Re Reginald Sidney Fletcher; Coral Emily Fletcher; James Warren Dunlop and Lilian Ann Dunlop v Commissioner of Taxation [1990] FCA 209; 295 Taxation 23 FCR 134 (28 June 1990)

FEDERAL COURT OF AUSTRALIA

Re: REGINALD SIDNEY FLETCHER; CORAL EMILY FLETCHER; JAMES WARREN DUNLOP
and LILIAN ANN DUNLOP
And: COMMISSIONER OF TAXATION
No. G819 of 1989
FED No. 295
Taxation
23 FCR 134

COURT

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Lockhart(1), Wilcox(1) and Lee(1) JJ.

CATCHWORDS

Taxation - Deductions - Income Tax Assessment Act 1936, s.51 - Determination of the essential character of the expenditure - Whether purpose or motive is a criterion of deductibility under s. 51 - Whether the presence of s. 260 and Part IVA prevent the implication of a qualification upon s. 51 for the purpose of inhibiting tax avoidance.

Income Tax Assessment Act 1936: sub-ss. 51(1), 92(2).

HEARING

SYDNEY
28:6:1990

Counsel for the Applicants: Mr D.H. Bloom QC and Mr B.R. Pape

Solicitors for the Applicants: J.S. Walker and D.K.L. Raphael

Counsel for the Respondent: D.F. Jackson QC and Mr D.B. McGovern

Solicitors for the Respondent: Australian Government Solicitor

ORDER

1. The appeal be dismissed.

2. The applicants pay the costs of the respondent of the appeal.

NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

DECISION

The question in this appeal from the decision of the Administrative Appeals Tribunal, Taxation Division, is whether the Tribunal erred in law in upholding the disallowance by the Commissioner of Taxation of certain deductions claimed by the applicants under the Income Tax Assessment Act 1936 ("the Act").

2. This is the second occasion on which this matter has come before a Full Court of the Court. The first appeal was heard by a Full Court, differently constituted (Lockhart, Wilcox and Burchett JJ.), from a decision of the Tribunal, also differently constituted, affirming the disallowance by the Commissioner of Taxation of objections to fourteen assessments of income tax. The Full Court allowed the appeal, set aside the decision of the Tribunal and remitted the matter to the Tribunal for further hearing. In its reasons for judgment the Full Court referred to arguments that the relevant transactions were shams or a fiscal nullity; that the interest payments were outgoings incurred under a "tax avoidance agreement" within the meaning of sub-s. 82KH(1) of the Act and were therefore not deductible by virtue of s. 82KL of the Act; that Part IVA of the Act applied to the transactions; and, of particular relevance to the present appeal, whether the disputed amounts were deductible pursuant to s. 51 of the Act as being outgoings incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing such income. The Full Court's judgment is reported in (1988) 19 FCR 442.

3. The Full Court rejected the Commissioner's arguments on sham and fiscal nullity; hence those questions ceased to be relevant thereafter. It remained on the rehearing before the Tribunal for it to consider the application of s. 51, Division 3 of Part III and Part IVA.

4. On the rehearing before the Tribunal no fresh evidence was led by either party, so the Tribunal determined the matter on the evidence which had been before the Tribunal as originally constituted. The Tribunal adopted the statement of the facts as set out in the reasons for judgment of the Full Court on the first appeal and made certain additional findings of fact.

5. The relevant facts are complicated, but we need not set them out because they are comprehensively stated in the reasons for judgment of the Full Court which first dealt with this matter. It is sufficient for present purposes if we briefly state the primary facts so far as the possible application of s. 51 is concerned.

6. The applicants were partners in the business of subdividing and selling land at Killarney Vale on the Central Coast of New South Wales. They decided to invest money in a scheme, details of which were contained in a brochure advertising the availability of "future cash benefits". Three different investment plans were offered spanning terms of 15, 20 and 25 years respectively. Features common to all three plans were that income tax deductions were said to be available in each of the first five years and that moneys were to be received by the investor only during the last five years of the plan. In the year of income ended 30 June 1982 the four applicants invested a total of $50,000 under the fifteen year plan. They signed documents including a partnership agreement, two loan agreements and an annuity agreement the effect of which is set out in the earlier reasons for judgment of the Full Court. A great deal of activity occurred in relation to the signing of documents including drawing, indorsing and accepting bills of exchange, the net result of which was described by the Full Court as being that all three bills ended up in the hands of the original drawee with no payment actually passing under the bills. The only money which did pass by the end of June 1982 was the $50,000.

