Sheil v. Federal Commissioner of Taxation.

Judges:
Northrop J
Spender J
Gummow J

Court:
Full Federal Court

Judgment date: Judgment handed down 19 May 1987.

Northrop, Spender and Gummow JJ.

These appeals, by the taxpayer and by the Commissioner, come to this Court from the Supreme Court of Queensland [reported at 86 ATC 4731]. The appeals were, by order of this Court, consolidated and the taxpayer was given the carriage of the preparation of the record. The proceedings in the Supreme Court arose out of the disallowance by the Commissioner of a deduction claimed under sec. 51 of the Income Tax Assessment Act 1936 ("the Act") by the taxpayer in his return of income for the year ended 30 June 1977. The deduction claimed therein was $48,934 for interest and charges on moneys borrowed from Midland Credit Limited ("Midland Credit"). The Supreme Court allowed the deduction claimed, as to part only, viz. $18,875, and this led to the appeals by both taxpayer and Commissioner.

In a letter written by his accountants to the Commissioner dated 29 May 1978 (which by agreement was treated as the taxpayer's notice of objection to disallowance of the claimed deduction), it was said that the claim to the deduction arose in the following circumstances:

"(a) in June 1976 the taxpayer negotiated a loan for $350,000 from Midland Credit Ltd. for a period of two years. At the insistence of that Company the security documents comprised a charge over all the assets of Fermoy Pty. Ltd., a bill of mortgage over seven parcels of freehold owned by the taxpayer and a guarantee by the taxpayer and his wife. Although it was the intention of the parties that the loan was to the taxpayer, the principal debtor named in the documents was Fermoy Pty. Ltd.;

(b) the purpose of the loan was to enable the taxpayer to invest approximately $400,000 in an enterprise in the U.S.A. established by himself and another Australian to raise rabbits commercially. A Queensland Company, Thumpa Industries Pty. Ltd. and a U.S.A. Corporation, Thumpa Industries Inc. were formed to control the investment;

(c) the loan funds from Midland Credit Ltd. were received by the taxpayer as follows: - 

                                      $
      11th June         1976       250,000
      31st August       1976        70,000
      28th January      1977        30,000
                                  --------
                                  $350,000
                                  --------

None of these monies was received by

ATC 4432

Fermoy Pty. Ltd. The taxpayer paid the funds to Thumpa Industries Pty. Ltd. which company transferred the bulk of the funds by way of loan to Thumpa Industries Inc. (U.S.A.);

(d) at all times Fermoy Pty. Ltd. has regarded itself as a nominee for the taxpayer and we have sighted Directors' Minutes of Thumpa Industries Pty. Ltd. which state that the loan from the taxpayer to that Company and the loan by that Company to Thumpa Industries Inc. (U.S.A.) are interest free repayable on demand by the creditor;

(e) all the interest to Midland Credit Ltd. passed through the cash records of Fermoy Pty. Ltd. as principal debtor, but was charged to the taxpayer in that Company's [i.e. Fermoy's] records. The borrowing charges were paid some by the taxpayer and some by Fermoy Pty. Ltd. and charged to the taxpayer.

(f) the amount of $338,339.54 shown in the taxpayer's Balance Sheet at 30th June, 1977 as an investment in Thumpa Industries Pty. Ltd. has been reconciled with that company's records. The amount of $9,962.64 shown as an investment in Thumpa Industries Inc. (U.S.A.) represents funds expended directly in respect of that corporation."

We should say immediately that the evidence before the Supreme Court of Queensland and accepted there (and in certain respects not disputed by the taxpayer on the appeal to this Court) shows a significantly different sequence of events. We will deal further with this later in these reasons. But the above narration will serve to identify the principal participants in the transactions in question.

Thumpa Industries Inc. ("Thumpa America") was incorporated in the State of Washington on or before 10 March 1976. On that date it filed with the Secretary of State its Articles of Incorporation. These showed as first directors the taxpayer, a Mr Arnold G. Wilson and a Mr Thomas E. Habersetzer, the latter two with addresses in Washington. On or shortly after 10 March 1976, the Secretary of Thumpa America was directed by the Board of Directors to issue 2900 shares, 1000 to each of Mr Wilson and the taxpayer, and 900 to Mr Habersetzer.

