Yeung & Anor v. Federal Commissioner of Taxation
Judges:Davies J
Court:
Federal Court
Davies J.
These are appeals brought by the taxpayers, Dr Tai Fong Yeung and his wife, Mrs Wen Lin Yeung, against decisions on their objections to assessments of income tax for the years ended 30 June 1981, 1982 and 1983. Like issues may have arisen in other years but they are not before the Court.
The first issue concerns the quantum of the interest Dr and Mrs Yeung had in the income of a partnership, as defined in sec. 6(1) of the Income Tax Assessment Act 1936 (Cth) (``the Act''), claimed to exist between themselves and their four children: Philip Yul King Yeung born 6 June 1969, Shirley. Shiu Ling Yeung born 1 December 1970, Sylvia Shiu Man Yeung born 12 December 1971 and Daniel Yul Sinn Yeung born 21 April 1974.
Dr Yeung is a medical practitioner, who carries on practice in Hong Kong. In 1974-1975, he and Mrs Yeung planned for a future in Australia. They decided to acquire real estate in Australia in the names of themselves and of their four children, then aged 6, 4, 3 and 1 years of age. Mrs Yeung consulted a solicitor in Sydney, Mr B.E. Miller. On his advice, Mrs Yeung saw an accountant, Mr N.W. Elsely, for taxation advice. Mr Elsely advised that any purchase should be made in the joint names of the family members. Commencing in November 1975, purchases were made over a number of years and, notwithstanding the advice of Mr Elsely, were made in the names of the six family members as tenants in common in equal shares. The funds for the acquisitions were supplied wholly or substantially by Dr Yeung. Some of the funds may have come from moneys held separately by or for Mrs Yeung or for the children but there is no clear evidence before the Court as to any funds, other than Dr Yeung's, which were used in the purchase.
When the children were too young to sign their own names, all relevant contracts of purchase were executed on their behalf by Mrs Yeung. Likewise, when each of the properties was, after its purchase, leased in the names of the six owners, the lease was signed by Dr and Mrs Yeung and also by Mrs Yeung in the names of each of the children. As the children grew in age and when it was convenient for them to do so, the children themselves executed the contracts of sale and leases.
Dr Yeung maintained a bank account at the Commonwealth Trading Bank of Australia on which he and Mrs Yeung and also a friend or relative were signatories. Cheques in favour of T.F. Yeung and Associates for the rents were paid into the bank account. The rent receipts were mingled with all other moneys in the account. The account was used generally with respect to the affairs in Australia of Dr and Mrs Yeung and of their children. Moneys in the account were received and applied as if they were moneys of Dr Yeung or of Dr and Mrs Yeung. Thus, in the year [ended] 30 June 1982, the rental income from the jointly held properties amounted to only $60,946 whereas total receipts amounted to $1,026,454 and payments to $1,034,433. All expenditure in relation to a home purchased in the names of Dr and Mrs Yeung, including the rates, telephone etc., and all other expenditure relating to the family in Australia was paid out of the account.
The contention of Mr T.F. Bathurst Q.C., who with Mr C. Lonergan appeared for Dr and Mrs Yeung, was that, with respect to the properties purchased in the names of the six members of the family and leased in their names, there was a partnership as defined in sec. 6(1) of the Act in that Dr and Mrs Yeung and their four children derived the rental income jointly.
The following are relevant provisions of the Act:
``6(1)... `partnership' means an association of persons carrying on business as partners or in receipt of income jointly, but does not include a company;
91 A partnership shall furnish a return of the income of the partnership, but shall not be liable to pay tax thereon.
92(1) The assessable income of a partner in a partnership shall include -
- (a) so much of the individual interest of the partner in the net income of the partnership of the year of income as is attributable to a period when the partner was a resident; and
- (b) so much of the individual interest of the partner in the net income of the partnership of the year of income as is attributable to a period when the partner was not a resident and is also attributable to sources in Australia.''
ATC 4196
No partnership return was prepared or lodged but income tax returns were lodged in the names of the individual members of the family and, at least in the years with which we are concerned, one sheet of each return claimed a partnership of six entitled ``Tai Fong Yeung and Others'' and a derivation by each of the six members of the partnership of one-sixth of the net income thereof. Apart from that document, drawn up each year for insertion in the income tax returns, no partnership accounts were kept.
