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The Full Federal Court (Spender, Siopis and Gilmour JJ) has dismissed the Commissioner's appeal from the decision of French J, who held that 2 taxpayers were not liable to pay  penalties imposed by the Commissioner under the combined operation of the former ss 224 and 226L of ITAA 1936. The taxpayers had entered into a cattle breeding project and claimed deductions for expenses relating to the project. After an unsuccessful test case involving another taxpayer, the 2 taxpayers abandoned any claim that their expenses were deductible, but continued to object to the imposition of penalties, on the basis that their sole or dominant (subjective) purpose in entering into the arrangement was otherwise than to pay no tax or less tax.

The AAT had rejected the taxpayers' evidence about their subjective purpose in entering into the arrangement, holding that s 224(2) did not involve an inquiry into the subjective purposes of the taxpayers concerned. French J upheld the taxpayers' appeal from the AAT, holding that evidence of the taxpayers' subjective purpose was relevant and had not been challenged by the Commissioner.

After reviewing the law and the decision of French J, the Full Federal Court concluded that French J did not err in concluding that s 224(2) and, therefore, s 226L, imported a subjective test: FCT v Starr [2007] FCAFC 204 (Full Federal Court; Spender, Siopis and Gilmour JJ; 21 December 2007).

For a copy of the decision, go here

TAXVINE NOTE: The penalty provisions relevant to this appeal were to be found in Pt VII of the ITAA. By operation of s 222AA it does not apply to "statements made, or schemes entered into, in relation to the 2000-01 year of income or a later year of income". It has been replaced by Div 284 of Schedule 1 of the Taxation Administration Act 1953 (Cth). The latter provisions are materially different from those considered in the appeal, and impose an objective test in determining the purpose for which a "scheme benefit" was obtained.

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