FC of T v BROWN

Judges:
Lee J
RD Nicholson J
Merkel J

Court:
Full Federal Court

MEDIA NEUTRAL CITATION: [1999] FCA 721

Judgment date: 3 June 1999

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Lee, RD Nicholson and Merkel JJ

Introduction

1. The present appeal involves a claim by the respondent, Mr John Joseph Brown (``the taxpayer''), to be entitled to allowable deductions under s 51(1) of the Income Tax Assessment Act 1936 (Cth) (``the Act'') for his proportion of interest paid during the 1993 and 1994 financial years by a partnership, comprising Mr Brown and his wife, on moneys lent by their Bank to the partnership to enable it to acquire and conduct a delicatessen business. The issue arising on the appeal is whether interest paid by the partnership on the balance of the moneys lent by the Bank after the sale of the delicatessen business, and therefore after the cessation of the partnership business, continued to be an allowable deduction under s 51(1) of the Act.

2. The appellant, the Commissioner of Taxation (``the Commissioner''), disallowed the taxpayer's objections against assessments of income tax for the financial years ended 30 June 1993 and 30 June 1994. The basis of the objections was that the interest payments made by the partnership during those two years ought to have been allowed as deductions from the gross income of the partnership with a resultant increase in the taxpayer's share of the partnership losses under s 92(2) of the Act. The taxpayer ``appealed'' to the Court under s 14ZZ(a) of the Taxation Administration Act 1953 (Cth) in respect of each disallowance. The two ``appeals'', which were consolidated, were heard and determined by the learned primary judge, Carr J [98 ATC 4695]. His Honour allowed the taxpayer's ``appeals'' and ordered that the Commissioner's decision to disallow the objections be set aside and, in lieu thereof, the taxpayer's objections to the disallowance of the deductions claimed in respect of interest during the two years of income be allowed. Each matter was remitted to the Commissioner for reassessment accordingly.

3. The Commissioner has appealed against the judgment of his Honour on the ground that his Honour erred in law in finding that the interest payments were necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income and were therefore allowable deductions. The Commissioner seeks orders that the appeal be allowed and that his decisions disallowing the taxpayer's objections to his assessments for the relevant years be confirmed.

Factual background

4. The facts were not in dispute. The relevant facts were stated by his Honour as follows [at 4697]:

``... Since approximately 1 July 1987 the applicant and his wife have traded together in partnership under the name or style of `J.J. & J.E. Brown' (`the Partnership'). Until November 1988 the sole business activity of the Partnership was growing orchids. The parties have agreed that, for the purposes of this appeal, the applicant will not rely on the fact that he and his wife at all material times conducted the business of growing orchids. In November 1988 the applicant and his wife as partners, borrowed the sum of $105,000 from the Rural and Industries Bank of Western Australia (`the Bank loan') to fund the purchase by them of a delicatessen in Claremont, a suburb of Perth. The assets so purchased comprised

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ATC 4602

goodwill, fixtures, plant and stock-in-trade. The delicatessen was conducted on leasehold premises. The balance of the term of the lease was assigned to the applicant and his wife. The applicant and his wife conducted the orchid business and the delicatessen business as entirely separate businesses. The Bank loan was applied solely in the purchase of the delicatessen business. The terms of the loan required the applicant and his wife to make 120 monthly repayments of $1832 comprising both principal and interest. The payments commenced on 28 December 1988. In each of the income years ended 30 June 1989 and 1990 the applicant and his wife, as partners, made payments of interest in respect of the loan. In the Partnership income tax returns for those years, those interest payments were claimed and allowed as deductions under s 51(1) of the Act. In turn, the applicant's income tax for those years was assessed on the basis that those interest payments were allowable deductions to the Partnership. The Partnership's income tax returns were processed under the `self assessment' regime, that is, the assessments were made solely from the information contained in the income tax returns lodged by the Partnership. Those returns were not subjected to examination or audit by the respondent. The same applied to any relevant assessments made in relation to the applicant's income. In or about March 1990 the applicant and his wife sold the delicatessen business for $65,000. They applied the net proceeds of the sale in reduction of the Bank loan, but a balance of $42,174.71 remained outstanding. They continued to pay interest on that balance as reduced by some payments of principal. The Bank loan was repaid in full on 3 July 1995. Particulars of interest paid by the applicant and his wife in respect of the Bank loan during the financial years ended 30 June 1991 to 30 June 1995 were as follows:

Financial Year      Amount
    1991           $7405.07
    1992           $6430.51
    1993           $4193.54
    1994           $3752.64
    1995           $2381.81
          

