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08 Apr 10 Whole (rather than half) of deemed dividend assessable to taxpayer - Rozman

The Federal Court (Perram J) has dismissed part of the taxpayer's appeal and upheld the Commissioner's appeal from the decision of the AAT (Block DP), which had held that only one half of certain moneys paid at the direction of a private company constituted a deemed dividend for Div 7A purposes. The moneys were owed to the private company by two US companies and were paid, at the private company's direction, into the taxpayer's US bank account. The taxpayer and her partner were the shareholders of the private company, and the moneys were drawn by the taxpayer for personal expenses incurred by her and her partner. The Commissioner had sought to assess the taxpayer on the whole of the amount of the moneys.

The taxpayer argued that a direction by a private company to a debtor to discharge the debt by payment to a shareholder cannot be described as being a situation in which “a private company pays an amount to an entity” within the meaning of those words in s109C(1). The Court rejected this argument, stating, at para 22:

"In truth, there is no reason to construe “pay” as requiring a direct flow of money from payer to payee. Only in a world in which the concept of money was confined to cash and coin could such a notion even begin to work, for once it be accepted that that concept includes debts and other choses of action, it becomes nonsensical to speak about money literally moving from the payer to the payee. Ms Rozman’s construction of the word “pay” is, therefore, to be rejected. It ignores ordinary usage and it does so for no good reason."

In relation to the Commissioner's appeal, the AAT had found that there is authority (in MacFarlane v FCT (1986) 13 FCR 356) for the proposition "that where a couple live and work together and make contributions to a jointly-owned and operated business, money appropriated (or to be more accurate, misappropriated) by them from that business should be taxed in their hands as to one half each". The Commissioner's appeal from this finding was upheld by the Court, which stated that "(w)ithout an intermediate finding that a trust arose, MacFarlane was authority for no such proposition." And, in this respect, the AAT had expressly found that there was no trust in favour of the taxpayer's partner.

The consequence was that the Commissioner's original assessment, including the whole, rather than half, of the moneys in the taxpayer's assessable income, was restored.

Finally, the Court upheld the taxpayer's appeal on the question of penalty on the basis that the AAT had incorrectly failed to deal with the matter. The Court therefore remitted the matter to the AAT for determination.

FCT v Rozman [2010] FCA 324 (Federal Court, Perram J, 1 April 2010).


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