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15 Sep 10 Interest and losses not deductible - IEL Finance

In a long running saga, the Federal Court (Emmett J) has held that Spassked Pty Limited ("Spassked") was not entiled to deductions for interest in the 1991, 1993 and 1994 income years. This meant that companies to whom Spassked had transferred losses arising from the claimed income deductions under the former s 80G ITAA 1936 were not entitled to deductions for those losses.

Spassked borrowed funds at interest from IEL Finance Limited, a finance company in the Industrial Equity Limited ("IEL") group of companies, of which Spassked was a member. Spassked then used thes funds to subscribe for "A" class shares in another group company ("GIH"). "B" class shares in GIH were held by IEL. GIH used the funds to subscribe for shares in subsidiary companies that used the funds to acquire profitable assets. Between 1988 and 1994, Spassked incurred interest expenses of $3,272,715,111 but, in the same period, received only $43,962,139 by way of two unfranked dividends paid by GIH, notwithstanding that GIH earned substantial amounts of income and paid dividends to IEL in the order of $3,045,199,551.

The Commissioner denied Spassked's claims for deductibility under former s 51(1) ITAA 1936 on the grounds that it was never the intention of the parties that Spassked would derive assessable income. In contrast, the taxpayer argued that when interest expenses to IEF were incurred by Spassked in the 1991, 1993 and 1994 Years, it was the intention and expectation of the directors of Spassked, in those years, that dividends would be paid by GIH to Spassked at the earliest available opportunity and that there was the potential for such dividends to be paid.

In relation to the 1992 income year, Spassked's claim for a deduction for the interest incurred in that year was dismissed by the Full Federal Court in Spassked Pty Ltd and Others v FCT [2003] FCAFC 282. However, the Full Federal Court held that Spassked was not estopped from arguing the same issues in relation to the 1991, 1993 and 1994 income years - see Spassked Pty Ltd and Others v FCT (No 2) [2007] FCAFC 205.

In the event, Emmett J came to the same conclusion in relation to the 1991, 1993 and 1994 income years that the Full Federal Court had come to in relation to the 1992 income year. His Honour said, at para 250, as follows:

"...I do not consider that there was, in any of the 1991, 1993 or 1994 Years, any intention or expectation, on the part of those responsible for the decision as to whether to make assessable distributions to Spassked, that Spassked would, at any foreseeable time in the future, derive assessable income that could be referrable to the interest expenses that it was incurring to IEF in those Years."

On the basis of this finding, Emmett J considered the potential application of Part IVA, but did not decide the issue.

IEL Finance Limited ACN 008 556 130 v FCT [2010] FCA 898 (Federal Court, Emmett J, 20 August 2010).


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