These amounts were not claimed as deductions in either the Partnership's or the applicant's returns of income for the above years. The applicant's income for the years ended 30 June 1993 and 30 June 1994 was assessed on the basis that his share of the Partnership losses in those years was to be calculated as in the returns filed by the Partnership i.e. no deductions in respect of his share of the above interest payments. On 24 November 1995 the applicant objected to those assessments. The basis of those objections was that the abovementioned interest payments ought to have been allowed as deductions from the gross income of the Partnership with a resultant increase in the applicant's share of the Partnership losses under s 92(2) of the Act. [ The taxpayer now believed the amounts were deductible pursuant to a recent decision of this Court in
Placer Pacific Management Pty Ltd v FC of T 95 ATC 4459.] On 18 November 1996 the respondent disallowed those objections.''

5. We have two concerns about the manner in which the matter proceeded before his Honour. The first relates to the agreement between the parties, accepted by his Honour, that for the purposes of the appeals, the taxpayer would not rely upon the evidence before the Court to the effect that he and his wife at all material times also claim to have been conducting a partnership business of growing orchids. Although the orchid growing activities were on a relatively small scale, the partnership tax returns disclose that the orchid and delicatessen ``businesses'' were each conducted as part of the business of the partnership.

6. The consequence of the agreement between the parties was that the partnership business was to be treated as being at an end when the delicatessen business was sold, notwithstanding that the taxpayer was claiming that the partnership's orchid growing ``business'' continued. In our view the proper way to approach the agreement, in the events that have occurred, is to treat the taxpayer as having agreed, for the purpose of the appeals, not to rely on the evidence before the Court that there was any partnership business other than the delicatessen business. Consequently, the Court was requested by the parties to disregard any evidence before it in relation to the conduct, by the taxpayer and his wife, of the alleged partnership ``business'' of growing orchids.

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ATC 4603

7. In these circumstances his Honour was entitled to disregard, as he did, any evidence that there was any business carried on by the partnership other than the delicatessen business. Whether that situation will raise questions of issue estoppel is not a matter requiring consideration in these proceedings: see
Hoysted v FC of T (1925) 37 CLR 290 cf
Broken Hill Co Pty Ltd v Broken Hill Municipal Council (1925) 37 CLR 284 and
Caffoor v Commissioner of Income Tax, Colombo [1961] AC 584 at 600-601.

8. The second concern relates to the terms of the Bank loan agreement entered into by the partnership, which were not disputed by the Commissioner. Those terms did not provide for early repayment of the loan which was for a ten year term with 120 monthly repayments of principal and interest. Unlike the situation with the orchid growing activities of the partnership his Honour was not asked to disregard the loan agreement. Rather, he was required to act upon the basis of the undisputed evidence concerning the terms of that agreement. In the reasons for judgment, it was accurately described as imposing a ``binding legal commitment'' on the part of the taxpayer and his wife to make 120 monthly repayments of $1,832, comprising both principal and interest, commencing on 28 December 1988.

9. At the outset of the hearing before his Honour counsel for the taxpayer asserted that the ``loan agreement allowed for early repayment without any penalty''. On the appeal, when asked to explain the basis for this assertion Mr McCusker QC, senior counsel for the taxpayer, said:

``The other agreed fact for the purpose of the appeal was that there could be at any time a payment of all or part of the loan from the bank as a repayment without any penalty.

Merkel J: That was a term of the loan contract.

Mr McCusker: I don't know whether it was agreed it was a term of the loan contract. I'm not sure, your Honour, that it would necessarily need to be, as long as the loan contract didn't provide for a penalty. There is at least a reasonable argument that at law there was an entitlement to pay out at any time unless there was a provision to the contrary. Anyway, the point, became moot because of the agreement.''

10. Accordingly, the Commissioner contended, both before his Honour and the Full Court, that the loan agreement allowed repayment of the loan at any time, without penalty, by the taxpayer and his wife. It is not altogether clear whether, and if so to what extent, his Honour was prepared to act on the basis of the assertion of the taxpayer's counsel. It appears from his reasons that his Honour was prepared to infer that when the business was sold, the Bank agreed to permit the taxpayer and his wife to repay the loan without incurring penalty interest. Elsewhere his Honour stated as a ``circumstance'' that the loan was able to be repaid at any time without any penalty interest. However, it was central to his Honour's decision that under the terms of the loan agreement the taxpayer and his wife had a legal liability to pay interest for ten years.

