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01 Mar 07 Post-cessation interest deductible - Guest

The Federal Court (Heerey J) has held that the taxpayer (Guest) was entitled to a deduction for interest incurred on a loan taken out for the purpose of investing in a blueberry project. Under the project, repayments of the loan were intended to be made out of the proceeds of sale of fruit. The project did not prosper. Receivers were appointed to the project in 1991, and they ceased applying the proceeds of fruit sales to the taxpayer's debt. Claims for deductions for interest were made in the 1998, 1999, 2000 and 2001 income years.

The Court noted that a line of cases supports the proposition that a loss or outgoing may be deductible even if it is incurred some years after the associated business, or the taxpayer’s involvement in it, has ceased: Placer Pacific Management Pty Ltd v FCT (1995) 31 ATR 253, FCT v Brown (1999) 99 ATC 4600, FCT v Jones (2002) ATC 4135, and R & D Holdings Pty Ltd v DFCT (2006) ATC 4472. The Court held, at para 86:

"Here the occasion of the borrowing...and the consequent interest liability was undoubtedly to be found in business operations directed towards the gaining or producing of assessable income. The cessation of the taxpayer’s involvement in the business did not in itself retrospectively alter the occasion of the borrowing. Apart from cessation, there was no event which altered the taxpayer’s relationship to the business... In 1987 Mr Guest became obliged to pay interest on a business-related borrowing. The obligation arose from his entering into the loan agreement and failing to make the two $5,000 repayments on time. In the tax years in question his liability for interest arose under the same obligation. He owed the interest in his capacity as borrower of the same loan to a successor in title of the original lender. Apart from the sheer passage of time argument, the interest liabilities had a "real connection" with Mr Guest’s blueberry growing business."

Of equal interest is the Court's conclusion in response to the Commissioner's argument that the taxpayer was not carrying on a blueberry growing business (see paras 91-3):

"91 It is true that there is no evidence that Mr Guest ever visited the blueberry farm or did anything to participate in the business other than sign documents, pay some money, return income and claim deductions.

92 This does not mean, however, that Mr Guest was not carrying on business. He did so by engaging his agent Johnson Farm Management for that purpose: qui facit per alium facit per se; see also Commissioner of Taxation v Sleight (2004) 136 FCR 211 at [46]-[61], the facts of which are quite similar to the present case. Mr Guest’s involvement in the blueberry growing at Corindi was comparable to that of English absentee landlords of Irish estates in the nineteenth century. They conducted their business through the medium of agents such as Captain Hugh Boycott, who gave his name to the language.

93 The blueberry project involved the motive of profit, albeit not immediate, repetition of activities, systematic organisation, and the investment by Mr Guest and the other three individuals of significant amounts. This was not a hobby."

Guest v FCT [2007] FCA 193 (Federal Court, Heerey J, 23 February 2007).

For a copy of the decision, go here

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