Federal Court of Australia

The issue in these appeals is whether the applicant, Mr John Joseph Brown, is entitled to allowable deductions under s 51(1) of the Income Tax Assessment Act 1936 ("the Act") for his proportion of interest paid by a partnership, comprising Mr Brown and his wife, on the balance of moneys loaned to the partnership by their bank. In these reasons, as a matter of convenience, I sometimes refer to that partnership as if it were a separate legal entity.

The appeals are against the disallowance by the respondent, the Commissioner of Taxation, of objections by the applicant against assessments of income tax for the years ended 30 June 1993 and 30 June 1994. The respondent has agreed to pay all the costs of the appeals as part of his tax clarification programme.

FACTUAL BACKGROUND

The facts are not in dispute. 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 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. On 18 November 1996 the respondent disallowed those objections. On 14 January 1997 the applicant appealed to this Court under s 14ZZ(a) of the Taxation Administration Act 1953 (Cth). The two appeals have been consolidated.

THE RESPECTIVE CONTENTIONS AND MY REASONING

The applicant contended that the interest payments made during the years ended 30 June 1993 and 30 June 1994, after the cessation of the Partnership business, were deductible under both limbs of s 51(1) of the Act. In particular, the applicant submitted that those payments of interest were losses and outgoings necessarily incurred in carrying on a business for the purpose of gaining or producing income. They thus fell within the second limb of the sub-section. The applicant relied upon the observations made by Barwick CJ and Mason J in A.G.C. (Advances) Ltd v Federal Commissioner of Taxation [1975] HCA 7; (1975) 132 CLR 175 and the decision of a Full Court of this Court in Placer Pacific Management Pty Ltd v Federal Commissioner of Taxation [1995] FCA 1362; (1995) 95 ATC 4459. The applicant further contended that the interest incurred was not of a capital nature and that the nexus between the business activity of the Partnership and the incurring of the interest liability had not been severed by the sale of the business.

The respondent contended that because the Partnership had ceased conducting the delicatessen business in about March 1990, any interest payments made after that date were not incurred in gaining or producing the assessable income of the Partnership or necessarily incurred in the carrying on of a business by the Partnership for the purpose of gaining or producing such income. At the hearing, the respondent expressly disclaimed any contention that the interest payments were of capital or of a capital nature. He thus abandoned an earlier contention to that effect.

The respondent put these submissions on two broad bases, namely, the use of the borrowed funds and the occasion of the outgoings. There was a further submission which focused on the time which had lapsed between the cessation of the business and what was said to be the incurring of the interest expense. Mr J D Allanson, counsel for the respondent, submitted that during the 1993 and 1994 income years when the interest liabilities were incurred, "the funds" (by which he meant the balance of the Bank loan remaining unpaid) were not being used for the purpose of gaining or producing income or in the carrying on of the business. He submitted that because the funds had been "wholly consumed" the applicant "fails the `use' test". This was a reference to a line of authorities which included Commissioner of Taxation v Roberts [1992] FCA 363; (1992) 37 FCR 246 at 255 and 257; Fletcher v Federal Commissioner of Taxation [1991] HCA 42; (1991) 173 CLR 1; Kidston Goldmines Ltd v Commissioner of Taxation (1991) 30 FCR 77 at 85; John Fairfax & Sons Pty Ltd v Federal Commissioner of Taxation [1959] HCA 4; (1959) 101 CLR 30; Inglis v Federal Commissioner of Taxation [1979] FCA 106; (1979) 40 FLR 191 at 195; Steele v Federal Commissioner of Taxation (1997) 97 ATC 4247; Wharf Properties Ltd v Commissioner of Inland Revenue of Hong Kong (1997) 97 ATC 4225 at 4229; Ure v Federal Commissioner of Taxation [1981] FCA 9; (1981) 81 ATC 4100 at 4110; Federal Commissioner of Taxation v Ilbery [1981] FCA 188; (1981) 38 ALR 172 at 181; Stamoulis v Federal Commissioner of Taxation (1997) 97 ATC 5,051 and Federal Commissioner of Taxation v Riverside Road Pty Ltd (in liq) [1990] FCA 205; (1990) 23 FCR 305. The respondent relied on the circumstance that under the terms of the agreement for the Bank loan the applicant and his wife were entitled to repay that loan at any time without incurring any penalty interest. From that circumstance, he sought to characterise the interest payment as having been "voluntarily incurred". The next step, building on that characterisation, was to submit that in turn the characterisation of the interest payments would ordinarily be determined by reference to the object which the taxpayer had in view, the result aimed at by the taxpayer or the advantage which the expenditure was intended to gain - a reference to the observations of Deane and Sheppard JJ in Ure at 4109 where their Honours reviewed the case law to that date. Mr Allanson also relied on observations made by the High Court of Australia in Fletcher at 17-18. The respondent contended that in the present case the result aimed at by the applicant and his wife, by making the relevant interest payments after the business had been sold, was the retention (by avoiding bankruptcy) of private assets. As that was not an income-producing purpose but was, so it was submitted, a private purpose, the interest expenses were not deductible. As part of this submission, the respondent contended that the use of the funds was not to be found in income-producing activity but "...in the funding of the excess of creditors over debtors".

