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The Federal Court (Edmonds J) has upheld the Commissioner's appeal from the decision of the AAT in Areffco and FCT [2011] AATA 628 (6 September 2011).

By assessments for the years of income ended 30 June 1997 and 1998, the Commissioner included in the taxpayer's (Rawson’s) assessable income amounts it received in Australia from Mercantile Discount Bank (“MDB”), an Israeli bank: namely, $3 million in the 1997 year and $1.75 million in the 1998 year. Rawson at all times contended that the receipts were loans made to it by MDB. Further, in assessments or amended assessments for the same years, the Commissioner disallowed amounts claimed by Rawson as allowable deductions for interest allegedly paid on the loans.

The Federal Court held that the taxpayer had failed, in the AAT hearing, to discharge the onus that it carried to establish that the receipts were to be properly characterised as loans. The Court noted that there was no evidence before the AAT of any loan contract nor, otherwise, of any obligation on the part of Rawson to repay the amounts it received through MDB in 1997. Although not fatal to Rawson's case, there were also other "unusual" features of the transaction and conduct of the parties to the transaction which made it more likely that the receipts represented a transfer of funds from Rawson’s bank account or accounts with MDB in Israel (through the instrumentality of MDB), to Rawson’s bank account in Australia.

It followed that the alleged interest payments were not allowable as deductions, as they did not represent a cost of borrowing funds for use in Rawson’s business of lending money to affiliated companies and were not, therefore, a working expense.

The Commissioner's appeal was allowed with costs: FCT v Rawson Finances Pty Ltd [2012] FCA 753 (Federal Court, Edmonds J, 17 July 2012).


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