In 1981, Dr and Mrs Yeung transferred their taxation affairs to another accountant, Mr J.K. Liu, and, thereafter, Mr Liu maintained a record of all payments out of Dr Yeung's bank account. That cash payments book included a column ``Drawings'' but, as the items in the drawings column included such miscellaneous items as cash, school fees, N.S.W. Medical Board (licence fee) and S.C.C. (home elec.), it did not identify by whom the drawings were made or from what. No account was maintained to show the interest of each of the family members in the partnership or had credited to it any part of the income of the partnership or debited to it any drawings. There is in evidence a balance sheet drawn up by Mr Liu, presumably for the purpose of these proceedings, which purports to show the state of the partnership. Later in these reasons, I shall set out that balance sheet.
Mrs Yeung and the children came to Australia in 1982 to live permanently in this country. Dr and Mrs Yeung acquired a home in their joint names in which Mrs Yeung and the children have since lived. Dr Yeung has yet to join the family in Australia on a permanent basis but will do so in due time.
Dr and Mrs Yeung on 1 July 1980 gave notice to the partnership requiring repayment of the sums originally contributed for the purchase of the various properties. The notice read:
``We wish to advise that we wish to withdraw our advances to the Partnership as soon as alternative finance can be arranged by your Partnership.
We also wish to advise that interest at the rate of 8.5% per annum would be charged on the first $380,000 advanced to the Partnership.''
The alleged advance totalled $546,000.
The justification for and the purpose of this step were left in some obscurity by the evidence given to the Court.
Mrs Yeung gave this evidence:
``Well, is your evidence that your accountant advised you to withdraw advances from the partnership? - Well, like I told you earlier, yes, it was all according to what advice given us by our accountant, yes.
Can you recall now what your accountant said to you about that matter? - No, I do not.
...
Well, do I understand you correctly to say that the letter was written on the advice of Mr Liu? - Yes.''
Mr Liu gave this evidence:
``As best you can recall, what was said by her and by you in relation to the matter? - She come to us and she explained over casual conversations she has indicated to us, I mean to me in particular, her circumstances and of her, as she then show some concern as to the then existing structure because of the children's involvement into the various properties. And then she also indicated then she would need some money back for her own use, the husband and wife.
As a result of that did you advise her to write a letter to the effect of -? - Yes, we advised her to write a letter to make everything more of a clear structure.''
I am unable to find any principle of law or any factual basis which would have entitled Dr and Mrs Yeung to regard the capital moneys contributed for the purchase of the properties as moneys lent to the partnership. Nor was the step taken to make available to Dr and Mrs Yeung any more cash than they otherwise had available. In my view, it is likely that the step was taken because Dr and Mrs Yeung and their advisers considered that, as the children became older and realised the significance of being co-owners of the properties, they might seek to make use of the capital which appeared to be theirs. This explanation accords with Mr Liu's evidence as to Mrs Yeung's ``concern as to an existing structure because of the children's involvement''.
ATC 4197
In early 1981, one of the properties, No. 30 Lochinvar Parade, Carlingford, was sold. The net proceeds, $110,000, were paid into Dr Yeung's bank account. That sum was treated as part repayment of the moneys advanced by Dr and Mrs Yeung.
A new family discretionary trust, of which Ozanu Pty. Ltd. was the trustee, was brought into the affairs of Dr and Mrs Yeung and, in February 1982, there was an exchange of cheques of $250,000 each from Dr Yeung's bank account to Ozanu Pty. Ltd. and from Ozanu Pty. Ltd. to Dr Yeung's bank account. The $250,000 paid into Dr Yeung's bank account was treated as a loan by Ozanu Pty. Ltd. to the partnership and as a repayment by the partnership to Dr and Mrs Yeung of part of the moneys claimed to have been advanced. I shall deal later with this transaction in more detail.
