Income Tax - Power of Commissioner to amend assessments under s 170(2) Income Tax Assessment Act 1936 - whether respondent made full and true disclosure of all material facts necessary for assessment.

Income Tax Assessment Act (1936): ss 51(1) and 170(2).

Counsel and Solicitors for appellant: Mr D B Williams QC and Mr W S Martin instructed by the Australian Government Solicitor

Counsel and Solicitors for respondent: Mr R H Pringle QC and Mr P J Glaister instructed by Messrs Freehill Hollingdale and Page

(i) the amended assessment in respect of the

income tax of the respondent for the 1979

year of income be remitted to the appellant

for amendment in accordance with these Reasons;

(ii) the appeals of the respondent in respect of

all of the assessments and amended assessments

for the years of income 1980 to 1984 be dismissed;

(iii) the assessments for the year of income 1984/85

be remitted to the appellant for amendment.

4. The respondent pay the costs of the appeals to this court and of the

proceedings below save as to the first day of the proceedings below.

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

The appellant, the Commissioner of Taxation, appeals against a decision of a judge of this Court upholding an appeal of the respondent, Riverside Road Pty Ltd (in liquidation), against assessments made by the appellant in respect of the years of income ending 30 June 1979 to 1985 inclusive. The assessments for the 1979 to 1984 years of income were amended assessments. The 1985 assessment which related to the period 1 July 1984 to 31 January 1985, prior to the respondent going into voluntary liquidation on 1 February 1985, and to the period 1 February 1985 to 30 June 1985 was an original assessment. Also the subject of the respondent's application to this Court were consequential assessments of tax payable under Division 7 of the Income Tax Assessment Act 1936 (Cth) ("the Act") for the income years 1980, 1982, 1983 and 1984.

2. The principal issue between the parties was the availability, as a deduction under s.51(1) of the Act, of a portion of the amounts claimed in the respondent's returns of income in these years for interest on secured and unsecured loans. The amounts claimed in each return, being the total of all interest incurred by the respondent, and the amounts disallowed by the Commissioner was as follows:

Year Interest on Interest on Amount

Mortgage Loan Secured Loans Disallowed

1978/79 $43,749 $35,447 $31,612

1979/80 $45,505 $35,447 $77,552

1980/81 $43,750 $35,448 $75,872

1981/82 $43,750 $35,447 $75,871

1982/83 $43,765 $35,447 $75,885

1983/84 $43,792 $37,069 $77,465

1984/85 $35,223 $15,576 $48,665

(1.7.84 to

31.1.85)

3. In the assessment for the period 1 February 1985 to 30 June 1985 the Commissioner disallowed an amount of $5,678 being the fees of the liquidator claimed to be an allowable deduction under s.51(1) of the Act. His Honour found that these fees were deductible to the extent of $2,000 only.

4. There was no appeal or cross-appeal in respect of so much of his Honour's decision as related to the allowance in part of the liquidator's fees.

5. Also at issue between the parties is the power of the 'Commissioner, to the extent that the interest allowed was not deductible, to amend the assessments for the years 1979 to 1984 inclusive, a matter which his Honour did not find it necessary to consider.

6. Except in one respect, to which we will later refer, the facts were not in dispute and may be shortly stated.

7. The respondent was formed for the purpose of operating a motel called the Captain Fremantle Motor Lodge near Fremantle in Western Australia. The respondent, then called Captain Fremantle Motor Lodge Pty Ltd, purchased in September of 1969, the year of its incorporation, a parcel of land for that purpose at a cost of $102,000. A tender to build the motel for $199,100 was accepted and construction commenced. Thirty six thousand one hundred dollars was expended on plant and equipment. In 1971 the respondent purchased adjacent land for $45,000 and constructed extensions to the motel building for some $192,000. A further amount of approximately $53,000 was expended on furniture and fittings. These outlays were financed in part from share capital but substantially from unsecured loans from shareholders and loans secured by mortgage over the respondent's land.

8. The history of external borrowings by the respondent was summarised by his Honour as follows:

"In February 1970, $200,000 by way of bridging

finance was obtained from Town and Country Building

Society, secured by a first mortgage over Lot 2.

It was repaid in December of that year and $200,000

borrowed from Messrs Mauger, Peek and McCall for a

three year term at an effective rate of 9% per

annum. That loan was extended until August 1976

and repaid following a further borrowing, in May

1976, of $350,000 from the Perpetual Executors

Trustees and Agency Company Limited. That advance

was for three years at 12.5% per annum and was

secured by first mortgage over both lots. It was

repaid on 1 May 1979, a loan of $350,000 for a term

of 5 years at 12.5% then having been secured from

the Motor Vehicle Insurance Trust. This borrowing

was increased to $485,000 in December 1981, the

interest rate being maintained at the same level.

It too was secured by first mortgage over the land.

