FEDERAL COURT OF AUSTRALIA

Charles Apartments Pty Limited v Commissioner of Taxation [2025] FCA 461

ORDERS

THE COURT ORDERS THAT:

1.    The Applicant’s appeal be dismissed.

2.    The Applicant pay the Respondent’s costs of the appeal, to be taxed if not agreed.

3.    The Respondent’s cross-appeal be allowed.

4.    The decision of the Administrative Appeals Tribunal dated 28 May 2024 (Decision) be set aside.

5.    In lieu of the Decision it be determined that the Respondent’s objection decision be affirmed.

6.    There be no order as to costs of the cross-appeal.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

WHEATLEY J:

INTRODUCTION

1    Charles Apartments Pty Limited, the Applicant, appeals from the decision of the Administrative Appeals Tribunal given on 28 May 2024 (WCVB v Commissioner of Taxation [2024] AATA 1259 (D or Decision)), pursuant to s 44 of the Administrative Appeals Tribunal Act 1975 (Cth) (AAT Act). Such appeals are in the original jurisdiction of the Court and may only be on a question of law: Haritos v Commissioner of Taxation (2015) 233 FCR 315; [2015] FCAFC 92 at [62].

2    On the appeal, the Applicant advances the matters raised in its supplementary notice of appeal filed 24 September 2024. However, at the hearing, the Applicant formally withdrew and abandoned the error alleged regarding penalties, being Question of Law 5 and Ground 5, in the supplementary notice of appeal.

3    The Applicant advances arguments in relation to what is termed the Further Deduction Issue. In short, the Applicant’s argument is that the Tribunal erred by failing to take a “consequential step” to consider whether the Applicant had a further deduction available to it (in the same amount as the additional income). This was (so the argument was advanced) because the Tribunal held that the Applicant had not discharged its onus of proof in relation to its assessable income such that the additional income which the Commissioner of Taxation had included, remained part of the Applicant’s assessable income. It is this failure (expressed in different ways) which the Applicant alleges caused the Tribunal to err on a question of law.

4    The Commissioner resists the Applicant’s contentions regarding the Further Deduction Issue in essence on two bases. First, that the matters raised by the Applicant go to the merits of the Decision rather than identifying legal error. Secondly, and in any event, that the Tribunal did not make any such an error in reaching its conclusion as to the maximum of the interest deduction allowable, which would not have included this additional income.

5    The Commissioner also cross-appeals and seeks that the Tribunal’s decision to vary the reviewable (deemed) objection decision, to allow a deduction in respect of interest in the amount of $1,870,223.34, be set aside and that the objection decision be affirmed.

6    For the reasons which follow the Applicant’s appeal should be dismissed and the Commissioner’s cross-appeal be allowed.

ISSUES

7    To put the relevant issues in context, it will be necessary to outline some of the background in further detail. However, before doing so, it is convenient to identify the issues which were the subject of the Tribunal’s decision:

(1)    What was described as the Fourth Contract Issue, which related to the Applicant’s assessable income and whether the Applicant had discharged its onus to negate the increase to its assessable income by an amount referrable to the fourth contract, or whether the taxpayer’s assessable income should only have been determined by reference to the proceeds of three contracts of sale.

(2)    Two issues under the heading of the Deductions, being:

(a)    an allowable deduction in respect of interest; and

(b)    an allowable deduction in respect of construction costs; and

(3)    Penalties.

8    The Tribunal held that:

(1)    in relation to the Fourth Contract Issue, the Applicant had not discharged its onus of proof. Therefore, a portion (being the portion attributed to the Applicant by the Commissioner, in an amount of $946,000, being the amount of the additional income) of the sale proceeds under that fourth contract was attributable to the Applicant and should have been included in its assessable income (even if it never actually received those monies) (Decision at [102]).

(2)    the deduction for the claim in respect of:

(a)    interest in the 2011 income year was an outgoing incurred in gaining or producing assessable income (Decision at [139] – [140]), in the amount of $1,870,223.34;

(b)    the construction costs were a claim which the Applicant had not discharged its onus as being incurred or as being available on all of the evidence, during the relevant income year (Decision at [149] – [151]); and

(3)    the penalty which comprised of a base penalty of 50% on the basis that the Applicant or its agent was reckless within the meaning on item 2 of s 284-90(1) of Sch 1 to the Taxation Administration Act 1953 (Cth) and an uplift of 20% pursuant to s 284-220(1) as the Applicant prevented or obstructed the Commissioner in relation to the fourth contract (Decision at [160]).

9    The matter which remains the subject of challenge from the Applicant’s supplementary notice of appeal is the Further Deduction Issue. The Applicant seeks (by way of the orders sought) that the quantum of the interest deduction should be increased by an additional $946,000 (so that the total of the interest deduction is $2,816,223.23).

10    The Applicant does not challenge either the Fourth Contract Issue, being the increase to the Applicant’s assessable income, the deduction in respect of the construction costs and also abandons the appeal in respect of penalties.

11    The Commissioner seeks to resist the Applicant’s appeal and challenges the Tribunal’s Decision, by way of the cross-appeal, only in relation to the interest deduction in the amount of $1,870,223.34, seeking that the Decision be set aside and the objection decision be affirmed (that is, that the allowable deduction for interest be nil).

12    As such, the only issue is in respect of the allowable deduction for interest. The Applicant claims that the Tribunal erred and the allowable deduction should be increased by $946,000 to $2,816,223.23. The Commissioner claims that the Tribunal erred and the deduction should be decreased to nil (as it was in the objection decision).

THE TRIBUNAL’S DECISION

13    Although only one issue remains concerning the deduction in relation to interest; to put that issue in context, it is necessary to consider the Decision with respect to the Fourth Contract Issue and the claim for a deduction in respect of interest. This is because the Applicant submits that the Tribunal’s error involved a failure to address the availability of a deduction of $946,000, by way of the Further Deduction Issue. The Applicant commences the argument regarding the Further Deduction Issue with the Tribunal’s finding that the Applicant had not discharged its onus to establish that the amount of $946,000 was not assessable income derived by the Applicant.

The Fourth Contract Issue

14    The Applicant was a member of the Demian Group or Group of companies with Mr Demian being the controlling mind of the relevant entities within that Group. The Applicant was a special purpose vehicle, for the specific purpose of acquiring and developing the three contiguous properties at 6, 8 and 10 Charles Street, Parramatta (Properties). The Applicant was established in late 2001 for this specific purpose. The Applicant and Demian Holdings Pty Ltd (as joint tenants, Demian Holdings only held a 1/20th share) purchased the Properties in February 2002 for $3,125,000.00. The acquisition of the Properties was funded by a loan facility from St George Bank in the amount of $3,000,000.00 (D at [28] – [29] and [108]).

15    The Applicant commenced the process of obtaining the development approvals for the Properties in December 2002. The development application lodged sought approval to build a mixed-use multi-storey building which included retail tenancies and apartments with parking. That approval was granted in January 2006, which anticipated construction would commence within 5 years otherwise it would lapse. A fresh approval after a series of interactions between Mr Demian and the planning authority was issued in May 2009, which would lapse if work did not begin by May 2012 (D at [31]).

16    On 23 June 2003, St George Bank wrote to the Applicant advising that the loan facility was due to expire at the end of June 2003 (D at [109]). A new, global solution to the Demian Group’s financing needs was sought with Suncorp establishing a loan of $27 million to consolidate and payout other existing facilities within the Group, including the Applicant’s St George Bank facility secured by the Properties (D at [30] and [110]).

17    By 24 December 2003, the Suncorp facility was established, the St George Bank facility was paid out and Suncorp subsequently took a mortgage over the Properties as part of the security for this new facility. The Tribunal records that the facility deed included a requirement that security be provided by various Demian Group companies, including the Applicant (D at [112]). On this same day, Mr Demian signed a Deed of Guarantee and Indemnity, as between the Applicant and Suncorp (Guarantee) (amongst others) (D at [112]). The borrower from the Demian Group, which established this Group facility with Suncorp, was West Apartments Pty Ltd.

18    Another of the Group companies provided treasury services (Treasury Company), such that it advanced $3 million to the Applicant so that St George Bank could be paid out and the Properties would be available to Suncorp for security. The Applicant was a party to an intragroup loan for this amount. This intragroup loan was later assigned to another Group member (Assignee), however the details of that assignment are not in dispute for the purposes of the appeal or cross-appeal.

19    Consideration of the terms of the intragroup loan agreement will be necessary. However, it is convenient to do so in the context of considering the issue concerning the deduction of interest. It is sufficient at this stage to record that the Demian Group’s lead borrowing company, West Apartments, was in default under the terms of the facility deed with Suncorp and Suncorp was considering taking enforcement action (D at [30] and [117]). On 9 June 2009, Mr Demian on behalf of the Applicant and in his personal capacity signed a Deed of Forbearance (Forbearance) (D at [117]).

20    In the early part of 2010, Mr Demian approached Suncorp to obtain its consent to the sale of the Properties. Discussions between Mr Demian and the responsible officer at Suncorp ensued. Mr Demian received a verbal ‘go ahead’ from the responsible officer at Suncorp shortly after 12 May 2010. Three separate contracts of sale were entered in relation to each of the three Properties. The first contract was signed on 18 May, the second 2 June and the third on 7 June 2010 (D at [39]). Each of these contracts related to each of three Properties, which were all due to settle on different dates. Suncorp required that all three contracts settle concurrently, which occurred. The final sale price (inclusive of GST) for the Properties was $5 million (D at [34]). The Applicant returned as assessable income in its income tax return for the year ending 30 June 2011 the $5 million from these three contracts, on the basis that this was the total derived from the sales of the Properties (D at [4]).

21    On 7 June 2010, a fourth contract, described as a deed of agreement, was also entered into between Advanced Communications Pty Ltd and Chapel Business Centre Pty Ltd (CBC). CBC was also the purchaser under the three separate contracts for the sale of the Properties. Advanced was another Demian Group company. This fourth contract was for the right, title and interest in relation to certain documents, therein defined as the D.A. Documents, for the sum of $3,850,000 plus GST. The D.A. Documents were defined as “All plans, reports, council approvals, submissions for (6-10 Charles Street, Parramatta NSW), (Corner of Speed Street and 1 Mill Road, Liverpool, NSW), (Corner Chapel Road & Rickard Road, Bankstown NSW).”

22    In relation to the Fourth Contract Issue, there was no dispute that:

(1)    the Applicant did not return as assessable income any proceeds of sale from the fourth contract, in its tax return for the year ending 30 June 2011; and

(2)    it was not disclosed to Suncorp, the financier.