7. In each of the years of income 1983, 1984 and 1985 similar "round robins" with bills of exchange were carried out to effect the payments required by the loan agreements and the annuity agreement. The partnership was known as "Annuity Investments Partnership No. 18" which submitted an income tax return for the year ended 30 June 1982. That return showed income of $170,000, being the annuity received, and expenditure of $494,667 being interest paid of $360,000 and undeducted purchase price of $134,667. The result was a net loss of $324,667. In their personal returns of income each of the applicants claimed as a deduction one-quarter of this lastmentioned amount. In each case these claims were rejected, objections lodged but disallowed. Although the relevant sums differed a little, the same course of events occurred in subsequent relevant years, thus giving rise to the fourteen appeals to the Tribunal.

8. On the rehearing the Tribunal made findings including the following:-

"11. On the whole of the evidence as it emerges
from the transcript, we are satisfied that when
the extreme artificiality of this financial scheme
is examined, involving as it does bills of
exchange for millions of dollars going on a
merry-go-round and finishing up, as clearly
intended, back in the hands of the drawee, the
conclusion is overwhelming, viz. that this whole
exercise had, as far as the accountants were
concerned, the dominant purpose of reducing the
taxable income of their clients."

. With respect to s. 51 the Tribunal found:

"15. Turning to the law, we are satisfied that the
appropriate test to be applied is not to look for
the subjective intention of the taxpayer but to
ask: what was the impugned expenditure intended to
achieve? When the question is posed in that way,
what the Fletchers and Dunlops intended or
believed becomes irrelevant once it is found that
the clear purpose of the expenditure, as revealed
by the evidence, was to obtain a tax
deduction. ...
16. Applying the test we have outlined above, it
follows that once we have concluded that this
scheme was just another vehicle promoted for the
dominant purpose of reducing taxable income, it
follows that the interest payments do not
constitute outgoings which were incurred in
gaining or producing assessable income of these
taxpayers. This test received support from the
views expressed by their Honours of the High Court
(albeit in a different context) in John v FC of T
[1989] HCA 5; 89 ATC 4101 at 4105:
In Ronpibon Tin N.L. and Tongkah Compound N.L.
v F.C. of T. [1949] HCA 15; (1948-1949) 78 CLR 47, it was stated
by the Court (at p 56) that 'for expenditure
to form an allowable deduction as an outgoing
incurred in gaining or producing the
assessable income it must be incidental and
relevant to the end'. In F.C. of T. v Ilbery [1981] FCA 188; 81
ATC 4661, Toohey J said (at ATC pp 4666-4668)
by reference to the above statement from
Ronpibon Tin that 'that was not to exclude the
notion of purpose'. His Honour added that
'purpose may stamp the outgoing as one having
no relevant connection with the gaining or
producing of assessable income'.
Although the first limb of sec. 51(1) speaks
of a loss or outgoing 'incurred in gaining or
producing the assessable income', a loss or
outgoing may be so incurred notwithstanding
that no income has been gained or produced in
the period in which the loss or outgoing is
claimed to be deductible. The test of
deductibility under that limb, as laid down in
Ronpibon Tin, 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' (at p 57).
It is readily understandable that, if no
income has been gained or produced and a
question arises as to whether the occasion
would be expected to produce assessable
income, consideration of the purpose for which
the expenditure was outlaid might not be
wholly irrelevant. It may be too that even
where income is produced 'the purpose for
which the advantage occasioning the loss or
outgoing is sought may evidence a sufficient
relationship with the income-earning process':
Handley v FC of T [1981] HCA 16; 81 ATC 4165 per Stephen J at
pp 4168-4169. But the cost of a step taken in
the process of gaining or producing income
must be regarded as an outgoing or taken into
account in calculating the loss (if any)
incurred, whatever purpose or motive may have
attended all or any of the steps involved.
17. We consider it highly significant that the
High Court referred to Toohey J's decision in
Ilbery with approval (the other two members of the
Court concurring). Elsewhere in his judgment,
Toohey J stated (at p 4667);
As Brennan J. pointed out (in the Magna Alloys
case [1980] FCA 150; 80 ATC 4542 at p 4547):
Though purpose is not the test of
deductibility, nor even a conception
relevant to a loss involuntarily
incurred, in cases where a connection
between an outgoing and the taxpayer's
undertaking or business is affected by
the voluntary act of the taxpayer, the
purpose of incurring that expenditure may
constitute an element of its essential
character, stamping it as expenditure of
a business or income-earning kind.
Conversely, I would add, purpose may stamp the
outgoing as one having no relevant connection
with the gaining or producing of assessable
income.
The above passage was, in turn, cited with
approval by Wilcox J in Anderson v FC of T 89 ATC
4982 at pp 4990-4991, a case which, like the
present one, involved expenditures incurred by a
partnership for no discernable purpose other than
to derive a tax deduction.
18. In the result, we are satisfied on the
authorities that once it has been shown - as in
this case - that the purpose of the impugned
outgoing was to obtain a tax deduction, that fact
sufficiently colours the outgoing to take it out
of sec 51; cf Case V104[1988] AATA 213; , 88 ATC 670 at 676."