11. The Court is required to act on the evidence before it. Whilst agreed facts will usually be treated as part of the evidence, it is imperative that the facts which are agreed be accurately and clearly stated. That has not occurred with respect to the loan agreement. Indeed, it is difficult to define with any precision what the so-called ``agreed facts'' are. Before his Honour an early right of repayment was asserted by the taxpayer's counsel but was not presented to his Honour as an ``agreed fact''. On the appeal senior counsel for the taxpayer suggested that the basis for the ``agreed fact'' is that there is a reasonable argument at law that the loan may be repaid at any time unless there is a provision to the contrary. The problem with that view is that the loan agreement expressly provides that the principal, together with interest, was repayable over ten years with no provision for early repayment of principal.

12. In these circumstances the Court should approach the appeal on the basis of the undisputed evidence before the trial judge that there was no entitlement under the terms of the loan agreement to repay the loan prior to its term without the prior agreement of the Bank. We are prepared to infer that the Bank's acceptance of partial repayment of the loan upon the sale of the business constituted its agreement on that occasion to permit repayment of the loan without penalty interest. For the purposes of the appeal, we are also prepared to

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ATC 4604

assume in the Commissioner's favour that, as a matter of practicality rather than legal obligation, the Bank was prepared to allow early repayment, without penalty, if requested to do so. It is likely that his Honour made a similar assumption. Indeed, that is what occurred when the loan was finally repaid on 3 July 1995.

The decision of the primary judge

13. His Honour concluded that the occasion for the loss, being the payments of interest during the 1993 and 1994 financial years, was to be found in the Bank loan agreement which constituted a binding legal commitment on the part of the taxpayer and his wife to make the interest payments in the relevant financial years. His Honour found that the Bank loan was inextricably linked to the acquisition and carrying on of the delicatessen business for the purpose of gaining or producing assessable income. Accordingly, there was a sufficient connection between the occasion for the payment of interest and in the carrying on by the partnership of the delicatessen business for the purpose of producing assessable income, to result in the interest being an allowable deduction under s 51(1). Relying upon
AGC (Advances) Ltd v FC of T 75 ATC 4057; (1975) 132 CLR 175,
FC of T v Riverside Road Pty Ltd (in liq) 90 ATC 4567; (1990) 23 FCR 305 and
Placer Pacific Management Pty Ltd v FC of T 95 ATC 4459, his Honour concluded that those findings were sufficient to entitle the taxpayer to the interest as allowable deductions under the ``second limb'' of s 51(1) notwithstanding the prior sale and cessation of the partnership business.

14. His Honour rejected the Commissioner's contention that the occasion of each outgoing of interest was the monthly payment (which included interest) voluntarily elected to be made during the 1993 and 1994 financial years when the taxpayer and his wife chose to pay the accrued interest after they had ceased to carry on the partnership business.

Contentions of the parties

15. The Commissioner disputed his Honour's conclusion that the occasion of the payment of interest was to be found in the carrying on of the partnership business. Rather, he contended that the occasion of the outgoing was to be found in the circumstances concurrent with the accrual of the liability to pay interest which arose on each recurring monthly interest date. Approaching the matter in that way, the Commissioner submitted that once the business had ceased, the payment of the relevant outgoing was not to be found in the carrying on of the business but was to be found in the voluntary decision of the partnership not to repay the loan and to continue to pay interest instalments. Thus, so it was said, after the sale of the business the nexus between the carrying on of the business and the payment of the relevant outgoings had been broken.

16. An alternative submission of the Commissioner was that, even if the occasion of the outgoing was to be found in the entry into the original Bank loan rather than payment of interest from month to month, after the business was sold the occasion of the outgoing was no longer to be found in the carrying on of the relevant business. Rather, so it was said, it was to be found in the acquisition of the capital asset of the business which is the corpus of the business which ceased to exist on its sale.

17. The Commissioner also contended that the period of time between the cessation of the business and the incurring of the interest expenses in the 1993 and 1994 financial years was such that the outgoings in question were no longer sufficiently proximate to the business previously conducted by the partnership.

18. The taxpayer contended that his Honour correctly concluded that the occasion for the outgoing was to be found in the Bank loan transaction entered into to enable the partnership to acquire and carry on the delicatessen business for the purpose of producing assessable income. The taxpayer also submitted that the Commissioner's contention that the interest on that loan would only be deductible if, and so long as, the income producing asset produces income for the taxpayer was contrary to authority and, in particular, the recent decision of the High Court in
Steele v DFC of T 99 ATC 4242; (1999) 161 ALR 201. In substance, it was contended that that decision not only undermined the Commissioner's approach to the deductibility of interest in the present case, but fully supported the approach adopted by his Honour.