Thumpa Industries Pty. Ltd. ("Thumpa Australia") was incorporated in Queensland in 1975. At the time of the material events in this case, the directors were the taxpayer and Mr Wilson. The taxpayer's wife became a director in December 1976. The shareholding was divided equally between Mr Wilson and the taxpayer.

The taxpayer, his wife and brother are medical practitioners. He was a senator in the Parliament from 1974-1981, and was re-elected in 1984. Fermoy Pty. Ltd. ("Fermoy") is a Queensland company incorporated in 1964. The directors and shareholders were the taxpayer, his wife, and his brother. It was the medium for the conduct of a surgical private hospital in Brisbane; the taxpayer also, as his personal enterprise, conducted Dungarvan Private Hospital in Brisbane. The taxpayer's brother appears to have had no interest in Thumpa Australia or Thumpa America.

The Commissioner having disallowed the claim in respect of moneys borrowed from Midland Credit and other claims to deductions in respect of the same and other years of income, the objections were treated as appeals and forwarded to the Queensland Supreme Court. The only issues that remained at the hearing of the appeals to this Court concerned the Supreme Court's treatment of the deduction of $48,934 claimed in respect of 12 monthly payments of interest on moneys borrowed from Midland Credit. Of this, his Honour treated $18,875 as properly allowable as a loss or outgoing of the taxpayer within the meaning of sec. 51(1) of the Act. This led, as we have said, to appeals by both parties to this Court. The Commissioner submits that none of the interest payments should have been allowed, the taxpayer that all of them should have been.

We should add that the taxpayer also was denied by the Commissioner a deduction claimed, in respect of the year of income ended 30 June 1977, for $6,088 for "Borrowing Charges re Loan Midland Credit Ltd.". The primary Judge dismissed the taxpayer's claim in respect of this sum and no appeal was before us against that decision. His Honour's reasoning appears in the following passage [at p. 4735]:

The essence of the Commissioner's primary complaint before us was that his Honour erred in not reaching a conclusion to like effect in respect of the claim for 10 of the 12 interest payments on the Midland Credit loan which were received by Midland Credit in the year of income ended 30 June 1977.

We turn now to the principal events. The taxpayer in his capacity as a senator was approached by Mr Wilson. Mr Wilson had a scheme for commercial rabbit breeding and in the course of providing assistance in dealings with governmental authorities the taxpayer himself took up a financial interest in the venture. Thumpa Australia was formed as we have described and property was acquired at Tenterfield, New South Wales. This was worth about $50,000. The necessary governmental approvals to the pursuit of the venture in Australia were not forthcoming. Mr Wilson travelled to the United States and set about establishing the venture in that country. Mr Wilson told the taxpayer of the funding requirements for the American venture and the taxpayer set about raising finance in Australia. Meanwhile, Thumpa America was formed in the State of Washington in the manner we have already described and an American partner was introduced into the United States operations.

The documentary evidence discloses that approaches were made by the taxpayer in the period July 1975-February 1976 to institutions including the Bank of New South Wales. AGC (Advances) Ltd., and the Bank of Queensland Ltd. These did not bear fruit. However, on 11 May 1976 Midland Credit wrote to its solicitors in Brisbane instructing them to act for it in a loan of $350,000 to Fermoy for a period of three years with a minimum of three months at an interest rate of 17½% reducing to 15½% if paid within seven days of the due date. The letter went on to list the security as including a first mortgage over "Fermoy Medical Hospital Complex" together with personal guarantees of the taxpayer and Dr M.E.A. Sheil (the taxpayer's wife). The original instructions received by Messrs Stephens Barbeler and Grant, the solicitors for Fermoy and the taxpayer, appear to have been that the money was to be advanced to the taxpayer personally. Instructions were received from the taxpayer. The lender insisted upon the transaction following the form outlined in the letter of 11 May 1976. It appears that Thumpa Australia was not acceptable as the borrower because although it had the land at Tenterfield this was not sufficient security for the loan, given the limited value of that land. We should add that the copy of the letter of 11 May 1976 in evidence has the words Fermoy Pty. Ltd. which appear next to the word "borrower" struck out and written in manuscript beside them "Glenister Sheil".

