Federal Commissioner of Taxation v. Reed

Judges:
Foster J

Court:
Federal Court

Judgment date: Judgment handed down 6 December 1988.

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Foster J.

This is an appeal by the Commissioner of Taxation (``the Commissioner'') from a decision of the Taxation Appeals Division of the Administrative Appeals Tribunal constituted by a Senior Member [reported as Case U169, 87 ATC 967]. That decision upheld an application by the present respondent, Graham E. Reed (``the taxpayer''), for review of the Commissioner's decision disallowing the taxpayer's objections to assessments to income tax in respect of the years of income ending 30 June 1983 and 30 June 1984. The Senior Member varied the Commissioner's decisions in relation to those assessments and by holding that deductions claimed by the taxpayer for certain payments of interest were allowable under sec. 51(1) of the Income Tax Assessment Act 1936 (``the Act'').

The appeal is brought pursuant to sec. 44(1) of the Administrative Appeals Tribunal Act 1975 (``the AAT Act'') which provides that:.

``A party to a proceeding before the Tribunal may appeal to the Federal Court of Australia, on a question of law, from any decision of the Tribunal in that proceeding.''

The appeal thus provided is confined solely to questions of law. (
F.C. of T. v. Brixius 87 ATC 4963.) If the case on appeal discloses no question of law for determination, then the Court has no jurisdiction in the matter. In the present case the respondent taxpayer has, in fact, sought the dismissal of the proceedings for want of jurisdiction on the basis that no question of law exists for determination of the Court and that, if there be any error in the decision appealed from, it is on error of fact only.

It is convenient to set out the salient facts of the matter, as they appear from the decision appealed from, before considering questions raised in the notice of appeal, the notice of motion, and in argument.

The taxpayer has been a registered pharmacist for over 30 years. In 1963 he was the owner of a suburban pharmacy business in Sydney which he conducted in premises owned by himself. In that year he sold that business to his wife who, thereafter, continued to be the owner of it. The learned Senior Member found that ``the sale was intended (inter alia) to free the applicant from restrictions proposed by the then pending Pharmacy Act (No. 48 of 1964, N.S.W.) as to ownership of multiple pharmacies''. After the sale, the wife became the tenant of the taxpayer of the premises in which the business was conducted. The taxpayer became the employee of his wife. He was employed as ``manager'' of the business and, as such, had total control of the running of it. Apart from the day-to-day management of the business and attending to its operation as a pharmacy, he determined, from time to time, what rent should be paid to him by his wife and also what salary he should receive from her. As found by the Senior Member [at 87 ATC p. 968] his managerial role ``extended to power to determine how the net income generated by the business would be divided between them. That power was exercised by deciding what outgoings would be borne by the husband and what by the wife; and by deciding to what extent the wife would remunerate the husband for all his services''.

In 1979 some changes occurred. The business had undergone some competition from a nearby pharmacy which absorbed a significant portion of the business available in the area. The opportunity arose for the taxpayer and his wife to acquire this business and to amalgamate it with the existing business. The business was in fact purchased but, in order that this might be achieved, it was necessary that the taxpayer and his wife enter into certain borrowing arrangements. These borrowings were secured by a joint mortgage over their family home. In the first instance the amount of $70,000 was borrowed. Out of this amount an existing mortgage of $15,130 was discharged and the whole of the balance was used in paying the purchase price for the new business, which was purchased in the wife's name, in paying the wife's costs incidental to the purchase and in providing some working capital.

The wife obtained an assignment of the lease of the premises in which the business was conducted. The previous business was moved into the new premises to be amalgamated with the new business, thus creating an enlarged business owned, as before, by the wife. The premises owned by the taxpayer, in which the original business had been conducted, thereby became free for commercial letting to other persons. This was done, and was productive of income to the taxpayer.