I do not accept that submission, principally because I do not think that it is correct to say that there has been any relevant change in the use of the moneys borrowed. The moneys were originally borrowed by the applicant and his wife as partners for the purpose of acquiring an income-generating asset (the delicatessen business). They were expended solely in effecting that acquisition. The respondent expressly eschews any contention that the interest payments made after the business was sold were payments of capital or a capital nature. A fortiori, there can thus be no suggestion (and the respondent again expressly eschewed any such submission) that the interest payments made while the business was being conducted by the applicant and his wife, were not allowable deductions. [The respondent admitted such deductibility in paragraph 5 of his Response filed on 27 August 1997.] In my view, the use to which the proceeds of the Bank loan were put (which I have just described above) precluded any such suggestion. They were outlaid once and for all in that use. When the business was sold, some of the Bank loan was repaid. I do not think that the fact that, under the terms of their loan agreement with their bank, the applicant and his wife could have repaid the balance of the Bank loan at the same time without incurring penalty interest, assists in the true characterisation of the use to which those moneys were put. The tax position of the Partnership is to be determined on the basis of the facts, not on what might or might not have been done. The respondent's argument depends upon the proposition that the applicant and his wife were financially in a position to repay the outstanding balance either by sale of the property against which it was secured, or other property, or by re-financing. The respondent, in making this submission assumed that this was an established fact. Were it necessary for the disposition of this case to make such a factual finding, I would have considerable difficulty in doing so. There are bits and pieces of evidence relevant to that matter, such as the partnership balance sheets annexed to the income tax returns. On the basis of the net assets disclosed in those documents it might be inferred that the applicant and his wife had the means to repay the balance of the Bank loan, but there was no evidence that the balance sheet values of the various assets were realisable values. The statement of assets and liabilities signed by the applicant and his wife when they applied for the Bank loan on 11 November 1988 was exhibited to the applicant's affidavit, probably because in the same document the purpose of the loan was stated as being "Purchase of Loch St. Deli & Takeaway". That statement disclosed a net asset position which, had it been maintained after the sale of the delicatessen business in March 1990, may have enabled the applicant and his wife either to repay the balance of the Bank loan either by sale of assets or re-financing. But I do not consider such evidence as there was of their financial means, was a sufficient basis upon which to reach such a conclusion. Fortunately, in my opinion, it is not necessary to reach a conclusion one way or the other on that point. Assuming for the moment, but without so deciding, that the applicant and his wife were in a position, by selling assets or re-financing, to repay the balance of the loan but chose not to do so, what is the tax significance of that choice? The respondent says that that means that the interest payments are to be regarded as having been "voluntarily incurred" by the applicant and his wife, so that by having regard to some actual subjective or imputed purpose on their part (to retain private assets by avoiding bankruptcy) the use of the funds was for a private purpose. This proposition sits somewhat awkwardly with the respondent's earlier submission that the funds had by then been "wholly consumed", but fairness dictates that the submissions, to the extent of any such inconsistency, be treated as alternatives. I do not accept the respondent's submissions. They involve, so it seems to me, a notional transmogrification of the Bank loan from being a source of funds which were applied in the purchase of the delicatessen business (some of which were repaid on the sale of that business, but the balance of which can be seen to have been lost) into an identifiable fund applied by the applicant and his wife for the private purposes identified by the respondent. In my opinion that is not a proper approach when the task in hand is to assess the use being made from time to time of borrowed funds. The reality is that the balance of the Bank loan proceeds were lost in the delicatessen venture. I do not think that in the circumstances of this case it is sensible to regard those moneys as having been put to any use during the tax years 1993 and 1994; they had simply ceased to exist. To the extent that the use of the Bank loan proceeds might have been a "tool" to assist in the resolution of this matter (see Hill J in Kidston Goldmines at 85) that tool is, in my opinion, simply not available.