A document drawn up in Mr Liu's office records the position as between Dr and Mrs Yeung and the partnership as follows:
``Loan Account: T.F. YEUNG, W.L. YEUNG & OTHERS
$
1/7/80 Outstanding balance to 1/7/80 for purchase of 546,000.00
various properties - at costs
1/81 Proceeds from sale of Carlingford property 110,000.00
---------- ----------
Balance 30/6/81 436,000.00
----------
8/2/82 Repayment of loan 250,000.00
----------
Balance 30/6/82 186,000.00
----------
Balance 30/6/83 186,000.00
-----------
Balance 30/6/84 $186,000.00
-----------''
The balance sheet prepared in Mr Liu's office, to which I have already referred, reads as follows:
``T.F. YEUNG & Others (6 Persons) Partnership
Balance Sheet as at 30th June, 1981 1982 & 1983
1981 1982 1983 $ $ $ Capital Accounts 600 407 1,128 (All Partners) ------- ------- ------- Represented by: Fixed Assets Properties - at cost 466,000 466,000 466,000 Current Assets Sundry Debtors - Rent - 6,552 4,507 Current A/C - T.F. Yeung 4,400 43,259 85,588 -------- ------- ------- Total Assets 470,400 515,811 556,095 -------- ------- ------- Less: Liabilities Mortgage Loan - OZANU P/L - 267,671 304,043 Unsecured Loan 436,000 186,000 186,000 - T. & W.L. Yeung & Others
ATC 4198
Accrued Expenses - Interest T. & W.L. Yeung 32,200 54,085 54,085 - Others 1,600 7,648 7,939 Unsecured Loan - W.L. Yeung - - 2,900 ------- ------- ------- Total Liabilities 469,800 515,404 554,967 Net Assets 600 407 1,128 ------- ------- -------''
Although I have set out the loan account and the balance sheet, it should be kept in mind that those documents were prepared for presumably the purposes of this dispute with the Commissioner of Taxation. As Mr Liu made clear in his evidence, he prepared annually for the purposes of the partnership only a profit and loss account. There has been no apportionment of the various drawings from Dr Yeung's bank account or any other account which specifies the interest which particular partners have in the partnership.
By way of example of the documents that were drawn up annually, I set out the following income expenditure statement for the year ended 30 June 1981, a copy of which was included in the tax return of each of the six family members for that year.
``Tai Fong Yeung and Others
Income and Expenditure Statement for the Year Ended 30th June, 1981
$ $ Rent received 53,590 Less: Expenses Accountancy Fee 1,600 Agent's Commission 1,105 Bank Charges 68 Electricity 78 Interest on Loans 32,200 Insurance 1,340 Council Rates 2,239 Water Rates 2,423 Repairs and Maintenance 1,584 Land Tax 4,773 ------ Total Expenses 47,410 ------ Net Income $6,180 ------ Distributed as follows Shirley Shiu Ling Yeung 1/6 1,030 Sylvia Shiu Man Yeung 1/6 1,030 Philip Yul King Yeung 1/6 1,030 Daniel Yul Sinn Yeung 1/6 1,030 Tai Fong Yeung 1/6 1,030 Lau Wen Lin Yeung 1/6 1,030 -----''
As can be seen, the net return from the properties was low, having regard to the capital sums expended on their purchase. The largest item of expenditure was the interest payable on the sums alleged to be due to Dr and Mrs Yeung and subsequently to Ozanu Pty. Ltd. The debiting of that interest reduced the net income of the partnership to only $6,180 in the 1981 year. In 1982, it reduced it to $407 and in 1983 to $721. In the 1983 year, the only interest debited was the interest payable to Ozanu Pty. Ltd. but, as that interest was paid at a commercial rate, it was equivalent to the sums debited in the prior years.
In subsequent years, all but one of the properties was sold. The proceeds of sale were
ATC 4199
used to pay off the balance of the sums claimed by Dr and Mrs Yeung and the moneys borrowed from Ozanu Pty. Ltd. and interest thereon and the surplus was invested with and remains with the Commonwealth Savings Bank in the names of the six members of the family.The first issue to be considered is whether there was a partnership between the six family members in the sense that there was a derivation by them of income jointly and, if so, what was the individual interest which each family member had in the net income of the partnership in each of the subject years of income.
If these proceedings involved litigation between Dr and Mrs Yeung on the one hand and the children on the other, reference would have to be made to principles of law such as the presumption of a resulting trust in the event of the unequal contribution of moneys, the presumption of advancement by a father of his wife and children and rules of evidence such as the rule that, in rebutting such a presumption, the conduct of a person after the purchase of property is not to be taken into account as evidence in his favour but may be admitted as evidence against him. See, for example, the discussion in
Calverley v. Green (1984) 155 C.L.R. 242. These proceedings are, however, not such proceedings but are proceedings between Dr and Mrs Yeung and the Commissioner of Taxation.