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ATC 5017

The taxpayer continued to be employed as manager of the enlarged business. He continued to exercise the same total managerial control as previously described. In the relevant years of income, interest was paid to the mortgagee. After an appropriate allowance was made for such portion of the interest as was attributable to the amount of $15,130 used to discharge the previous mortgage, the balance of the interest was paid equally by the taxpayer and his wife. In July 1982 the mortgage was paid out by the raising of another mortgage for $75,000. The additional $5,000 was used by the taxpayer's wife in connection with the business. The arrangements as to payment of interest continued.

In the financial years in question the taxpayer claimed as deductions the amount of the interest thus paid by him. The amounts claimed were $3,429 for the fiscal year ending 30 June 1981 and $4,759 and $5,190 for the fiscal years of 1983 and 1984 respectively.

The amounts were claimed as deductions under sec. 51(1) of the Act. The Commissioner rejected the claims in toto on the basis that the outgoings of interest were not ``incurred in gaining or producing the assessable income'' of the taxpayer. Stated simply, the contention was that the taxpayer's payments of interest were made in relation to the business of his wife in respect of which he was merely an employee. There was no connection between the interest payment and the income of the taxpayer capable of bringing it within the section. It was also asserted that payments were of a private or domestic nature only.

The taxpayer objected to the disallowance of the interest payments and that the matter ultimately came before the Senior Member who held that the interest payments were deductible under sec. 51(1) of the Act. I shall refer to the Senior Member's reasons later in this judgment.

By his amended notice of appeal to this Court pursuant to the provisions of sec. 44 of the AAT Act the Commissioner seeks to raise the following matters as questions of law:

``(a) Whether the Tribunal has correctly interpreted and applied the provisions of s. 51(1) of the Income Tax Assessment Act 1936 (as amended) (`the Act') in finding that the respondent was entitled to a deduction in respect of interest paid during each year of income on moneys borrowed by the respondent and his wife jointly and wholly applied by the respondent's wife in the conduct of a pharmacy business owned by her and managed by the respondent.

(b) Whether the Tribunal in the interpretation and application of s. 51(1) of the Act was correct to exclude consideration of:

• (i) increase in the income of the respondent's wife; and
• (ii) reduction in the respondent's tax liability as purposes for which money was laid out.

(c) Whether the Tribunal was justified in excluding from consideration material in the respondent's tax returns in evidence before it.''

The notice also indicated the following grounds of appeal:

``GROUNDS

(a) The Tribunal erred in finding that the amounts of $3,429.00, $4,759.00 and $5,190.00 (`the amounts') were incurred by the respondent in gaining or producing assessable income by way of salary.

(b) The Tribunal erred in not finding that the amounts were outgoings of a capital, private or domestic nature within the meaning of s. 51(1) of the Income Tax Assessment Act 1936 as amended.

(c) The Tribunal erred in finding that the amounts were deductible from the salary income of the respondent pursuant to s. 51(1) of the Income Tax Assessment Act 1936 as amended.

(d) The Tribunal should have held that the respondent was not entitled to a deduction in respect of interest paid during each year of income.''

It was submitted on behalf of the taxpayer, in reliance upon F.C. of T. v. Brixius (supra) that the notice of appeal, so drawn, did not adequately raise any question of law for the determination of this Court.

In Brixius the Full Court (Forster, Fisher and Spender JJ. at p. 4967) adopted what had been said by the Full Court in
Brown v. Repatriation Commission (1985) 60 A.L.R. 289 at p. 291 in

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ATC 5018

respect of a section of the Repatriation Act 1920, which was in similar terms to sec. 44 of the AAT Act, namely, ``the existence of a question of Law is not merely a qualifying condition to ground an appeal from a decision of the Tribunal; rather, it and it alone is the subject matter of the appeal, and the ambit of the appeal is confined to it''.