In expectation of the settlement of the transaction Messrs Richard Stephens and Barbeler prepared a written authority whereby Fermoy authorised Midland Credit through its solicitor to disburse all moneys in connection

ATC 4434

with the advance to Fermoy in accordance with the directions of Messrs Richard Stephens and Barbeler. That firm was described therein as Fermoy's solicitors. The document bears the date 8 June 1976 and was signed by the taxpayer as a director of Fermoy. The direction was sent to Midland Credit or its solicitor in advance of the settlement. The settlement took place in the offices of Messrs Richard Stephens and Barbeler on the afternoon of 11 June 1976. This was a Friday. The evidence includes a deed dated with that date between Fermoy and Midland Credit which recites an agreement to advance the sum of $350,000 to Fermoy and creates a charge by Fermoy on all its assets to secure that advance. It acknowledges that of the $350,000, $250,000 was received on 11 June 1976 and provides that the principal will be repaid on 11 June 1978 (not 1979 as one might have expected for a three year loan facility). The deed was executed under the common seal of Fermoy in the presence of the taxpayer and his wife. The evidence also includes a deed of guarantee dated 11 June 1976 between the taxpayer and his wife as sureties and Midland Credit as principal creditor. The deed recites the Fermoy deed of charge and contains a guarantee to Midland Credit of all moneys owing thereunder.

In his oral evidence the taxpayer emphasised that in his view he was the borrower and that Fermoy was merely acting as his agent. The taxpayer's wife gave evidence to like effect. Both said that on 11 June 1976 in the offices of the solicitors the taxpayer indicated to his accountant and the solicitor Mr Barbeler that the documentation for the Midland Credit loan should not show Fermoy as borrower. However Mr Barbeler gave evidence that by the time he had received instructions it had been fairly well established that Fermoy was to be named as the borrower. By the time the transaction was settled on 11 June 1976 it must have been quite clear to the taxpayer that so far as Midland Credit was concerned it was only prepared to lend moneys to Fermoy and that it was looking to security from Fermoy as well as to the personal guarantees of the taxpayer and his wife.

Either concurrently with or shortly after the conclusion of the settlement, but in a separate room, there were two meetings of directors of Fermoy. At the first it was resolved inter alia that the Company execute the deed of charge to secure the advance of $350,000 by Midland Credit. At the second the directors of Fermoy resolved as follows:

"The intention being at all times that Senator Dr. Glenister Sheil be the principal debtor, and this Company being named as principal debtor in all documents associated with the loan from Midland Credit Ltd. at the request of that Company and as detailed in the attached statement signed by the Chairman, it is hereby resolved that this Company is to act as nominee only for Senator Dr. Glenister Sheil in all matters concerning the said loan."

At about 3 p.m. on the afternoon of 11 June 1976 a cheque from Midland Credit for the advance of $250,000 was taken to the branch of the Commercial Bank of Australia in George Street, Brisbane, for transfer to the credit of an account titled "The Manager, Thumpa Industries Pty. Ltd." at the Wynnum branch of the same bank. The sum of $250,000 appears as a credit to that account on 11 June 1976. The cheque did not appear in the evidence, nor does there appear the form of any direction, under the document dated 8 June 1976, by Fermoy's solicitor to Midland Credit pursuant to which the $250,000 represented by the cheque was disbursed. Mr Barbeler gave evidence suggesting the cheque was payable to the taxpayer personally. If this was so then presumably it may have been endorsed by him to Thumpa Australia before it was banked.

On 1 September 1976 a further credit was made to the account of Thumpa Australia at Wynnum, this being of $70,000, and on 1 February 1977 there was a further credit of $30,000. His Honour found that these payments represented the balance of the advance of $350,000 made by Midland Credit. No challenge was made to His Honour's finding in this respect. His Honour also found that Thumpa Australia received these moneys as an interest free loan from the taxpayer, repayable on demand. As regards Fermoy, the auditors of that company in their report for that company in respect of the year ended 30 June 1978 referred to a "Special Loan" by that Company of $350,000 to the taxpayer and to a loan to it by Midland Credit "due for repayment on the same day". That reflects the inference we would draw from the facts we have outlined.