23    Even though the Tribunal accepted that the proceeds of sale under the fourth contract were never actually received by the Applicant, the Tribunal was not satisfied that the Applicant had discharged its onus, that a portion of those sale proceeds were not assessable income of the Applicant. The Tribunal was satisfied that there was a commercial linkage in the minds of the various parties between the three contracts of sale and the fourth contract. The Tribunal accepted that it was appropriate to treat a portion of the proceeds of sale under the fourth contract as amounts that were assessable to the Applicant.

24    On the basis that the Applicant had failed to discharge it onus, in relation to Fourth Contract Issue, the Tribunal held that the portion of the sale proceeds from the fourth contract (being the $946,000) should remain included in the assessable income of the Applicant.

The Deduction – claim for interest

25    The Tribunal considered two issues for determination of this issue. First, whether the loss or outgoing was incurred (D at [104]). Secondly, whether there was a nexus established between the loss or outgoing being incurred and the earning of assessable income (D at 105]).

26    First, the Tribunal considered whether it was incurred. The Tribunal considered the financing arrangements for the Demian Group, being the initial purchase and then the subsequent refinance, with Suncorp. The initial purchase of the Properties was funded by a loan with St George Bank for $3 million (D at [107] – [109]).

27    The Demian Group approached a new banker, Suncorp, to provide a more global solution, being a loan of $27 million to consolidate and pay out existing facilities, including the St George Bank facility secured by the Properties (D at [110]). The Properties would be offered as security for the Applicant’s borrowings from Suncorp under this facility. Further, so that the Properties could be so offered, as security, the Group would provide $3 million to the Applicant so it could pay out the St George Bank loan and discharge that mortgage (D at [111]).

28    Mr Demian’s evidence (which was accepted by the Tribunal) was that although interest accrued on the amount advanced under the intragroup arrangement, the Applicant was not liable to pay that interest as it accrued but instead would pay the capitalised interest when it sold the Properties. Furthermore, the Applicant would only be liable for such interest, to the extent that there were sufficient sale proceeds from the sale of the Properties (D at [104], [113], [120], [127] and [132]).

29    When the Applicant sold the Properties, the entirety of the sale proceeds under the three contracts was ultimately paid to Suncorp (D at [119] and [139]). This was the entire net amount of $4,870,223.34.

30    The Tribunal referred to the terms of the contingency upon which the liability rested (D at [120]) and a calculation summary of interest claimed on the principal debt of $3 million, from 2003 until August 2010, calculating an amount of around $3,400,000 (D at [121]). However, so the Tribunal continued, as the Applicant was only able to pay $1,870,223.34, it was only liable for that amount under the terms of the intragroup loan.

31    The Tribunal described the arrangement as effectively a limited recourse loan and held that in the circumstances, the position advanced was not unusual (D at [131]).

32    On this basis (D at [132] – [133]), the Tribunal was satisfied that the claim for a deduction in respect of interest was incurred. The Tribunal also accepted the terms of the intragroup loan was that the Applicant was only liable to pay as much as it could, that being the maximum amount that could be deducted.

33    Second, the Tribunal considered whether the Applicant had established the nexus. The Tribunal recognised (D at [136]) that the complication in this matter arose out of the refinancing and the consolidating of the loans. It was this consolidation, together with the Applicants increased exposure and other companies in the Demian Group indirectly receiving a benefit by the payment into the facility by the Applicant, which created the uncertainty referred to by the Tribunal (D at [137] – [139]). However, the Tribunal held that the Applicant “would not have derived any of the assessable income it subsequently returned without agreeing to pay the net proceeds of the sale [of the Properties] to Suncorp in reduction of the debt due under the facility.” On this basis, the Tribunal was satisfied that the loss or outgoing was incurred in gaining or producing the Applicant’s assessable income (D at [139]).

CONSIDERATION

The Supplementary Notice of Appeal

34    The Applicant’s written submissions did not seek to separately address the questions of law raised on the supplementary notice of appeal. The matters are all addressed together.

35    The Commissioner submits that the grounds of the Applicant’s supplementary notice of appeal take issue with the merits of the Decision rather than identify an error of law and hence it does not properly raise a question of law, which is necessary to attract this Court’s jurisdiction.

36    Earlier, on 20 August 2024, the Commissioner filed a notice of objection to competency in relation to the three questions of law sought to be advanced in the Applicant’s original notice of appeal filed on 25 June 2024. It is unnecessary to set out those questions of law as the Applicant amended its questions of law and grounds in support of those questions by way of the supplementary notice of appeal. The Court did make provision for hearing the objection to competency on 1 November 2024. Those Orders also granted the Applicant leave to file and serve the supplementary notice of appeal. It is apparent that the hearing of the notice of objection to competency did not proceed.

37    The Applicant’s supplementary notice of appeal identifies the questions of law in relation this issue as follows (emphasis removed):

(1)    Whether there was a denial of procedural fairness by the Tribunal making its findings at [139]-[140] & [165]?

(2)    Whether the Tribunal properly construed s 8-1 of the Income Tax Assessment Act 1997 (Cth)?

(3)    Whether the facts:

(a)    found by the Tribunal; or

(b)    ought to have been by the Tribunal,

fall within s 8-1 of the Act?

(4)    Whether the Tribunal erred at [132] & [165] in finding that only $1,870,223.34 was paid in respect of interest?

38    Grounds 1-4 of the supplementary notice of appeal, are as follows:

1.    The Tribunal traced the history of the deductions issue, including that there needed to be tracing of the deductions, [107]-[133], concluding at J[132] the intragroup loan structure did not preclude the interest being allowed. The quantum allowed was $1,870,233.34 (at [165]) but the Tribunal held (at [133] & [139]-[140]) that the amount paid was limited to $1,870,233.34. The Tribunal erred by failing to take a consequential step in its reasoning. It erred in finding that the Decision ought only be amended to the extent of allowing $1,870,233.23 in interest paid as an allowable deduction because it was earlier found, at [102], that additional income ought to be assessed to the Applicant from the ‘fourth contract’. That earlier finding was relevant to the quantum of interest allowable as a deduction under s 8-1 of the Act because it was additional assessable income to which the expense of the interest paid had the relevant nexus.

2.    The Applicant contends that the allowable deduction of $1,870,233.23 ought to have been increased to $2,816,223.23 (being an increase of $946,000 on the deductions of $1,870,233.23 held to be allowed by the Tribunal) because:

a.    the Applicant was liable to further interest expense;

b.    the additional interest to which the taxpayer was liable was a relevant outgoing;

c.    the outgoing had the requisite nexus to satisfy s 8-1 of the Act; and

d.    the outgoing was no subject to any of the disqualifying factors in s 8-1(2) of the Act.

3.    If the Tribunal was going to limit the allowable deduction to $1,870,233.23, rather than $2,816,223.23 (being an increase of $946,000 on the deductions of $1,870,233.23 held to be allowed by the Tribunal), the Tribunal should have afforded the parties the opportunity to have been heard in relation to the nexus of the additional income to the allowable deduction. If the Applicant had been afforded that opportunity to be heard it would have contended at set out in [2] immediately above.

4.    The Tribunal erred, including at [121], in finding that the Applicant’s submissions as to the interest paid was limited to $1,870,233.23 when the Applicant submitted via a table of interest payments a much higher figure.

39    It is difficult to reconcile the alleged grounds with the questions of law sought to be advanced. There is some intermingling of the matters advanced in the grounds, which then appear to be supportive of the questions of law advanced. However, whether or not the appeal is on a question of law is to be approached as a matter of substance not form: Haritos at [62(6)] and [94]. The principles articulated in Haritos (at [95] – [105]) include that although the questions of law are not to be distilled from the grounds of appeal, when those questions are read in context, together with the grounds which detail why it is that the question so advanced should be answered in the way an applicant promotes, fairness requires that the entire notice of appeal should be read, not simply the questions of law in isolation.

40    The Applicant clarified at the hearing that Grounds 1, 2 and 4 were relevant to Question of Law 2, regarding the construction of s 8-1 of the Income Tax Assessment Act (Cth) (1997 Act). It is apparent that Ground 3 is also relevant to the procedural fairness question in Question of Law 1 and Ground 4 is relevant to Question of Law 4. There appears to be some overlap and intermingling of the grounds supporting Question of Law 3. However, that Question was not the focus of the Applicant’s written or oral submissions.

41    In relation to Question of Law 1, whether the Tribunal denied procedural fairness, that would be an appeal on a question of law: Haritos at [202]. The particular paragraphs of the Decision referred to in Question of Law 1, together with Ground 3, provide the necessary detail to support the question of law advanced. That, alone, is sufficient to properly enliven the Court’s jurisdiction.

42    Question of Law 2, being a question of construction of s 8-1 of the 1997 Act could raise a question of law: Commissioner of Taxation v Michael John Hayes Trading Pty Ltd (as trustee of MJH Trading Trust) (2024) 303 FCR 62; [2024] FCAFC 80 at [3]. That construction error can be summarised (with reference to Grounds 1, 2 and 4) as, because the Tribunal held that the Applicant did not discharge its onus in relation to income (and hence had the additional assessable income of $946,000, which the Commissioner had included) it was required, as a matter of construction pursuant to s 8-1 of the 1997 Act, to go on and consider what is termed “the consequential step”, being the Further Deduction Issue. Again, this would be sufficient to properly raise the Court’s jurisdiction.

43    Whether or not the supplementary notice of appeal could have been better drafted is not the relevant issue and I make no comment about that either way. For the reasons outlined above, I am satisfied that the questions of law, as a matter of substance, advanced in the supplementary notice of appeal, when read in context, together with the grounds and the identified paragraphs of the Decision, properly enliven the jurisdiction of the Court.

Questions & Grounds - The Further Deduction Issue

44    Although variously advanced by way of Questions of Law 1 to 4, the Applicant’s contentions can be described as the Tribunal:

(a)    failing to afford the parties the opportunity to be heard, being a denial of procedural fairness; and/or

(b)    not properly construing s 8-1 of the 1997 Act; and/or

(c)    limiting its consideration of the allowable deduction for interest to $1,870,233.23,

without considering the nexus of the additional income and a further allowable deduction for interest, being in the same amount of the additional income ($946,000).

45    Question of Law 3 was not separately addressed, either in the Applicant’s written submissions or at the hearing. It was also not expressly abandoned. I have considered it together with the other questions and grounds, given the intermingling that has occurred.

Procedural Fairness

46    At the hearing, the Applicant accepted, in this respect, that it ran its case before the Tribunal in a particular way. The Applicant disputed and sought to discharge its onus in relation to the additional assessable income attributed to it by the Commissioner. The Applicant only advanced a case that the fourth contract did not constitute any income to the Applicant taxpayer. At the hearing of this appeal the Applicant, quite properly, recognised that it could have advanced an alternative case. That being if it was unsuccessful in discharging the onus in relation to the additional assessable income from the fourth contract, then it should have also been entitled to an additional allowable deduction, in the same amount. The Applicant in the hearing described this, in the context of advancing the legal error based on the construction argument (and drawing an analogy to the Commissioner’s procedural fairness argument), as the “procedural fairness concession”.