With the exception of progress payments advanced by

Perpetual Trustees, any amounts borrowed whether

unsecured shareholders' loans or otherwise were

paid into a common fund drawn upon as required to

finance the applicant's projects."

9. It seems that the increase in borrowings in 1976 and 1981 related to a borrowing for working capital. The position therefore was that as at 31 December 1978 and 1 February 1979 the respondent had external borrowings of $350,000 secured over the respondent's motel which loan was due to be repaid in May 1979.

10. As at 31 January 1979 the amount of unsecured loans outstanding to shareholders was $236,313 made up of $179,610 repayable on 1 February 1980 and $56,703 maturing on 31 December 1985.

11. In mid 1978, Mr Walker, the respondent's company secretary and a member of the respondent's Board of Directors from 1969 until December 1984, who was also a chartered accountant, conceived the idea of transferring the ownership of the respondent's land and buildings to a related entity. In his evidence, which his Honour appears to have accepted, Mr Walker explained that his purpose in formulating the proposal was to protect the real property of the respondent against liabilities incurred in the conduct of the motel business. The transaction entered into in February 1979 achieved this purpose only to a limited extent because the respondent replaced its asset of land and buildings with a debt repayable on demand equal to the value, as at the date of the transaction, of those assets. Thus, any protection against creditors would only be to the extent to which thereafter the land and buildings increased in value.

12. Following legal advice, the respondent's Board forwarded a circular to shareholders on 1 November 1978 setting out a proposal for restructuring the respondent. The circular under the heading "Introduction" read as follows:

"The object of the restructuring is to transfer

ownership of the land and building to a separate

entity so that the same can be leased to Captain

Fremantle Motor Lodge Pty Ltd. Captain Fremantle

Motor Lodge Pty Ltd will pay to this separate

entity a rental which will be an expense of the

Company. In turn, this expense will reduce the

taxable profit of Captain Fremantle Motor Lodge Pty

Ltd.

The separate entity selected is a Unit Trust

because its profits are not subject to company tax.

The Unit Trust will be designed to maintain the

relative position of shareholders in relation to

control and ownership of the land and building."

13. Having regard to this circular and the objective consequences of the proposal, the appellant challenged any finding that his Honour may be said to have made that the purpose of the restructuring was the protection of the respondent's assets. Rather, it was submitted that, even if Mr Walker's evidence be accepted, his motivation should not be attributed to the respondent. The circular, it was submitted, provided the best evidence of the respondent's motive and purpose since it formed the basis of the subsequent resolution to effect the transaction contemplated. The circular, it was said, made it quite clear that the motive or purpose of the reorganisation was to be found in the tax consequences that would flow from it.

14. It seems to us that his Honour made no finding as to the motivation of the respondent for the reorganisation because, on the view he took, the motivation for the reorganisation was irrelevant. Although ultimately differing from his Honour as to the result in law of the reorganisation, we are of a similar view.

15. The steps necessary to the reorganisation as set out in the proposal were summarised by his Honour as follows:

"1. The establishment of a Unit Trust with units

to be held by shareholders in proportion to

the number of their shares. The directors of

the Corporate Trustee of the Unit Trust to be

the directors of the applicant.

2. Following incorporation of the Trustee Company

and establishment of the Unit Trust the land

and buildings to be sold to the Trustee at

market value. The purchase price was to be

payable free of interest and on demand.

3. Upon execution of the contract of sale the

Trustee would lease back the land and building

to the company for a rental of $90,000 per

annum subject to annual reviews. The lease

was to be for a term of one year with five

consecutive options to renew for like terms.

16. The income tax results of the transaction, as indicated in the proposal, were said to be that the respondent would, by continuing to operate the motel business, be entitled to a deduction for the rental payable by it to the trustee. The taxable income of the respondent would accordingly be reduced by an amount approximately equal to the rental paid and company tax payable by the respondent would be accordingly reduced. The unit trust would not be liable to tax although the net income of the trustee would be available for distribution to unit holders and inferentially taxed to them under the provisions of Division 6 of Part III of the Act.

17. The circular makes no direct reference to the continued deductibility of the interest on external loans and shareholders' loans although an illustration given in it assumes such continued deductibility.

18. The proposal was duly approved at an extraordinary general meeting of shareholders held on 6 December 1978. A unit trust, designated as the Challenger Unit Trust, was established of which the corporate trustee was East Street Nominees Pty Limited. On 30 January 1979 a contract was entered into whereby the respondent agreed to sell the land and buildings to East Street Nominees Pty Limited for $900,000, being the value of the unencumbered freehold as at 24 January 1979. The contract appears not to have been stamped at that time. It provided that the purchase money was to be payable interest free on demand and that possession was to be given on or about 1 February 1979. The trustee agreed to lease back the land for a term of one year commencing on 1 February 1979 with options for renewal at a rental of $95,000 per annum subject to periodic review. The rental was to be payable in advance in quarterly instalments of $23,750, the first instalment being due on 1 February 1979.