Reasoning on the appeal

19. At the relevant time s 51(1) of the Act provided:

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ATC 4605

``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.''

20. Steele's case involved, inter alia, a claim for deduction for interest paid in relation to property which had been purchased by the taxpayer with the intention of developing the property as a motel. Although the taxpayer took possession of the property in 1980 and actively pursued the possibility of using it for the motel business proposed by her, she was unable to proceed with that project and ultimately sold her remaining interest in the property by May 1987. In the meantime, the taxpayer was obliged to pay to the vendor interest on the unpaid balance of purchase money. The primary issue before the High Court was the deductibility of that interest under s 51(1) of the Act. In considering the taxpayer's entitlement to claim interest as an allowable deduction under the first limb of s 51(1) a number of observations, apposite to the issues in the present matter, were made in the majority judgment of Gleeson CJ and Gaudron and Gummow JJ (with whom Callinan J agreed, save on the issue of relief). Those observations may be summarised as follows.

• 1. The reference in s 51(1) to ``the assessable income'' is to be construed as an abstract phrase referring not only to assessable income derived in any particular year but also to assessable income the relevant outgoing ``would be expected to produce''. Thus, the test of deductibility under the first limb is that ``it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income or, if none be produced, would be expected to produce assessable income'': see
  Fletcher & Ors v FC of T 91 ATC 4950 at 4957; (1991) 173 CLR 1 at 16-17 and Steele at par 22.
• 2. Interest paid on ordinary commercial terms for the use of money expended to acquire property held for an income producing purpose is a recurrent payment which secures, not an enduring advantage, but rather, the use of borrowed money during the term of the loan. Therefore, in the usual case, where interest is a recurrent payment to secure the use for a limited term of loan funds, it is proper to regard the interest as a revenue item and its character is not altered by reason of the fact that the borrowed funds are used to purchase a capital asset. Once it is determined that the interest paid during a relevant year is an outgoing incurred in gaining or producing a taxpayer's assessable income generally then, even though no assessable income is derived during that year and no such income may ever be derived, the circumstance that the capital asset has produced no income is not a reason to conclude that the interest is an outgoing of a capital nature: see Steele pars 25-29.
• 3. In deciding whether, in a case such as Steele, the interest was an outgoing ``incurred in gaining or producing the assessable income'' it is unnecessary to distinguish between the purpose of the taxpayer in borrowing the money and the use to which the borrowed funds were put. The reason for that is that even though no assessable income may be produced in the year in which the outgoing is incurred, where the purpose of the taxpayer in borrowing the money is immediately satisfied by the use of the borrowed funds to acquire the capital asset for income producing purposes, the necessary connection exists.
• 4. The temporal relationship between the incurring of an outgoing and the actual or projected receipt of income may in other cases, but not Steele, be one of a number of factors relevant to a judgment as to whether the necessary connection might in a given case exist. However, contemporaneity is not legally essential and whether it is factually important may depend upon the circumstances of a particular case: see Steele par 44. In that context their Honours said (at pars 45 and 46):
  • ``As Lockhart J said in
    FC of T v Total Holdings (Aust) Pty Ltd [(1979) 24 ALR 401 at 406; 79 ATC 4279 at 4283]:
    • `... [I]f a taxpayer incurs a recurrent liability for interest for the purpose of

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      ATC 4606

      furthering his present or prospective income-producing activities, whether those activities are properly characterised as the carrying on of a business or not, generally the payment by him of that interest will be an allowable deduction under s 51....
    • I say ``generally'' as some qualification may be necessary in appropriate cases, for instance, where interest is paid by a taxpayer as a prelude to his being in a position whereby he may commence to derive income. In such cases the requirement that the expenditure be incidental and relevant to the derivation of income may not be satisfied.'
  • This is consistent with cases which have decided that a taxpayer may be entitled to a deduction after a business has ceased, provided the occasion of a business outgoing is to be found in the business operations directed towards the gaining or production of assessable income generally [
    AGC (Advances) Ltd v FC of T (1975) 132 CLR 175; 75 ATC 4057;
    Placer Pacific Management Pty Ltd v FC of T (1995) 31 ATR 253; 95 ATC 4459]. However, cessation of business may be of factual importance [
    Inglis v FC of T (1979) 28 ALR 425; 80 ATC 4001].'' (Emphasis added)

21. Their Honours concluded that the matter had to be returned to the AAT to enable the necessary findings of fact to be made as to the purpose and use to which the property was to be put when it was acquired. Callinan J was satisfied that the purpose and use as a redevelopment for a motel complex had been found by the AAT with the consequence that the expenditures in question, including the interest, had only been made with one view, being gaining or producing assessable income, and were therefore within the first limb of s 51(1). His Honour would have required that the assessment be set aside to the extent that the Commissioner disallowed the claim to deduct the relevant losses.