47    What is required to afford procedural fairness will always depend, not only on the statutory framework within which a decision is made, but also on the context, facts and circumstances of the particular case: SZBEL v Minister for Immigration and Multicultural and Indigenous Affairs (2006) 228 CLR 152; [2006] HCA 23 at [26], [29] and [32]. The scope and content of what will be necessary and appropriate to ensure that procedural fairness has been afforded is flexible and adaptive to avoid practical injustice and ensure that the ultimate touchstone, being fairness, is met; SZBEL at [26], [29] and [32]: Degning v Minister for Home Affairs (2019) 270 FCR 451; [2019] FCAFC 67 at [13]; Commissioner for Australian Capital Territory Revenue v Alphone Pty Ltd (1994) 49 FCR 576; [1994] FCA 293 at 590-591. Procedural fairness also requires identification of issues, adverse conclusions or factors on which the decision is likely to turn which are not apparent and would not be an obvious or natural evaluation from the nature and content from the known material: Degning at [13]; SZBEL at [29]; Alphone at 591-592.

48    This concession, as described by the Applicant, recognises that if the Tribunal accepted the additional income arguments based on the fourth contract, then it would be open for the Tribunal to also consider what is now called the Further Deduction Issue. That is, the Further Deduction Issue was an obvious and natural issue which would have been open on an evaluation of the known material before the Tribunal. The concession by the Applicant is properly made. However, it does mean that Question of Law 1 of the supplementary notice of appeal must be dismissed.

Construction of s 8-1 of the 1997 Act

49    It is apparent that the Applicant seeks to advance this question of construction on the basis that the Tribunal failed to make the consequential connection as between the increase to the Applicant’s assessable income but without regard to an increase in the allowable deduction for interest. It is this argument, which the Applicant referred to in a shorthand way as the “consequential step” argument. This, the Applicant advanced, was on the basis of what is required on a proper construction of s 8-1 of the 1997 Act. The argument can more fully be described as follows:

(a)    the Tribunal accepted that there was an intragroup loan;

(b)    a term of the intragroup loan, in relation to interest was that:

(i)    the liability to pay any amount in respect of interest would not arise unless and until the Properties were sold; and

(ii)    the maximum amount of the liability for interest when it did become payable was limited to the amount of any surplus available following the sale (D at [120]) or only to the extent that there was sufficient sale proceeds from the sale of the Properties to pay interest (D at [127] and also see D at [132] – [133]).

(c)    the Tribunal held that the Applicant had derived the additional assessable income in the sum of $946,000 from the fourth contract;

(d)    there was further interest which could have been deducted, as provided in the calculation summary of interest (referred to in D at [121]), and which was referrable to the additional income held to be assessable of $946,000;

(e)    consequentially the amount of any deduction for interest should have been further increased by the same amount as that additional income of $946,000, as there were further proceeds of sale, or a further surplus.

50    The Applicant contends that it is an orthodox approach that where borrowed money is laid out for the purposes of gaining assessable income and this furnishes the required connection between the interest paid upon it by the taxpayer and the income derived. The Applicant also contends that interest is not normally a capital outgoing because it is a periodic expense.

51    Initially the Applicant sought to advance a somewhat strained submission regarding the construction of s 8-1 of the 1997 Act, with reference to Fletcher v Federal Commissioner of Taxation (1991) 173 CLR 1; [1991] HCA 42. It became apparent during the course of argument that the parties were in agreement as to the principle to be applied from Fletcher. However, it was its application to this case which was the basis of controversary.

52    The Commissioner, quite rightly, submits that the nexus required between the loss or outgoing being incurred and gaining or producing assessable income does not require a confined or narrow approach. As their Honours said in Fletcher at 16:

… the reference in it to “the assessable income” is not to be read as confined to assessable income actually derived in the particular tax year, requiring that it be related to the assessable income actually derived in the particular tax year. It is to be construed as an abstract phrase which refers not only to assessable income derived in that or in some other tax year but also to assessable income which the relevant outgoing “would be expected to produce”.

[footnotes omitted – emphasis in original]

53    Fletcher was considering s 51(1) of the Income Tax Assessment Act 1936 (Cth) (1936 Act) and as emphasised, in the above passage, the language of that section was “the assessable income” whereas s 8-1 of the 1997 Act now refers to “your assessable income”. This, in my view, does not change the construction but reinforces that a narrow or confined approach is not required and it is to be construed as referring to the taxpayer’s assessable income derived in that year or in some other year.

54    However, this does not necessarily mean (as the Applicant suggests in its written submissions) that the additional income would therefore translate to an additional deduction in the same amount.

55    The Commissioner submits that the Applicant’s argument goes to the merits of the decision and not to advancing any legal error. The Commissioner also argues that the additional income held to have been derived by the Applicant was not received by the Applicant and hence not able to be paid or payable as interest. The Commissioner relies on the Tribunal’s findings that:

(1)    there was no evidence that the Applicant actually received the amount of $946,000 pursuant to the Fourth Contract (D at [6]); and

(2)    $1,870,223.34 was the maximum amount that the Applicant could claim as a deduction having regard to the terms of the intragroup loan agreement, because “that was all that was left over” (D at [121]).

56    The Commissioner also relies on an additional argument regarding the way the Applicant ran its case before the Tribunal, which was to limit the amount of the interest deduction claimed to a maximum of $1,870,223.34. This is considered below, in more detail in relation to Question of Law 4 and Ground 4 below.

57    The Tribunal accepted that there was an intragroup loan agreement and accepted the terms of that agreement, describing it in various places in the Decision as follows:

(1)    D at [104], describing the argument advanced by the Applicant as “…it was a condition of the intragroup loan that the interest accruing between the 2004 and 2010 financial years was not due and payable unless and until the [Properties] were sold and a surplus was available to make the payment.”;

(2)    D at [113], referring to a passage of Mr Demian’s evidence that: “… those properties were designed to be developed, not to be sold as land. So it’s usually a longer period of time, a much longer period of time, because ... a DA takes quite a bit of time and you’ve got to market, you’ve got build, you’ve got to sell. And the first mortgagees are priority 1, any other direct expense to the sales become priority 2, and then eventually, the intercompany get paid.”

(3)    D at [114], the Tribunal observed that Mr Demian “was unable to produce the loan agreements which recorded the terms, and his recollection of the precise terms of the intragroup deal has shifted over time.”

(4)    D at [115], the Tribunal accepted that the absence of the loan documentation was not incredible and that Mr Demian’s recent recollection although fractured was believable.

(5)    D at [120], the Applicant’s argument was that the interest owed on the intragroup loan was accruing and capitalising as a contingent liability. The contingency was first, the liability to pay any amount of interest would not arise unless and until the Properties were sold and secondly, the maximum of the liability for interest was limited to the amount of the surplus available following the sale.

(6)    D at [121], the Tribunal found that the Applicant was only able and therefore was only liable to pay the $1,870,223.34 for interest under the terms of the intragroup loan.

(7)    D at [127], the Tribunal observed and set out the relevant passage from Mr Demian’s affidavit, noting the amended passage, which stated: “and then only to the extent there was sufficient sale proceeds from the sale of the [Properties] to pay the interest.”

(8)    D at [128] – [132], the Tribunal accepted Mr Damian’s account of the terms of the intragroup loan. The Tribunal observed that “While I accept there might be some uncertainty at the margins as to how much interest had accrued, there seems to be no doubt that at least $1.8 million was paid in respect of interest.”

(9)    D at [133] saying as follows:

[133]    Subject to what follows, that means the deduction was properly sought in relation to the 2011 year of income because the liability to pay the capitalised amount did not arise until that point. I should add that [the Applicant] could not claim a larger deduction in respect of all the interest that accrued: given I accept the terms of the intragroup loan said [the Applicant] was only liable to pay as much as it could, that is the maximum amount that could be deducted.

58    The Tribunal’s reference to the Applicant’s inability to claim a larger deduction, given that it accepted the terms of the intragroup loan and it was only liable to pay as much as it could, is at the centre of the Applicant’s complaint. The Applicant contends that the Tribunal did not consider the additional income it held was derived from the fourth contract, in the context of whether a further deduction for interest was allowable. It was argued that the determination of the additional income from the fourth contract bears on the interest that the Applicant paid, but which was disregarded by the Tribunal, and further that the summary document (Annexure A) was evidence of the interest payments.

59    At the hearing the Applicant sought to develop this submission further, in relation to the finding of the Tribunal regarding the terms of the intragroup loan, by making a distinction between the legal entitlement to receive funds (that amount being derived) and the actual cash flow of funds. This, so the Applicant contended, was based on how the Commissioner advanced the argument that the Applicant derived income from the fourth contract. That is, although the Applicant did not physically receive any monies from the fourth contract, as it was legally entitled to such an amount, it could have directed the payment elsewhere, including for the payment of interest. The Applicant contended that the submission could be “back-tested” as follows. As the Applicant was held to have derived this amount from the fourth contract, it must have been able to control where that amount was paid, otherwise it would be left in the invidious position of having derived an amount of income over which it had no control and hence no ability to discharge an expense from that amount of income.

60    The Applicant submitted that the term of the intragroup loan that was “only to the extent there was sufficient sale proceeds from the sale of the [Properties] to pay the interest” should not be limited to the physical receipt of money but would have also included monies which the Applicant could control as it had the legal entitlement to control those monies. The Applicant accepted that this could be described as being an argument about the proper construction of the intragroup loan, which was that the interest which was incurred by the Applicant included in terms of the “surplus” or the amount it could “afford to pay” an amount to which it had a legal entitlement to control not only amounts which it had physically received.

61    The Commissioner submitted that this argument was new, and that leave was required to advance it, which he opposed. The Applicant firstly sought to persuade the Court that leave was not required. However, in the alternative, sought leave, in so far as it might be required.

62    The Applicant relied on Ground 2 of the supplementary notice of appeal. This further deduction was an amount that the taxpayer claimed it was liable for, under the terms of the intragroup loan agreement, because it had the legal entitlement to that money and hence it was an amount it could afford to pay. The terms of the intragroup loan were not limited to any concept being a cash flow of funds. The Applicant emphasised the chapeau of Ground 2 (as is set-out above) which expressly refers to the increase of the allowable deduction sought, which ought to have included an additional $946,000, and then relied upon paragraphs (a), (c) and (d). The Applicant accepted that none of the words used in Ground 2, used phrases of “legal entitlement” or the “cash flow of funds” (or any combinations thereof). Furthermore, nothing in Ground 2 alerts the reader to it being an argument about the proper construction of the intragroup loan agreement, as opposed to it being based on a proper construction of s 8-1 of the 1997 Act. In that sense, it may be that the construction of the intragroup loan is only a subset of the s 8-1 argument. That is, on a proper construction of s 8-1, the Tribunal was required to consider as a “consequential step” whether the Applicant would be entitled to claim the further deduction, by way of interest based on the terms of the intragroup loan. However, to try and reflect it in this way recognises that Ground 2 of the supplementary notice of appeal does not expressly convey such an argument.

