinguished from
Gair v Federal Commissioner of Taxation (1944) 71 CLR 388 where the mortgage provided for the payment
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of interest for a period of one year, but there was no covenant to pay interest thereafter.69. What was alleged to be owing by Mr Guest in the writ and the invoice of 14 March 2002 and admitted to be owing in the deed of settlement, was interest. There is no mention of damages. Nor in any of the authorities hereafter mentioned was it suggested that liabilities incurred after the term of the loan in question were for damages rather than interest.
70. In any event, if the amount owed was damages rather than interest, it would be for the same amount. Damages incurred in the course of conducting a business, such as, for example, libel damages paid by a newspaper company, are deductible:
The Herald and Weekly Times Ltd v Federal Commissioner of Taxation (1932) 48 CLR 113.
Issue 2 - gaining or producing income
71. This issue, which also arises under the carrying on business limb, raises the question whether Mr Guest has shown there was a sufficient nexus between his incurring of interest liabilities in 1998 to 2001 and the blueberry growing business in which, following the appointment of Receivers, he ceased to have any involvement after 1991.
72. A line of cases supports the proposition that a loss or outgoing may be deductible even if it is incurred some years after the associated business, or the taxpayer's involvement in it, has ceased:
Placer Pacific Management Pty Ltd v Federal Commissioner of Taxation 95 ATC 4459; (1995) 31 ATR 253,
Federal Commissioner of Taxation v Brown (1999) 99 ATC 4600,
Federal Commissioner of Taxation v Jones (2002) ATC 4135, and
R & D Holdings Pty Ltd v Deputy Federal Commissioner of Taxation (2006) ATC 4472. In Placer the claimed deduction was for a payment in settlement of litigation in respect of defective goods supplied. In the other cases it was for interest on a business related loan.
73. That the gap in time may be considerable is demonstrated by the following table:
| Case | Business ceased | Deduction allowed |
| Placer | 1981 | 1989 |
| Brown | 1990 | 1994 |
| Jones | 1993 | 1998 |
| R & D | 1990 | 1999 |
In R & D there is the qualification that the business in question, the leasing of an office building, was still carried on, although not by the taxpayer but by a mortgagee in possession.
74. In the present case the Commissioner argues that some intervening event or act has broken the nexus between the income-obtaining activity and the outgoing in question. Such a breaking of the nexus is said to have occurred when Mr Guest
- • failed to repay the loan on the due date (31 March 1992), or
- • failed to accept the Receivers' offer in August 1996
The Commissioner also says the lapse of time in itself is sufficient to break the nexus.
75. The concept of a break in the nexus was applied in
Commissioner of Taxation v Riverside Road Lodge Pty Ltd (in liq) (1990) 23 FCR 305. In 1970 the taxpayer company borrowed money to acquire land and construct a motel. There were repayments and further borrowings. In 1979 the taxpayer transferred the property to the trustee of a unit trust, the beneficiaries of which were the shareholders in the taxpayer. The consideration for the transfer was the current value, payable on demand, interest free. The trustee then leased the property back to the taxpayer, which continued to conduct the motel business. The disputed deduction was for interest on pre-1979 loans incurred after the transfer.
76. The Full Court (Northrop, Wilcox and Hill JJ) observed (at 314) that the case was not one where the activities of the taxpayer in operating the motel ceased during any relevant year of income. However, in 1979, as a result of the sale and lease-back, the character of the activities of the taxpayer changed. Before, it was an owner/operator of a motel; afterwards it was an operator of a motel owned by others and of which it was only a tenant. The Full Court disagreed with the view of the trial judge that the 1979 change was not sufficient to change the relationship between the interest payments and the business activity. The interest outgoings ceased to be "relevant and incidental" to the business activities engaged in by the taxpayer after 1979. They had "no real connection at all
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with the business of running a rented motel" (at 315).77. In Brown the taxpayers borrowed money to fund the purchase of a delicatessen. They sold the business in 1990 but the proceeds were not sufficient to discharge the loan. They continued to pay interest until the loan was discharged in 1995. The Full Court (Lee, RD Nicholson and Merkel JJ) upheld the decision of the trial judge that there was a sufficient connection between the occasion for the payment of interest and the carrying on of the business. On the appeal, the Commissioner had argued that once the business had ceased the payment of the interest 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 and to continue to pay interest instalments (at [15]).