Turning to the "occasion of the outgoing", the respondent submitted that the occasion of the interest payments, after the cessation of the business, was not to be found in the business operations conducted by the applicant and his wife during the 16 month period referred to above. Three reasons were advanced for this contention. First, it was said that if the occasion of the outgoing were to be found in the original loan transaction, that would deny deductibility to all interest payments, even those made during the course of the operation of the business as, so it was put, that occasion is not to be found in such business operations. In my opinion that would be to take too narrow an approach. The occasion of the outgoing should not be confined simply to the original loan transaction. In my opinion, the occasion of the outgoing was the original loan transaction (carrying with it the obligation to pay interest for ten years) plus the outlaying of the proceeds of the loan in the purchase of the business. It was the combination of those two circumstances which had the result that the interest payments were allowable deductions, at least during the period when the applicant and his wife conducted that business. I do not think that the agreement made between the applicant and the respondent (referred to above) that the applicant would not rely on the conduct of the orchid business, precludes me from having regard, as I do, to the fact that the Bank loan was made to the applicant as partners. Technically, that relationship of partnership, so far as the delicatessen business was concerned, probably did not come into existence until they started trading. But, for income tax purposes, I consider that the factual context of the Bank loan being made to the applicant and his wife, as partners, for the purposes of financing the purchase of another business coupled with the application of the Bank loan moneys in that acquisition, assists in characterising the original loan transactions as being inextricably linked to the carrying on of a business for the purpose of gaining or producing assessable income. Secondly, the respondent submitted that in relation to recurrent expenditure, the occasion of an outgoing is to be found in circumstances contemporaneous with the incurring of the liability. The occasion of these outgoings, so it was put, was the use of the funds in the years 1993 and 1994. I have explained above my reasoning for the conclusion that there was no relevant "use of the funds" in those years. The funds had been lost and the use test was not available. Thirdly, the respondent submitted that where (as here) the taxpayer is not "locked in" to payment i.e. the outgoing is voluntary, the occasion of the outgoing cannot arise before the taxpayer submits himself to the liability - in this case in each month when the interest liability accrued. I have already expressed reservations about the factual basis for the allegation that the payments of interest were voluntary i.e. made as a matter of choice. Even if it had been established that the applicant and his wife could have chosen to discharge the balance of the Bank loan by selling assets or re-financing (or a combination of both) then I do not think it is correct to characterise the outgoing as being made voluntarily in the sense used for example in Fletcher. In the present case from November 1988 onwards there was a binding legal commitment on the part of the applicant and his wife to make these interest payments for 120 months. In those circumstances, I think it is unrealistic to say that the occasion of the outgoing took place each month in 1993 and 1994 when the applicant chose to pay the accrued interest. Even if that were wrong and the payments should be regarded as having been voluntarily incurred, that would lead only to the next step in the characterisation process identified in cases such as Ure at 4109. That next step is that, in a situation where an outgoing has been voluntarily incurred such characterisation:

"... will ordinarily be determined by reference to the object which the taxpayer had in view, the result aimed at by the taxpayer or the advantage which the expenditure was intended to gain ..."

The present matter is not, in my opinion, one where the characterisation can be determined in the ordinary manner by such a reference. There was simply no object which the applicant and his wife could be seen to have had in view, no result aimed at by them and no advantage which the expenditure was intended to gain other than to discharge their obligations to pay interest to their bank in respect of funds which had been lost. But to deny each such monthly payment the description of being "the occasion of the outgoing" would not, in my view, lead inevitably to the conclusion that the occasion for the loss is to be found in a transaction entered into in the carrying on by the Partnership of the business for the purpose of producing assessable income. I think that further analysis is required. For example, by way of a further submission, the respondent contended (and I agree) that the period of time between cessation of the business and incurring of the interest expense was relevant to whether the interest expense was sufficiently proximate to the business activities to be deductible under s 51(1). For that proposition the respondent relied upon AGC (Advances) Ltd at 188 and Riverside Road Pty Ltd.

FURTHER REASONING

I now turn to the statutory context and the three cases which I have found to be most helpful in deciding this matter. The statutory context is of course s 51(1) of the Act which provided:

"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 producing of exempt income."