ATC 4435

By letter dated 6 July 1976 the taxpayer wrote as follows to the directors of Thumpa Australia:

"With reference to the $273,400 (i.e. $23,400 additional) standing to my credit in the books of the Company at 30th June 1976 being in respect of funds loaned by me for ultimate investment in Thumpa Industries Inc., I hereby state that the said amount plus any further funds which I may lodge with the Company shall be regarded as an interest free loan repayable at my demand."

Prior to receipt of the $250,000 on 11 June 1976, Thumpa Australia already owed the taxpayer $23,400. Hence the reference in this letter to $273,400. The evidence also included minutes of meetings of directors by Thumpa Australia held on 7 July 1976 attended by the taxpayer and his wife in which it was resolved as follows: 

      "LOAN ACCOUNT -                 A letter from Senator Dr. Sheil dated
      SENATOR DR.                    6th July, 1976 was tabled. After
      GLENISTER SHEIL:               discussion it was resolved that all
                                     moneys loaned by Senator Dr. Sheil to
                                     this Company should be interest free
                                     and repayable on demand.

      LOAN ACCOUNT -                 It was resolved that all moneys loaned
      THUMPA INDUSTRIES INC:         by this Company to Thumpa Industries
                                     Inc. should be interest free and
                                     repayable on demand."

The auditor's report in respect of Fermoy as at 30 June 1978 referred to a special loan by that company to the taxpayer amounting to $350,000, repayable on 11 June 1979 and to a current liability of the company Midland Credit Ltd. in the same sum due for repayment on the same day.

A page extracted from an otherwise unclearly identified ledger, the page being headed "Loan Fermoy Pty. Ltd.", shows a loan of $250,000 to Thumpa Australia as outstanding on 30 June 1976. It also shows a further indebtedness of $70,000 by Thumpa Australia on 31 August 1976 and of $30,000 on 28 January 1977.

There is a paucity of documentary evidence concerning the financial arrangements between Thumpa Australia and Thumpa America. The evidence includes a copy of an audited balance sheet of Thumpa America as at 30 September 1976. His Honour found that with the exception of $50,000 withheld from the initial receipt of $250,000 the balance of $300,000 "was sent by Thumpa Australia to Thumpa America" as "an interest free loan" and that, in spite of this, "the funds really went to Mr Wilson who, acting apparently with the general authority given to him by [the taxpayer] applied half of it to the subscriptions for their shares by each of the appellant and himself, and that capital, together with that supplied by the American shareholder was then used by Thumpa America in setting up and operating its business". The venture was a failure and Thumpa America was unable to make any repayments to Thumpa Australia. His Honour allowed the taxpayer's appeal in respect of $18,875 on the footing that $135,000 was applied to the taxpayer's subscription for further shares, the original 1,000 in Thumpa America, and that "the proportionate amount of interest paid for that sum [$135,000] was about $18,875".

We turn now to the facts concerning interest payments made in the year ending 30 June 1977. The only documents in the possession or power of Midland Credit concerning the loan to Fermoy and payments in respect thereof at the time of the hearing below were six leaves comprising its ledger card. Other papers had been destroyed some years after the final repayment date in 1979. The ledger shows receipt of interest payments as follows:

ATC 4436 

            "Due Date              Sum of Interest          Outstanding
                                       Paid                 Principal
                                         $                      $
 (1)       11 July 1976               3224.17                250,000
 (2)       11 August 1976             3229.17                250,000
 (3)       11 September 1976          3585.88                320,000
 (4)       11 October 1976            4133.33                320,000
 (5)       11 November 1976           4133.33                320,000
 (6)       11 December 1976           4133.33                320,000
 (7)       11 January 1977            4133.33                320,000
 (8)       11 February 1977           4273.47                350,000
 (9)       11 March 1977              4520.83                350,000
(10)       11 April 1977              4520.83                350,000
(11)       11 May 1977                4520.83                350,000
(12)       11 June 1977               4520.83                350,000
                                   ----------
                                   $48,934.33
                                   ----------"