63    Paragraph (a) is the best position for the Applicant. However, it only says “the Applicant was liable to further interest expense”. There is no descriptor of the basis on which the Applicant was relying on to contend it was liable to any further interest expense. There is no express reference to the intragroup loan or the terms of that intragroup loan in any part of Ground 2. Furthermore, there is no reference to the terms of the intragroup loan in the supplementary notice of appeal at all.

64    It is asking too much of Ground 2 as drafted in the supplementary notice of appeal to accept that it incorporates an argument regarding the proper construction of the intragroup loan agreement, as was orally advanced by the Applicant. This argument advanced by the Applicant at the hearing is new. It is not referrable to the supplementary notice of appeal or to the Applicant’s submissions (either on the appeal or the cross-appeal). There is no reference in those documents to matters such as:

(a)    the ‘proper construction’ of the intra-group loan agreement;

(b)    the distinction and then suggested relationship between:

(i)    what was described as the ‘legal entitlement’ to the additional income from the fourth contract, which would trigger the liability for interest; and

(ii)    what was described as the ‘cash flow of funds’, such that the surplus available or the extent to which there was sufficient sale proceeds from the sale of the Properties, was not limited to a concept of cash flow, but was based upon a surplus in so far as a total amount that the Applicant was legally entitled to received.

65    This is a legal argument that the Commissioner quite succinctly dealt with at the hearing. So, although that argument does not arise on the Applicant’s supplementary notice of appeal, in so far as leave is required, I will grant leave to the Applicant to be able to advance that argument.

66    The Commissioner submitted that the question of legal entitlement does not address the factual findings of the Tribunal, which were based on Mr Demian’s evidence. Those findings were that the Applicant would only have to “pay”, that being, on the Commissioner’s submission, the operative word, the amount of $1,870,223.34. Furthermore, that the case the Applicant ran before the Tribunal, in relation to the terms of the intragroup loan, was not based on a concept of “legal entitlement”. The Commissioner submitted that the intragroup loan agreement was not distinguishing between concepts of deemed receipt or constructive derivation, but it was a straightforward arrangement that the Applicant was to “pay” an amount for interest that the Applicant actually had the ability to “pay”.

67    The Tribunal at [132] accepted Mr Demian’s “account of the terms of the intragroup loan”. It is apparent that this is a reference to the revised affidavit of Mr Demian (D at [127]) wherein evidence of the terms of the agreement was given including as to the intragroup loan that the Applicant pay to the Treasury Company interest on the loan of $3 million at the same rate charged by Suncorp from time to time to West Apartments on the loan facility taken out by West Apartments. The Applicant was liable to repay the loan amount of $3 million and pay the interest which had been capitalised only once there was a sale of the Properties and then only to the extent there was sufficient sale proceeds from the sale of the Properties to pay the interest.

68    Although that is the critical aspect of the Tribunal’s finding, the matters referred to at [57] above are also relevant matters of the Tribunal’s reasoning process. The extent to which there were sufficient sale proceeds from the Properties is a reference to an amount above the principal amount borrowed of $3 million.

69    The terms of that agreement were directed towards the Applicant not bearing a burden to pay interest unless or until it sold the Properties. The Applicant was a special purpose vehicle for the specific purpose of acquiring and developing the Properties. The Applicant initially funded the purchase of the Properties by way of a loan from St George Bank for $3 million and then that loan was consolidated with other Demian Group companies borrowings from Suncorp, via an intragroup loan. The Applicant did not have direct borrowings from Suncorp. This was the context of the intragroup loan agreement.

70    Objectively and consistently with the terms of the agreement accepted by the Tribunal, the Applicant did not have sufficient funds to pay interest on the borrowings of $3 million as that interest accrued. Further and again consistent with this approach, the interest which was to be paid was to accrue at the same rate as that being charged by Suncorp on the Demian Group’s facility. However, that interest was only payable at the time there was a sale of the Properties, and it was from the proceeds of those sales that interest was then payable and was to be paid. The amount of interest to be paid was only to the extent that there were sufficient sale proceeds from the sales of the Properties to pay interest. There was an upper limit, a maximum of the interest that was payable by the Applicant pursuant to the terms advanced and accepted of the intragroup loan agreement. That is, the Applicant was not necessarily going to be liable for all of the interest that accrued on its borrowings. The Applicant would only be liable for interest to the extent that there was sufficient surplus sale proceeds. There was no evidence that the Applicant paid an additional amount of interest in the sum of $946,000. At the hearing the Applicant accepted that the Tribunal did not find that the Applicant paid interest of $3.4 million or an amount based the summary interest calculation. In all of the circumstances, it is clear that the interest expense for which the Applicant could be liable for pursuant to the intragroup loan was for a maximum amount that it could pay from amounts received from the sale proceeds of the Properties. The evident purpose was not to leave the Applicant in a cash deficit position. The Tribunal held that the Applicant did not receive the monies to which it was held to have derived by way of the fourth contract. As such, the Applicant could not have paid, by way of cash any interest from such amounts, assuming that additional income was proceeds from the sale of the Properties. Objectively, the terms of the intragroup loan do not support a construction which differentiates between a legal entitlement or constructive receipt of funds and the cash flow of funds.

71    That is sufficient to deal with the Applicant’s further, new argument regarding the construction of the intragroup loan. However, it was raised at the hearing whether the additional income from the fourth contract was properly characterised as proceeds from the sale of the Properties, in any event. The fourth contract was for the right, title and interest in the D.A. Documents. It was not disclosed to the financier, Suncorp, who held security over the Properties. These two matters support a construction of the fourth contract that it was not and did not produce proceeds from the sale of the Properties. If that is correct, that is an additional reason why the Applicant’s new argument regarding the construction of the intragroup loan would be unsuccessful.

72    Again, quite properly, at the hearing the Applicant’s submissions recognised that on the basis of the findings by the Tribunal (D at [58] and [61]), if the Court concluded that the additional income of $946,000, although constructively derived as a payment by direction, if it was independent of Suncorp and any obligations in the nature of interest payments, then on the basis of the case that was run before the Tribunal, this would be a complete answer and the Further Deduction Issue would be answered negatively. That is, the Applicant would not be able to establish the nexus and be entitled to the further deduction of interest in the sum of $946,000. It is unnecessary to reach a final conclusion on this issue. However, if one were necessary, the better view is that the Fourth Contract would not have answered the necessary description to be within the terms of the intragroup loan.

73    In conclusion, the Tribunal did not fail to take any consequential step, in terms of the proper construction of s 8-1 of the 1997 Act. The Tribunal engaged with the required matters and made the findings of facts necessary to properly consider the application of s 8-1 of the 1997 Act. Implicit in the Tribunal’s reasoning, given its references to the additional income not actually being received as monies, and then its express consideration of the terms of the intragroup loan, which were accepted, was that the terms of the intragroup loan would not apply to amounts not received as monies. The Applicant only incurred an amount for interest from the terms of the intragroup loan, limited to the amount of any surplus available above the principal amount, following the sales. Finally, as considered below, the Applicant did limit its case to only seeking a maximum amount of interest as a deduction of $1,870,223.34.

74    For all of these reasons, Question of Law 2 regarding the construction of s 8-1 of the 1997 Act separately and together with the construction of the intragroup loan, must be dismissed.

Any limitation on claim for the interest deduction

75    The Applicant argues that the Tribunal erred by limiting its consideration of the interest deduction which could be allowed to $1,870,223.34. The Applicant refers to a summary document of the calculation of interest, being Annexure A (D at [121]) and is critical of the way that the Tribunal considered that document. At the hearing the Applicant accepted that the Tribunal did not make a finding that there was accumulated or capitalised interest of $3.4 million. However, the Applicant maintained the submission that the Tribunal accepted the interest calculation, by reference to D at [121]. The Applicant supported that contention by reference to the Tribunal’s shorthand summary of “around 3.4 million” on the basis that the calculated interest was accepted but as the Tribunal did not need to go anywhere near that figure, it being far in excess of the surplus, the Tribunal restricted itself to that surplus amount, being $1,870,223.34.

76    The Commissioner submitted that the Applicant did limit its case before the Tribunal, to only arguing that the interest claimed was up to an amount of $1,870,223.34. In support of that submission the Commissioner relies on the following (although I have included additional lines from the transcript references, before and after to those relied on, for greater context):

(a)    The Applicant amending its Statement of Facts, Issues and Contentions lodged with the Tribunal, relevantly at [28(b)] and [52(b)(i)], which stated as follows:

[28]    Given the agreement referred to in paragraph 20 hereof and the fact that properties held by Charles Apartments were sold:

(a)    …

(b)    The interest payment due from Charles Apartments to Tramdell was also paid in the amount of $1,870,223.34 limited . Tto the extent there was sale proceeds from the sale of the Charles Street properties. Tramdell and West Apartments directed Charles Apartments to pay this amount to that the sale proceeds be all paid to Suncorp as shown in the Suncorp bank statements to as payment of the interest liability.

[52]    The Commissioner’s decision on objection concerning the assessment of the Applicant’s taxable income in the year ended 30 June 2011 be varied by reducing the Applicant's taxable income to nil by:

(a)    …

(b)    Allowance of the following additional deductions:

(i)    $2,844,115.87 as additional Interest expenses incurred in respect of the agreement referred to in paragraphs 20(c) and 20(d) above; and

(b)    The Applicant’s written opening submissions at [56] and [61], which stated as follows:

[56]    Suncorp was paid the following amounts from the sale proceeds of the Charles Street Properties $1,498,299.85, $1,498,299.85, $1,773,623.64, $100,000.59 The amount referrable to principal was $3,000,000. The amount referrable to interest was $1,870,223.34 ($4,870,223.34- $3,000,000).

[61]    In light of the above, the correct and preferable decision is that interest in the sum of 1,870,223.34 was incurred in the 2011 year.

(c)    The Applicant’s written closing submissions at [15], [107] and [115] – [116], which stated as follows:

[15]    The correct decision is to order the Commissioner to vary the 2011 year assessment by allowing an expense for interest in the sum of $1,870,223.34 and reduce the interest and penalty accordingly.

[107]    Suncorp was paid the following amounts from the sale proceeds of the Charles Street Properties $1,498,299.85, $1,498,299.85, $1,773,623.64, $100,000.50 The amount referrable to principal was $3,000,000. The amount referrable to interest was only $1,870,223.34 ($4,870,223.34- $3,000,000) as there was no other proceeds of sale to pay the balance of the interest calculated as set out in Annexure A to these submissions.