19. Possession was said to have been given on 1 February 1979 although, as his Honour observed, this was best characterised as a "notional event" as the respondent continued in uninterrupted possession operating the motel as before. Legal title was not transferred and the mortgage to Perpetual Trustees was not paid out. On 18 April 1979 Mr Walker, in his capacity as secretary of the respondent, sent a letter to himself as secretary of the trustee requesting the permission of the trustee to replace the Perpetual Trustees' mortgage with a new mortgage in favour of a third party, the Motor Vehicle Insurance Trust. Such a letter was apparently required to avoid the presumption of fraud. (See Sale of Land Act (1970) s.8). Not surprisingly, consent was forthcoming. The mortgage to Perpetual Trustees was repaid on 1 May 1979 and a new mortgage in favour of the Motor Vehicle Insurance Trust was entered into for the same amount for a term of five years.

20. Rental was thereafter paid to the trustee and from time to time reviewed upwards. The amounts incurred in the relevant years, and which were claimed and allowed as deductions, were as follows:

Year Lease Rents

1978/79 $39,583

1979/80 $95,000

1980/81 $100,000

1981/82 $105,000

1982/83 $110,000

1983/84 $137,500

1.7.84 to 31.1.85 $59,164

The deductibility of the lease rents was not in issue, either before the learned trial judge or before us.

21. On 6 December 1984 the land and buildings were sold by East Street Nominees Pty Limited to a third party, Tartaire Pty Limited, and the respondent sold the business together with the rights under the lease to another company, Girdis Management Pty Limited. All outstanding loans then owing to shareholders and external creditors were repaid and on 1 February 1985 an extraordinary general meeting of the shareholders of the respondent resolved that the respondent be wound up voluntarily.

22. The Commissioner initially allowed to the respondent a deduction for the totality of interest claimed in the assessments for the years ended 1979 to 1984 inclusive. However on 21 April 1986 the Commissioner issued amended assessments for these years disallowing a proportion of the interest claimed. The precise basis of the apportionment is not clear. However it appears that the proportion disallowed represents so much of the total interest as relates to the borrowings for land and buildings. On this basis the proportion of interest allowed represented so much of the interest incurred as related to borrowings for plant and equipment and working capital. The mathematical basis of the apportionment was not in issue before us and the case was argued on the basis that the interest disallowed represented the interest on so much of the respondent's borrowings as related to the purchase of the two parcels of land and the construction upon them of the motel operated by the respondent.

23. The Commissioner both at first instance and before us submitted that the interest disallowed was not deductible under the provisions of s.51(1) of the Act. Alternatively, it was submitted that the provisions of s.260 of the Act operated to disallow so much of the interest incurred as was disallowed. The respondent submitted that the whole of the interest incurred was an allowable deduction under s.51(1) and that the provisions of s.260 of the Act could not in these circumstances operate to disallow a part of the interest properly allowable under s.51(1).

24. His Honour, after setting out the facts and undertaking a careful analysis of the case law, concluded that the respondent was entitled to deduct the whole of the interest claimed. It was not in dispute that prior to the reorganisation in February 1979 the respondent was entitled to a deduction for the whole of the interest incurred by it on its borrowings both from internal and external sources. Those payments satisfied, as his Honour said, both of the positive limbs of s.51(1).

25. In his Honour's view, the sale and lease-back of the land did not in the circumstances of the present case result in severing the connection between the interest outgoings on the one hand and the business activity of the respondent on the other. His Honour's application of the well established principles of law to the facts of the present case sufficiently appears in the following quotation from the judgment appealed against:

"The Commissioner... relies upon the simple

proposition that because the land has been sold to

another entity the relevant connection between the

interest payments and the motel business carried on

on the land no longer exists. In my opinion that

factor alone is insufficient to so change the

relationship between the interest payments and the

business that they are no longer deductible. In a

very practical sense, the honouring by the

applicant of its commitments was necessary to its

retention of the use of the land upon which, as

legal owner and tenant of the beneficial owner, it

carried on its business. And if questions of the

motive and purpose of the continuing liability and

the tax advantage to be derived from it are

addressed in the way contemplated by the

authorities to which I have earlier referred, the

position is not so substantially changed as to

change the characterisation of the payments. That

is not to say that those questions would not have

been relevant to the deductibility of the lease

rents paid to East Street Nominees. But in my

opinion, the continuing commitment to pay interest

between 1979 and 1984/85 was, in all the

circumstances, a commitment to make payments

incurred in producing or gaining assessable income

and also answered the designation, as elaborated in

the authorities, of outgoings necessarily incurred

in the carrying on of the applicant's business."

26. His Honour also rejected the appellant's submissions so far as they related to s.260.

27. In these circumstances his Honour had no need to consider the remaining issue of whether the appellant was empowered by s.170 of the Act to amend the assessments for the years ended 30 June 1979 to 30 June 1984 inclusive.