78. Their Honours reviewed the case law, and in particular the decision of the High Court in
Steele v Deputy Commissioner of Taxation 99 ATC 4242; (1999) 197 CLR 449. They applied (at [20]) the statement of the High Court, adopting what was said by Lockhart J in
Federal Commissioner of Taxation v Total Holdings (Aust) Pty Ltd (1979) 79 ATC 4279 at 4283, that a taxpayer may be entitled to a deduction after a business has 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. However, cessation of business may be of factual importance. Their Honours (at [24]) concluded that the trial judge was correct in determining that the occasion for the loss or outgoing in question was the payment of interest which the taxpayers were obliged (their Honour's emphasis) to pay under the loan contract.
79. As to the Commissioner's nexus argument, based on the taxpayers' "entitlement" to pay out the loan, their Honours said (at [27]-[28]):
"…The fact that the Bank might, as a matter of practicability rather than legal obligation, allow early repayment does not alter the analysis in the present case. In our view his Honour was correct in characterising the occasion for the liability in such circumstances as depending upon the terms of the contract rather than upon whether or not the partners might or might not have availed themselves of an opportunity to repay the loan on a particular day because of an indulgence shown by the lender on that occasion. In that regard, it is significant that the partners did apply the net proceeds of sale in repayment of the loan and his Honour did not appear to be prepared to find that the taxpayer and his wife had any other partnership assets which were available, had the Bank agreed, to discharge the loan when, or even after, the partnership business ceased.
28. Had the loan agreement in question been a 'roll over' business loan facility which entitled the taxpayer conducting the business, on the date of each monthly payment, to elect to repay the principal and thereby avoid incurring liability for interest or to 'rollover' the loan and continue to be liable for interest, that may have been a different situation. In that circumstance there may be considerable force in a contention that the occasion of the liability was the election to 'roll over' the loan on each monthly payment date, rather than any liability arising under the terms of the original loan agreement establishing the terms of the 'roll over' facility. In such a case the cessation of the business or sale of the income-producing asset acquired with the borrowed funds might properly be regarded as breaking the nexus in much the same was as certain post cessation interest payments were not allowed as deductions in Riverside Road. However, as explained earlier, that is not the situation in the present case."
80. In Jones a husband and wife conducted a trucking business in partnership. They took out a loan with the ANZ Bank in 1990. In 1992 the husband died. In 1993 the business ceased. The wife recommenced full-time employment as a nurse using more than half her after tax income to repay the loan. In 1996 the wife refinanced the loan with another lender to obtain a lower interest rate. The Full Court (Beaumont, Finn and Sundberg JJ) upheld the wife's claim for deductions of interest for the years 1993-1998.
81. Their Honours (at [10]) rejected the Commissioner's argument that the taxpayer only became obliged to pay interest in the years
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in question because she chose not to repay the principal sum and that the "occasion" for the interest repayment was each periodic decision to keep the loan on foot. They did so for two reasons. First, the loan was for a fixed term and was not dependent on periodic decisions on the taxpayer's part to keep it alive. Secondly, she did not have the financial capacity to do so. Their Honours noted (at [11]) that "the borrowed funds and the interest on them were always referrable to the former business"82. Their Honours (at [14]) observed that Riverside Road:
"…does not establish that a taxpayer who has a legal right to repay a business loan after the cessation of business can never thereafter deduct interest payable on the loan. All it decided is that, in the circumstances of that case, which involved a distinct change in business activity during the currency of the loan, interest continued to be deductible after the cessation of the business for which the loan was incurred because the taxpayer was contractually bound to pay interest until the loan was repaid."
