A corporate taxpayer who claimed deductions for management fees of some $300,000 paid to associated companies for the 1999 to 2008 income years and for interest and bank charges of some id=”mce_marker”.8m paid to a foreign bank (the “Hua Wang Bank”) for the 2005 to 2009 has been unsuccessful in arguing that the outgoings were incurred in gaining or producing its assessable income for the purpose of deductibility under s 8-1 or s 25-25 of the ITAA 1997.
However, in view of its finding that the taxpayer’s actions did not amount to “fraud or evasion”, the Federal Court found that the Commissioner was out of time to amend assessments prior to the 2006 income year, resulting in the taxpayer being entitled to the deductions claimed in those years.
The taxpayer was owned and controlled by 2 brothers and was involved in a business of providing auto-repair services and retailing shock absorbers. It was one of a number of companies that was owned and controlled by the brothers (albeit, they were not subsidiaries or parents of each other). The transactions that were subject of the dispute related to various funds transferred to the Hua Wang Bank and the claiming of deductions for interest and bank charges on loans made by that Bank to the taxpayer. The Commissioner also disallowed deductions claimed by the taxpayer for “management fees” paid by the taxpayer to associated companies.
In finding that the taxpayer was not entitled to the deduction for the management fees, the Court found the taxpayer had not satisfied the relevant onus of proof as it had not established to whom the payments were made, the nature of the service provided and the relevance of the service to its income producing activities.
In relation to the interest and bank charges, the Court first dismissed the taxpayer’s claim that the liability for the debt had been novated to the taxpayer. It then found that, in any event, the outgoings did not relate or have a “nexus” to any identified income activities of the taxpayer (including by way of the on-loaning of the funds interest free to the related companies – as they were not group companies).
However, the Court dismissed the Commissioner’s claim that the arrangements were a “sham”. It also found that the taxpayer’s activities did not amount to “fraud or evasion”, but rather were “tax avoidance”, and that therefore the 6 year time limit for amending assessments applied. Nevertheless, the Court found that it was appropriate for the Commissioner to impose shortfall penalties for “intentional disregard” plus a 20% uplift factor, and that there were no grounds for remission of the penalty.
(Fitzroy Services Pty Ltd v FCT [2013] FCA 471, Federal Court, Edmonds J, 20 May 2013.)
[LTN 96, 21/5/13]