9. Having decided that s. 51 did not apply, the Tribunal did not find it necessary to make any findings with respect to the application of ss. 82KH to 82KL or Part IVA of the Act, and affirmed the decisions of the Commissioner disallowing the objections of the applicants.

10. The argument on appeal was confined to the question of the correctness of the Tribunal's decision that s. 51 did not operate to render the interest payments deductible. It was common ground between the parties that, if this Court held that the Tribunal applied an incorrect test in law with respect to s. 51, the Court might either remit the matter to the Tribunal (see Administrative Appeals Tribunal Act 1975 sub-ss. 44(4) and (5)) or itself deal with the matter (sub-s. 44(4) and Statham v Federal Commissioner of Taxation (1989) 89 ATC 4070); though the parties differed as to which of these courses the Court should take in the exercise of its discretion. It was also common ground that, since questions relating to sub-division D of Division 3 and Part IVA of the Act were not considered by the Tribunal (those matters being raised by the notice of contention filed by the Commissioner), it would be preferable that the whole matter be remitted to the Tribunal if the appeal was not disposed of on the s. 51 question.

11. The applicants accepted the findings of fact of the Tribunal on the rehearing before it and the conclusions of the Tribunal set out in paragraph 11 of the Tribunal's reasons, cited earlier. The applicants confined their attack on the Tribunal's reasons to the tests which the Tribunal applied in determining that the outgoings in question were not allowable deductions. Counsel for the applicants submitted that the sole question for the Tribunal with respect to sub-s. 51(1) was whether the interest in question was incurred in gaining or producing assessable income, which involved in turn ascertaining whether there was some connection between funds borrowed and the earning of assessable income. Reference was made to Federal Commissioner of Taxation v Munro [1926] HCA 58; (1926) 38 CLR 153 at 198. It was submitted that, where no connection between the outgoing and the derivation of assessable income is apparent, regard may be had to purpose in order to see whether, despite the apparent lack of connection, there is in fact one. Reliance was placed upon Magna Alloys and Research Pty. Limited v Federal Commissioner of Taxation [1980] FCA 150; (1980) 33 ALR 213 per Brennan J. at 218-9; Federal Commissioner of Taxation v Ilbery [1981] FCA 188; (1981) 38 ALR 172 per Toohey J. at 180 and John v Commissioner of Taxation [1989] HCA 5; (1989) 166 CLR 417 at 426-7. It was argued that there was clearly a connection in this case between the outgoing and the derivation of assessable income, that the Tribunal erred in regarding purpose or motive as a criterion of deductibility under s. 51, and that the Tribunal compounded this error by regarding the relevant question as being the purpose for which the transaction which involved the incurring of the outgoing was entered into. It was submitted that the Tribunal confused the purpose of the transaction with the purpose of the outgoing and that, even if the Tribunal had correctly found that the dominant purpose in entering into the transaction was to avoid tax, this did not necessarily disqualify the outgoing from deductibility under s. 51. Reliance was placed by counsel for the applicants upon Federal Commissioner of Taxation v Patcorp Investments Pty. Limited (1976) 140 CLR 247 especially per Gibbs J. at 292, a passage adopted in John at 434-5, in support of the proposition that the presence of an anti-avoidance provision in the Act (Part IVA in this case) makes it impossible to place upon s. 51 a qualification which it does not express for the purpose of inhibiting tax avoidance.