28. Section 51(1) of the Act provides relevantly as follows:

"All losses and outgoings to the extent to which

they are incurred in gaining or producing the

assessable income, or are necessarily incurred in

carrying on a business for the purpose of gaining

or producing such income, shall be allowable

deductions except to the extent to which they are

losses or outgoings of capital, or of a capital,

private or domestic nature, or are incurred in

relation to the gaining or production of exempt

income."

29. Section 51(1) is the section which permits a deduction for what might generally be called the working expenses of a business although the section is not limited to allowing deductions only to taxpayers carrying on a business. Perhaps because the circumstances that will give rise to a deduction under s.51(1) are almost infinitely variable, the section is framed in broad general terms yet with great economy of expression. The words of s.51(1) have been the subject of considerable discussion in the cases in an attempt to elucidate the concepts stated in the section.

30. In form the section divides into two positive limbs which provide the tests for deductibility subject to the exclusions thereafter set out. In the present case the respondent relies upon both of these limbs.

31. The first limb of the subsection is directed at expenditure incurred "in", that is to say "in the course of" (see Amalgamated Zinc (De Bavay's) Ltd v. Federal Commissioner of Taxation [1935] HCA 81; (1935) 54 CLR 295 at 303 per Latham CJ and at 309 per Dixon J) gaining or producing the assessable income. The reference to "assessable income" was held not to relate to the assessable income of the year in which the expenditure was incurred, but to assessable income generally: Ronpibon Tin NL v. Federal Commissioner of Taxation [1949] HCA 15; (1949) 78 CLR 47 per Latham CJ, Rich, Dixon, McTiernan and Webb JJ at 56 and see too the cases referred to by Lockhart J in Federal Commissioner of Taxation v. Total Holdings (Aust) Pty Ltd (1979) 79 ATC 4279 at 4282.

32. It was early recognised in the cases that there must be some connection between the outgoing and the activities directed at gaining or producing the assessable income. That connection is often expressed by the notion that the expenditure must be relevant and incidental to the gaining or producing of assessable income: Ronpibon Tin NL v. Federal Commissioner of Taxation (supra) at 56. Thus in Charles Moore and Co (WA) Pty Ltd v. Federal Commissioner of Taxation [1956] HCA 77; (1956) 95 CLR 344 Dixon CJ, Williams, Webb, Fullagar and Kitto JJ said at 351:

"...the phrase 'incidental and relevant' when used

in relation to the allowability of losses as

deductions do not refer to the frequency,

expectedness or likelihood of their occurrence or

the antecedent risk of their being incurred, but to

their nature or character. What matters is their

connection with the operations which more directly

gain or produce the assessable income."

33. In referring to the requirement that the expenditure be incidental and relevant to the operations or activities regularly carried on for the production of income, Gibbs CJ, Stephen, Mason and Wilson JJ in Federal Commissioner of Taxation v. Smith [1981] HCA 10; (1980-1) 147 CLR 578 at 586 said that:

"What is incidental and relevant in the sense

mentioned falls to be determined not by reference

to the certainty or likelihood of the outgoings

resulting in the generation of income but to its

nature and character, and generally to its

connexion with the operations which more directly

gain or produce the assessable income."

34. In other cases, it has been said that the expenditure must have a "perceived connection" with the gaining or production of income: Federal Commissioner of Taxation v. Hatchett [1971] HCA 47; (1971) 125 CLR 494 at 499 (per Menzies J).

35. However, as Williams, Kitto and Taylor JJ observed in Lunney v. Federal Commissioner of Taxation (1958) 100 CLR 478 at 497 expressions of the kind "incidental and relevant" are "not used in an attempt to formulate an exclusive or exhaustive test for ascertaining the extent of the operation of the section; the words were merely used in stating an attribute without which an item of expenditure cannot be regarded as deductible under the section".

36. What is involved is a process of identifying the essential character of the expenditure to determine whether it is in truth an outgoing incurred in gaining or producing the assessable income: Lunney (supra) at 499.

37. Although the second limb is clearly concerned only with the deductibility of a business expense, it is clear from the cases that in the case of a taxpayer such as the respondent here, who at all relevant times was carrying on a business, the two limbs overlap and are not mutually exclusive. Indeed it has been said that the second limb "in actual working... can add but little to the operation of the leading words 'losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income'" Ronpibon Tin NL and Tongkah Compound NL v. Federal Commissioner of Taxation [1949] HCA 15; (1949) 78 CLR 47 at 56. Thus in John Fairfax and Sons Pty Ltd v. Federal Commissioner of Taxation [1959] HCA 4; (1959) 101 CLR 30 at 40, Fullagar J said of the two limbs:

"The first is directed to expenditure incurred in

the actual course of producing assessable income:

Amalgamated Zinc (De Bavay's) Ltd v. Federal

Commissioner of Taxation [1935] HCA 81; (1935) 54 CLR 295 at 303,

309 and W Nevill and Co Ltd v. Federal Commissioner

of Taxation [1937] HCA 9; (1937) 56 CLR 290 at 305. It is,

primarily at least, concerned with expenditure

voluntarily incurred for the sake of producing

income. Its scope is not, of course, confined to

cases where the income is derived from carrying on

a business. The second may be thought to be

concerned rather with cases where, in the carrying

on of a business, some abnormal event or situation

leads to an expenditure which it is not desired to

make, but which is made for the purposes of the

business generally and is reasonably regarded as

unavoidable: Hannan, Principles of Income Taxation

(1946) p 291: Federal Commissioner of Taxation v.

Snowden and Willson Pty Ltd [1958] HCA 23; (1958) 99 CLR 431."

38. Although it is clear that the wording of the present section, is, as the learned trial judge observed, to be traced to the recommendations of Ferguson J and Mr Nixon, two of the Commissioners who reported in the Third Report of the Royal Commission on Taxation 1934, that report provides little explanation for the insertion into the second limb of the concept that the expenditure be "necessarily incurred". In any event the concept of "necessity" in the second limb was not intended to be interpreted restrictively against the taxpayer but rather was "probably intended to mean no more than 'clearly appropriate or adapted for'": Ronpibon (supra at 56). It expressed a requirement that "the expenditure must be dictated by the business ends to which it is directed:..." Federal Commissioner of Taxation v. Snowden and Willson Pty Ltd [1958] HCA 23; (1958) 99 CLR 431 at 437 per Dixon CJ and see too per Fullagar J at 443-4.

39. Under the second limb, as under the first limb, it is clear that the purpose for which the business must be carried on (not it will be noted the purpose for which expenditure is incurred) must be a purpose of gaining or producing the assessable income, that is to say assessable income generally, rather than the assessable income of a particular accounting year: AGC (Advances) Ltd v. Federal Commissioner of Taxation [1975] HCA 7; (1974-5) 132 CLR 175 at 189 and 196-7.

40. In the circumstances of the present case no different result was contended for under either limb and the differing wording of each will not affect the outcome of the case.

41. It is not in dispute that a liability for interest on moneys borrowed and used in a business will ordinarily be an allowable deduction. So much was made clear in the judgment of Dixon J (as his Honour then was) in The Texas Co (A'sia) Ltd v. Federal Commissioner of Taxation [1940] HCA 9; (1939-40) 63 CLR 382 where his Honour said at 468:

"Some kinds of recurrent expenditure made to secure

capital or working capital are clearly deductible.

Under the Australian system interest on money

borrowed for the purpose forms a deduction. So

does the rent of premises and the hire of plant."

42. Whether interest incurred by a taxpayer will, in a particular case, satisfy the test of deductibility depends upon the facts of a particular case: Total Holdings Pty Ltd (supra) at 4283 and the cases there cited. Lockhart J there said:

"If a taxpayer with a continuing business incurs a

liability for interest being incidental to or

connected with the operations or activities

regularly carried on for the production of income,

the interest is an allowable deduction. The

circumstance that each item of expenditure cannot

be traced to a particular item of income does not

prevent the deduction of the expenditure. See Ward

and Co Ltd v. Commr of Taxes (NZ) (1923) AC 145 at

p 148; De Bavay's case (supra) at p 307; W

Nevill and Co Ltd v. F.C.of T.(supra) at p 305; and

The Texas Co (A'sia) Ltd v. F.C.of T.(supra) per

Starke J at p 451."

43. The language of the section introduces, as Professor Parsons points out in his work Income Taxation in Australia Law Book Company 1985 (paras 5-37 to 5-48), an element of contemporaneity. Thus an outgoing may be precluded from deductibility if it be incurred at a point too soon before the commencement of the business or income producing activity (Federal Commissioner of Taxation v. Maddalena (1971) 45 ALJR 426; Lodge v. Federal Commissioner of Taxation [1972] HCA 49; (1972) 128 CLR 171) or if it is incurred after the business or activity has ceased (e.g. Amalgamated Zinc (De Bavay's) (supra)), at least in the latter case where a considerable time had passed and the taxpayer had given up all thought of mining. However, the subsequent case of AGC (Advances) Pty Ltd (supra) while not a case where the business had wholly ceased, although operations had been suspended, suggests that there should be some qualification to the absolute principle suggested in De Bavay's case. Mason J in AGC (Advances) Ltd at 197-8, discussing a loss incurred by writing off a debt after a company had ceased to carry on as a going concern the business in which the debt was created, remarked that:

"even in such a case it may be correct to speak of

the loss as having been incurred in the carrying on

of the business. This is because the occasion for

the loss is to be found in a transaction entered

into in the carrying on of the business for the

purpose of producing assessable income..."

