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The Federal Court (Edmonds J) has held that the taxpayer was not entitled to a deduction for management fees and interest paid to an entity or entities located in Western Samoa. One of the entities (to whom the interest was paid) was the Hua Wang Bank of Western Somoa ("the Bank"), an entity established by or on behalf of Mr Vanda Gould, a Sydney accountant. The funds lent by the Bank appeared to be, or were in fact, from sources originally associated with the taxpayer or the taxpayer itself.

In relation to the management fees, there was no evidence supporting the claim for deductibility, including no evidence as to the identity of the payee, the nature of the services provided, how they were provided or when they were provided.

The Commissioner argued that the alleged loan or loans from the Bank was an arrangement or arrangements which was a sham "to disguise the fact that the applicant expatriated funds to the Hua Wang Bank from Australia to avoid scrutiny and support false deductions for interest payments and bank disguise transfers of money made to support the deductions which were falsely claimed". This argument was rejected by Edmonds J.

However, in relation to the payment of interest on loans made up to 30 June 2004, these loans were made by the Bank to a company related to the taxpayer. Edmonds J held that the interest was not deductible as there was no evidence of the taxpayer's indebtedness to the Bank. In particular, there was no evidence that the taxpayer had assumed, by novation, the liability of the related company to the Bank.

Further, in relation to loans made by the Bank to the taxpayer after 30 June 2004, the proceeds of these loans were lent by the taxpayer to related companies interest free. On this basis, Edmonds J held that the interest was not allowable as a deduction under either s 8-1 or s 25-25 ITAA 1997.

However, in relation to the Commissioner's power to amend the taxpayer's assessment in relation to one of the years in question, Edmonds J dismissed the Commissioner's argument that he was entitled to amend at any time on the basis that there had been fraud or evasion. His Honour held that what was involved was tax avoidance, not tax evasion. The amended assessment was set aside on the basis that it was "flawed and infected with legal error".

Fitzroy Services Pty Ltd v FCT [2013] FCA 471 (Federal Court, Edmonds J, 20 May 2013)


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