The Court was also guided, as I am, by what Brennan J. said in
Waterford v. Commonwealth of Australia ((1987) 71 A.L.R. 673 at p. 689), in relation to sec. 44 of the AAT Act. His Honour said [at 87 ATC pp. 4967-4968]:

• ```A finding by the AAT on a matter of fact cannot be reviewed on appeal unless the finding is vitiated by an error of law. Section 44 of the AAT Act confers on a party to a proceeding before the AAT a right of appeal to the Federal Court of Australia `from any decision of the Tribunal in that proceeding' but only `on a question of law'. The error of law which an appellant must rely on to succeed must arise on the facts as the AAT has found them to be or it must vitiate the findings made or it must have led the AAT to omit to make a finding it was legally required to make. There is no error of law simply in making a wrong finding of fact. Therefore an appellant cannot supplement the record by adducing fresh evidence merely in order to demonstrate an error of fact. As the purpose for which a document is brought into existence is a question of fact (per Jacobs J. in
  Grant v. Downs (C.L.R. at p. 692)), the contents of document 29 are immaterial to the question whether the AAT has made an error of law on the material before it.

Lord Radcliffe in
Edwards (Inspector of Taxes) v. Bairstow (1956) A.C. 14 at p. 38 said in the context of an income tax appeal:

• `... by the system that has been set up the commissioners are the first tribunal to try an appeal, and in the interests of the efficient administration of justice their decisions can only be upset on appeal if they have been positively wrong in law. The court is not a second opinion, where there is reasonable ground for the first.

Notwithstanding the fact that there is no limit on the power of a Full Court of this Court to review a decision of a single judge of the Supreme Court in income tax matters under sec. 200 of the Act (and now of a single judge of this Court), in our opinion we are bound to accept a limitation when the appeal comes from the Tribunal. It is perhaps incongruous that there exists this limitation when it is the taxpayer who has the option whether to seek a review of the Commissioner's decision by the Tribunal or to have his or her appeal heard by a single judge of this Court. This circumstance however does not justify an attempt, in the words of Davies L.J. (as he then was) in
R. v. Industrial Injuries Commission; Ex parte Amalgamated Engineering Union (No. 2) (1966) 2 Q.B. 31 at p. 50, `to magnify or inflate questions of fact into questions of law...'

The question therefore which arises at the outset is whether the Commissioner is contending that the finding of the Tribunal is vitiated by an error of law. If not, this Court has no jurisdiction. Brennan J. indicated in Waterford's case at p. 689 the nature of such an error in that it `must arise on the facts as the AAT has found them to be, or it must vitiate the findings made or it must have led the AAT to omit to make a finding it was legally required to make'. As he then said, `There is no error of law simply in making a wrong finding of fact.'''

In relation specifically to sec. 51(1) of the Act the Full Court said (at p. 4968):

``As a matter of law the question for determination on the first limb of sec. 51(1) is whether the outgoing has the necessary relation to the gaining of assessable income, that is, has it the essential character of an outgoing incurred in gaining such income? The Tribunal correctly identified this principle and the Commissioner did not contend to the contrary. Its task was then to apply the law to the facts as found. The application of sec. 51(1) in this manner is in the varied circumstances of each case very much a matter of fact and degree. These factors were so stated by Wilson J. who gave the principal judgment of the majority of the High Court in
F.C. of T. v. Forsyth 81 ATC 4157; (1980) 148 C.L.R. 203. He said at ATC p. 4161; C.L.R. p. 210:

• `The proper construction of sec. 51 has been discussed by this Court in a number

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  ATC 5019

  of cases, and I think it is fair to say that its application in the circumstances of each case remains very much a matter of fact and degree.'''

It is thus completely clear that a complaint that the Tribunal has incorrectly applied correctly ascertained principles of law to the facts of the case, is a complaint as to an error of fact and not as to an error of law. When this is borne in mind, it is apparent that the grounds set out in the present notice of appeal complain only of errors of fact and not of errors of law. Also question of law (a) does not assert any relevant error of law in that it does not set out, in terms, the incorrect interpretation of the section that it refers to. An incorrect application of the section, correctly interpreted, would produce no error of law.

However, questions (b) and (c), although exiguously expressed, appear to assert errors of law, in that they claim that the Tribunal, in determining the matter, totally excluded from consideration matters which were necessarily relevant to its considerations. In fact, this was the way, and the only way, in which counsel for the Commissioner submitted that error of law had occurred in the instant case.