The presumptions I have mentioned have little weight when the events were influenced by taxation advice and, I infer occurred, with a view in part at least to minimising the taxation payable on the income anticipated from the properties purchased in Australia. Section 190(b) of the Act places the onus upon a taxpayer to prove that an assessment of tax and the basis of the assessment were wrong. Dr Yeung was not called to give evidence nor were any of the children. There are, however, two affidavits by Mrs Yeung and she was cross-examined upon them. Mrs Yeung is obviously an intelligent woman and appeared to have a good grasp of the issues in the case. Nevertheless, Mrs Yeung's recollection of the primary facts, including the details of purchases and of financial dealings was poor.
Mrs Yeung gave this evidence, inter alia:
``The question I asked you was, you have never seen any books of account for the partnership comprising yourself, your husband and your children? - No, that was not written up in any way because what we did was a real intention that the children should also have a share in our interests and this is what we parents are doing because everything we do we do it also with the children's interests in mind and we are not cheating or doing anything illegal.
...
Why did you wish to have the properties put into your children's name? - Because everything we do we like the children to have an interest, you know, in our, you know, investment and we do it for the interests of the children, always this.''
Such vague evidence does not disclose an intent on the part of Dr and Mrs Yeung to benefit their children any more specific than that of most parents who, in their actions, keep their children's interests in mind as well as their own.
Some of the material contained in Mrs Yeung's affidavit sworn 30 October 1986 goes further than the evidence I have just set out. However, I prefer to judge the intentions of Dr and Mrs Yeung from the facts that have occurred and from Mrs Yeung's oral evidence rather than from that affidavit. In her oral evidence, Mrs Yeung was not able to recollect matters of detail. Her oral evidence accorded generally with the view stated in one paragraph of the affidavit of 30 October 1986, namely, that what was done was done ``to secure our family's financial security''. I think that was the end sought to be achieved, together with the minimisation of taxation. I am not satisfied that there was a clear and particular intent to give to each of the children a one-sixth interest in the capital and income of the properties to be purchased.
On the whole of the evidence, there are a number of factors which lead me to conclude positively that the purchases of the properties were made with a view to giving each of the children some beneficial interest therein. The first is the evidence of Mrs Yeung which I have already set out that she and Dr Yeung wished the children to have an interest in the properties. Secondly, the affidavit by the solicitor, Mr B.E. Miller, and the affidavit and oral evidence given by the first accountant, Mr N.W. Elsely, confirm that from their
ATC 4200
conversations with Dr and Mrs Yeung they understood that the children were to have an interest in the properties. The nature of Mr Elsely's tax advice, namely that it was sufficient to purchase the properties in the six names, was such as to make it clear that Mr Elsely believed that each of the children was to have a one-sixth interest in the properties and in the income thereon. Thirdly, each of the children was made aware of the purchase of the properties in the six names and each, when old enough, signed relevant documents such as contracts and leases. Fourthly, the fact that Dr and Mrs Yeung decided to withdraw the funds contributed for the purchase of the properties is an indication that they believed that, if they did not do so, the children would have a genuine claim to the capital of those funds to the extent of one-sixth each. Lastly, not all of the family's assets in Australia have been acquired in the six names, for the family home and two investment properties have been acquired in the names of only Dr and Mrs Yeung.When these matters are considered in the light of the formal purchase of the properties in the six names as tenants-in-common and in the light of the execution of the leases formally in the six names, the conclusion I draw is that each of the six members of the family had, and was intended to have, a beneficial interest in the properties. That is not to say, however, that I accept that the properties were purchased in the six names with the intention and effect that each of the six members of the family was to acquire and acquired an equal one-sixth interest in the capital and income therefrom. The facts of the case, including the notice given on 1 July 1980 by Dr and Mrs Yeung requiring repayment of the sums paid for the purchase of the properties, are inconsistent with that view.
It is sufficient for the existence of a partnership as defined in sec. 6(1) of the Act that the properties were owned by the six members of the family as tenants-in-common, that the leases were in the names of the six and, therefore that the rents were derived by the six.
