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17 Nov 08 Taxpayers have mixed success on appeal from AAT - Narbey

The Federal Court, (McKerracher J) has dismissed the taxpayers' appeal from a decision of the AAT, which had denied the taxpayers' claims for deductions incurred in relation to management fees and interest on a loan entered into for the purpose of financing the taxpayers’ payment of the management fees. However, the Federal Court has allowed the taxpayers' appeal in relation to penalties imposed by the Commissioner

Reasons of considerable length were produced by the AAT but the taxpayers asserted that the AAT had not, despite recording much of the agreed facts and the arguments of both parties, explained why it preferred the Commissioner’s arguments. The taxpayers also asserted that the Tribunal erred in law in failing to make the material finding as to the applicants’ subjective or actual purposes in entering into the arrangement which gave rise to the incurring of the expenses.

After an extensive review of the issues and the AAT's reasons, the Court concluded, at para 115: "...while the Tribunal did not set out expressly its considerations of each and every argument raised by the applicants, it seems to me that acceptance of the submissions of the Commissioner necessarily meant that those arguments of the applicants were rejected." This aspect of the appeal was dismissed.

However, in relation to penalty, the Court said at para 125:

"...it appears to me that on the authorities, it is necessary on the issue of penalty, for the Tribunal to take into account the subjective purpose of the applicants and particularly to express its conclusion on whether or not it accepted the evidence given by the applicants on that topic. This, the Tribunal did not do. In my view, although the error of law which this omission constitutes is understandable in light of the failure to refer the Tribunal to the decision of Starr 65 ATR 86, nevertheless it constitutes a reviewable error."

Narbey v FCT [2008] FCA 1699 (Federal Court, McKerracher J, 14 November 2008).

For a copy of the decision, go here.

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