[115]    In undertaking this calculation, the total interest capitalised on the $3,000,000 loan for the period from 24 December 2003 to 12 August 2010 is $3,427,796.03. However, because of the agreement referred to in [97] above, only $1,870,223.34 was incurred in the 2011 year, because the sale proceeds of the sale of the Charles Street Properties did not realise proceeds to pay the balance of the interest that would have been payable.

(d)    In the Applicant’s oral closing submissions, as follows:

P-310, ln 43-45: Now, Ms Kaur-Bains will take the tribunal through how we calculated the percentage of the interest. But ultimately, we’ve capped it at the 1.8 million because that was the deal that Mr Demian did.

P-317, ln 13-15: those figures are added up, it comes to the principal plus the 1.870223, and we say that that was payable, the interest was, obviously, payable to Tramdell ...

P-357, ln 1-4: And the commissioner’s contention is that Charles Apartments has not established that it incurred interest in the amount of $2.8 million. And we know now that actually the maximum that the taxpayer is seeking in any event is about 1.8.

77    That last reference to the approximately $2.8 million appears to also be referred to in the Applicant’s original Statement of Facts, Issues and Contentions (SFIC) at [52(b)(i)], being $2,844,115.87. In the first paragraph of the Applicant’s written opening submissions, the Applicant describes the adjustments made by the Commissioner in issuing the notice of amended assessments, which included disallowance of a deduction claimed under s 8-1 in the amount of $2,844,115.87, as an interest expense. This figure is also contained within an interest calculation prepared by the Applicant described in the material as “Charles Apartments Loan Summary from 24 December 2003 to 30 June 2011.”

78    The Commissioner collected together references (in “MFI-1” on the appeal) to the various versions and amounts of interest which the Applicant had advanced during the proceedings.

79    The Applicant ran its case in a particular way before the Tribunal. It sought to dispute and discharge its onus in relation to the additional income attributed to it from the fourth contract. It did not advance an alternative case should it have been unsuccessful in relation to discharging its onus as to the additional income. As the Applicant accepted in relation to the procedural fairness argument, it could have argued an alternative position. As the Applicant’s case and position progressed, it evolved, it was amended, and then a final position was advanced in the Tribunal.

80    The various versions of the interest calculation do not assist the Applicant in seeking to contend that the Tribunal erred in finding that the Applicant’s submissions as to the interest paid or claimed as a deduction was limited to $1,870,223.34. What the various versions do establish is that the Applicant’s position earlier in the proceedings was changing. In opening, senior counsel for the Applicant referred to a version of the calculation which was exhibited to an affidavit of the Applicant’s accountant. It was described as “that’s just a calculation. It’s not evidence of what the interest was, it was just that if the tribunal is satisfied by other reasons that interest was owed, then [the accountant] has done a calculation as capitalised and he’s sought to set out the basis of how he has done that” (P-15, ln 39-43). There was objection to the accountant’s affidavit which was provided late. The Applicant took the position of not relying on the accountant’s affidavit and putting the calculation before the Tribunal, by way of an aide-memoire, that being a submission (P-20, ln 1 to P-22, ln 25 and P-23, ln 32-33). The calculation sheet was not put before the Tribunal as evidence, but was to assist the Tribunal, by way of a submission as to the calculation of interest.

81    From this, the Applicant’s position did evolve. The Applicant’s position commenced in August 2021 in its original SFIC with its claim for an allowable deduction for interest in the sum of $2,844,115.87. In preparation for the hearing in December 2023, the Applicant amended its SFIC and also the first affidavit of Mr Demian in May 2023. Those amendments, inter alia, articulated the Applicant’s position regarding the terms of the intragroup loan and identified the amount of the interest deduction now sought was a maximum of $1,870,223.34. Those two amendments worked together. The terms then advanced (and accepted by the Tribunal) were that the intragroup loan required the Applicant to pay interest, when the Properties were sold to the extent that there were sufficient proceeds of sale. The natural meaning of this was that after repayment of the principal borrowing, being the $3 million, as well as any other settlement costs, the balance was incurred by way of interest. The net proceeds from the sale of the Properties was $4,870,223.34, which was not amended (SFIC at [27]). The Applicant then contended, consistent with the terms of the intragroup loan, that after repayment of the principal, the balance of $1,870,223.34 was due and payable as interest.

82    What became plain was that the Applicant had settled on a position in relation to its claim for an allowable deduction for interest. It is clear from the matters set above that the Applicant did narrow its case. It narrowed it in the sense that it only sought to advance a claim for an allowable deduction for interest in the sum of $1,870,223.34.

83    As such, there was no error by the Tribunal and Question of Law 4 must be dismissed.

Conclusion – supplementary notice of appeal

84    As already observed, there was not any separate submissions or consideration by the Applicant of Question of Law 3. I have considered all of the questions and grounds advanced by the Applicant. There was overlap and intermingling of the matters raised. However, at the core of the Applicant’s submissions on the appeal was that the Tribunal erred as a matter of law in relation to whether an additional amount as a deduction for interest in the sum of $946,000 should have been allowed under s 8-1 of the 1997 Act. For the reasons outlined above, none of the matters raised by the Applicant establish the error advanced by the Applicant.

85    As such, for all of the reasons given, the supplementary notice of appeal must be dismissed, with costs.

The cross-appeal

Questions & Grounds

86    The Commissioner advanced the following questions of law in his notice of cross appeal:

1.    Whether there was a denial of procedural fairness by the Tribunal in making its findings at [139]-[140]?

2.    Whether the Tribunal properly construed s 8-1(1) of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997)?

3.    Whether the facts found by the Tribunal fall within s 8-1 of the ITAA 1997?

4.    Whether the Tribunal erred at [121] in finding that the amount of interest that had actually accrued was “around $3.4 million”?

5.    Whether the Tribunal erred at [132] in finding that $1,870,223.34 was paid in respect of interest?

[emphasis in original]

87    The Commissioner advances 8 grounds in support of these questions. Once again, there is overlap and intermingling of the grounds, in relation to each of the questions advanced. There is no separate or clear delineation of which ground specifically applies to which question advanced. This is also evident from the Commissioner’s written submissions which identify several grounds being relevant to the first Question of Law advanced. In the Commissioner’s primary submissions on the cross-appeal, the Commissioner only addresses Question of Law 1, together with Grounds 1, 2 and 8, under the heading of denial of procedural fairness.

88    However, what is evident from how those submissions are advanced and how the cross-appeal was advanced at the hearing, is that the Commissioner relies on, in essence, two questions of law which are interrelated:

(a)    first, that the Tribunal failed to properly apply the nexus requirement of s 8-1 in the 1997 Act and applied what was described as a “but for” test; and

(b)    secondly, the Tribunal denied the parties procedural fairness by applying this “but for” test, without providing the parties an opportunity to be heard on that different test.

Did the Tribunal apply a “but for” test?

89    The Commissioner submits that the Tribunal applied a “but for” test at D at [139] – [140], which was incorrect as a matter of law applying s 8-1 of the 1997 Act and hence failed to properly construe that provision. It is worth setting out those paragraphs in full to put this submission in context (WCVB being the Applicant):

[139]    I acknowledge there is some uncertainty over whether other entities may have benefitted from WCVB’s payment. However it is also clear from the interactions with Suncorp I have already described that Suncorp required WCVB to pay the entirety of the net proceeds of the sales of the Astoria properties to Suncorp as a condition of Suncorp giving its consent as mortgagee to the sales. To put it differently, WCVB would not have derived any of the assessable income it subsequently returned without agreeing to pay the net proceeds of the sale to Suncorp in reduction of the debt due under the facility. The net proceeds that WCVB ultimately remitted included $3 million in principal and the balance in respect of interest. It seems obvious to me the outgoing was incurred “in gaining or producing [WCVB’s] assessable income”.

[140]    In those circumstances, I am satisfied the claim for a deduction in the 2011 year of income with respect to interest is made out.

90    The Commissioner submits that the parties before the Tribunal both engaged in an orthodox approach of applying the “refinancing principle”. This was with particular reference to the Applicant’s oral opening and closing submissions. Both parties referred to and relied on (either in written submissions or at the hearing) the refinancing principle: Commissioner of Taxation v Roberts; Commissioner of Taxation v Smith (1992) 37 FCR 246; [1992] FCA 543, wherein Hill J, with whom Jenkinson J agreed, stated as follows at 255 and 257:

The mere act of borrowing money, burdened with the obligation to pay interest, does not of itself gain or produce assessable income. The amount borrowed is not assessable income. What operates to gain or produce assessable income is the manner in which those moneys are used, so that the necessary connection between the outgoing for interest and the activities which more directly gain or produce assessable income will be found, in the ordinary case, in the use to which the borrowed funds are put. That is not to say that there may not be cases where motivation or subjective purpose will play a part in the question of characterisation. …

…

In principle, such a case is no different from the borrowing from one bank to repay working capital originally borrowed from another; the character of the refinancing takes on the same character as the original borrowing and gives to the interest incurred the character of a working expense. Both these cases would equally satisfy the second limb of s 51(1). …

91    Therefore, applying the reasoning from Roberts, determination of the character of an interest expense is done by a consideration of the “use” of the borrowed funds. Where there has been a refinancing of the borrowed funds, it is necessary to trace the original borrowed funds and ascertain the use of those funds, then on any refinance, consider the continued use of those borrowed funds, to determine the character of the interest expense.

92    The Tribunal’s reasoning at D at [139], according to the Commissioner’s submissions, is in error in that it does not consider the use of the borrowed funds but considers the use of the net settlement proceeds paid to Suncorp. The Tribunal reasoned, incorrectly on the Commissioner’s submissions, that the Applicant would not have derived any assessable income without agreeing to pay those net proceeds to Suncorp. By paying that amount to Suncorp, it consented to the sale as mortgagee and hence the Applicant earned the sale proceeds. The Commissioner described the Tribunal’s reasoning as applying a “but for” test.

93    The Applicant’s written submissions on the cross-appeal implicitly accepted that it advanced the refinancing principle, by referring to the Tribunal’s reasons “tracing” the history of the deductions in relation to interest (which commenced D at [107]) from the St George Bank borrowing, through the Group borrowings with Suncorp and the intragroup loan. At the hearing, the Applicant submitted that the Tribunal considered (D at [107] – [137]), the character and use of the original borrowings from St George Bank, through the refinance by way of the Group borrowing facility with Suncorp and then considered the intragroup structure. In doing so, it was submitted that the Tribunal did consider the refinancing principle and the character and “use” of the borrowed funds.