44. The present is not, of course, a case where the activities of the respondent in operating the motel ceased during any relevant year of income - except the year 1985 when the motel business was sold - although it is a case where in the year 1979, as a result of the sale and lease-back, the character of the activities of the respondent changed. Before 1 February 1979 the respondent's business was that of an owner/operator of a motel. After that date, its business can be characterised as that of an operator of a motel owned by others and of which it was only a tenant. Hence, the relevance of the interest outgoing to its altered business activities must be considered.

45. The learned trial judge was of the view that the 1979 change was not sufficient to change the relationship between the interest payments and the business activity. In so saying he relied at least in part upon the fact that the respondent necessarily had to pay the interest to retain the use of the land upon which it conducted the motel business. But the fact that the interest outgoings (on secured borrowings) necessarily had to be met to retain the land, and therefore the business, does not conclude the question of deductibility. So much can be seen from the early decision of the High Court in Federal Commissioner of Taxation v. Munro [1926] HCA 58; (1926) 38 CLR 153.

46. In Munro, the taxpayer borrowed money upon the security of a rent producing property. The moneys so borrowed were applied to acquire 20,000 shares in a company, 18,000 of which were by direction allotted to the taxpayer's sons as a gift, the remaining shares being allotted to the appellant. The remaining funds were advanced to the company interest free. The taxpayer argued that whenever money was borrowed by a taxpayer on the security of a rent producing property the interest was deductible irrespective of the purpose to which or the manner in which the money borrowed was applied. It was said that, if the interest was not met, the income by way of rent would cease. It was held under the then provisions of s.23(1)(a) of the Income Tax Assessment Act 1922-25 that no part of the interest was deductible. No apportionment was then possible having regard to the requirement in s.25(e) of that Act that the whole of the outlay be exclusively laid out or expended for the production of assessable income.

47. So too here, it is no argument for the deductibility of the interest that, unless paid, the income by way of profits on the running of the motel would cease. Rather the case must be resolved by determining whether the essential character of the interest outgoings after the sale and lease-back was such that it can be said that those outgoings were incurred by the respondent in the course of the gaining or production of assessable income or, having regard to the business then carried on by it, they were necessarily incurred by the respondent in carrying on that business.

48. Once this is appreciated, it is apparent that at some point of time at least the interest outgoings ceased to have this character or to be, in the sense used by the cases, relevant and incidental to the business activities engaged upon by the respondent after 1 February 1979. They had no real connection at all with the business of running a rented motel.

49. A question arises in this case as to when the interest outgoings ceased to have the necessary character of incidental and relevant outgoings. As at 1 February 1979 the loan to Perpetual Trustees was repayable on 1 May 1979. It was in fact repaid on that date. The remaining interest was incurred pursuant to the terms of a new borrowing entered into after the restructuring. It seems to us that it does not follow from De Bavay's case, particularly if regard be had to the comments of Mason J in AGC (Advances) Ltd (supra) to which we have referred, that the mere fact that the land and buildings were sold necessarily results in the conclusion that as and from the date of sale the whole of the interest incurred was not deductible. The respondent, pursuant to the contractual arrangements it had entered into, was obliged when it was an owner/operator to continue to pay interest until 1 May 1979. Had it sought to discharge its obligation to the mortgagee, it could have been required to pay interest to this date. In the circumstances of the present case therefore it cannot be said that the change in character of the business activity of the respondent immediately excluded the interest payable by it to the mortgagee from deductibility. Rather it seems to us that the respondent was entitled to a deduction of such part of the disallowed interest as related to the borrowing of moneys reflected in the Perpetual Trustees' mortgage until 1 May 1979 and as related to the land and buildings upon which the motel was situated. It will be necessary to remit the assessment of the 1979 year back to the Commissioner to re-assess the amount of the deduction in accordance with these reasons, subject of course to the issues arising under s.170.

50. The interest, so far as it related to the shareholders' loan accounts, is in a different position. Although these loans were as at 31 January 1979 not repayable until some time in the future, an arrangement was reached, presumably on 1 February 1979, with the shareholders that all shareholders' loans would be extended until 31 December 1985. In these circumstances we are of the view that the relevant connection between the interest outgoings and the respondent's business activities was broken on 1 February 1979 so that no part of the interest thereafter incurred was deductible.

51. As can be seen we have reached our conclusion without reference to the submissions of the appellant that after 1 February 1979 the deductibility of the interest was denied by the motivation of the respondent in entering into the rearrangements (being tax minimisation, so it was said) and the purpose, which was said to be apparent thereafter. That purpose was said to be tax avoidance and the purpose was said to be a sole or dominant purpose of the incurring of the interest.