83. Their Honours referred to Brown and the passage quoted at [79] above. They observed (at [17]) that in the instant case the taxpayer had no free choice between continuing the loan and repaying it. They said:
"In our view the obiter dictum in Brown deals with the case of a true election - where the borrower has the resources to pay out the loan but decides not to and rolls the loan over instead. In any event … the loan in the present case was not a 'rollover' business loan facility, but one that would run for the agreed term unless the taxpayer decided to repay early."
84. In the present case there is no evidence one way or the other as to Mr Guest's personal financial resources in March 1992 or August 1996. Since the onus of showing that his assessments are excessive lies on him, if it is necessary for him to show that non-repayment of the loan was due to impecuniosity then his appeal must fail.
85. However, the authorities do not in my view establish that, as a matter of law, interest on a business-related loan ceases to have that character once an opportunity to repay the loan is not taken, the only exception being where the failure to repay is due to the taxpayer's impecuniosity.
86. Here the occasion of the borrowing from Rural Finance and the consequent interest liability was undoubtedly to be found in business operations directed towards the gaining or producing of assessable income. The cessation of the taxpayer's involvement in the business did not in itself retrospectively alter the occasion of the borrowing. Apart from cessation, there was no event which altered the taxpayer's relationship to the business, such as occurred in Riverside Road. In 1987 Mr Guest became obliged to pay interest on a business-related borrowing. The obligation arose from his entering into the loan agreement and failing to make the two $5000 repayments on time. In the tax years in question his liability for interest arose under the same obligation. He owed the interest in his capacity as borrower of the same loan to a successor in title of the original lender. Apart from the sheer passage of time argument, the interest liabilities had a "real connection" with Mr Guest's blueberry growing business.
87. The point may be illustrated by a hypothetical example. A taxpayer has a business-related loan. While the business is still operating, the term of the loan comes to an end. The taxpayer has the resources to repay the loan, but decides not to, perhaps because the interest rate is favourable, or perhaps he simply overlooks the matter. The interest would continue to be deductible. There seems no logical reason why a different result should occur in a situation where the business has ceased.
88. There remains the argument based on sheer passage of time. There may come a time when the period between cessation of business and payment or incurring of interest is such that in all the circumstances the payment is "no longer sufficiently proximate to the activities of the business to be deductible": Brown at [25]. As senior counsel for the Commissioner accepted, the period cannot be precisely stated. The answer must depend, as was said in Brown at [25], upon commonsense or practical weighing of all the factors.
89. In itself the period of time in the present case is substantial, but it is not really
ATC 4278
disproportionate to the periods that have been considered not sufficient to destroy proximity in other cases; see [73] above. At the most, the period in this case might be said to be approaching the outer limits. Also there is the factor that from the point of view of the lender and its successors willingness to enforce the loan was never abandoned, either by the Receivers or Equus. It is not as though some commercial archaeologist came across a long forgotten loan and set about recovery.Issue 3 - carrying on a business
90. As often happens in such cases (see Riverside Road at 312), consideration of s 8-1(1)(a) and (b) tended to overlap. If, as I find to be the case, Mr Guest succeeds under (a) he does not need to establish the carrying on business element of (b). Nevertheless, I find that this element has been satisfied.
91. It is true that there is no evidence that Mr Guest ever visited the blueberry farm or did anything to participate in the business other than sign documents, pay some money, return income and claim deductions.
92. This does not mean, however, that Mr Guest was not carrying on business. He did so by engaging his agent Johnson Farm Management for that purpose: qui facit per alium facit per se; see also
Commissioner of Taxation v Sleight 2004 ATC 4477; (2004) 136 FCR 211 at [46]-[61], the facts of which are quite similar to the present case. Mr Guest's involvement in the blueberry growing at Corindi was comparable to that of English absentee landlords of Irish estates in the nineteenth century. They conducted their business through the medium of agents such as Captain Hugh Boycott, who gave his name to the language.
93. The blueberry project involved the motive of profit, albeit not immediate, repetition of activities, systematic organisation, and the investment by Mr Guest and the other three individuals of significant amounts. This was not a hobby.
Orders
94. Since there will need to be some adjustment to the amounts (see [63] above), I direct counsel to bring in minutes of proposed orders to give effect to these reasons.
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