Mr N.R. Burns, of counsel, who appeared for the respondent, submitted that sec. 6(1) did not apply to the facts of the case for, he submitted, the children did not personally receive any of the income and, therefore, were not ``in receipt of income jointly''. However, the leases were in the children's names as well as in the names of their parents. Each receipt of the rents under those leases was a receipt on behalf of all the co-owners. The rents were received, for the purposes of the definition in sec. 6(1), by all members of the family jointly.
Mr Burns also submitted that the step of placing the properties in the names of the children as well as those of the parents, the leasing of the properties in the six names and other relevant transactions were shams, mere facades which had no reality and were therefore void and of no consequence for the purposes of taxation. See e.g.,
Snook v. London & West Riding Investments Ltd. (1967) 2 Q.B. 786 at p. 802. However, notwithstanding the tender ages of the children when the properties were acquired and the somewhat ephemeral nature of the children's benefits - for they did not actually handle any income or other moneys coming from the properties - I am satisfied that the transactions were intended to have and had reality. I think it probable that Dr and Mrs Yeung did intend the children to benefit from the properties.
Mr Burns submitted that the children were of such tender age that all relevant transactions were, so far as they were concerned, void. I need not determine whether the children were required to have and had sufficient discretion personally to enter into all the transactions such as the leases entered into in the subject years. Such issues are discussed in Harland's The Law of Minors, para. 506, 507 and in The Law of Contract by Greig and Davis, pp. 767-769. In the present case, the income was derived from properties of which all six members of the family were the co-owners. Minors, even of tender age, may own such property. The children's interests in the income earning properties were not void and the leases were not wholly void. I am therefore satisfied that there was a partnership, as defined in sec. 6(1) of the Act, between Dr and Mrs Yeung and their four children.
However, that conclusion does not determine the crucial issue, namely whether each of the six members of the family was entitled to a one-sixth interest in the net income of the partnership.
In respect of this, one fact stands out above all and that is that all the rents were, without any complaint from any of the children and without any accounting to show that what was done resulted in some liability to one or more
ATC 4201
of the children, paid into Dr Yeung's bank account in Sydney. The rents became part of the funds in that bank account which were used by Dr and Mrs Yeung to pay all outgoings, without regard to the fact that a child or the children might have some particular or special interest therein.Certainly, from out of the funds in his bank account, Dr Yeung paid expenses relating to his children including the school fees, and expensive school fees they were. But no doubt like any parent, Dr Yeung contracted to pay those fees and would have paid them whatever the state of the titles of the subject properties. As Mrs Yeung made clear in her evidence, it was Dr Yeung's income from his medical practice in Hong Kong which was the true source of the family's moneys.
Having regard to the facts which occurred, I am unable to draw the conclusion that any member of the Yeung family considered the children to have, or that the children had, during the subject period, entitlement to the income derived from the properties acquired in the six names.
What is totally missing from the facts of this case is any identification, other than in the income tax returns, of an entitlement by each child to a one-sixth interest or to any other specific interest in the income derived from the properties purchased in the six names. That income was not treated as the children's income either factually or by virtue of accounts. The income went directly to Dr Yeung's bank account and was used together with all other moneys in that account as Dr and Mrs Yeung chose.
Mr Bathurst relied upon the purchase of the properties in the names of the six members of the family as ``tenants in common in equal shares''. But, plainly, Dr and Mrs Yeung did not regard the children as having an equal interest in the capital of the properties. Dr and Mrs Yeung subsequently withdrew the capital they had contributed. With respect to capital, the children did not receive an equal share. For that reason, I place little reliance upon the title when determining what interest the children had in the income derived from the properties. The children were not joint tenants of the properties. They were tenants in common. Therefore their interests in the income might not be equal with those of their parents, as their interests in the capital were not.
Mr Bathurst referred to sec. 43 of the Trustees Act 1925 (N.S.W.) and submitted that Dr Yeung was a trustee or guardian of his children's money and applied their income for their benefit. He submitted that a guardian who discharges his duty adequately to maintain is not liable to account. See
Countess of Bective v. F.C. of T. (1932) 47 C.L.R. 417 at pp. 420-421. But Dr Yeung received the rents on behalf of all the co-owners. Therefore, he was a trustee and bound to account to all the persons having a beneficial interest in that income. No such accounting was undertaken. The rents were simply mingled with and dealt with as Dr Yeung's or as Dr and Mrs Yeung's own funds.
