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18 Nov 08 Special leave refused in Lenzo

The High Court (Gummow, Hayne and Crennan JJ) has refused the taxpayer leave to appeal from the decision of the Full Federal Court in FCT v Lenzo [2008] FCAFC 50, in which the Full Federal Court upheld the Commissioner's appeal from the decision of French J (as he then was) in a case concerning Part IVA ITAA 1936.

French J held that Part IVA did not apply to deny the taxpayer's claims for deductions for expenses incurred in relation to an investment in a sandalwood plantation project near Kununurra in Western Australia. After reviewing the eight factors in s 177D(b), French J concluded that neither the taxpayer nor the manager or promoter entered into or carried out the scheme for the dominant purpose of enabling the taxpayer to obtain a tax benefit in connection with the scheme. In particular, French J did not accept that the use of a "round robin" loan was determinative of the issue. On appeal, all three judges of the Full Federal Court agreed that French J had erred in his conclusion regarding dominant purpose.

In delivering the decision of the High Court, Gummow J said: "The actual decision of the Full Court concerning the application of section 177C in this case is not attended by sufficient doubt to warrant a grant of special leave. There are insufficient prospects of success on the other grounds sought to be argued."

His Honour prefaced this conclusion by warning against the use of the term "counterfactual" to describe what might have occurred if the relevant scheme had not been carried out: "Reference to this condition as a “counterfactual” may sometimes be a convenient shorthand expression, but it must not obscure the proper application of the legislative provision, " his Honour said.

For a copy of the transcript of the special leave hearing, go here.

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