Each entry bears a notation "copy to" the Commercial Bank of Australia Ltd., Wynnum. The ledger does not disclose the source of these payments. Fermoy conducted an account at a branch of the National Bank of Australasia Ltd. in Queen Street Brisbane and before each monthly payment of interest Midland Credit wrote to Fermoy requesting payment thereof and drawing attention as appropriate to the increases in principal from $250,000 to $320,000 and then $350,000. It appears from the copy of the letter of 4 January 1977 which was in evidence that it was copies of these letters that were sent to the branch of the Commercial Bank of Australia at Wynnum. The date of each of these letters is shown as the first entry of the details of each interest payment. The evidence also contains in respect of each of the seven payments a letter from the bank at Wynnum to Fermoy advising of the remittance of moneys to Fermoy's account with the National Bank of Australasia of moneys "to cover interest payment due" on the Midland Credit loan. The bank statements for the Thumpa Australia account at Wynnum show debits over the period in question corresponding (save for 50 cents in respect of the first two payments) to all but the sixth and seventh payments of interest received by Midland Credit from Fermoy (i.e. except those for December 1976 and January 1977). After the October interest payment the account went into debit in the sum of $3,743.77. It went back into credit sufficiently to meet the November payment but by December 17 was in debit to $3,317 and it remained in debit until $30,000 was credited on 1 February 1977.

His Honour found that in respect of all these 12 payments, the interest was paid by Fermoy to Midland Credit and that all but those for December 1976 and January 1977 were paid from moneys received by it from Thumpa Australia by payments out of the account into which the principal moneys advanced by Midland Credit had been paid in the manner we have described. No challenge is made to that finding.

However, it remains to link the taxpayer to those 12 payments of interest such that he has sustained outgoings as claimed by him. As we have mentioned, the taxpayer claimed in his objection that the interest payments by Fermoy were charged to him in the records of Fermoy. The case was, apparently with the acquiescence of the Commissioner, differently presented in the Supreme Court. It was contended that (a) the 10 payments by Thumpa Australia ($40,668) were debited against the loan account of the taxpayer in the books of that company and (b) the payments for December 1976 and January 1977 (of $8266) were made personally by the taxpayer to Fermoy. The Supreme Court accepted these submissions (a) and (b). The acceptance of (a) was challenged before us by the Commissioner. Thus this case as to 10 of the 12 instalments turns upon matters of fact which must be established by the taxpayer if he is to go on to show that those outgoings satisfy the further criteria presented by sec. 51 of the Act.

ATC 4437

The primary Judge's findings as to submission (a) appears in the following passage [at p. 4734]:

"On a comparison between those two years, (i.e. 1976 and 1977) his loan account, after adjustment for other recognisable debits and credits, shows a reduction in the latter year approximately equal to the interest payments made by Thumpa Australia, and there is no other explanation for such a substantial reduction. Although it shows other interest payments of its own, that company does not report in its profit and loss account any interest payments corresponding to those which are in question; and as the loan from the appellant to that company was interest free, there was no obligation upon the latter to make the payments from its own funds and no reason why it should. Finally there is no item in the financial papers in any way contrary to the appellant's claim."

The findings as to submission (b) were as follows [at p. 4734]:

"There were two instalments of interest not paid by Thumpa Australia, probably because it was in overdraft in its bank account at the time and, so far as one can see, these were made by the appellant personally by way of payment to Fermoy, following the process of reimbursing it for its payment to Midland."

We turn first to the challenge by the Commissioner to the holding that 10 interest payments by Thumpa Australia to Fermoy (and thence to Midland Credit) were debited to the taxpayer's loan account. Before doing so, we should refer to the evidentiary position in this case, some of our concerns with which will already have become apparent.

The record before this Court shows the documentary evidence before the Supreme Court to have been of a limited character. For example, it did not include (i) cheques (and supporting records) by means of which there readily would appear the paths along which moneys were disbursed after Midland Credit made the three advances of principal (ii) cheques (and supporting records) by means of which moneys were remitted to the United States (iii) in respect of the relevant periods, bank statements of Fermoy, Thumpa America or the taxpayer (whether trading as the Dungarvan Private Hospital or otherwise), or (iv) the books of account of Thumpa America, Thumpa Australia, Fermoy or the taxpayer (save for limited exceptions in the last two cases).