In these circumstances, although I am satisfied that there was a partnership as defined between Dr and Mrs Yeung and the children, I am not satisfied that, in the subject years, each of the children had a one-sixth or any other beneficial interest in the net income of that partnership. In this aspect of the matter, therefore, the decisions taken on the objections must be affirmed.
I turn now to the second issue in these appeals, namely whether the interest of $17,671, incurred on the loan from Ozanu Pty. Ltd. in respect of the year ended 30 June 1982, and the sum of $37,500, incurred for such interest in the year ended 30 June 1983, was deductible from the assessable income of the partnership under the provisions of sec. 51(1) of the Act.
Section 51(1) provides:
``51(1) All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income.''
Though the interest was not paid in the subject years, the Commissioner was not troubled by that aspect of the matter. He disallowed the deductions claimed primarily on the footing that the transaction giving rise to the
ATC 4202
incurring of the interest was of a capital, private or domestic nature and was not directed to the derivation of assessable income.To recapitulate some of the facts: On 1 July 1980, Dr and Mrs Yeung gave notice to the partnership, if I may call it that, between themselves and their four children, that they intended to withdraw from the partnership the moneys they had contributed for the purchase of the properties owned and leased by the partnership. I have already set out the terms of that notice. Subsequently, on 4 February 1982, there was an exchange of cheques of $250,000 each passing from Dr Yeung's bank account to Ozanu Pty. Ltd. and from Ozanu Pty. Ltd. to Dr Yeung's bank account. Presumably the cheque from Ozanu Pty. Ltd. was made payable to T.F. Yeung and Associates but there was no evidence as to this. The transaction was treated notionally as a loan by Dr and Mrs Yeung to Ozanu Pty. Ltd. of $250,000, as a loan by Ozanu Pty. Ltd. to the partnership of $250,000 and as a repayment by the partnership to Dr and Mrs Yeung of $250,000.
The terms of the loan from Ozanu Pty. Ltd. to the partnership were set out in a document which read as follows:
``Re: Mortgage Loan - A$250,000
We wish to advise that we are prepared to advance the sum of A$250,000 to your Partnership under the following terms and conditions: -
1. Term: Interest only Loan for 3 years (with 3 months penalty interest on early payout).
2. Interest: 15% per annum.
3. Security: Unregistered First Mortgage on the following properties: -
- (a) Lot 2, 33 Kurrara Street, Lansvale.
- (b) 80 Hotham Parade, Artarmon.
- Personal Guarantee from T.F. Yeung.''
On 8 February 1982 an instrument of mortgage was executed whereby the six co-owners mortgaged two of their properties to secure the repayment of $250,000 borrowed from Ozanu Pty. Ltd. Each of the members of the family personally executed the mortgage.
Mr Burns submitted that there was no evidence of a contract between the partnership and Ozanu Pty. Ltd. But apart from the letter of offer set out above there was the instrument of mortgage, executed by Ozanu Pty. Ltd. and by Dr and Mrs Yeung and the children, which acknowledged receipt of the loan and set out its terms. That is evidence of the making of the loan.
Mr Burns submitted that the children were too young to enter into a binding contract of loan. That may be so, but the issue is whether the partnership, as defined in sec. 6(1) of the Act, incurred a liability for interest. A debt for the interest to Ozanu Pty. Ltd. was incurred. Dr and Mrs Yeung were adults. And they acted for themselves and their children. In my opinion, the transaction was not totally void. As Lord Herschell L.C. said in
Lovell and Christmas v. Beauchamp (1894) A.C. 607 at p. 611 with respect to an analogous issue:
``The adult partner is, however, entitled to insist that the partnership assets shall be applied in payment of the liabilities of the partnership, and that until these are provided for no part of them shall be received by the infant partner....''
The instrument of mortgage was not void and the obligation recorded therein, though not enforceable personally against the infant co-owners, was enforceable against the land which comprised the income earning assets. In my opinion, the interest due to Ozanu Pty. Ltd. was incurred by the partnership, as defined by sec. 6(1) of the Act.
The liability for the interest which was incurred on the loan from Ozanu Pty. Ltd. was not of a capital nature. I therefore turn to the question whether the interest was incurred in gaining or producing the assessable income of the partnership or, on the other hand, was incurred for a purpose which did not have at its heart the gaining of assessable income.