12. The appeal was argued before us on the basis that, if sub-s. 51(1) applied at all, it is the first limb of the sub-section that is relevant. But it was not suggested that any different considerations arose or results followed if the second limb applied. We shall therefore confine our findings to the first limb of the sub-section.

13. In Ronpibon Tin N.L. v Federal Commissioner of Taxation [1949] HCA 15; (1949) 78 CLR 47 the High Court expounded the meaning of the first limb of sub-s. 51(1) at 56-57 in the following oft cited passage:

"For 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 words 'incurred in
gaining or producing the assessable income' mean
in the course of gaining or producing such income.
Their operation has been explained in cases
decided under the provisions of the previous
enactments: see particularly Amalgamated Zinc (de
Bavay's) Ltd. v. Federal Commissioner of Taxation
[1935] HCA 81; (1935) 54 CLR 295 at pp 303-304, 307, 309, 310
and W. Nevill and Co. Ltd. v Federal Commissioner of
Taxation ((1937) 56 C.L.R., at pp 300, 301,
305-306, 308).
Notwithstanding the differences in other respects
in the present provision, the expression 'incurred
in gaining or producing the assessable income' has
been left unchanged and bears the same meaning.
In brief substance, to come within the initial
part of the sub-section 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."

14. In Lunney v Federal Commissioner of Taxation [1958] HCA 5; (1958) 100 CLR 478 Williams, Kitto and Taylor JJ. said at 497 with respect to the first sentence in this passage from Ronpibon:

"... the expression 'incidental and relevant' was
not used in an attempt to formulate an exclusive
and exhaustive test for ascertaining the extent of
the operation of the section; the words were
merely used in stating an attribute without which
an item of expenditure cannot be regarded as
deductible under the section."

15. Two years earlier in Charles Moore and Co. (W.A.) Pty. Ltd. v Federal Commissioner of Taxation [1956] HCA 77; (1956) 95 CLR 344, Dixon C.J., Williams, Webb, Fullagar and Kitto JJ., when speaking about involuntary outgoings or losses, said at 351:

"Phrases like ... the phrase 'incidental and
relevant' when used in relation to the
allowability of losses as deductions do not refer
to the frequency, expectedness or likelihood of
their occurrence or the antecedent risk of their
being incurred, but to their nature or character.
What matters is their connection with the
operations which more directly gain or produce the
assessable income."
Brennan J. observed in Magna Alloys at 217:
"In Ronpibon Tin, supra, the Court did not explain
either limb in terms of motive or purpose. The
phrases 'in the course of', 'incidental and
relevant', and 'the occasion of' appear. These
phrases, though not synonyms for the statutory
terms, import a connection between the incurring
of expenditure on the one hand and the gaining or
production of assessable income or the carrying on
of a businesss on the other."

16. In our opinion the test to be applied in determining whether expenditure qualifies for deduction under the first limb of sub-s. 51(1) is to ascertain the "essential character" of the expenditure, as stated by Williams, Kitto and Taylor JJ. in Lunney at 497, Brennan J. in Magna Alloys at 217, Toohey J. in Ilbery at 179-180, a Full Court of this Court (Forster, Fisher and Spender JJ.) in Commissioner of Taxation v Brixius (1987) 16 FCR 359 at 361 and French J. in Riverside Road Pty. Limited (In Liquidation) v Federal Commissioner of Taxation (1989) 90 ATC 4,031 at 4,041.

17. The critical question in the present case is whether purpose is relevant in determining the essential character of the interest payments. The question has been considered by this Court in a number of cases: Magna Alloys per Brennan J. at 216-227; Ure v Federal Commissioner of Taxation [1981] FCA 9; (1981) 34 ALR 237; Ilbery at 179-181; Federal Commissioner of Taxation v Creer (1986) 65 ALR 485; Anderson v Federal Commissioner of Taxation (1989) 89 ATC 4982 at 4990-4991; and Riverside Road at 4,041.

18. In Ure Brennan J. said at 241:

"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] HCA 58; (1926) 38
CLR 153 at pp 170, 171, 197; Texas Co.
(Australasia) Ltd. v. F.C. of T. [1940] HCA 9; (1940) 63 CLR
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".