As the submissions relating to question (b) depend ultimately upon the meaning to be attributed to a passage in the Senior Member's reasons for judgment, it is prudent to recall at the outset that it has not infrequently been stated in this Court that a reasonably liberal approach should be taken to the construction of language used in judgments of the Tribunal. As was said (per Morling and Wilcox JJ.) in
Times Consultants v. Collector of Customs (1976) A.L.R. 313 at p. 328, ``The Tribunal is an administrative body and, whilst errors of law made by it are susceptible to correction by this Court, its decision should not be too closely scrutinised for the purpose of searching for errors of law in what may be imprecise language''. (See also
Blackwood Hodge (Australia) Pty. Ltd. v. Collector of Customs (1947) F.L.R. 131 at pp. 143 and 145.)

Counsel for the Commissioner, in relation to question of law (b), based his argument upon the decision of the Full Court of this Court in
Ure v. F.C. of T. 81 ATC 4100; (1981) 50 F.L.R. 219. In that case the (simplified) facts were that the taxpayer had borrowed money at an interest rate of 12½% per annum, and lent the money to his wife and to a family company at an interest rate of 1% per annum. He claimed a deduction for the interest paid by him. The Commissioner did not totally disallow the claim for interest but allowed only an amount equivalent to the amount returned to the taxpayer by way of interest derived from the onlending. In so doing, he purported to apportion the amount of interest claimed as a deduction into a part which could properly be described as being outlaid in gaining assessable income within the meaning of the section and into the remaining part which could only properly be described as relating to private or domestic concerns. This approach was held to be correct at first instance in the Supreme Court of N.S.W. (Lee J.) and was confirmed in the Full Court of this Court. It is, in my view, worthy of note that Ure was a case in which the Commissioner was prepared to allow, by way of apportionment, part of the deduction claimed. It was not a case, as is this, where the deduction had been totally denied.

Both before the learned Senior Member and before me, the Commissioner relied upon a lengthy passage from the judgment of Brennan J. (at ATC p. 4104; F.L.R. pp. 223-224). The passage, so far as relevant, reads as follows:

``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. v. F.C. of T. (1949) 78 C.L.R. 47 at p. 56). An outgoing of interests 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.

In the present case a question arises as to whether it can truly be said that the incurring of interest charges at rates of 7.5%, 8.5%, 10% and 12.5% per annum is incidental to the gaining of income by way of interest at the rate of 1% per annum. The answer to that question does not turn directly upon the disparity in interest rates,

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ATC 5020

but upon an examination of the purposes for which the money was laid out. The disparity in interest rates is itself eloquent to suggest the existence of purposes ulterior to the earning of interest at the rate of 1% per annum, and the evidence confirms the existence of further purposes.

... where a question arises as to the purpose for which money is laid out by a taxpayer, it is erroneous to exclude as irrelevant evidence of the use of that money, albeit by others, in conformity with arrangements made by the taxpayer. That is not to deny the separate identity of those who use the borrowed money, not to attribute vicariously to the taxpayer the activities of others. It is simply to take some relevant factors into account in determining the purposes for which money is laid out. Those purposes do not depend upon the state of the taxpayer's mind but upon what the taxpayer in the circumstances of the case is ascertained to have done in using and arranging for the use of the borrowed moneys.

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 & Research Pty. Ltd. v. F.C. of T. 80 ATC 4542 at p. 4549; (1980) 49 F.L.R. 183). In the present case, there is an air of unreality about the proposition that the borrowed moneys were laid out wholly for the purpose of earning a return of 1% per annum. Rather is it right to say that the purpose for which the borrowed moneys were laid out included all the purposes earlier mentioned, only one of which was to earn a return of 1% per annum.