94    The Applicant also contended that the Tribunal did not apply a “but for” test, observing that those words do not appear in the Decision at [139], or at all. When asked at the hearing whether there was any “magic” to the words “but for”, counsel for the Applicant replied “If your Honour comes to the view that the process was, in effect, the but for test, that is enough to get my friend up on the appeal.” The Applicant’s submissions continued to rely on the submissions by the parties which were said to be replete with references to the cases applying the refinancing principle, which in turn it was submitted was adopted by the Tribunal.

95    The Tribunal commenced its consideration of the deductions issue at D at [103] with express reference to s 8-1(1) of the 1997 Act. At the Decision at [104], the first sub-issue was identified, being whether and when a loss or outgoing is “incurred”. In the Decision at [105], the second issue was identified, which required establishing the nexus between the loss or outgoing and the earning of the assessable income. At the Decision at [106], the Tribunal emphasised the importance of satisfying the nexus.

96    In the Decision from [107], the Tribunal outlines the claim for a deduction in respect of interest, observing that to understand that claim “it is necessary to delve into the financing arrangements surrounding the purchase of the [Properties] and the group’s subsequent refinance though Suncorp”. That is, the Tribunal initially appears from D at [107] to frame the issue by reference to a consideration of the borrowed funds, the use of those borrowed funds and the subsequent refinancing of those borrowed funds.

97    The Tribunal then observes (D at [108]) that the initial purchase of the Properties in 2002 was funded by way of a loan from St George Bank which had advanced $3 million for the purchase. It is apparent that the Tribunal was satisfied that the original “use” of the borrowed funds from St George Bank was to purchase the Properties in 2002.

98    Pressure was applied to the Demian Group by St George Bank (D at [109]), thereby causing the Demian Group to seek a new banker, to refinance and seek a more global solution to the Group’s financing needs. A facility for $27 million was established with Suncorp. To establish this finance facility, the Properties would become security, and to provide clear title for Suncorp, one of the Demian Group companies advanced the Applicant $3 million so that the loan and mortgage with St George Bank could be discharged (D at [110] – [111]). This was the Tribunal considering the first step of the refinancing principle, seeking to trace the original borrowings from St George Bank to the next financier.

99    A first Demian Group company lent the Applicant $3 million to pay out St George Bank. The Tribunal referred to the deed facility with Suncorp which required security by various Group companies, including the Applicant (D at [112]). The Applicant was also a party to the Guarantee, in favour of Suncorp, after which Suncorp took a mortgage over the Properties.

100    In the Decision from [113] – [116], the Tribunal outlined the terms of the intragroup loan from the original “group treasury company” being the Treasury Company to the borrowing then being assigned to another (second) Demian Group company (referred to as the Assignee). That is, the Tribunal continued to trace the borrowed funds of the Applicant from the first Demian Group company to the second Demian Group company. This is the Tribunal’s engagement and application of the refinancing principle, by seeking to establish the continued link from the original borrowed funds to purchase the Properties, to the final intragroup loan, for which the Applicant contended interest should be deductible.

101    Due to Suncorp’s concern’s regarding its exposure to the Demian Group around 2009, the Forbearance was entered, amongst others in the Group, including the Applicant. The intent of that deed was described by the Tribunal as (D at [118]):

… whereas [the Applicant’s] [Properties] were originally mortgaged to secure the debt owing under the facility established in December 2003, [the Applicant] was acknowledging that it and the other obligors would be responsible for all the debts under all the facilities.

[emphasis in original]

102    This recognises a change to the nature of the security held over the Properties. Originally, the Properties were only securing the borrowings which were “used” to make the purchase of the Properties (D at [111] and [118]).

103    However, it is apparent on entering the Forbearance the nature of the security changed. The Tribunal recognised that the Properties were now to secure all of the debts of the Demian Group under all of the facilities with Suncorp. The Tribunal does not consider the effect of this change of the nature of the security. The “use” of the original amount of borrowed funds by the Applicant, being the $3 million, had not changed.

104    However, when the Properties were sold, the entire sale proceeds were paid to Suncorp. The Tribunal states (D at [119]):

… $3 million of the amount paid to Suncorp was a repayment of principal (ie the amount advanced to [the Applicant] to pay out the St George facility in 2003). The balance – an amount of $1,870,223.34 – was presumably referable to interest on the Suncorp facility.

[emphasis added]

105    The Tribunal recognises that part of the payment to Suncorp was repayment of the original borrowing which were to funds the initial purchase of the Properties. However, the Tribunal presumes that the balance was interest and interest payable by the Applicant to Suncorp. This is without considering the change to the nature of the obligations of the Applicant to Suncorp from the Forbearance.

106    From D at [120] – [133], the Tribunal considered the first issue of whether and when the claimed loss or outgoing for interest was “incurred” under the heading “(w)as interest deductible in the 2011 financial year or at some other time”. In this part of the Decision, the Tribunal outlined the competing positions and submissions of the Applicant and the Commissioner, in relation to the claimed interest on the intragroup loan (which was to be charged at the same rate as Suncorp was charging under that facility). Some limited findings were made regarding the credit of Mr Demian’s evidence and whether inferences could be drawn (D at [127], [129] and [130]).

107    The Tribunal then reasoned (D at [131]) that the intragroup loan was a limited recourse loan meaning that the Applicant was only liable for interest for whatever amount it could pay. The Tribunal was satisfied that the Applicant had established the terms of the intragroup company loan, relevantly stating (D at [132]):

… While I accept there might be some uncertainty at the margins as to how much interest had accrued, there seems to be no doubt that at least $1.8 million was paid in respect of interest.

108    This position, again (also see, D at [119]) is simply a conclusion reached without any analysis of the proper characterisation of this amount.

109    On this first issue and subject to its consideration of nexus, the Tribunal then concluded that (D at [133]) the interest deduction was properly sought in the 2011 income year, the amount being incurred was $1,870,223.34. This was also based upon the Tribunal’s acceptance of the terms of the intragroup loan, which provided that the Applicant was liable for interest on the principle sum borrowed (being the $3 million) at the same rate of interest being charged by Suncorp on the Group facility, but was only liable to pay such interest at the time the Properties were sold, and was only liable to pay as much as it could (D at [133]).

110    From D at [134] – [138], the Tribunal considered the second issue which required establishing the nexus between the loss or outgoing and the earning of assessable income, under the heading “(h)as [the Applicant] established the nexus?”. Again, the Tribunal commenced in this part of the Decision by outlining the competing positions and submissions. In this respect, it must be remembered that the Commissioner’s position included broadly submitting that the Applicant had not discharged its onus and that the taxpayer had not established the nexus as the assessable income referrable was that of another company within the Demian Group.

111    The Tribunal was satisfied that the Applicant sold the Properties and the amounts received from those sales were included in its assessable income (D at [135]). The Tribunal observed that a complication in this matter was that the amount of $27 million was borrowed through one or more Group companies and monies from the facility were advanced to various Group members (D at 136]).

112    At D at [137], the Tribunal commences that paragraph considering the original amount of borrowed funds, being the $3 million, which was to fund the purchase of the Properties. The Tribunal then makes a passing reference to the change in the nature of the security that the Applicant provided Suncorp over the Properties (the Applicant then also being an obligor under the Forbearance). At [138], the Tribunal referred to and accepted that the entire net proceeds of sale were received into the Suncorp loan account, which reduced the overall amount owing to Suncorp, by the Demian Group. The Tribunal then reasoned, D at [139], which is set out above.

113    At various points of the Tribunal’s reasoning, the Tribunal correctly articulated the relevant principles regarding general deductions under s 8-1 of the 1997 Act, requiring whether and when the loss or outgoing was “incurred” and requiring establishment of the nexus between the loss or outgoing and the earning of assessable income. The Tribunal initially considered the origin and use of the borrowed funds from St George Bank to fund the purchase of the Properties. The Tribunal engaged in some tracing of the refinancing of those borrowed funds. However, in this context, the Tribunal did not consider the effect of the Guarantee or the Forbearance. The Tribunal presumed an amount and a calculation of interest, simply being the amount paid to Suncorp above the capital amount originally borrowed to fund the Properties.

114    The actual paragraphs of reasoning and findings of the Tribunal from D at [107] – [140] are somewhat limited, as opposed to those paragraphs which record the various positions and submissions of the parties. Once the relevant reasoning is crystalised in those earlier paragraphs, it is apparent that the Tribunal errs on its consideration of the claim for the interest deduction, which is then encapsulated at D at [139].

115    The reasoning at D at [139] develops and picks up on the thread of the Tribunal’s reasoning from D at [119] and [132]. There the Tribunal acts on a presumption that the balance of the net sale proceeds, after payment of the capital amount initially borrowed to purchase the Properties (being the $3 million) is assumed to be a payment by way of interest, as it is paid to Suncorp, which is the Group financier. At [121], the Tribunal refers to the summary interest calculation, which the Tribunal states “suggests” the total interest was around $3.4 million. The Tribunal does not expressly find that the schedule supports a finding that the Applicant incurred interest of a particular amount and by way of the intragroup loan (despite the Applicant having obligations as a guarantor (under the Guarantee) and an obligor (under the Forebearance)).

116    With this focus on the entire net settlement proceeds and the necessary consent of Suncorp to provide clear title to the Properties for the sale to actually take place, the Tribunal engages in the reasoning at D at [139]. Of course, a particular paragraph of the Tribunal’s reasons should not be read in isolation or with an “eye keenly attuned to error”: see Collector of Customs v Pozzolanic Enterprises Pty Ltd (1993) 43 FCR 280 at 287; [1993] FCA 456, cited with approval in Minister for Immigration and Ethnic Affairs v Wu Shan Liang (1996) 185 CLR 259 at 272; [1996] HCA 6. The Tribunal’s reasons must be read as a whole. Approaching the Decision in this way and considering D at [139], it is clear that the Tribunal has erred. The Tribunal does not consider the use of the borrowed funds to ascertain whether any amount claimed to be interest on those funds would be deductible. The focus is regarding the net proceeds of sale and that the entirety of those proceeds were paid to Suncorp for release of its mortgage, which in turn meant that the Applicant earned assessable income. This is clear from the Tribunal’s reasons stating “… Suncorp required [the Applicant] to pay the entirety of the net proceeds of the sales …” and “[the Applicant] would not have derived any of the assessable income it subsequently returned without agreeing to pay the net proceeds of the sale to Suncorp in reduction of the debt due under the facility”. Applying the previous presumption regarding the balance amount of $1,870,223.34 (D at [119] and [132]) the Tribunal applies the incorrect test and finds that the “The net proceeds [the Applicant] ultimately remitted included $3 million in principal and the balance in respect of interest”.