19. Toohey J. cited this passage with apparent approval in Ilbery at 180.

20. In Ilbery Toohey J., with whose reasons for judgment Northrop and Sheppard JJ. agreed, said at 179-180:

"When the High Court in Ronpibon Tin N.L. v. F.C.
of T. [1949] HCA 15; (1949) 78 CLR 47, said at p 56: 'For
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' that was not to exclude the
notion of purpose. As Brennan J. pointed out in
Magna Alloys at 218-9: 'Though purpose is not the
test of deductibility nor even a conception
relevant to a loss involuntarily incurred, in
cases where a connection between an outgoing and
the taxpayer's undertaking or business is effected
by the voluntary act of the taxpayer, the purpose
of incurring that expendtiure may constitute an
element of its essential character, stamping it as
expenditure of a business or income-earning kind.'
Conversely, I would add, purpose may stamp the
outgoing as one having no relevant connection with
the gaining or producing of assessable income."

21. It is clear from Toohey J.'s judgment in Ilbery that the purpose of the taxpayer was, in his Honour's view, an important consideration on the facts of that case.

22. Central to the case for the appellant was the argument that John is authority for the proposition that purpose is an irrelevant consideration in determining whether a loss or outgoing is deductible under the first limb of sub-s. 51(1). The passage from the reasons for judgment of Mason C.J., Wilson, Dawson, Toohey and Gaudron JJ. in John at 426-427, cited by the Tribunal in its findings set out above is sufficient to reject the argument because it is plain that by reference, with apparent approval, to passages from the judgments of Toohey J. in Ilbery and Stephen J. in Handley v Federal Commissioner of Taxation [1981] HCA 16; (1981) 148 CLR 182 at 189-190, their Honours regarded purpose as being relevant to the essential character of a loss or outgoing, at least in some circumstances. Their Honours expressed some qualification with respect to the relevance of purpose in the last sentence of the passage cited above, a qualification noted in Raymor (N.S.W) Pty. Limited v Federal Commissioner of Taxation (1989) 89 ATC 5173 at 5179, but not of relevance to the present case.

23. In John their Honours were looking at questions related to trading stock and, in particular, at the principles to be applied in calculating the cost of such stock in ascertaining whether a profit had been gained to be treated as income pursuant to the Act or, alternatively, as in the case before them, a loss sustained. It was for that reason that the last sentence of the passage referred to was concerned with "the cost of a step taken in the process of gaining, or producing, income" (emphasis added) and their Honours' statement that such a cost "must be regarded as an outgoing or taken into account in calculating the loss ... incurred, whatever purpose or motive may have attended all or any of the steps involved" has to be understood in that context. In John the issue for decision was whether a cost that had been accounted for in determining that a loss had been incurred as a result of a transaction was properly included as such a cost. Their Honours were not concerned with voluntarily incurred expenditure or with any question of the essential character of such expenditure. Those issues were, however, directly considered in Ilbery.

24. Reliance was also placed by counsel for the applicants upon the further passage from the reasons for judgment of Mason C.J., Wilson, Dawson and Toohey in John at 435:

"By this we understand it to be argued that s. 51
should be construed so as to exclude therefrom a
loss or outgoing that has been artificially
contrived by a preordained series of transactions
or a composite transaction into which there have
been inserted steps which have no commercial
purpose apart from the avoidance of a liability to
tax. If that construction is to be reached as a
matter of implication then, for the reasons
already given, the presence of s. 260 precludes
that approach. If it is advanced as a matter
excluded by the plain meaning of s. 51, there is
no occasion to resort to any new principle of
construction. We should add that on ordinary
principles of construction there is no warrant for
limiting s. 51 by reference to the two quite
specific ingredients identified by Lord Brightman
in Furniss (a reference to Furniss v Dawson [1983] UKHL 4; (1984
AC 474, in particular the passage from the speech
of Lord Brightman at 527). We would thus reject
the principle of fiscal nullity as one appropriate
to be adopted in the construction of the Act
generally, or one appropriate to be adopted in the
construction and application of s. 51."

