Case: Commissioner of Taxation v Riverside Road Lodge Pty Ltd (in liq) (1990) 23 FCR 305
Outcome: cited
The concept of a break in the nexus was applied in Commissioner of Taxation v Riverside Road Lodge Pty Ltd (in liq) (1990) 23 FCR 305. In 1970 the taxpayer company borrowed money to acquire land and construct a motel. There were repayments and further borrowings. In 1979 the taxpayer transferred the property to the trustee of a unit trust, the beneficiaries of which were the shareholders in the taxpayer. The consideration for the transfer was the current value, payable on demand, interest free. The trustee then leased the property back to the taxpayer, which continued to conduct the motel business. The disputed deduction was for interest on pre-1979 loans incurred after the transfer. 76 The Full Court (Northrop, Wilcox and Hill JJ) observed (at 314) that the case was not one where the activities of the taxpayer in operating the motel ceased during any relevant year of income. However, in 1979, as a result of the sale and lease-back, the character of the activities of the taxpayer changed. Before, it was an owner/operator of a motel; afterwards it was an operator of a motel owned by others and of which it was only a tenant. The Full Court disagreed with the view of the trial judge that the 1979 change was not sufficient to change the relationship between the interest payments and the business activity. The interest outgoings ceased to be "relevant and incidental" to the business activities engaged in by the taxpayer after 1979. They had "no real connection at all with the business of running a rented motel" (at 315). 82 Their Honours (at [14]) observed that Riverside Road: "...does not establish that a taxpayer who has a legal right to repay a business loan after the cessation of business can never thereafter deduct interest payable on the loan. All it decided is that, in the circumstances of that case, which involved a distinct change in business activity during the currency of the loan, interest continued to be deductible after the cessation of the business for which the loan was incurred because the taxpayer was contractually bound to pay interest until the loan was repaid." 86 Here the occasion of the borrowing from Rural Finance and the consequent interest liability was undoubtedly to be found in business operations directed towards the gaining or producing of assessable income. The cessation of the taxpayer's involvement in the business did not in itself retrospectively alter the occasion of the borrowing. Apart from cessation, there was no event which altered the taxpayer's relationship to the business, such as occurred in Riverside Road . In 1987 Mr Guest became obliged to pay interest on a business-related borrowing. The obligation arose from his entering into the loan agreement and failing to make the two $5000 repayments on time. In the tax years in question his liability for interest arose under the same obligation. He owed the interest in his capacity as borrower of the same loan to a successor in title of the original lender. Apart from the sheer passage of time argument, the interest liabilities had a "real connection" with Mr Guest's blueberry growing business. 87 The point may be illustrated by a hypothetical example. A taxpayer has a business- related loan. While the business is still operating, the term of the loan comes to an end. The taxpayer has the resources to repay the loan, but decides not to, perhaps because the interest rate is favourable, or perhaps he simply overlooks the matter. The interest would continue to be deductible. There seems no logical reason why a different result should occur in a situation where the business has ceased. 90 As often happens in such cases (see Riverside Road at 312), consideration of s 8-1(1)(a) and (b) tended to overlap. If, as I find to be the case, Mr Guest succeeds under (a) he does not need to establish the carrying on business element of (b). Nevertheless, I find that this element has been satisfied. 91 It is true that there is no evidence that Mr Guest ever visited the blueberry farm or did anything to participate in the business other than sign documents, pay some money, return income and claim deductions.