If the borrowed moneys had been laid out solely for the purpose of gaining assessable income, the interest would be wholly deductible; but as they were laid out in part for that purpose, and in part for other purposes, the interest charges must be apportioned. They are items of expenditure of the kind secondly described in the following passage in the judgment of the High Court in Ronpibon Tin N.L. v. F.C. of T. (supra at p. 59):

• `It is perhaps desirable to remark that there are at least two kinds of items of expenditure that require apportionment. One kind consists in undivided items of expenditure in respect of things or services of which distinct and severable parts are devoted to gaining or producing assessable income and distinct and severable parts to some other cause. In such cases it may be possible to divide the expenditure in accordance with the applications which have been made of the things or services. The other kind of apportionable items consists in those involving a single outlay or charge which serves both objects indifferently. Of this directors' fees may be an example. With the latter kind there must be some fair and reasonable assessment of the extent of the relation of the outlay to assessable income. It is an indiscriminate sum apportionable, but hardly capable of arithmetical or ratable division because it is common to both objects.'''

The following passages from the judgment of Deane and Sheppard JJ. are also of significance in the present context. Their Honours say (at ATC p. 4108 et seq.: F.L.R. p. 230 et seq.):

``In considering the deductibility, pursuant to sec. 51(1), of the interest paid by the taxpayer, it is important to be mindful of the fact that an outgoing which is claimed to have been incurred in earning assessable income is only deductible, pursuant to the subsection, `to the extent to which' it was so incurred and `to the extent to which' it cannot properly be characterized as being of a private or domestic nature. Where an outgoing was partially so incurred or should be partially so characterized, the subsection requires apportionment between what, not being of a private or domestic nature, should properly be regarded as incurred in earning the assessable income and what should not.

...

In the present case... there is neither... suggestion of anticipation or hope of income being derived by the taxpayer either in another form or by way of interest at a higher rate. The money was borrowed by the taxpayer at rates of interest of up to 12.5% per annum with the object of being lent at a rate of interest of 1% per annum. The explanation of the lending at the lower

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ATC 5021

rate is to be found in private and domestic considerations. These included the provision of financial benefits to the taxpayer's wife and to a family trust, the provision, in the case of the first and second loans, of a residence for the taxpayer and his family and the reduction of the taxpayer's taxable income.

...

In Ronpibon Tin N.L. & Tongkah Compound N.L. v. F.C. of T. ((1949) 78 C.L.R. 47 at pp. 56-57) the Full Court of the High Court of Australia provided guidance on the meaning of the words `incurred in gaining or producing the assessable income' in the context of sec. 51(1) of the Act. Their Honours said: `For the expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to that end...'

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. Ltd. 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 Ltd. 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'.

In a case such as the present where the outgoing claimed as a deduction is interest paid on borrowed money, one cannot ordinarily look to the direct object or advantage which the outgoing was intended to achieve for the reason that that will ordinarily be the receipt of the borrowed money which is likely to be neutral in character. One must, of necessity, look more to the objects or advantages which the application and use of the borrowed money were intended to gain F.C. of T. v. Munro (1926) 38 C.L.R. 153 at p. 197)...

One of the most difficult aspects of the problem of characterizing an outgoing is the assessment of what, if any, weight is to be given to indirect objects which a taxpayer had in mind in incurring the outgoing. Such objects form part of the relevant circumstances by reference to which the problem of characterization must be resolved. There is however no rigid principle which can be applied in determining what, if any, weight should be given to them.''

Their Honours after a consideration of the facts of the case and the objects of the taxpayer in relation to the payment of the interest sought to be deducted, say (at ATC p. 4110; F.L.R. p. 233):

``In the result, the outlays of interest can be seen as servicing a number of objects indifferently. The predominant, though indirect, objects were not concerned with earning assessable income for the taxpayer but were, for the purposes of sec. 51(1), of a private and domestic nature. The object of earning assessable income in the form of interest was present in a subordinate role. If,

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ATC 5022

in these circumstances, apportionment were not possible and it were necessary to give a single characterization to the whole of the interest which was paid, we would conclude that the interest could not be characterized as having been incurred in earning assessable income and that its primary characterization was as being of a private or domestic character. It is however established that apportionment is, in these circumstances not only permissible but required.