22. The observations in Steele's case are of considerable assistance in confining, but not determining, the issues arising in the present case. Plainly, in the present case it is appropriate to approach the issue of the ``occasion'' of the loss or outgoing, being interest paid, by reference to the purpose of the taxpayer and his wife in borrowing the money and the use to which those borrowed funds were put. Thus, the occasion for the recurring liability for interest on the Bank loan was the Bank loan agreement the purpose of which was for the taxpayer and his wife to acquire and carry on in partnership the delicatessen business. As stated in the majority judgment in Steele (at par 46), the taxpayer may still be entitled to a deduction after the business ceased in respect of a recurrent liability for interest:

``... provided the occasion of a business outgoing is to be found in the business operations directed towards the gaining or production of assessable income generally.''

23. Obviously, cessation of business is of factual importance. In the present case its significance relates to whether, as a result of the cessation, the occasion of the recurrent loss or outgoings in question was no longer to be found in the business operations directed towards the gaining or production of assessable income generally of the partnership business. His Honour answered that question in the negative and his reasoning may be summarised as follows.

• 1. AGC (Advances) Ltd established that bad debts may be written off as a loss and give rise to an allowable deduction under s 51(1) notwithstanding that the debt was written off, and therefore the loss incurred, after the taxpayer has ceased to carry on, as a going concern, the business in which the debt was created. As Mason J said at ATC 4072; CLR 198:
  • ``... Yet even in such a case it may be correct to speak of the loss as having been incurred in the carrying on of the business. This is because the occasion for the loss is to be found in a transaction entered into in the carrying on of the business for the purpose of producing assessable income, that is, in the agreement by which the debt was created. Because the loss had its origin in such a transaction the loss may be said to be one which was incurred in the carrying on of the business for the purpose of producing assessable income, notwithstanding that its true character as a loss is not finally ascertained until the debt is written off.''

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    ATC 4607

• 2. In Placer a Full Court (at 4464) said of AGC:
  • ``In our view AGC should be taken as establishing the proposition that provided the occasion of a business outgoing is to be found in the business operations directed towards the gaining or production of assessable income generally, the fact that that outgoing was incurred in a year later than the year in which the income was incurred and the fact that in the meantime business in the ordinary sense may have ceased will not determine the issue of deductibility. There is no relevant distinction to be drawn between losses and outgoings. Provided the occasion for the loss or outgoing is to be found in the business operations directed to gaining or producing assessable income, that loss or outgoing will be deductible unless it is capital or of a capital nature.''
• In Placer the taxpayer had sold the relevant business and assets of its conveyor belt division but continued to be liable in respect of any claims arising from the conduct of the business before its sale. After the sale of the business, a claim against the taxpayer for a defective conveyor system was settled on terms which required the taxpayer to pay $325,000 plus legal fees of $58,379. The taxpayer claimed a deduction for those amounts in its return of income. The Full Court held that the amounts payable under the terms of settlement and the legal costs were allowable deductions under the ``second limb'' of s 51(1) saying (at 4464):
  • ``On the facts of the present case the occasion of the loss or outgoing ultimately incurred in the year of income was the business arrangement entered into between Placer and NWCC [the coal company] for the supply of the conveyor belt which was alleged to be defective. The fact that the division had subsequently been sold and its active manufacturing business terminated does not deny deductibility to the outgoing.''
• 3. Recurrent expenditure of interest was considered by another Full Court in Riverside Road Pty Ltd. The taxpayer claimed that certain interest paid on secured and unsecured loans were allowable deductions, even after the sale, on 1 February 1979, of the land and the motel business conducted by the taxpayer upon the land. In relation to the interest paid on the secured loan, the Full Court (at ATC 4576; FCR 315) relevantly, for present purposes said:
  • ``A question arises in this case as to when the interest outgoings cease to have the necessary character of incidental and relevant outgoings. As at 1 February 1979 the loan to Perpetual Trustees was repayable on 1 May 1979. It was in fact repaid on that date. The remaining interest was incurred pursuant to the terms of a new borrowing entered into after the restructuring. It seems to us that it does not follow... that the mere fact that the land and buildings were sold necessarily results in the conclusion that as and from the date of sale the whole of the interest incurred was not deductible. The respondent, pursuant to the contractual arrangements it had entered into, was obliged when it was an owner/ operator to continue to pay interest until 1 May 1979. Had it sought to discharge its obligation to the mortgagee, it could have been required to pay interest to this date. In the circumstances of the present case, therefore, it cannot be said that the change in character of the business activity of the respondent immediately excluded the interest payable by it to the mortgagee from deductibility. Rather, it seems to us that the respondent was entitled to a deduction of such part of the disallowed interest as related to the borrowing of moneys reflected in the Perpetual Trustees' mortgage until 1 May 1979 and as related to the land and buildings upon which the motel was situated.''
• 4. His Honour concluded that the occasion for the loss, being the payments of interest, was to be found in a transaction, being the Bank loan, entered into in the carrying on by the partnership of the business for the purpose of producing assessable income. His Honour then concluded [at 4703]:
  • ``... The application of the principles or guidelines explained in AGC (Advances) Ltd, Placer and Riverside Road Pty Ltd to the facts of the present matter means, in my opinion, that the interest payments