117    To phrase the Tribunal’s reasoning differently, the Applicant would not have derived any of the assessable income that it subsequently returned without agreeing to pay the entire net proceeds of the sale of the Properties to Suncorp. To obtain Suncorp’s consent to the sale, to release the Properties and thereby to make the assessable income returned, it had to pay the proceeds to Suncorp – that is, “but for”, Suncorp releasing the Properties, the Applicant would not have been able to complete the sale and therefore would not have earned the assessable income it returned.

118    I am satisfied that the Tribunal has erred in this critical aspect of its reasoning when seeking to apply the nexus test. As recognised by the Applicant that is sufficient for the cross-appeal to be allowed.

Did the Tribunal deny the parties procedural fairness?

119    The reasoning engaged in by the Tribunal at [139] was not the subject of any submissions by the parties (probably because, it was in error). However, whether in error or not, the parties were not afforded an opportunity to address that position. The application of the nexus test, or as it was considered by the Tribunal in a “but for” test, was critical to the determination of the interest deduction issue. Given the critical nature of this and that it was not obvious or a natural evaluation from the nature and content of the known material: Degning at [13]; SZBEL at [29]; Alphone at 591-592, it was incumbent on the Tribunal to identify this issue and give the parties an opportunity to be heard in relation to it.

120    At [477] above, the relevant principles of what is required to afford procedural fairness, in a summary way, have been outlined. A jurisdictional error would be a question of law within the requirements of s 44 of the AAT Act. However, it also extends to non-jurisdictional errors: Haritos at [62(7)]. A denial of procedural fairness is an error of law, and therefore an appeal from a decision on that ground will raise a question of law: Haritos at [202]; Clements v Independent Indigenous Advisory Committee (2003) 131 FCR 28; [2003] FCAFC 143 at [8] and [35].

121    There is no doubt that had the Tribunal afforded the parties an opportunity to be heard, the Commissioner at least (but the likely the Applicant as well) would have made further and different submissions to those previously advanced. The Commissioner who advances this aspect on the cross-appeal contends that he would have submitted that (in summary):

(a)    the entirety of the net settlement proceeds, being $4,870,223.34 paid by the Applicant to Suncorp, discharged the Applicant’s obligation pursuant to the Guarantee; and

(b)    consequently the entirety of the net settlement proceeds, being $4,870,223.34, was of a capital nature and no part was deductible on revenue account.

122    I accept that, afforded an opportunity to be heard, it is likely that the Commissioner would have advanced such submissions. It is not necessary to find that those submissions would have been accepted by the Tribunal such as to alter the result. It is sufficient that there is “a realistic possibility that a different decision could have been made”: MZAPC v Minister for Immigration and Border Protection (2021) 273 CLR 506; [2021] HCA 17 at [39]. Generally, there will be a “realistic possibility that a decision-making process could have resulted in a different outcome if a party was denied an opportunity to present evidence or make submissions in an issue that required consideration”: Nathanson v Minister for Home Affairs (2022) 276 CLR 80; [2022] HCA 26 at [33].

123    The Tribunal had found that the net settlement proceeds for the sale of the Properties was paid to Suncorp and applied to the Group’s loan account facility to reduce the Group’s outstanding debt with Suncorp. The consent given by Suncorp for the sales was done on the express basis that the cumulative proceeds of those sales would be applied to reduce the Group’s outstanding debt with Suncorp (D at [19] and [119]). The Tribunal also found that the Applicant had provided the Guarantee to Suncorp, to secure the borrowings, after which Suncorp took the mortgages over the Properties (D at [112]). The Tribunal also accepted that later, the Applicant become a party to the Forbearance, which made the Applicant an “Obligor”. As an Obligor, the Applicant was then responsible for all of the debts under all of the facilities with Suncorp.

124    The circumstances of the Group borrowings, the lending, including the intragroup lending, the tracing of the re-financing, the use of these borrowed funds (relevant to the Properties) and then the relevant consideration and calculation of interest was somewhat complex. Had the Tribunal afforded the parties, the opportunity to be heard about how the Tribunal was considering the nexus question, by way of this “but for” test and hearing then these further submissions, there is a realistic possibility that the decision could have been different.

125    This conclusion also means that the Commissioner’s cross-appeal must be allowed.

ORDERS TO BE MADE

126    Although the supplementary notice of appeal is to be dismissed, for the purposes of considering the Orders to be made, it is worth considering the relief sought:

1.     The Appeal be allowed.

2.     The decision of the Tribunal be set aside so far as it:

a.    limits the Applicant’s allowable deductions in the 2011 income tax year to $1,870,233.23; and

b.    imposes penalties on the Applicant.

3.     Allow the Applicant, in relation to the 2011 income tax year, allowable deductions of $2,816,223.23 (being an increase of $946,000 on the deductions of $1,870,233.23 held to be allowed by the Tribunal).

4.     In relation to penalties to which the Applicant is subject:

a.    remit them to 25%; or, in the alternative

b.    remit them to 50%.

5.     There be no order as to costs of the Cross-Appeal but the Respondent pay the Applicant’s costs of the Appeal.

127    In the Commissioner’s Notice of Cross Appeal, the relief sought was as follows:

1.     The cross-appeal be allowed.

2.     The decision of the Tribunal dated 28 May 2024 be set aside and substituted with a decision affirming the objection decision.

3.     There be no order as to costs in respect of the Respondent’s cross-appeal. This is on the basis that the Respondent has decided to provide funding under the ATO Test Case Litigation Program to assist the Applicant meet the costs of the proceedings in respect of the Respondent’s cross appeal.

128    That is, neither party, if successful sought for the matter to be remitted to the Tribunal.

129    Prior to the hearing, the Court raised with the parties, if either the supplementary notice of appeal or the notice of cross appeal was successful, could the parties consider the appropriate orders to be made, with reference to (but without limitation):

(1)    Administrative Review Tribunal Act 2024 (Cth) (ART Act) s 176 (or any authorities with respect to the Administrative Appeals Tribunal Act 1974 (Cth), s 44(4) and (7));

(2)    Morales v Minister for Immigration and Ethnic Affairs (1995) 60 FCR 550 at 560-561; and

(3)    Commissioner of Taxation v Ross (2021) 174 ALD 77; [2021] FCA 766 at [335] – [338].

130    At the hearing, the parties maintained their positions, such that neither pressed for the matter to be remitted. This was on the basis, so it was submitted that any findings of fact that needed to be made for either of the outcomes contended for had already been made by the Tribunal in the Decision. Essentially, so it was submitted, it was a question of characterisation, not of fact finding.

131    Also implicit in the position advanced by both parties was that neither party was seeking to put forward any further evidence to the Tribunal on any of the issues or questions advanced on this appeal.

Statutory Framework

132    Relevantly, s 176 and s 177 of the ART Act provide as follows:

176    Federal Court has jurisdiction

(1)    If an appeal is made under Subdivision A, the Federal Court:

(a)    has jurisdiction to hear and determine the appeal; and

(b)    must hear and determine the appeal; and

(c)    may make any order it considers appropriate because of its decision.

(2)    Without limiting the orders it may make, the Federal Court may:

(a)    affirm or set aside a decision of the Tribunal; or

(b)    remit a matter to be decided again by the Tribunal, either with or without the taking of further evidence, in accordance with the directions of the Court.

177    Court may make findings of fact

(1)    In hearing the appeal, the Federal Court may make findings of fact if:

(a)    the findings of fact are not inconsistent with findings of fact made by the Tribunal (other than findings made by the Tribunal as the result of an error of law); and

(b)    it appears to the Court that it is convenient to do so.

(2)    In deciding whether it is convenient, the Court must have regard to:

(a)    the extent (if any) to which it is necessary to make findings of fact; and

(b)    the means by which those facts might be established; and

(c)    the quick and efficient resolution of the whole of the matter; and

(d)    the relative expense and delay (if any) to the parties if the Court, rather than the Tribunal, makes the findings of fact; and

(e)    whether any of the parties considers that it is appropriate for the Court, rather than the Tribunal, to make the findings of fact; and

(f)    any other matters that the Court considers relevant.

(3)    For the purposes of this section, the Court may:

(a)    have regard to the evidence given in the proceeding in the Tribunal; and

(b)    receive further evidence.

133    These provisions are similar to those of ss 44(3), (4), (5), (7) and (8) of the AAT Act.

134    In relation to s 176 of the ART Act, the revised explanatory memorandum relevantly stated as follows:

1113.    It also clarifies that the FCA may make any orders it deems appropriate based on its decision, including (but not limited to):

•    affirming or setting aside the Tribunal’s decision

•    remitting a matter to be decided again by the Tribunal. The Court may order that the Tribunal review the remitted matter with or without taking additional evidence.

…

1115.    This clause is equivalent to subsections 44(3), (4) and (5) of the AAT Act. It has minor updates to reflect modern drafting practices. These do not affect the operation or effect of the provision.

135    Further, the revised explanatory memorandum relevantly stated the following regarding s 177 of the ART Act:

1116.    This clause enables the FCA to make findings of fact in an appeal on a question of law. It is equivalent to subsections 44(7) and (8) of the AAT Act. It has minor updates to reflect modern drafting practices. These do not affect the operation or effect of the provision, and do not expand the FCA’s ability to make findings of fact. The operation of this provision, as set out below, was interpreted by the Full Court of the FCA in Haritos v Federal Commissioner of Taxation (2015) 33 FCR 315. The clause is intended to operate consistently with that interpretation.

1117.    The clause provides that the Court may only make findings of fact that are consistent with previous findings made by the Tribunal (unless that finding was due to an error of law), and where it is convenient for the Court to make the finding.

136    Therefore, it is clear that any changes in legislative drafting in s 176 and s 177 of the ART Act, to that of ss 44(3), (4), (5), (7) and (8) of the AAT Act, are not meant to bring about substantive changes in the operation or effect of these provisions. As such, the authorities considering the relevant provisions of the AAT Act should still be applied.

137    The Full Court in Haritos (notably referred to in the revised explanatory memorandum), in considering the text and context of s 44, held that, although s 44(7) permits the Court to make findings of fact in certain limited circumstances, the provision does not enlarge the jurisdiction, on which to appeal: Haritos at [114]. That is, the jurisdiction to appeal from ss 44(1) and (3) does not involve pure questions of fact.

138    The Full Court in Collie v Commissioner of Taxation [2024] FCAFC 172 at [59], was considering a submission regarding an appeal and the appropriate orders to be made where the appeal was to be allowed, stated the following:

Senior counsel for Mr Collie maintained in oral address that Mr Collie in the appeal sought orders that his applications for review of the Commissioner’s objection decisions be allowed in full, the objection decisions be set aside, and Mr Collie’s objections be allowed in full. As the presiding judge said at the hearing, that was an ambitious submission. As an appellate court, we could not possibly arrive at a final result in the absence of full and clear factual findings by the Tribunal. See Skiwing Pty Ltd v Trust Company of Australia [2006] NSWCA 276 at [32], [34] (Spigelman CJ); and cf TechnologyOne Ltd v Roohizadegan [2021] FCAFC 137; (2021) 309 IR 262 at [179] (Rangiah, White and O’Callaghan JJ); Beale v Government Insurance Office of New South Wales (1997) 48 NSWLR 430 at 444 (Mason P); Keith v Gal [2013] NSWCA 339 at [151]- [154] (Gleeson JA).

