Case S83

Judges:
HP Stevens Ch
TJ McCarthy M
PM Roach M

Court:
No. 1 Board of Review

Judgment date: 27 September 1985.

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H.P. Stevens (Chairman)

The questions at issue in this reference relate to the deductibility of three amounts of interest (on joint loans with his wife) claimed as deductions in the taxpayer's return of income for the year ended 30 June 1982. The total amounts are respectively $6,417, $2,514 and $3,900 and the taxpayer is claiming one-half of each.

2. It is convenient to deal with the amount of $6,417 first for, although the return of income described it as relating to a joint investment in a nursing home and a partnership of the taxpayer, his wife and two other persons a reply in June 1983 to a query stated ``the loans giving rise to claims for interest deductions were obtained for the purpose of purchasing shares in, and placing funds on loan with'' a company conducting a nursing home. However before the Board the evidence was that it had nothing to do with such purchase etc. but rather the relevant loan related to the acquisition by the partnership referred to of a block of income-producing flats. How a firm of registered tax agents could give such an absolutely incorrect reply to a specific query which asked, inter alia, for details ``stating whether your clients purchased shares, an interest in the partnership or other'' was not explained. Counsel on behalf of the Commissioner readily conceded on the evidence before the Board that the claim was allowable (no doubt it would have been conceded on assessment if the correct facts had been supplied in response to the query) and it is unnecessary to deal with the matter further.

3. The second amount of $2,514 related to a fully drawn advance of $45,000 from the Commonwealth Bank to assist in the acquisition of an interest in the proprietary company running a nursing home. The deed for sale of shares in this company dated 1 July 1978 was between the taxpayer and his wife as joint purchasers and another company as vendors and recited, inter alia, that the purchasers would purchase ``eighteen one dollar `B' class shares and nine one dollar `C' class shares'' for which ``the consideration for the purchase shall be fifty five thousand nine hundred and forty four dollars ($55,944)''. This consideration was apparently one-half of the net assets as set out in an attached balance sheet of the company as at 30 June 1978. The net assets of $111,888 were arrived at after deducting loans at call $62,000 - one-half relating to the vendor interests - and the deed provided that ``the vendors will effect the repayment of the shareholders loan funds as set out in the balance sheet annexed hereto''. How the vendors were to independently repay the loans (except by regarding part of the consideration as repayment) was not explained and in my view the $55,944 was to be for both the shares and the loan account. In the company's ledger it was so dealt with and the existing loan account was debited and a new account credited. A chartered accountant in a letter of 9 April 1981 said $31,000 was loaned to the company for it to repay the existing loan (one substituted for another) and only the balance was ``paid to previous shareholders for their shares''. However there was no evidence of the necessary bankings to the company account and payments out by it (only the debit and credit referred to above) and this letter does not alter the view I have formed.

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ATC 614

4. No dividends have yet been paid on the shares acquired although it was anticipated that the company would prosper and dividends be paid. The loan account bore interest at least for the first twelve months although none is being paid now - it was decreased and then stopped apparently due to lack of funds - although the terms on which the money was ``lent'' were never clearly stated.

5. On the evidence I am satisfied that the shares and loan account were acquired as income-producing assets and that accordingly the interest claim in relation to their acquisition is allowable.

6. The final item $3,900 relates to a loan from Citicorp on-lent interest free to the nursing home company. $12,000 was borrowed and on-lent to help the company pay its expenses and reduce its overdraft. At the hearing it was conceded the correct interest amount was $2,438 and it was contended that it was allowable since the loan was for the purpose of furthering the taxpayer's income-producing activities. It was also submitted that the interest-free on lending was ``in exactly the same category as an interest-free loan from a holding company to a subsidiary. It is made with a view to making the subsidiary or the company in which one holds shares more profitable''.

7. In my view the decision in
F.C. of T. v. Total Holdings (Aust.) Pty. Ltd. 79 ATC 4279 does not apply generally to all circumstances where someone borrows and on-lends interest free and does not apply in the present situation. Comments in decisions must be considered having regard to the context in which they are made and the context in the above case was a rather special one. If the comments relied upon are to be regarded as authority for the proposition, inter alia, that interest-free loans to an employer to ensure a continuation of employment can make the interest on the money on-lent allowable as a deduction, then I need a direction to that effect. Costs of obtaining employment are not allowable and I can see no reason why the same does not apply to interest-free loan situations. Accordingly I would uphold the disallowance of the claim for $2,438.

8. For the above reasons I would uphold the taxpayer's objection to the extent of allowing a deduction of $4,465 i.e. his one-half share of the amounts of $6,417 and $2,514. Assessment for year ended 30 June 1982 to be amended accordingly.