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The Full Federal Court (Jessup, Jagot and Nicholas JJ) has upheld the taxpayer's appeal from the decision of Edmonds J in FCT v Rawson Finances Pty Ltd [2012] FCA 753, in which Edmonds J upheld the appeal of the Commissioner 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.

In describing the case as "difficult", Jagot J outlined some of the reasons for this description at para 79:

"One reason it is difficult is that, after a hearing over nine days and through a meticulous analysis of some 77 pages of the whole of the material before it, the Administrative Appeals Tribunal (the Tribunal) reached a conclusion which seems inherently implausible – that the appellant, Rawson Finances Pty Ltd (Rawson) had proved on the balance of probabilities that in 1997 an Israeli bank lent $4.75 million to an Australian company with an issued share capital of $2.00 without having any form of security or guarantee and thereafter took no step to require the payment of interest on the outstanding loan amounts of about $1.75 million over two periods of more than three years each between 2001 and 2009, the loans ultimately having been fully repaid by December 2009. This conclusion was reached despite: – (i) the lack of any loan agreements, (ii) the lack of any witness who had any involvement in the establishment of the loans being called to give evidence, (iii) the evidence that Israeli banking practices usually would require security for such loans, (iv) Rawson’s lack of financial capacity at the time of the loans to repay the money, and (v) the lack of any action taken by the bank despite Rawson having failed to pay interest for some seven and a half years in total out of the 12 years over which the loans existed."

Contrary to the findings of the AAT in favour of the taxpayer, Edmonds J 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 taxpayer appealed.

On appeal, the Full Federal Court unanimously upheld the taxpayer's appeal. Jagot J, with whom Nicholas J agreed, said, at para 119:

"The Tribunal was entitled to weight [sic] the evidence as it saw fit provided that in so doing it did not lose sight of the decision it had to make (whether on the whole of the evidence Rawson had discharged the burden of proving the assessments were excessive) and reached conclusions that were reasonably open on the evidence...the Tribunal did not lose sight of the decisions it had to make. Moreover, there was material from which, contrary to the Commissioner’s submissions and primary judge’s conclusion, a justifiable, even if not sound, inference could be drawn that the funds transfers represented genuine loans."

The Commissioner conceded that if the funds were loans then the interest was deductible.

Rawson Finances Pty Ltd v FCT [2013] FCAFC 26 (Full Federal Court; Jessup, Jagot and Nicholas JJ; 5 March 2013).


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