We mention this not to suggest that it was incumbent upon the taxpayer to adduce any particular item or items concerned if he were to succeed. The point is that the Court below had to deal with the case on the evidence before it and whilst the documentary evidence was supplemented and explained by oral evidence of the taxpayer and others, the result was to leave the primary Judge with the necessity of making extensive inferences if he were to find the taxpayer had established the stratum of fact which had to be present if the taxpayer were to go on to show that the application of the law to those facts would make out his case for allowing the deductions claimed. His Honour did draw inferences on a number of matters and the result has drawn criticism before us from both parties.

No question of the credit of the taxpayer or the other witnesses arises but gaps and uncertainties caused his Honour much difficulty. Thus his Honour described (correctly in our view) the taxpayer's evidence upon a number of issues as "understandably vague" and "unsatisfactory". In relation to the dealings between Thumpa Australia and Thumpa America his Honour was driven by "the paucity of evidence and the general disregard of detail in the arrangements" to rely upon "the general context and commonsense". Again, his Honour described the intentions with which the taxpayer "entered into" the loan transaction with Midland Credit and the arrangement for the payment of interest as "vague and loosely defined".

As we have mentioned, no books of Thumpa Australia were in evidence. The taxpayer deposed that "As far as I know it [Thumpa Australia] has been wound up". No evidence was given as to whether it was a compulsory or voluntary winding up, or when it commenced and concluded. A senior clerk of a firm of public accountants gave evidence that, when she started employment there 10 years ago, there were records of Thumpa Australia in the firm's strong room. She said that "old records and files" are "disposed of" by the firm after being kept for seven years. That procedure

ATC 4438

"would have" been followed in the case of Thumpa Australia, she said.

We have also commented upon the paucity of documentary evidence concerning Fermoy and Thumpa America. In their report (which we mentioned earlier in these reasons) dated 4 December 1978 (in respect of the year ended 30 June 1978) the auditors of Fermoy said:

"The Special loan by the Company to Dr. Glenister Sheil amounting to $350,000 is shown in the Assets as repayable on 11th June, 1979 for the reason that the exactly equal amount owing to Midland Credit Limited and shown as a Secured Current Liability is due for repayment on the same day.

Because of the complexities of investments made in the United States of America by Dr. Glenister Sheil out of the funds lent to him by the Company and full details of which are not available to us at this date, we are unable to satisfy ourselves that repayment will be effected by him on the due date."

The present proceedings concern events that commenced in 1976 and were instituted upon a letter on behalf of the taxpayer, dated 22 August 1978, requesting the Deputy Commissioner of Taxation to forward the "appeal" to the Supreme Court of Queensland. A Mr Cavaye who was described as the taxpayer's accountant and who was in attendance at the settlement of the Midland Credit transaction in June 1976, died shortly before the hearing in the Supreme Court. If explanation of the paucity of documentary evidence be material in evaluating the taxpayer's case, the circumstances we have outlined are not by any means explained simply by the death of Mr Cavaye. On ordinary principles the taxpayer bore the burden in the Supreme Court of establishing affirmatively, on the balance of probabilities the facts necessary to make out his case:
McCormack v. F.C. of T. 79 ATC 4111 at pp. 4120-4122, 4123, 4127-4128 and 4132-4133; (1979) 143 C.L.R. 284 at pp. 301-304, 306, 314 and 323. Given the nature and the state of the evidence in the Supreme Court and the nature of the primary Judge's findings of fact, which we have discussed earlier in these reasons, we believe it is open to (and incumbent upon) us to determine the matter for ourselves, subject to giving, as we believe we do, due weight to the conclusions of the learned primary Judge:
Warren v. Coombes (1978-1979) 142 C.L.R. 531;
Taylor v. Johnson (1982-1983) 151 C.L.R. 422 at pp. 426-427; cf.
Heating Centre Pty. Ltd. v. Trade Practices Commission (1986) ATPR ¶40-674; (1986) 65 A.L.R. 429.

