Case: Federal Commissioner of Taxation v Brown (1999) 99 ATC 4600
Outcome: cited
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 Federal Commissioner of Taxation (1995) 31 ATR 253, Federal Commissioner of Taxation v Brown (1999) 99 ATC 4600, Federal Commissioner of Taxation v Jones (2002) ATC 4135, and R &amp; D Holdings Pty Ltd v Deputy Federal Commissioner of Taxation (2006) ATC 4472. In Placer the claimed deduction was for a payment in settlement of litigation in respect of defective goods supplied. In the other cases it was for interest on a business related loan. 73 That the gap in time may be considerable is demonstrated by the following table: Case Business ceased Deduction allowed Placer 1981 1989 Brown 1990 1994 Jones 1993 1998 R &amp; D 1990 1999 In R &amp; D there is the qualification that the business in question, the leasing of an office building, was still carried on, although not by the taxpayer but by a mortgagee in possession. 77 In Brown the taxpayers borrowed money to fund the purchase of a delicatessen. They sold the business in 1990 but the proceeds were not sufficient to discharge the loan. They continued to pay interest until the loan was discharged in 1995. The Full Court (Lee, RD Nicholson and Merkel JJ) upheld the decision of the trial judge that there was a sufficient connection between the occasion for the payment of interest and the carrying on of the business. On the appeal, the Commissioner had argued that once the business had ceased the payment of the interest was not to be found in the carrying on of the business but in the voluntary decision of the partnership not to repay the loan and to continue to pay interest instalments (at [15]). 83 Their Honours referred to Brown and the passage quoted at [79] above. They observed (at [17]) that in the instant case the taxpayer had no free choice between continuing the loan and repaying it. They said: "In our view the obiter dictum in Brown deals with the case of a true election where the borrower has the resources to pay out the loan but decides not to and rolls the loan over instead. In any event ... the loan in the present case was not a 'rollover' business loan facility, but one that would run for the agreed term unless the taxpayer decided to repay early." 84 In the present case there is no evidence one way or the other as to Mr Guest's personal financial resources in March 1992 or August 1996. Since the onus of showing that his assessments are excessive lies on him, if it is necessary for him to show that non-repayment of the loan was due to impecuniosity then his appeal must fail. 85 However, the authorities do not in my view establish that, as a matter of law, interest on a business-related loan ceases to have that character once an opportunity to repay the loan is not taken, the only exception being where the failure to repay is due to the taxpayer's impecuniosity. 88 There remains the argument based on sheer passage of time. There may come a time when the period between cessation of business and payment or incurring of interest is such that in all the circumstances the payment is "no longer sufficiently proximate to the activities of the business to be deductible": Brown at [25]. As senior counsel for the Commissioner accepted, the period cannot be precisely stated. The answer must depend, as was said in Brown at [25], upon commonsense or practical weighing of all the factors. 89 In itself the period of time in the present case is substantial, but it is not really disproportionate to the periods that have been considered not sufficient to destroy proximity in other cases; see [73] above. At the most, the period in this case might be said to be approaching the outer limits. Also there is the factor that from the point of view of the lender and its successors willingness to enforce the loan was never abandoned, either by the Receivers or Equus. It is not as though some commercial archaeologist came across a long forgotten loan and set about recovery.