In AGC (Advances) Ltd the taxpayer had, in December 1968, ceased carrying on the business of a financier lending money and financing the purchase of goods under hire purchase agreements. It entered into a scheme of compromise and arrangement under the Companies Act. During the years ended 30 June 1970 and 30 June 1971 the taxpayer wrote off, as bad debts, a number of hire purchase debts which it had been unable to recover. It claimed deductions in the amounts of those debts. By a majority (Barwick CJ and Mason J, Gibbs J dissenting) the High Court held that the taxpayer was entitled to those deductions under s 51(1). At 197-198 Mason J said:

"It may be argued that if the taxpayer has ceased to carry on a particular business, a loss subsequently sustained in relation to that business cannot be described accurately as a loss incurred in carrying on that business, or at any rate one incurred in carrying it on for the purpose of gaining or producing assessable income. But the soundness of the argument depends on what is meant by "incurred". A loss constituted by the writing off of a bad debt is no doubt incurred, in the sense that it is sustained, at the time when the debt is written off, and that may occur in a given case after the taxpayer has ceased to carry on as a going concern the business in which the debt was created. 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."

In Placer a Full Court of this Court (comprising Davies, Hill and Sackville JJ) said this of the decision in AGC (at 4464):

"In our view AGC should be taken as a 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 in July 1981. Two years previously it had installed and commissioned a conveyor system at a coalmine for a coal company ("the coal company"). Under the terms of the sale of the business, the taxpayer continued to be liable in respect of any claims arising from the conduct of the business before its sale. Soon after the sale of the business, the coal company claimed that the conveyor system was defective, and sued the taxpayer. That claim 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 for its 1989 tax year. At that time the taxpayer's activities consisted exclusively of investment and management of related corporations. The Full Court (at 4464) continued:

"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. A finding to the contrary would lead to great inequity. Many businesses generate liabilities which may arise in the considerable future. Such liabilities are sometimes referred to as "long tail liabilities". To preclude deductibility when those liabilities come to fruition on the basis that the active trading business which gave rise to them had ceased would be unjust."

The Full Court allowed the appeal in Placer on the basis that the amounts payable under the terms of settlement and the legal costs were allowable deductions under the second limb of s 51(1). The Court said that in those circumstances it was unnecessary to consider whether the same result would arise under the first limb of that subsection.

Recurrent expenditure of interest was considered by a Full Court of this Court in Riverside Road Pty Ltd. In that case the taxpayer had obtained both secured and unsecured loans for the purpose of buying land, erecting a motel on it, providing plant and equipment and for working capital. The taxpayer conducted the motel business on the land so developed. Later it sold the land and buildings to a unit trust and leased them back, thereafter conducting the motel business as a lessee. It claimed that the interest paid on the secured and unsecured loans were allowable deductions, even after the sale of the land and buildings. The Full Court distinguished between the interest paid on the secured borrowings and the interest paid on the unsecured loans. The latter had comprised shareholders' loan accounts. As at the date upon which the land and buildings were sold (1 February 1979) those shareholders' loan accounts were not repayable. On 1 February 1979 there was a rearrangement in relation to those loans. It was agreed that all the shareholders' loans would be extended until 31 December 1985. The Full Court held that in those circumstances the relevant connection between the interest outgoings on the shareholders loans and the taxpayer's business activities was broken on 1 February 1979, so that no part of the interest thereafter incurred was deductible. In relation to the interest paid on the secured loan, the Full Court (at 315) said:

"A question arises in this case as to when the interest outgoing 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 from Amalgamated Zinc (De Bavay's) case, particularly if regard be had to the comments of Mason J in AGC (Advances) Ltd to which we have referred, 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."

As I have mentioned above, I agree that the period of time between cessation of the business and incurring of interest expense is relevant to whether such interest expense was sufficiently proximate to the business activities for it to be deductible under s 51(1). In a particular case, the period of time might be so long that one could not say that the occasion for the outgoing or loss was to be found in a transaction entered into in the carrying on of a former business. However, that is not how I would characterise the circumstances of the present matter. In my view, it is quite clear that the occasion for the loss in the present matter (the loss being the payments of interest) is to be found in a transaction entered into in the carrying on by the Partnership of the business for the purpose of producing assessable income. That is, in the arrangements between the applicant and his wife as partners on the one hand and the Rural and Industries Bank of Western Australia on the other hand whereby the Bank loan was made and, as contemplated by all concerned, the proceeds of the loan were applied in the purchase of the delicatessen business. 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 in the years in question were deductible under the second limb of s 51(1). See also Commissioner of Taxation v E.A. Marr and Sons (Sales) Ltd [1984] FCA 213; (1984) 2 FCR 326 at 333. In those circumstances, there is no need to consider whether they would also be deductible under the first limb of that subsection.

