Guest v Commissioner of Taxation; Guest v Commissioner of Taxation (No 2)
Document type: Impact of Court Decisions Report
Venue: Federal Court of Australia (VID 376 of 2004)
Judgment date: 23 February 2007
Date published: 30 August 2007

Summary of decision:
This case concerns claims for interest accrued in 1998 - 2001 on a loan taken out in 1987 to invest in a blueberry growing project which ceased in 1991. The loan was fully recourse if two early repayments were not made on time. | The Commissioner's appeal against the decision was discontinued.

Overview of facts:
Mr John David Guest invested in the Corindi Blueberry Project in June 1987 to grow blueberries. He together with 3 other individuals borrowed $55,000 to fund their investment from a finance company associated with the project which required two payments to be made by a specified date with the expectation of the balance being repaid out of the proceeds of the sale of fruit, without recourse to the borrowers. Mr Guest's interest was one sixth. The project was not successful and Receivers were appointed to the companies involved in 1991. In 1997 the loan was assigned by the finance company to Equuscorp Pty Ltd ("Equus") which held a first ranking charge over the company and numerous associated companies. Equus commenced proceedings against Mr Guest in 2002 seeking principal and interest due pursuant to the original loan agreement. Mr Guest admitted liability for the amount owing of $117,251.42 and agreed to pay $59,000 over six income years in return for the debt being assigned to a party nominated by Mr Guest. Mr Guest claimed deductions for his one sixth share of the interest accrued on the loan for the 1998 to 2001 income years. | The Commissioner argued that: • There was no liability to pay interest as the loan was without recourse to the borrowers. • The finance company had in its discretion allowed further time for payment. • The terms of the loan agreement provided that any amounts due were not interest but damages for the loss of use of money and that in fact the loan agreement ceased on maturity of the loan in 1992. • The nexus with the gaining or producing of assessable income was broken either by Mr Guest's decision in 1992 not to repay the loan or by the period of time that had lapsed since the project had ceased. • Amounts received from fruit sales in the relevant year ought to be deducted from the principal before calculating the balance on which interest was charged in respect of that year. • In the 1991 income year proceeds of fruit sales of $26,400 should have been applied against the balance of the loan pursuant to the sale of fruit agreement instead $11,400 was credited to the loan account and $15,000 was paid to the project's farm management company. | • There was no liability to pay interest as the loan was without recourse to the borrowers. • The finance company had in its discretion allowed further time for payment. • The terms of the loan agreement provided that any amounts due were not interest but damages for the loss of use of money and that in fact the loan agreement ceased on maturity of the loan in 1992. • The nexus with the gaining or producing of assessable income was broken either by Mr Guest's decision in 1992 not to repay the loan or by the period of time that had lapsed since the project had ceased. • Amounts received from fruit sales in the relevant year ought to be deducted from the principal before calculating the balance on which interest was charged in respect of that year. • In the 1991 income year proceeds of fruit sales of $26,400 should have been applied against the balance of the loan pursuant to the sale of fruit agreement instead $11,400 was credited to the loan account and $15,000 was paid to the project's farm management company. | Issues decided by the court or tribunal | • By reason of the failure to pay the two $5,000 instalments on time Mr Guest became legally liable for repayment of the full amount of the loan and interest • There was no election by the finance company to accept late payment. • The liability incurred after the term of the loan was interest. • The interest liabilities had a real connection with Mr Guest's blueberry growing business. • The period of time is not really disproportionate to the periods that have been considered not sufficient to destroy proximity in those cases concerning a loss or outgoing incurred some years after a business, or the taxpayer's involvement in it, has ceased. • Mr Guest was carrying on a business. • Under the terms of the loan agreement until the proceeds of fruit were applied on 31 March of the relevant year the whole amount due at the beginning of the year was outstanding. • The Court found that $15,000 was never paid to the credit of the loan account and was applied to keep things afloat in the Corindi project at the expense of investors like Mr Guest. | • By reason of the failure to pay the two $5,000 instalments on time Mr Guest became legally liable for repayment of the full amount of the loan and interest • There was no election by the finance company to accept late payment. • The liability incurred after the term of the loan was interest. • The interest liabilities had a real connection with Mr Guest's blueberry growing business. • The period of time is not really disproportionate to the periods that have been considered not sufficient to destroy proximity in those cases concerning a loss or outgoing incurred some years after a business, or the taxpayer's involvement in it, has ceased. • Mr Guest was carrying on a business. • Under the terms of the loan agreement until the proceeds of fruit were applied on 31 March of the relevant year the whole amount due at the beginning of the year was outstanding. • The Court found that $15,000 was never paid to the credit of the loan account and was applied to keep things afloat in the Corindi project at the expense of investors like Mr Guest.