In Ronpibon Tin N.L. & Tongkah Compound N.L. v. F.C. of T. (supra, at p. 59), their Honours said:

• `But the provision contained in s. 51(1), as has been already said, contemplates apportionment. The question what expenditure is incurred in gaining or producing assessable income is reduced to a question of fact when once the legal standard or criterion is ascertained and understood.'''

It is against these statements of principle that counsel for the Commissioner submits that an error of law requiring correction arises in this case. In evaluating this submission it is necessary to turn to passages of the judgment of the learned Senior Member. In so doing, it should be noted that he had regard to Ure's case and, indeed, set out in his reasons most of the passages from the judgment of Brennan J., to which I have made reference above.

The Senior Member made findings of fact as follows [at 87 ATC p. 970]:

``14. As the evidence was presented I find that the husband did seek financial advantage out of the arrangements with his wife. He expected, as she did, that the reconstituted business would be more profitable and that he would participate in that increased profit in that he would receive increased remuneration at a rate to be determined by him. That expectation was fulfilled. In addition, he expected that he would be able to obtain a higher rental for his own premises from a family-related trust which on-let to strangers than he had drawn from his wife in the past. That expectation was also fulfilled. The latter factor was significant because the rapid and substantial increases in rental income caused that source of income in some years to be more productive of income for the husband than ownership of the business was for the wife, even though major expenses, such as interest and rent, had been borne by the husband...

22. I accept the evidence of the applicant that the arrangements given effect to between the joint mortgagors permitting one to have the use of the moneys borrowed while each accepted liability was an arrangement which took effect in the context of the totality of the arrangements between them. I accept that it was arranged with a degree of informality appropriate to the matrimonial relationship which subsisted between them. The arrangement was that, in their mutual interest and with a view to the well-being of the family, the wife would own the business and the husband would manage it; that they would jointly borrow moneys to be wholly used by the wife in order to expand the business she owned; that the husband would exercise the widest powers in the management of the business in its original and in its expanded form: that it was to be expected that the expanded business would be more profitable; and that the rewards to be paid to the husband for his services in the management of that expanded business would be increased in a manner to be determined.''

The learned Senior Member continued:

``23. In my view this case is not like either Munro (ante) or Ure (ante). In Munro, in so far as shares were gifted to the sons, there was no financial benefit in prospect for the father, let alone the prospect for the father, let alone the prospect of the derivation of assessable income. In Ure the only prospect of financial benefit by way of assessable income to the lender was the prospect of receiving interest at the rate of 1% per annum. For this applicant there was no such limitation or, subject to what I have said in para. 10 to 13 (ante), any other which would make the outlay disproportionate to any return there might be. Nor, in my view, does it matter that (inter alia) the applicant was motivated to assist his wife to increase her income or even to reduce the level of his income tax liability below what it might have been had he purchased the new business and operated it himself. Unlike Munro (ante) he was not making a `gift' of the moneys borrowed and

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ATC 5023

unlike Ure (ante) he was not making a `gift' - without reward or income return to himself - of the interest on the moneys borrowed.''

On the basis of these findings, it was held that the applicant was entitled to succeed. It is submitted on behalf of the Commissioner that that portion of the passage cited above in which the Senior Member asserts that motivation on the part of the taxpayer to assist his wife to increase her income or to reduce the level of his own income tax liability did not matter, indicates error of law calling for correction by this Court.

In the notice of appeal the form of correction sought is the setting aside of the Tribunal's decision and the confirmation of the assessments. This could be the appropriate form of relief only if this Court were satisfied that the deduction should be disallowed in toto. In his oral submissions, counsel for the Commissioner sought, additionally, in the event that the Court did not conclude that none of the amounts claimed were deductible, that the matter be returned to the Tribunal for further consideration. Apparently it was envisaged that, in this eventuality, some argument could be put to the Tribunal that apportionment should take place. I consider that the Commissioner is in considerable difficulty in this regard. The assessments did not proceed on the basis of apportionment. Apportionment was not argued before the Tribunal and, although the matter was raised in discussion during submissions before me, it was positively asserted by counsel for the Commissioner that he was not in a position to ``urge an apportionment''. I note also that the Senior Member, in his reasons, noted that he approached ``the resolution of the matter on the basis that if the arguments presented for the Commissioner failed, the applicant is entitled in full to the deductions he claimed''.

