The Full Federal Court has unanimously confirmed the decision in Noza Holdings Pty Ltd & Ors v FCT [2011] FCA 46 that the head company of an Australian group of consolidated companies (“Noza”) was entitled to a deduction under s 25-90 of the ITAA 1997 (deductions for ‘debt interest’ costs incurred in deriving foreign non-assessable non-exempt income) in the 2003 income year for a dividend payment of $170m paid under a range of transactions as part of the group’s world-wide project to protect its intellectual property.

It did so essentially on the basis of finding that the outgoing was incurred in the year of declaration of the dividend, in deriving income from a foreign source, notwithstanding the Commissioner’s claim that there were insufficient profits to pay the dividend.

However, the Full Court found in the alternative (and contrary to the decision at first instance), that Noza was not entitled to a deduction of $83m in each of the 2003 to 2005 income years pursuant to s 25-90 for the amounts that accrued as liabilities owing under the terms of a preference share arrangement.

At the same time, the Full Court also held that a related Australian resident taxpayer (“ITW AFC Pty Limited”) that was also part of the arrangements was not entitled to a deduction for a dividend payment of $83m in the 2002 income year pursuant to s 25-90.

Note that the Commissioner abandoned reliance on Pt IVA in the appeal to the Full Federal Court.

(FCT v Noza Holdings Pty Ltd & Anor [2012] FCAFC 43, Full Federal Court, Edmonds, Jessup and Robertson JJ, 28 March 2012.)

[LTN 63, 29/3]

Income Tax Assessment Act 1997 – s25-90

25-90  Deduction relating to foreign non-assessable non-exempt income

An * Australian entity can deduct an amount of loss or outgoing from its assessable income for an income year if:

(a)        the amount is incurred by the entity in deriving income from a foreign source; and

(b)        the income is * non-assessable non-exempt income under section 23AI, 23AJ or 23AK of the Income Tax Assessment Act 1936 ; and

(c)        the amount is a cost in relation to a * debt interest issued by the entity that is covered by paragraph (1)(a) of the definition of debt deduction .

Note:          This section does not apply to a Division 230 financial arrangement.