It is established that, when looking at the deduction of interest under sec. 51(1) of the Act, what is relevant is the purpose for which the moneys borrowed were applied, that is to say, was that purpose directed to the earning of assessable income or was it directed to some other purpose.
In
Ure v. F.C. of T. 81 ATC 4100, Brennan J. said at p. 4104:
ATC 4203
``Section 51 requires that a deductible expenditure be incurred `in' gaining assessable income, that is to say, it must be incidental and relevant to the gaining of that income (
Ronpibon Tin N.L. & Tongkah Compound N.L. v. F.C. of T. (1949) 78 C.L.R. 47 at p. 56). An outgoing of interest may be incidental and relevant to the gaining of assessable income where the borrowed money is laid out for the purpose of gaining that income (
F.C. of T. v. Munro (1926) 38 C.L.R. 153 at pp. 170, 171, 197;
Texas Co. (Australasia) Ltd. v. F.C. of T. (1940) 63 C.L.R. 382 at p. 468). The laying out of the borrowed money for the purpose of gaining assessable income furnishes the required connection between the interest paid upon it by the taxpayer and the income derived by him from its use....
The purposes for which money is laid out is an issue of fact, turning upon the objective circumstances which human experience would judge to be relevant to the issue (cf.
Magna Alloys and Research Pty. Ltd. v. F.C. of T. 80 ATC 4542 at p. 4549).''
At p. 4109, Deane and Sheppard JJ. said:
``The question whether an outgoing should properly be seen as being wholly or in part `incidental and relevant' to the `end' of gaining or producing the assessable income and the question whether the outgoing is wholly or in part of a private or domestic nature are both questions of characterization. Where liability to make the outgoing has been voluntarily incurred, those questions of characterization will ordinarily be determined by reference to `the object' which the taxpayer had in view (Latham C.J.,
W. Nevill & Co. Limited v. F.C. of T. (1937) 56 C.L.R. 290 at p. 301), the `result aimed at' by the taxpayer (per McTiernan J., ibid. at p. 308) or `the advantage which the expenditure was intended to gain, directly or indirectly, for the taxpayer' (per Gibbs J.,
F.C. of T. v. South Australian Battery Makers Pty. Ltd. 78 ATC 4412 at p. 4420; (1978) 140 C.L.R. 645 at p. 660) in the context of the relevant facts and circumstances. In the ordinary case where the income which is expected to flow from an outgoing offers an obvious commercial explanation for incurring it the relevant characterization can readily be determined by reference to the gaining or producing of that income. In the more complex case however, where there is no such obvious commercial explanation, the solution of the problem of characterization must be derived from a weighing of the many aspects of the whole set of circumstances including direct and indirect objects and advantages which the taxpayer sought in making the outgoing. Some of those circumstances may point in one direction, some in the other. In such a case, as was said by the Privy Council in
B.P. Australia Limited v. F.C. of T. ((1965) 112 C.L.R. 386 at p. 397) in relation to the question whether a particular outgoing was of income or capital according to ordinary concepts, it is `a common sense appreciation of all the guiding features which must provide the ultimate answer'.''
See also
F.C. of T. v. Ilbery 81 ATC 4661 and
F.C. of T. v. Janmor Nominees Pty. Ltd., 87 ATC 4813.
I have already discussed what I perceive to be the purpose of the transaction so far as Dr and Mrs Yeung were concerned. So far as they were concerned, the giving of the notice on 1 July 1980 and the exchange of cheques which occurred on 4 February 1982 were not directed to the gaining of assessable income or even, it would seem, to making more cash available to Dr and Mrs Yeung, but rather to reducing the interest which each of the four children might be able to claim in the properties of which they were co-owners. As to the arrangement with Ozanu Pty. Ltd., which seems to have been developed at a time after the notice of 1 July 1980 had been given, I infer that it was intended to achieve what it did, namely, to reduce the net income of the partnership and to direct income to the new family trust structure of which Ozanu Pty. Ltd. was the trustee.
Thus, from the point of view of Dr and Mrs Yeung, who were the persons entitled to the net income of the partnership and who managed or guided the affairs of the partnership, the transaction was not directed to the gaining of assessable income but rather to reducing the capital of the partnership in which the children might claim an interest and also to reducing the net income of the partnership.