We return to the challenge by the Commissioner to the holding that payments by Thumpa Australia to Fermoy (and thence to Midland Credit) were debited to the taxpayer's loan account. The balance sheet of Thumpa Industries as at 30 June 1976 showed a liability of $273,400 being an unsecured loan from the taxpayer. The balance sheet as at 30 June 1977 showed an increase to $338,334.54, the difference being $64,939.54. His Honour put it to an officer of the Commissioner who gave oral evidence that if $64,939 were subtracted from $100,000 representing additional advances from Midland Credit after the initial $250,000, the balance (some $35,000) "approximates the interest that was paid" [by Thumpa Industries and debited to the taxpayer's loan accounts]. It will be recalled that of the total of $48,934 received by Midland Credit, $40,668 represented payments from Thumpa Australia to Fermoy's account and that two instalments (comprising $8266) were funded by other means. It was on the strength of this inference as to the cause of the $35,000 change in the Thumpa Australia loan account that his Honour further inferred that the taxpayer had established that the whole of the $40,668 was treated in this way.

In our view the taxpayer did not sufficiently make out this part of his case. Prior to 11 June 1976 the taxpayer had already lent Thumpa Australia $23,400. The particular dealing which led to this was not explained. Mention was made in evidence, as we have said, of the purchase by the company of land at Tenterfield but the evidence did not disclose plainly the funding thereof. The taxpayer also referred to a payment in August 1976 in connection with a trip by him to the United States of $10,500 from Dungarvan (a personal account) to Thumpa Industries and the bank statements of that company confirm this. It should also be noted that in the taxpayer's balance sheet which accompanied his return for the year of income in question (viz. that ending 30 June 1977) the investment in Thumpa Industries was shown as

ATC 4439

$409,411.85. The letter of 29 May 1978 to the Commissioner (to which we have earlier referred) enclosed an amended balance sheet as at 30 June 1977. This showed the investment in question as $338,339.54, and it was said in the letter that this sum had been "reconciled" with the records of the debtor Thumpa Industries. Those records presumably still existed in May 1978, and the letter served as an objection by the taxpayer. We have earlier in these reasons discussed the later unavailability of those records. Against this skimpy documentary background, no analysis or explanation was presented in the taxpayer's loan account with Thumpa Australia. We have set out the passage which records the reasoning by which his Honour found for the taxpayer on this issue. In the circumstances we have mentioned, and giving due weight to his Honour's decision, we are, as we have said, unable to find that the taxpayer has made out his case on this issue. We are unable to find on the ordinary balance of probabilities that the ten instalments totalling $40,668, paid from Thumpa Industries' account to Fermoy and thence to Midland Credit were as to the whole or any particular instalment or part thereof, debited to the taxpayer's loan account with Thumpa Industries.

We turn now to consider the position as regards the two payments found by his Honour to have been made to Fermoy personally by the taxpayer.

No challenge was made to the finding that the payments were as made. The question then is whether they constituted (in whole or part) outgoings incurred in gaining or producing assessable income or were (in whole or part) necessarily incurred in carrying on a business for the purpose of gaining or producing such income. In our view the outgoings did not bear this character. We give our reasons as follows.

Although Thumpa Australia received $350,000 in the manner we have described, it retained $50,000 from the funds it remitted to the United States. The taxpayer clearly controlled Thumpa Australia and his decisions were those of the company. The taxpayer expected the funds received by Thumpa America to be used for capital works and other activities to establish the enterprise and that there would be a period before the enterprise generated income. He was concerned to make certain that for a year funds remained available in Australia to service the interest payments that could become due to Midland Credit. He said he had approached the various financiers on the footing that $300,000 was needed to set up the enterprise and $50,000 to pay the interest. Hence the $50,000 was retained by Thumpa Australia, in words put to and accepted by the taxpayer, "to pay the interest whilst you saw the enterprise through its early stages".

In his evidence, the taxpayer said that he expected Thumpa America to repay from its earnings the total of the loan of $350,000 by June 1979 and that it would pay the interest due to Midland Credit after the first year. Of the $350,000 borrowed from Midland Credit, $300,000 was paid to Thumpa America and $50,000 was retained in Australia to provide the source of funds for the payments of interest on the loan for the first year ending on 11 June 1977. This arrangement has the appearance of commercial reality and is consistent with the documentation in evidence before the Court.

