The Federal Court has dismissed a taxpayer’s appeal and held that its claimed deduction of $420,000 for the purchase of “sequestered carbon” was not deductible. The Court also held that the Commissioner’s Part IVA determination was “correct and inevitable on the evidence”.

On 29 June 2009, the taxpayer, which provided security and cleaning services under contacts, entered into an emissions reduction purchase agreement whereby it agreed to acquire 3 contact lots, each of 5,000 tonnes of “sequestered carbon”, for $420,000. A non-refundable deposit of $63,000 was paid. The balance was never paid and the agreement did not proceed as the legislation to establish the carbon pollution reduction scheme was never passed.

The ATO audited the taxpayer and disallowed the deduction and imposed 75% shortfall penalty. The Commissioner also made a determination under s 177F(1)(b) that the whole of the amount of $420,000 was a tax benefit that was not allowable to the taxpayer for the 2009 year. The Commissioner considered that the agreement was void for uncertainty because of the lack of an objective means to identify both what the projects referred to in the recitals were or involved or when they would be completed and what “emissions unit” meant. He reasoned that the agreement was an extraordinary and artificial transaction. Alternatively, the Commissioner found, if his earlier view were wrong, that the purchase price was part of a scheme within the meaning of Pt IVA and that, accordingly, the taxpayer was not entitled to a deduction for any of the purchase price. He found the taxpayer would not have done anything in the absence of the tax benefit of the deduction it claimed. On appeal, the Commissioner did not press the void for uncertainty argument, and the taxpayer did not challenge the shortfall penalty.

After review, the Federal Court said it was not satisfied that the $420,000 claimed was necessarily incurred in carrying on a business of the taxpayer for the purpose of gaining or producing its assessable income within the meaning of s 8-1(1)(b). Nor did the Court consider that the $63,000 deposit was capable of being treated as severable from the balance. The Court considered the taxpayer did not incur a loss or outgoing, within the meaning of s 8-1(1)(a), to pay the balance of the purchase price of $357,000 when it entered into the agreement. The agreement provided that the balance would become payable for a subject matter, namely emissions units, that did not then exist. The Court concluded that the dominant purpose of the taxpayer and other parties when they entered into or carried out the scheme (being, advising or causing the taxpayer to enter into the agreement pay the deposit of $63,000 and claim the full purchase price of $420,000 as a deductible outgoing in the 2009 year of income) was to enable the taxpayer to obtain a tax benefit in connection with that scheme. The Court said Commissioner’s Part IVA determination was “correct and inevitable on the evidence”.

(Academy Cleaning & Security Pty Ltd v DCT [2017] FCA 875, Federal Court, Rares J, 3 August 2017.)

[Austlii – [2017] FCA 875; TT Month; LTN 148, 7/8/17]

Catchwords from Austlii Report

INCOME TAX – assessable income – appeal against objection decision to disallow taxpayer’s objection to notice of amended assessment – where taxpayer paid non-refundable deposit of $63,000 and claimed deduction of $420,000 from assessable income after entering into agreement to pay balance of $357,000 purchase price at uncertain future time when notice given that future property then deliverable – where Deputy Commissioner conceded deposit outgoing incurred in year of income – deductibility of balance of purchase price under s 8-1(1)(a) of Income Tax Assessment Act 1997 (Cth) – whether balance outgoing “incurred” in gaining or producing taxpayer’s assessable income – whether liability to pay balance defeasible

INCOME TAX – assessable income – deductibility of outgoing under s 8-1(1)(b) of Income Tax Assessment Act 1997 (Cth) – whether whole, or part, of $420,000 outgoing necessarily incurred in carrying on taxpayer’s business for purpose of gaining or producing assessable income – where outgoing made to acquire future property to be created in commercially speculative and unspecified projects – where taxpayer used outgoing as promotional tool – whether whole, or part, of outgoing appropriate and adapted for ends of taxpayer’s business – whether sufficient connection between outgoing and taxpayer’s business

INCOME TAX – whether taxpayer obtained tax benefit under s 8-1(1) of Income Tax Assessment Act 1997 (Cth) in connection with scheme to which Pt IVA of Income Tax Assessment Act 1936 (Cth) applied – whether “dominant purpose” of taxpayer, through its director or his professional advisors, entering into agreement was to obtain tax benefit of deduction of $420,000, or $63,000 – where subject matter of agreement priced at well above market price – where agreement lacked clarity and did not oblige vendor ever to deliver any property or complete transaction to trigger taxpayer’s obligation to pay balance of purchase price – where agreement entered into shortly before end of tax year – where no evidence of taxpayer investigating other investment options

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