Mr Bathurst submitted, however, that the matter must be looked at from the point of view
ATC 4204
of the partnership, the net income of which is to be calculated by the Commissioner of Taxation as if the partnership were an individual: see sec. 90.Even so, the issue is not an easy one. In
Begg v. D.C. of T. (1937) 4 A.T.D. 257, executors of a deceased person's estate had obtained advances from a bank by way of overdraft, the purpose of the transaction being to obtain money with which to pay succession and estate duties and other outgoings, to provide legacies and to finance the estate generally so as to avoid sacrificing the assets by immediate sale. Reed A.J. held that the interest on the moneys borrowed was wholly and exclusively laid out and expended for the production of assessable income and incurred in the gaining and producing of assessable income. At p. 269, his Honour said:
``As I have already pointed out, one effect of the borrowings was to preserve most of the assets in the form in which they were at the testator's death. It is clear from the evidence that, if the executors had sold some of the assets to pay the duties, the income producing value of the estate must have dropped.''
On the other hand, a deduction has been disallowed where the interest has been incurred on money borrowed for use for private purposes, though the borrowing allowed the taxpayer to avoid the realisation of income producing assets. See e.g., Case 157
(1957) 9 T.B.R.D. 292; Case N59,
(1962) 13 T.B.R.D. 230 and Case 5,
(1950) 1 T.B.R.D. 9.
In the present case, the identification of a purpose of the partnership for which the borrowed money was laid out is not simple. The relevant cheque passed directly from Ozanu Pty. Ltd. to Dr Yeung's bank account.
I am prepared to accept that from the partnership's point of view, what occurred was that two of the partners decided to withdraw funds from the partnership. It does not materially matter whether those funds were loan funds or capital which the partners had invested in the properties. The notional payment out to Dr and Mrs Yeung and the borrowing of an amount from Ozanu Pty. Ltd. necessarily effected a change in the capital interests which each of the partners had in the partnership. What the partnership achieved by the borrowing from Ozanu Pty. was the maintenance of the income earning properties. Funds were withdrawn, but were replaced by loan funds and the income-earning properties remained held by the six members of the family.
In an income-earning enterprise, both income and equity capital may be invested in assets directed to the earning of income. In such an event, if equity capital is repaid and loan capital replaces it, interest payable on the loan capital will ordinarily be an allowable deduction from the income derived from the assets. This is because the assets held represent the equity and the loan capital and, if the assets are directed to the earning of income, then both the loan capital and the equity capital which they represent are devoted to the earning of assessable income.
A contrary view may seem to have been expressed in
F.C. of T. v. Sheil 87 ATC 4430. At p. 4439, Northrop, Spender and Gummow JJ. referred to an analogous circumstance in these terms:
``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.''
Their Honours nevertheless rejected the interest deduction for the reason stated at p. 4440:
``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.''
In my opinion, however, the case turned upon its own facts, which were much more complex than the present and which included the making of interest-free loans.
ATC 4205
In the present case, after the carrying through of the subject transaction, the funds borrowed from Ozanu Pty. Ltd. were represented in the properties owned and leased by the partnership. Therefore, in my opinion, the loan funds should be regarded as having been invested in those properties. As the properties were income earning assets, the conclusion follows, in my opinion, that the moneys are to be regarded as laid out for the purpose of gaining assessable income.
The Commissioner did not seek to attack the deduction on the footing that the interest payable to Ozanu Pty. Ltd. was inappropriately high. Even if an object of the arrangement was to reduce the net income of the partnership, that would not seem to affect the deductibility of the interest payable on moneys invested in income earning assets. See
Cevil Brothers Pty. Ltd. v. F.C. of T. (1964) 111 C.L.R. 430.
It follows that the partnership is entitled to the deductions sought of the interest incurred on the $250,000 borrowed from Ozanu Pty. Ltd.
For these reasons, therefore, the orders of the Court will be that:
- 1. The decisions on the objections relating to the individual interest of each of the applicants in the net income of the partnership ``Tai Fong Yeung and Others'' are affirmed.
- 2. The appeals are allowed with respect to the decisions on the objections relating to the interest incurred by the partnership to Ozanu Pty. Ltd.
- 3. The matter is remitted to the respondent to amend the assessments in accordance with the reasons for judgment of the Court.
- 4. Counsel may address the Court with respect to costs.
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