It is unnecessary to decide whether the $50,000 to which we have referred was in the hands of Thumpa Australia impressed with a trust for the purpose of placing Fermoy in funds to pay interest to Midland Credit (cf.
Barclays Bank Ltd. v. Quistclose Investments Ltd. (1970) A.C. 567,
Australasian Conference Association Ltd. v. Mainline Constructions Pty. Ltd. (in liq.) (1978) 141 C.L.R. 335 at p. 353). To the extent that Thumpa Australia did not provide Fermoy with the necessary funds, that company, if nothing else were done, risked default under its security, and the taxpayer alone did not control Fermoy, his brother being an interested party. Further, to the extent that Fermoy risked default, the taxpayer and his wife risked calls upon their personal guarantees. At least in a practical sense, then, the $50,000 was earmarked for use in seeing to payment of interest to Midland Credit. However, the bank account of Thumpa Australia at Wynnum was put to other uses and first went into overdraft. It did not have funds in it to enable Thumpa Australia to meet the interest payments for December 1976 and January 1977 and was only in funds sufficient to meet later payments because of a credit of $30,000 on 1 February 1977. This situation had arisen because of the use to which the taxpayer

ATC 4440

had procured or directed Thumpa Australia to put its funds.

The question is, as Deane and Sheppard JJ. explained in
Ure v. F.C. of T. 81 ATC 4100 at pp. 4108-4111; (1981) 50 F.L.R. 219 at pp. 231-234, one of characterisation. One may concede for immediate purposes that the taxpayer had busied himself in procuring, in the manner we have described, the provision of finance by Midland Credit with the overall object of enhancing the value of the business enterprise to be conducted by Thumpa America. But what must be shown here is what Brennan J. called the required connection (Ure's case, supra, at ATC pp. 4103-4104; F.L.R. p. 223,
Magna Alloys & Research Pty. Ltd. v. F.C. of T. 80 ATC 4542 at pp. 4545-4551; (1980) 49 F.L.R. 183 at pp. 187-195) between the outgoing (viz. the two payments by the taxpayer) and gaining or producing the assessable income. The second limb of sec. 51 would present a similar issue of necessary nexus with carrying on a business of the required description. We should add that in so far as evidence of the intention of the taxpayer in making these two payments would be relevant to assist his claim to deductions under sec. 51, his evidence was insufficiently focused upon these two payments to yield any material that would be of assistance. We have already referred to the understandably vague recall by the taxpayer of matters of detail.

In our view, the payments for December 1976 and January 1977 are to be characterised as payments to restore the funds of Thumpa Australia from the depletion that had occurred by making use of those funds for other purposes and to do so by putting Fermoy directly in moneys it otherwise would have received out of the $50,000 retained by Thumpa Australia. This would remove any prospect of calls upon the guarantees of the taxpayer and his wife, or upon the Fermoy security. The payments were not truly incidental and relevant in the necessary sense to the gaining of the taxpayer's assessable income in the sense required for the first limb of sec. 51(1) of the Act. Nor were they necessarily incurred in carrying on a business in the sense of the second limb of that provision. There being a lack of the necessary relevance or connection, the case is not one for apportionment; there is not an element within the outgoings that has that necessary relevance to or connection with income derivation (cf.
F.C. of T. v. Gwynvill Properties Pty. Limited 86 ATC 4512 at p. 4527; (1986) 69 A.L.R. 488 at p. 507, Parsons Income Taxation in Australia para. 9-11 and 9-12).

It follows that the appeal by the Commissioner succeeds and that by the taxpayer fails. There were a number of items allowed by way of deductions by the learned primary Judge which were not the subject of any appeal. Because of the partial success of the taxpayer below but having regard to the holdings on appeal we believe the appropriate order for costs below should be that the taxpayer should have his costs in the Supreme Court, but limited to one day.

The result is that:

(a) In the appeal by the Commissioner (Q. No. G 159 of 1986):

(b) In the appeal by the taxpayer (Q. No. G 160 of 1986):

 

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