25. This passage must be read in the context in which it appears, from which it is plain that their Honours were considering whether the doctrine of fiscal nullity is part of Australian law. They rejected the argument that s. 51 should be construed as the vehicle for the introduction, by implication, of that doctrine into income tax law. Their Honours said that s. 260 and Part IVA (in a statement which preceded the passage cited above) , made specific provision for what "may be called tax minimisation arrangements" and "thereby excludes any implication of a further limitation upon that which a taxpayer may or may not do for the purpose of obtaining a taxation advantage". Their Honours adopted what was said by Gibbs J. in Patcorp at 292: "the presence of s. 260 makes it impossible to place upon other provisions of the Act a qualification which they do not express, for the purpose of inhibiting tax avoidance". The passages from the judgment of Mason C.J., Wilson, Dawson, Toohey and Gaudron JJ. upon which reliance was placed by counsel for the applicants do not support the argument of counsel for the appellant.

26. In our opinion in determining the essential character of an expenditure, purpose is not necessarily the criterion or test of deductibility. But in cases of voluntary expenditure, the purpose for which the expenditure was incurred may be relevant. The extent of the relevance and the weight placed upon the evidence with respect to it will vary according to the circumstances of each case. In some cases, (for example, Ilbery) it may be critical; but at the other end of the spectrum, where the connection between expenditure and the gaining or producing of assessable income is clear by reference to the objective facts, it may be superfluous to consider the purpose for which the expenditure was incurred.

27. This is not a case where the relevant expenditure was so clearly incurred in gaining or producing assessable income as to produce the plain conclusion of an actual nexus between the expenditure and the gaining or producing of the assessable income; so that evidence of purpose would be of little, if any, assistance. The purpose of the applicants and their advisers and others involved in the financial scheme is at the heart of the facts of this case. The Tribunal was therefore entitled to take into account the matters which it did, including those relating to purpose, and to come to the conclusion that the essential character of the scheme was not to gain or produce assessable income for the partners but to reduce the taxable income of the applicants. The expenditure incurred by the partnership and the resultant loss were stamped with that essential character.

28. It is plain that the elaborate and complex matrix of facts justified the finding of the Tribunal of "extreme artificiality" and that the "whole exercise had, as far as the accountants were concerned, the dominant purpose of reducing the taxable income of their clients".

29. It has not been established that the Tribunal fell into error in reaching the conclusions to which we referred earlier and the further conclusion that this is a case which "involved expenditures incurred by a partnership for no discernible purpose other than to derive a tax deduction".

30. A further attack was made by the applicants upon the findings of the Tribunal. Counsel for the applicants submitted that the Tribunal fell into error in that it purported to deny to each applicant the deductibility of portion of the partnership loss attributable to interest under sub-s. 51(1) rather than to consider the appeals as appeals from the Commissioner's disallowance of deductions claimed by the applicants as partners pursuant to sub-s. 92(2) of the Act.

31. It is clear that the Commissioner disallowed the claim by each applicant for a deduction pursuant to sub-s. 92(2) of his or her individual interest as partner in the partnership loss. It is true that the Tribunal in its reasons discussed the appeals before it with reference to sub-s. 51(1) of the Act, but it does not follow that the Tribunal misconceived the task before it. Plainly the Tribunal's task was to consider the correctness of the Commissioner's disallowance of the objection of each applicant, which was an objection againt the disallowance by the Commissioner of each applicant's individual interest in the partnership loss, that loss being calculated after taking into account both the income derived by the partnership and its liability for interest. But in our opinion it is understandable that the Tribunal expressed its reasons essentially with reference to sub-s. 51(1), because the starting point for the availability of a deduction under sub-s. 92(2) is the incurring by a partnership of a partnership loss in the relevant year of income.

32. The partnership loss in this case is the loss constituted by the interest paid on the moneys borrowed to pay for the relevant annuity and on the moneys borrowed to pay the interest. The partnership claimed this as a loss in its partnership return and each of the applicants in turn claimed his or her individual interest as partner in that loss pursuant to sub-s. 92(2). Sub-section 51(1) must be the source of the partnership loss arising from the payment of interest and this was the focal point of the Tribunal's reasons; but it is obvious that a partner's entitlement to a deduction arises under sub-s. 92(2) and plainly does not have as its source sub-s. 51(1), though that is an essential integer in the claim by the partnership in its return that it has incurred a partnership loss from which the claims of the individual applicants spring.

33. The appeal must be dismissed. In these circumstances it is not necessary to consider the questions raised by the Commissioner in his notice of contention with reference to sub-division D of Division 3 of Part III and s. 177F of Part IVA of the Act.

34. We would dismiss the appeal with costs.