139    The apparent width of ss 44(4) and (5) of the AAT Act, now s 176 of the ART Act, was referred to by Derrington J in Commissioner of Taxation v Ross (2021) 174 ALD 77; [2021] FCA 766 at [335], observing that the scope of those provisions must be exercised with caution. This is consistent with the observations in Haritos, regarding the limited circumstances wherein this Court may make findings of fact. Sheppard J observed in Minister for Immigration and Ethnic Affairs v Gungor (1982) 63 FLR 441; [1982] FCA 99 at 454-455 that the Court is not given by s 44(4) wide powers to make such orders as it thinks fit. Having said that, however, Sheppard J went on to say “(h)aving set aside a decision, it has no express power to substitute what it sees as the correct decision unless such is the appropriate order by reason of its decision on the point of law in the context of the particular proceedings” (emphasis added).

140    As such, it does not translate that every matter must be remitted if an appeal or cross-appeal is allowed and the decision of the Tribunal set aside. As was made clear by Sackville J in Morales v Minister for immigration and Ethnic Affairs (1995) 60 FCR 550 at 560-561 where the only question was the construction of a particular provision of an Act and the parties agreed that whoever succeeded on that issue was entitled, as a matter of law, to succeed in the Tribunal, the Court could and did make final orders disposing of the case, without remitter. Similarly, even if an error of law is found by the Court, but the decision was clearly correct on the material before the Tribunal, it is open to the Court to dismiss the appeal.

141    It is also recognised that there is a species of matter whereby it would be futile to remit a matter for re-hearing, as there is only one possible outcome: Morales at 560-561. Derrington J in Ross at [337] referred to the decisions of Harradine v Secretary, Department of Social Security (2020) 25 FCR 35; [1989] FCA 339 and Truchlik v Repatriation Commission (1989) 25 FCR 414; [1989] FCA 300. Each of those decisions were where the facts were fully found and the statutory question of construction or the question of law could only lead to one conclusion. As such, each decision set aside the Tribunal’s decision and made final orders. Also see the final orders made by the Full Court in Commissioner of Taxation v BHP Billiton Limited (2019) 263 FCR 334; [2019] FCAFC 4 and Commissioner of Taxation v Condell (2006) 63 ATR 514; [2006] FCA 1047 (upheld on appeal: [2007] FCAFC 44), each of which allowed the appeal, set aside the decision of the Tribunal and affirmed the objection decision. The primary judge in Condell, Kiefel J, observed at [34] that “It is not suggested that there is any basis for remitting the matter to the Tribunal. There can be only one outcome”. As Derrington J stated at [342]:

… More particularly, the authorities to which I have referred above suggest that the power of the Court to effectively decide the matter itself is limited to those cases where the facts are found and beyond dispute, and the matter turns on a question of law. That is not the position here where the conclusion that the taxpayers could not succeed before a properly instructed Tribunal is, essentially, a factual determination rather than one of law.

142    From the above authorities, if the following matters are satisfied, it may be appropriate for the Court to make final orders, without remitting the matter to the Tribunal. Those being:

(a)    neither party sought for the matter to be remitted;

(b)    both parties agree that the Court should resolve the relevant issue (depending on which ground(s) of appeal or the cross-appeal might be accepted);

(c)    both parties agree that the Tribunal had fully found all of the relevant facts, relevant to the grounds of appeal or cross-appeal;

(d)    the resolution of the question(s) of law could only lead to one outcome.

143    For the Court to make the orders advanced by the parties, it is necessary to consider whether the facts have been fully found and whether there is only one outcome..

Relevant facts found by the Tribunal

144    Relevantly, the Tribunal found as follows:

(a)    the Applicant entered the Guarantee on 24 December 2003 with Suncorp: D at [112];

(b)    by the Guarantee, the Applicant unconditionally and irrevocably guaranteed payment for the Credit Facility of West Apartments with Suncorp: D at [110] and [117];

(c)    the terms of the Credit Facility, which implicitly would include the Guarantee, required and Suncorp took, a first registered mortgage over the Properties (Mortgage): D at [30], [111], [112] and [137];

(d)    difficulties ensued and to forestall Suncorp taking enforcement action, the Applicant entered into the Forbearance with Suncorp, West Apartments Pty Ltd and other Group companies: D at [117];

(e)    the intent of the Forbearance was clear, it was meant to acknowledge that the Applicant would be responsible for all of the debts under all of the facilities. The Applicant became an “obligor” to Suncorp: D at [118] and [137];

(f)    the Applicant did not have directly paid to it any of the sale proceeds, from the sale of the Properties, including pursuant to the Fourth Contract: D at [6], [41], [102] and cf [135] wherein the Tribunal referred to the amounts being “received”. However, this must be understood as being “derived”, given the immediate reference to those amounts being included in its assessable income and in light of the Tribunal’s earlier observations (D at [102]), supported by the settlement statements (T33) and the references to the payments to Credit Facility on 13 August 2010, which was supported by the relevant Bank statements (T94);

(g)    the sale of the Properties had to be consented to by Suncorp given the terms of the facility, Guarantee, Forbearance and Mortgage. Suncorp was able to dictate what occurred with the sale proceeds. The consent to the sale was done expressly on the basis that the cumulative proceeds of sale were required to be applied to the Group’s Credit Facility: D at [19], [30], [37], [42], [138] and [139];

(h)    the entire net sale proceeds under the three sale contracts, being $4,870,223.34 was paid to Suncorp and into the Group’s Credit Facility on 13 August 2010 to reduce the overall amount owing by the Group: D at [41], [42], [119] and [138].

145    Those are the relevant facts as found by the Tribunal.

Is there only one outcome?

146    To consider whether there is only one outcome, it is necessary to consider the characterisation of the payment to Suncorp. The Commissioner submitted that it was uncontroversial that the payment made by the Applicant into the Group’s Credit Facility was made pursuant to the Guarantee. The Commissioner further submits, in his reply, that this was not cavilled within the Applicant’s written submissions. This may have been on the basis that before the Tribunal the Applicant submitted in its closing submissions, inter alia, “…the Applicant’s legal obligation was as guarantor, there was nevertheless a borrowing by the Applicant, through the intercompany loan mechanism…”.

147    However, in the Applicant’s written submissions, on the cross-appeal, developed further orally, the Applicant submitted that the cases relied on by the Commissioner could be distinguished as in those cases, the taxpayer was a “true guarantor” whereas in the present circumstances, the Applicant was a “true borrower”. This was developed by contending that the Applicant taxpayer was a borrower. This was made with specific reference to the $3 million dollar principal borrowings that the Applicant had borrowed. In this sense, so the submission was put, the Applicant was not a “true” guarantor of the Suncorp borrowings.

148    The Commissioner relied upon several authorities to support his submission that payments made under or pursuant to a guarantee are generally amounts of a capital nature. The first was a decision of the Full Court in Commissioner of Taxation v Email Ltd (1999) 42 ATR 698; [1999] FCA 1177 at 708 [45], where the Court stated:

Generally, although not invariably, money paid by a taxpayer pursuant to guarantees the taxpayer has given has been held to be on capital account, notwithstanding that the guarantee is given in the course of some business activity of the taxpayer. A typical example is the recent decision of Hely J in Bell & Moir Corp Pty Ltd v Commissioner of Taxation (unreported) [1999] FCA 1009 which refers to a number of decisions of Taxation Boards of Review which have so held, but cf Commissioners of Inland Revenue v Huntley & Palmers Ltd (1928) 12 TC 1209. We do not think it desirable in the present case to enter into a discussion of the circumstances where the occasion for the giving of a guarantee will result in moneys paid under it being on revenue account.

149    The decision of Hely J was also referred to by the Commissioner in Bell & Moir Corp Pty Ltd v Commissioner of Taxation (1999) 99 ATC 4738; [1999] FCA 1009 at [18] – [21]. Applying that analysis, the Applicant provided, by way of a voluntary act, the Guarantee. The advantage was the Credit Facility provided to the Demian Group company. In a practical sense, this was of benefit to the Applicant, in the sense of the extended, consolidated credit facilities to the Demian Group. The benefit to the Applicant, by the provision of the Guarantee, was the consolidated Group Credit Facility with Suncorp, which then allowed the Applicant’s loan with St George Bank to be paid out via an intragroup company.

150    That is, contrary to the Applicant’s submission on the appeal (but consistent with its position before the Tribunal), the Applicant was a guarantor. The Applicant was not a borrower with Suncorp. While the ultimate source of the funds to pay out the St George Bank loan were sourced from Suncorp, the Applicant was not a party to the Credit Facility loan deed. As recorded in the recitals of the Guarantee (T8), the Guarantor, which included the Applicant, had requested Suncorp make the “Moneys Secured” available to the borrower, being West Apartments, being the group borrowing company (as referred to by the Tribunal at D at [112]). That the Credit Facility via other group companies and loans, facilitated the Applicant to pay out St George Bank did not, then transform the Applicant into a borrower with Suncorp. The Applicant’s borrowings were during this relevant period always with another entity (be it St George Bank or an intragroup company).

151    What is clear from the facts as found by the Tribunal is that Suncorp could “dictate” what occurred with proceeds of sale (D at [37]). Suncorp could do so because its consent to the sales of the Properties was required to release the Mortgage. The Mortgage was provided as security and was required by the Guarantee. As such, and on these bases, Suncorp required the cumulative proceeds of the sales of the Properties to be applied to the Group’s Credit Facility, to reduce the Group’s debt with Suncorp.

Conclusion – facts found and outcome

152    Therefore, based on the facts as found by the Tribunal, other than findings made as the result of the error of law, there can only be one outcome. The proper characterisation of the payment to Suncorp of the net sale proceeds was one under the Guarantee and in accordance with Email and Bell & Moir, the payment to Suncorp would be on capital account and hence not deductible. The Tribunal erred in relation to its characterisation of the proceeds of sale and the Decision should be set aside. The Commissioner’s cross-appeal must be allowed and because there is only one outcome, the objection decision affirmed.

153    Although the Commissioner has been successful on the cross-appeal, the appropriate order in relation to costs is that there be no order as to costs. This is on the basis that the Commissioner has decided to provide funding under the ATO Test Case Litigation Program to assist the Applicant to meet the costs of the proceedings in respect of his cross appeal, irrespective of the outcome.

Associate:    

Dated:    9 May 2025