FEDERAL COURT OF AUSTRALIA

Guest v Commissioner of Taxation (No 2) [2007] FCA 412

TAXATION – calculation of interest

Guest v Commissioner of Taxation [2007] FCA 193 cited

JOHN DAVID GUEST v COMMISSIONER OF TAXATION

VID 376 OF 2004

HEEREY J

23 MARCH 2007

HOBART (HEARD IN MELBOURNE)

THE COURT ORDERS THAT:

1.                  The appeal is allowed;

2.                  The applicant is entitled to deduct the amounts of interest set out in the table of calculations filed with the Court on 19 February 2007;

3.                  The Commissioner’s decision to disallow the applicant’s deduction is set aside and the matter is remitted to the Commissioner to determine the applicant’s objections in accordance with the reasons delivered on 23 February 2007;

4.                  The Commissioner pay the applicant’s costs of the appeal including reserved costs.

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

REASONS FOR JUDGMENT

1                     On 23 February 2007 I delivered reasons substantially upholding Mr Guest’s contentions in this matter. I directed that counsel bring in minutes of proposed orders to give effect to the reasons:  Guest v Commissioner of Taxation [2007] FCA 193. 

2                     Differences have arisen between the parties as to the appropriate calculation of interest for which I have held Mr Guest is entitled to deductions. Written submissions have been filed.

3                     Two issues arise: the method of calculation of interest and the application of sale of fruit proceeds.  Depending on which approach is correct as to each issue, Mr Guest may have been under no liability at all to Rural Finance as at 31 March 1991 in which case no deductions will be allowable for the tax years in question (1998–2001 inclusive).  Alternatively, there may be a liability which will result in a deduction for substantially less than the amounts claimed.

First issue – method of calculation of interest

4                     The Commissioner contends that amounts received by Mr Guest with respect to fruit sales during the relevant year ought to be deducted from the principal before calculating the balance on which interest is charged in respect of that year.  Mr Guest says that the interest should be calculated before the fruit proceeds are deducted.

5                     The parties agree that the issue is determined by cl 3A(ii) of the loan agreement which relevantly provides:

“…interest shall accrue at the rate of nineteen (19%) per centum on the balance of the Principal Sum from time to time outstanding such interest to be calculated annually in arrears on the 31^st March in each year of this Agreement.”

6                     Under cl 6.2 of the sale of fruit agreement the buyer, Kathleen Drive StoneFruit Growers’ Syndicate No. 1 Pty Ltd (Kathleen), was required to pay the joint venture at the price specified in the fourth schedule in each year on 31 March (not “by” that date as the Commissioner contends: see sale of fruit agreement cl 6.2).  The amount specified for the year ended 31 March 1989 was $12,800.  This amount was not applied to the loan balance until 31 March 1989 so $41,996.88 was the loan balance for the entire twelve months.  In my view Mr Guest is correct on this issue because until the proceeds of fruit were applied on 31 March the whole amount due at the beginning of the year was outstanding. 

Second issue – application of sale of fruit proceeds

7                     In the year ended 31 March 1991 the proceeds of fruit sales due were $26,400.  The Commissioner says that the whole of that amount should have been subtracted from the balance of the loan, not $15,000 which Mr Guest calculates.  The difference represents an amount apparently paid to Johnson Farm Management. 

8                     Clause 6.1 of the sale of fruit agreement provided that Mr Guest and his co-joint venturers through their agent, Johnson Farm Management, were to notify Kathleen when fruit was ready for delivery pursuant to the agreement “and shall forward a direction for payment to the Buyer in the form annexed hereto and marked “A”.”  Annexure A is addressed to Kathleen and reads

“DIRECTION FOR PAYMENT 

The Joint Venturer hereby directs and authorises the Buyer to pay the proceeds from the sale of the fruit crop as follows:  To Rural Finance Pty Limited.”

9                     For the year ended 31 March 1991 Kathleen was obliged to forward the entire sum of $26,400 to Rural Finance.  The loan books of account relied upon by Mr Guest show only $11,400 being credited to his loan account. 

10                  The Commissioner says that it does not follow that Rural Finance never received the full amount.  The loan books of account are consistent with Rural receiving the full amount but then having wrongly applied $15,000 of it in payment of the maintenance fee that Mr Guest and his fellow investors owed to Johnson Farm Management.  Also Rural had a charge over the fruit proceeds by virtue of cl 3C(i) of the loan agreement.  All these agreements were executed at the same time and plainly the scheme was that all proceeds were to be directed to Rural Finance. 

11                  The Commissioner argues that there are at least two possible explanations, which are equally possible.  One is that Kathleen breached its obligations under the sale of fruit agreement and wrongly paid $15,000 to Johnson Farm Management instead of Rural Finance.   The second is that Rural Finance received the full amount and wrongly passed on $15,000 of it to Johnson Farm Management.  Since Mr Guest bears the onus of proof, he has not shown that the first explanation rather than the second is correct.

12                  I do not agree.  The two explanations are not equally possible.  There is no logical reason why Rural Finance would have paid the management fee.  It would have deprived Mr Guest of his tax deduction and thus would have been contrary to the whole purpose of the scheme.  Rural Finance’s books of account are only consistent with it never having received the $15,000.  I am satisfied that it is more likely than not that Kathleen never paid the $15,000 to Rural Finance.  Since Receivers and Managers were appointed on 26 July 1991 (see earlier judgment at [49]) it is reasonable to infer that the Corindi project had been under financial pressure in the preceding months. This would provide a motive for Kathleen to apply the $15,000 to keep things afloat, at the expense of investors like Mr Guest.

13                  I must say I deprecate this point being raised at such a late stage of proceedings, which commenced as long ago as March 2004.  The contention that the whole loan had been repaid did not emerge until after the hearing had finished and Mr Guest had, pursuant to leave, filed his calculation of interest.  The purpose of that leave was to enable a recalculation to take into account the fact that Mr Guest had conceded he was only entitled to a one-sixth deduction. Also there was some uncertainty about a figure on an invoice of the Receiver.  The Commissioner’s submission raised a totally new point which if correct would have made the whole proceeding a waste of time.

14                  This problem has been exacerbated by the Commissioner’s sending further unsolicited submissions to my Chambers.  Once a hearing is concluded, parties should have no further communication with the judge except where directions have been given for the filing of further submissions.  It may be legitimate for a party to send a written submission without such directions having been given, but only in exceptional circumstances (such as the discovery of a statute or authority directly in point), and then only with the prior consent of the other party.  Simply copying a submission to the other party is not acceptable.

Conclusion

15                  The Commissioner fails on both issues.  There will be orders that

1. The appeal is allowed;

2. The applicant is entitled to deduct the amounts of interest set out in the table of calculations filed with the Court on 19 February 2007;

3. The Commissioner’s decision to disallow the applicant’s deduction is set aside and the matter is remitted to the Commissioner to determine the applicant’s objections in accordance with the reasons delivered on 23 February 2007;

4. The Commissioner pay the applicant’s costs of the appeal including reserved costs.

Associate:

Dated:         23 March 2007