In light of this I consider that the only possible approach for the Court to adopt is that the Commissioner must succeed or fail in this appeal on the basis of the establishment of a right in law, on the facts as found by the Senior Member, to the disallowance, in toto, of the deductions claimed.

On this aspect of the case, the Commissioner submits that error of law, sufficient to found jurisdiction and require correction has come about in two alternative ways. Firstly, it is sought to avoid the obvious difficulty that arises from the circumstances that the learned Senior Member has in his judgment set out the relevant passages from Ure's case and then proceeded to apply them to the facts, by advancing an argument based upon the passage in the Ronpibon case, cited above, which requires that the relevant legal principles be ascertained and ``understood''. It is put that the Senior Member, although accurately citing the relevant principles, did not truly understand them and, consequently, committed legal error in applying them. In essence, the argument is that Ure's case required, in determining the deductibility or otherwise of the interest payments made by the taxpayer, that as a matter of law consideration be given to other purposes served by the making of the payments over and above the gaining or producing of assessable income. In particular, it is said that the Tribunal should have considered the effect upon the characterisation of the interest outgoing of the purposes of increasing the income of the wife from the pharmacy business and the reduction of the taxpayer's own taxation liability. It is then asserted that the passage, already cited above, namely that it did not ``matter that (inter alia) the applicant was motivated to assist his wife to increase her income or even to reduce the level of his income tax liability below what it might have been had he purchased the new business and operated it himself'' indicates that, in undertaking the characterisation exercise, the Senior Member erroneously excluded these relevant matters from consideration.

I consider that this argument fails in limine, as I am quite unable to read the passage as indicating that the matters referred to therein were being totally excluded from consideration. The passage is not without some ambiguity, and doubtless it could have been more clearly expressed, but in the context in which it appears I am firmly of the view that it signifies no more than that the Tribunal was finding, as a matter of fact, that, in the whole of the circumstances, these considerations did not require that the interest outgoings be characterised as private or domestic only or that they were otherwise unconnected with the gaining or producing of assessable income. I am therefore satisfied that the first argument

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ATC 5024

demonstrates no error of law in the Tribunal's reasons.

The next argument, as I understand it, accepts that the passage relied upon indicates no more than findings of fact as to the insignificance of the matters referred to. The submission is then made that the effect of the finding of such purposes can never be insignificant but, on the contrary, must be determinative, as a matter of law of the non-deductibility of the interest outgoings. In other words, once the Tribunal had found the existence of such purposes relating to the interest outgoing, it was required, ipso facto, to deny deductibility to the whole of the outgoing.

This submission could well encounter difficulties arising from the use of the word ``motivated'' in the passage relied on. Indeed the passage may have its genesis in a discussion that took place during the hearing before the learned Senior Member and which is recorded at pp. 124-125 of the Appeal papers, where the Commissioner's representative appears to have conceded that personal motivations in relation to the business arrangements instituted between the taxpayer and his wife did not have ``much to do'' with entitlement to the deductions claimed. I refer also to distinctions drawn between ``motive'' and ``objective purpose'' by Brennan J. in Magna Alloys and Research Pty. Ltd. v. F.C. of T. ((1949) F.L.R. 183 at p. 185). In light of those distinctions it may well be that the passage relied upon is not capable of supporting legal argument based upon ``ulterior purposes''.

In the event, I do not find it necessary to consider these matters.

I am quite satisfied that Ure's case is not authority for this wide proposition of law, particularly in circumstances where no apportionment has been sought to be applied and the only issue is the deductibility or non-deductibility of the whole of the relevant outgoing. The passages cited above from the judgments in the case, in my view, clearly indicate that the effect upon deductibility of ``ulterior purposes'' is a question of fact to be determined in the whole of the circumstances of each individual case. I also observe that, if the principle contended for were in fact the law, then the Full Court cases of
F.C. of T. v. Total Holdings (Australia) Pty. Limited (1943) F.L.R. 217 and Magna Alloys and Research Pty. Ltd. v. F.C. of T. (1949) F.L.R. 183 could not have been decided in the manner that they were.