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    ATC 4608

    in the years in question were deductible under the second limb of s 51(1).''

24. We can find no error in his Honour's approach. It accords with, and is fully supported by, the approach to deductibility of interest under s 51(1) (albeit the first limb) in Steele. In particular his Honour, in determining that the occasion for the loss or outgoing in question was the payment of interest which the taxpayer was obliged to pay under the Bank loan contract, was applying the principles established in AGC, Placer and Riverside Road to the undisputed facts of the present case. It was not suggested before us that the Bank loan was not on ordinary commercial terms.

25. As his Honour pointed out there may come a period of time between cessation of business and the payment of interest which is such that, in all the circumstances of the case, the payment is no longer sufficiently proximate to the activities of the business to be deductible under s 51(1) with the consequence that those activities no longer provide the occasion for the outgoing. However, the evidence in the present case did not establish that that point had been arrived at during the 1993 or 1994 financial years. Answers to such questions depend upon a ``commonsense'' or ``practical'' weighing of all the factors: see Fletcher at ATC 4958; CLR 18.

26. Accordingly, the present case was determined against the Commissioner because the cessation of business did not have the consequence that the ``occasion'' for the liability to pay interest no longer remained the original liability to pay that interest under the Bank loan.

27. We turn to the Commissioner's reliance on the ``entitlement'' of the partners to pay out the loan. The fact that the Bank might, as a matter of practicability rather than legal obligation, allow early repayment does not alter the analysis in the present case. In our view his Honour was correct in characterising the occasion for the liability in such circumstances as depending upon the terms of the contract rather than upon whether or not the partners might or might not have availed themselves of an opportunity to repay the loan on a particular day because of an indulgence shown by the lender on that occasion. In that regard, it is significant that the partners did apply the net proceeds of sale in repayment of the loan and his Honour did not appear to be prepared to find that the taxpayer and his wife had any other partnership assets which were available, had the Bank agreed, to discharge the loan when, or even after, the partnership business ceased.

28. Had the loan agreement in question been a ``roll over'' business loan facility which entitled the taxpayer conducting the business, on the date of each monthly payment, to elect to repay the principal and thereby avoid incurring liability for interest or to ``roll over'' the loan and continue to be liable for interest, that may have been a different situation. In that circumstance there may be considerable force in a contention that the occasion of the liability was the election to ``roll over'' the loan on each monthly payment date, rather than any liability arising under the terms of the original loan agreement establishing the terms of the ``roll over'' facility. In such a case the cessation of the business or sale of the income-producing asset acquired with the borrowed funds might properly be regarded as breaking the nexus in much the same way as certain post cessation interest payments were not allowed as deductions in Riverside Road. However, as explained earlier, that is not the situation in the present case.

29. In the circumstances, his Honour was not in error in not regarding the cessation of the business as having broken the nexus between the carrying on of the business and the incurring of the liability for interest under the Bank loan and the meeting of that liability by the payment of interest during the 1993 and 1994 financial years. As stated by his Honour, it was unnecessary to consider whether the outgoings would also be deductible under the first limb of s 51.

30. Accordingly, for the above reasons, we are satisfied that the appeal is to be dismissed with costs.

THE COURT ORDERS THAT:

The appeal be dismissed with costs.