Barkoczy, Stephen --- "Editorial" [1999] JlATax 6; (1999) 2(2) Journal of Australian Taxation 64

Editorial

Associate Professor Stephen Barkoczy

The general deduction provision contained in former sec 51(1) of the Income Tax Assessment Act 1936 (Cth) ("ITAA36") is continuing to live up to its reputation as one of the most litigated provisions in our tax laws. In the first few months of this year, the courts have already handed down a number of important decisions concerning this provision.

The most significant decision of this year is, without doubt, the High Court decision in Steele v DFC of T 99 ATC 4242. This case concerned the deductibility of interest payments incurred on borrowings used to purchase land which, the taxpayer submitted, was intended to be developed as a motel site (although the development never actually took place). A majority of the High Court held that the Full Federal Court (by a majority) had erred in applying the decision in Wharf Properties Ltd v CIR (Hong Kong) 97 ATC 4225 to conclude that the interest expenditure incurred by the taxpayer was capital in nature. In Wharf Properties, the Privy Council had treated as capital, interest incurred by a company on borrowed funds used to purchase a tramway depot as a development site. The site had been purchased in 1987, but was only vacated by the tramway company in 1989. In coming to its conclusion, the Privy Council expressly rejected the Papua New Guinea decision in Travelodge Papua New Guinea Ltd v C of T 85 ATC 4432 which was subsequently endorsed by the High Court majority in Steele. In Travelodge it had been held that interest paid on borrowings used to fund the construction of a hotel was of a revenue nature notwithstanding that the interest had been capitalised and that no income had yet been produced from the hotel.

Other recent noteworthy decisions concerning the general deduction provision are found in Email Ltd v FC of T 99 ATC 4208 and FC of T v Payne 99 ATC 4391. In the first case, O'Loughlin J applied the Full Federal Court decisions in FC of T v Total Holdings (Australia) Ltd 79 ATC 4279 and FC of T v EA Marr & Sons Sales Ltd 84 ATC 4580 to conclude that deductions were available for indemnity payments relating to warranties made by a holding company on the sale of shares by one of its wholly-owned subsidiaries. In the second case, a majority of the Federal Court granted deductions for expenditure incurred by a taxpayer in travelling between his home which he also used as a deer farm and the airport where he reported for his duties as a Qantas pilot.

It is not only in the area of deductions that there have been a number of recent notable cases. For instance, there has also been a spate of important decisions concerning the scope of the Commissioner's access powers under s 264 of the ITAA36. The relevant cases include May v DFC of T 98 ATC 4690, Deloitte Touche Tohmatsu & Ors v DFC of T 98 ATC 5192 and DFC of T v Coombes (No 2) 99 ATC 4082.

All of the above cases (and the appeals that will no doubt emanate from some of them) warrant close scrutiny and hopefully detailed examination in articles that will appear in future issues of this journal. I encourage potential contributors to consider tackling the many issues raised by these cases.

This issue of the Journal contains a variety of interesting articles on a diverse range of topics. Jack Stuk and Darren Sommers examine matters that arise where the "distributable income" of a trust as calculated for accounting purposes differs from the "net income" of the trust as calculated for tax purposes. The article looks at a number of well-known cases including Davis v FC of T 89 ATC 4377, Richardson v FC of T 97 ATC 5098 and Zeta Force Pty Ltd v FC of T 98 ATC 4681. There is also an article by Hope Ashiabor on capital gains tax and lease incentives as well as an article discussing the role of mediation in tax disputes by Associate Professor Richard Fayle who is a member of the Administrative Appeals Tribunal and one of our Advisory Board members.

Special mention should also be made of the feature article in this issue of the Journal which is written by Justice Graham Hill of the Federal Court. In his article, Justice Hill examines the fascinating link between the judiciary and the tax reform process. It is my great pleasure to also announce that Justice Hill has joined our Advisory Board as senior member. This issue of the Journal also welcomes Professor John Prebble from Victoria University of Wellington in New Zealand as an additional Advisory Board member.

April 1999