52. These submissions confuse, in our opinion, motive and purpose, discrete concepts as the judgment of Brennan J in Magna Alloys and Research Pty Ltd v. Federal Commissioner of Taxation [1980] FCA 150; (1980) 33 ALR 213 at 215-6 points out.

53. It is not necessary for the resolution of the present case to consider the role of the purpose, subjective or objective, of the respondent, a matter dealt with in a different context recently by the High Court in John v. Federal Commissioner of Taxation [1989] HCA 5; (1989) 166 CLR 417 at 426, and in particular the relevance to the question of deductibility of a motive or purpose (if that is a correct word in the present context) of tax avoidance. The result would be the same whatever the purposes of either Mr Walker, the directors or the shareholders in implementing the arrangements of 1 February 1979.

54. Having regard to our conclusions as to deductibility under s.51(1) it is unnecessary (except in the 1979 year to the extent to which we have already indicated) to consider the application of s.260 of the Act. For the 1979 year it suffices to say that there is nothing in the facts to which we have referred that would suggest that the incurring of the interest to the Perpetual Trustee Co until 1 May 1979 could be categorised as a contract, arrangement or agreement having one or more of the purposes or effects referred to in s.260. Further, as is illustrated by the decisions of the High Court in both Cecil Bros Pty Ltd v. Federal Commissioner of Taxation [1964] HCA 82; (1964) 111 CLR 430 and John at 433, there are real difficulties in applying the provisions of s.260 of the Act to disallow a deduction otherwise properly allowable under s.51(1) particularly where, as here (and in Cecil Bros), the suggested use of the section is to disallow only a part of a total outgoing otherwise allowable.

Whether the Commissioner was empowered by Section 170 of the Act to amend the Assessments for the 1979 to 1984 Years Inclusive

55. The 1979 assessment was issued on 16 January 1980. Tax payable under it was due and payable on 1 May 1980. The amended assessments were issued on 21 April 1986 just within the six year limitation period contained in s.170(2). There was no suggestion in the present case that the avoidance of tax was due to fraud or evasion. All the other amended assessments were made well within six years of the date when tax would have become due and payable under the original assessments. Thus, the question whether the Commissioner had power to amend the assessments depends, under s.170(2), upon whether the respondent had made a full and true disclosure of all the material facts necessary for its assessment. The parties were agreed that if we were to find for the respondent upon this issue it would be necessary to send the matters back to the learned trial judge to consider whether the Commissioner had made a mistake of fact, that being a matter in respect of which his Honour had made no findings, although having heard evidence directed to the question.

56. It is necessary therefore to turn to the returns lodged to see the extent of the disclosure made by the respondent. Reliance was placed on the returns of both the respondent and the returns of the trustee of the Challenger Unit Trust for the relevant years.

57. The return of the respondent in the 1979 year disclosed that there had been a sale of land resulting in a capital profit of $279,826. It was apparent from a note to the balance sheet that the purchaser of the land and buildings was East Street Nominees Pty Ltd as trustee of the Challenger Unit Trust and that the mortgage loan from the Motor Vehicle Insurance Trust was secured over that property. The accounts showed the amount of $903,447 arising from the sale of the land as being at call and a note to the balance sheet disclosed that this was "secured by a contract of sale, and the debt is repayable at call, and is interest free".

58. The profit and loss account of the respondent showed a claim for interest on mortgage loans and unsecured loans, distinguishing the two. It also claimed for the first time, as an outgoing, "rents" of $39,583 although the recipient of the rent is not disclosed.

59. A detailed analysis of the balance sheet would, if undertaken by a sophisticated auditor, have revealed that some part of the borrowings related to the land and buildings upon which the motel was operated; because the issued capital was only $78,771 yet the land and buildings stood as at 1 July 1978 in the books at $688,259. It was clear too from the balance sheet of that year that the mortgage loan was $350,000 and that unsecured shareholders' loans totalled $236,313 i.e. that the total liabilities of the respondent in respect of loans were $586,313 as compared with fixed assets of land, buildings and plant standing in the balance sheet at 1 July 1978 of $758,175. The figure for land and buildings of $466,867 referred to as at 1 July 1978 was based on a 1976 valuation and not cost. The cost however could be determined by inference by subtracting the capital profit on sale from the net proceeds of sale of $903,447.

60. If it were relevant to take into account the returns of the Unit Trust and of the trustee, these would have revealed that the rental income was paid to the trust, that there were common directors, common addresses, public officers and accountants (if these be relevant matters) and that, save for one shareholder who did not participate in the reorganisation, the shareholders of the respondent and the holders of units in the Unit Trust were the same.