I certify that this and the preceding twelve (12) pages are a true copy of the Reasons for Judgment of Justice Carr

Associate:

Dated: 30 June 1998

Counsel for the Applicant:	Dr J J Hockley
Solicitor for the Applicant:	Messrs Wilson & Atkinson
Counsel for the Respondent:	Mr J D Allanson
Solicitor for the Respondent:	Australian Government Solicitor
Date of Hearing:	25 May 1998
Date of Judgment:	30 June 1998

SCRAP (ALREADY ON P 8)

The respondent put these submissions on two broad bases, namely, the use of the borrowed funds and the occasion of the outgoings. There was a further supplementary submission which focused on the time which had lapsed between the cessation of business and what was said to be the incurring of the interest expense. Mr J D Allanson, counsel for the respondent, submitted that during the 1993 and 1994 income years when the interest liabilities were incurred "the funds" (by which he meant the balance of the Bank loan remaining unpaid) were not being used for the purpose of gaining or producing income or in the carrying on of the business. He submitted that because the funds had been "wholly consumed" the applicant "fails the `use' test". This was a reference to a line of authorities which included Commissioner of Taxation v Roberts [1992] FCA 363; (1992) 37 FCR 246 at 255 and 257; Fletcher v Federal Commissioner of Taxation [1991] HCA 42; (1991) 173 CLR 1; Kidston Goldmines Ltd v Commissioner of Taxation (1991) 30 FCR 77 at 85; John Fairfax & Sons Pty Ltd v Federal Commissioner of Taxation [1959] HCA 4; (1959) 101 CLR 30; Inglis v Federal Commissioner of Taxation [1979] FCA 106; (1979) 40 FLR 191 at 195; Steele v Federal Commissioner of Taxation (1997) 97 ATC 4247; Wharf Properties Ltd v Commissioner of Inland Revenue of Hong Kong (1997) 97 ATC 4225 at 4229; Ure v Federal Commissioner of Taxation [1981] FCA 9; (1981) 81 ATC 4100 at 4110; Federal Commissioner of Taxation v Ilbery [1981] FCA 188; (1981) 38 ALR 172 at 181; Stamoulis v Federal Commissioner of Taxation (1997) 97 ATC 5,051 and Riverside Road Pty Ltd (in liq) v Federal Commissioner of Taxation [1990] FCA 205; (1990) 23 FCR 305. The respondent relied on the circumstance that under the terms of the agreement for the Bank loan the applicant and his wife were entitled to repay that loan at any time without any penalty interest. From that circumstance, he sought to characterise the interest payment as having been "voluntarily incurred". The next step, building on that characterisation, was to submit that in turn the characterisation of the interest payments would ordinarily be determined by reference to the object which the taxpayer had in view, the result aimed at by the taxpayer or the advantage which the expenditure was intended to gain - a reference to the observations of Deane and Sheppard JJ in Ure at p 4109 where their Honours reviewed the case law to that date. Mr Allanson also relied on observations made by the High Court of Australia in Fletcher at 17-18. The respondent contended that in the present case the result aimed at by the applicant and his wife by making the relevant interest payments after the business had been sold was the retention (by avoiding bankruptcy) of private assets. As that was not an income-producing purpose but, so it was submitted, a private purpose, the interest expenses were not deductible. As part of this submission, the respondent contended that the use of the funds was not to be found in income-producing activity but "...in the funding of the excess of creditors over debtors".

Turning to the "occasion of the outgoing", the respondent submitted that the occasion of the interest payments, after the cessation of the business, was not to be found in the business operations conducted during the 16 month period referred to above. Three reasons were advanced for this contention. First, it was said that if the occasion of the outgoing were to be found in the original loan transaction, that would deny deductibility to all interest payments, even those made during the course of the operation of the business as, so it was put, that occasion is not to be found in such business operations.

To the extent that the respondent relied upon the recurrent nature of the interest expenditure, that might well provide a basis for distinguishing the outgoings which were involved in AGC (Advances) Ltd and in Placer. In the former case the writing off of the bad debts could probably be seen as a "one off" transaction. The same could be said of the settlement and legal costs in Placer.