I therefore reject the applicants submissions in relation to questions of law (b)(i) and (ii) on the basis that the findings sought to be attacked were findings of fact only and not decisions of law; and, also, on the basis that the submission that, upon the facts found, the interest outgoings should have been held, as a matter of law, to be non-deductible, has not been made out. I note, however, that this latter submission did raise a question of law for determination on appeal.

The Commissioner finally submits, in conformity with question of law (c) in the notice of appeal that an error of law occurred in the proceedings before the Tribunal through failure on the part of the learned Senior Member to take into account at all the payment of rent on the business premises by the taxpayer in the fiscal years 1981 and 1983. It was submitted that this amounted to a failure to take into account relevant material. The rental payments were said to be relevant in so far as they resulted in the taxpayer receiving in the respective years of income in which they were paid a disproportionately small amount from the overall earnings of the business in comparison with that received by his wife. It was put that this disproportion would have been relevant to the Tribunal's deliberations in so far as the Senior Member, in the absence of taking it into account, had found in the passage referred to above from para. 23 of his reasons that there was no ``other (limitation) which would make the outlay (of interest) disproportionate to any return there might be''. It is submitted that had the Tribunal taken the rental payments into account it would not have been able to make this finding.

Two things should be noted. Firstly the statement as to disproportion occurs in a paragraph the main thrust of which is to contrast the case for decision with the cases of Munro and of Ure. What I understand the Senior Member to be saying in relation to Ure's case is that the arrangements entered into by the taxpayer in the present case provided him, through his managerial control of the business, with far greater prospects of earning income than in the Ure situation where the taxpayer could earn only 1% per annum on money which he had borrowed at rates up to 12.5%.

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ATC 5025

Secondly the Tribunal indicated that what was said was subject to the material in para. 10 to 13 of the reasons, which paragraphs dealt with the question of these rental payments made by the taxpayer. In those paragraphs the Senior Member points to the fact that the rental payments had not been the subject of any submissions during the course of the hearing and had been discovered by him only when, in the course of considering the matter thereafter, he had found them in the taxpayer's tax returns which had been tendered in evidence. He also notes that the rental payments had been allowed as deductions in the years in question although, consistently with the Commissioner's arguments advanced in relation to the interest payments, namely that they were paid in respect of the business owned by the wife with the consequence that there was no sufficient nexus with the taxpayer's earnings, the Commissioner should have disallowed them.

The Senior Member (in para. 12 of his reasons) indicated that he proposed ``as a matter of fairness'', to exclude from consideration the effect of the rental payments upon the taxpayer's situation.

It is quite clear that he adopted this course because of the way the matter had arisen and the way the parties had chosen to deal with it. Upon his discovering the matter he had in fact brought the parties back before him to discuss the position. The discussion is recorded in transcript which is reproduced at pp. 119-123 of the appeal papers. In my view, ample opportunity was given in that discussion for the raising of this argument. It was not raised and there was general agreement that the Tribunal should finalise its considerations of the matter without regard to the rental payments.

It is quite clear, in my view, that had the matter been raised in the hearing or had the Commissioner sought to have the hearing reopened so that it could be dealt with as an issue in the case, then both sides would have had the oportunity to call evidence in relation to the payments and to have made submissions as to their significance. As this was not done, I consider that, in accordance with principle, the matter cannot be raised on appeal.

Accordingly I reject the Commissioner's submissions as to this aspect of the appeal.

Accordingly the appeal must be dismissed. As a question of law emerged which could have been determinative of the appeal, I also dismiss the respondent's motion. I do not think, however, that this should affect the overall question of costs, which should be awarded to the respondent taxpayer.

Accordingly, I order that:

1. The appeal be dismissed with costs.

2. The respondent's motion be dismissed with no order as to costs.