61. Since nothing turns upon the identity of the participants in the reorganisation, it is not necessary to consider whether the material disclosed in the trust returns should properly be taken into account in determining whether there was full and true disclosure by the respondent, assuming that the trust returns were lodged prior to the assessment of the respondent's returns or were assessed by the assessor who assessed the respondent's returns. Some evidence as to these matters was led by the respondent but his Honour made no findings upon them. We should not however be thought to accept the proposition that, in determining whether there has been full and true disclosure by a taxpayer, regard can be had to material contained in another taxpayer's returns even if lodged at the same office at the same time. The decision of the High Court in Foster v. Federal Commissioner of Taxation (1951) 82 CLR 606 is not authority for so wide a proposition. In that case Dixon J said at 619 that:

"... a taxpayer can hardly be said to fail to

disclose to the Commissioner a fact which is not

only within the Commissioner's knowledge in

connection with the exercise of his functions in

the very matter, but which the taxpayer knows so to

be within his knowledge."

However, that is not the present case. The circumstances referred to by Dixon J will rarely exist: cf Federal Commissioner of Taxation v. Levy [1961] HCA 92; (1961) 106 CLR 448 and Lee v. Federal Commissioner of Taxation [1962] HCA 35; (1962) 107 CLR 329 with Federal Commissioner of Taxation v. Slater Holdings Pty Ltd (1980) 80 ATC 4534 (Full Federal Court, Bowen CJ, Brennan and Lockhart JJ). The mere simultaneous lodgement of returns will not enable a taxpayer to gain support from another return. At the very least, the taxpayer's return must make mention of the other return in such a way as to incorporate by reference material in the other return.

62. What is meant by full and true disclosure has been the subject of considerable discussion. In Austin Distributors Pty Ltd v. Federal Commissioner of Taxation (1964) 13 ATD 429 at 432-3 Menzies J said:

"The requirement of s.170... is not met by anything

less than full disclosure of all the material

facts, and a disclosure which leaves the

Commissioner to speculate as to some of the

material facts is not sufficient... The matter can

be tested in this way. If advice were to have been

sought by the taxpayer whether or not the sum in

question was a taxable premium, would the person

from whom that advice was sought have required more

information than this return disclosed to the

Commissioner?"

63. In most cases, where the question of full and true disclosure has arisen, the discussion of failure to disclose was in the context of a matter which went to the liability, as a matter of principle, to tax of an income item or the allowability, as a matter of principle, of an outgoing. See for example W Thomas and Co Pty Ltd v. Federal Commissioner of Taxation [1965] HCA 54; (1965) 115 CLR 58; Chamber of Manufacturers Insurance v. Federal Commissioner of Taxation (1984) 2 FCR 455; Hamblin Equipment Pty Ltd v. Federal Commissioner of Taxation [1974] HCA 1; (1974) 130 CLR 159, 174-5; Stapleton v. Federal Commissioner of Taxation (1989) 89 ATC 4818 per Sheppard J.

64. The present is not such a case. A close examination of the taxpayer's return would have showed that the taxpayer had sold the motel buildings and site and leased back a motel, that it had not repaid its borrowings and that, to some extent, these borrowings must have related to the purchase of the site and the construction of the motel. The relevant matters going to the abstract question of deductibility of interest were therefore disclosed, although a reader might be excused for overlooking the significance of them having regard to the cryptic way in which the disclosure was made. But is that enough?

65. It must be remembered that what must be disclosed fully and truly are all the material facts necessary for the assessment of the taxpayer. By assessment is meant, as the definition in s.6(1) of the Act makes clear, the "ascertainment of the amount of taxable income and of the tax payable thereon".

66. In the present case, the process of assessment required not only that the Commissioner form a view as to the deductibility of interest in the abstract, in the case of a sale and lease-back of the motel, but also that he compute the amount of interest which was allowable (because related to the plant and fittings used in the motel business or working capital) and that which was not allowable (because related to the purchase of the site and construction of buildings). To determine the amount deductible, and so calculate the taxable income and ultimate tax payable thereon, it was necessary for the Commissioner to know how much of the overall borrowings related to the site and buildings and how much to the other matters. No amount of sophisticated analysis of the returns would permit that calculation to be made. The returns merely lead to speculation as to the quantum involved and invite requests for further information or a detailed analysis of the books of the respondent. Where further information of a material kind must be forthcoming before the quantum of tax can be assessed, it cannot be said that there is a full disclosure of the material facts necessary for the assessment.

67. We allow the appeals in part, as regards the 1979 year, and in full as regards the remaining years. The Division 7 assessments raise no separate questions and the appeals in respect of them will also be allowed. We order, in respect of the appeal concerning the 1979 year, that the assessment be remitted to the Commissioner for amendment in accordance with these reasons. In relation to the remaining appeals, we set aside the decision of the learned primary judge and, in lieu thereof, we order that the appeals against the disallowance of the respondent's objections be dismissed. The respondent must pay the costs of the appeals to this Court and of the proceedings below, save as to the first day which was taken up with argument concerning additional tax under s.226 of the Act ultimately conceded in the respondent's favour. The parties were agreed that if we were of the view that the appeals should succeed this was the appropriate cost order.