Issues decided:
• By reason of the failure to pay the two $5,000 instalments on time Mr Guest became legally liable for repayment of the full amount of the loan and interest • There was no election by the finance company to accept late payment. • The liability incurred after the term of the loan was interest. • The interest liabilities had a real connection with Mr Guest's blueberry growing business. • The period of time is not really disproportionate to the periods that have been considered not sufficient to destroy proximity in those cases concerning a loss or outgoing incurred some years after a business, or the taxpayer's involvement in it, has ceased. • Mr Guest was carrying on a business. • Under the terms of the loan agreement until the proceeds of fruit were applied on 31 March of the relevant year the whole amount due at the beginning of the year was outstanding. • The Court found that $15,000 was never paid to the credit of the loan account and was applied to keep things afloat in the Corindi project at the expense of investors like Mr Guest. • By reason of the failure to pay the two $5,000 instalments on time Mr Guest became legally liable for repayment of the full amount of the loan and interest • There was no election by the finance company to accept late payment. • The liability incurred after the term of the loan was interest. • The interest liabilities had a real connection with Mr Guest's blueberry growing business. • The period of time is not really disproportionate to the periods that have been considered not sufficient to destroy proximity in those cases concerning a loss or outgoing incurred some years after a business, or the taxpayer's involvement in it, has ceased. • Mr Guest was carrying on a business. • Under the terms of the loan agreement until the proceeds of fruit were applied on 31 March of the relevant year the whole amount due at the beginning of the year was outstanding. • The Court found that $15,000 was never paid to the credit of the loan account and was applied to keep things afloat in the Corindi project at the expense of investors like Mr Guest.

ATO view of decision:
Material findings of Fact | The decision of the Court was open to it on the basis of the factual findings made by the Court. | The nexus argument and the cessation of the project | The finding of the Court that the nexus between a business and loan is not necessarily broken by a moderately lengthy period of time conforms with the approach described in TR 2004/4 (which addresses the Commissioner's view in relation to deductibility of interest incurred after the cessation of business). | It was open to the court to conclude, as it did, that the two instalment payments were not made on time thus making the investors liable for the loan, the interest was in fact incurred and the interest incurred was correctly calculated. We will not be applying the decision to other investors in Corindi, where these facts are not present. If the circumstances of other investors are distinguishable, we will seek to have another more representative case brought before a court or tribunal.

Administrative treatment:
Implications on current Public Rulings & Determinations | None

Legislative references: Income Tax Assessment Act 1997 8-1
Case references: Nilsen Development Laboratories Pty Ltd v Federal Commissioner of Taxation (1981) 144 CLR 616 (1981) 81 ATC 4031 (1981) 11 ATR 505 Cook v Fowler (1874) LR 7 HL 27 Gair v Federal Commissioner of Taxation (1944) 71 CLR 388 [1944] ALR 394 The Herald and Weekly Times Ltd v Federal Commissioner of Taxation (1932) 48 CLR 113 Placer Pacific Management Pty Ltd v Federal Commissioner of Taxation 95 ATC 4459 (1995) 31 ATR 253 Federal Commissioner of Taxation v Brown 99 ATC 4600 [1999] FCA 721 43 ATR 1 Federal Commissioner of Taxation v Jones 2002 ATC 4135 [2002] FCAFC 41 49 ATR 188 R & D Holdings Pty Ltd v Deputy Federal Commissioner of Taxation 2006 ATC 4472 [2006] FCA 981 64 ATR 71 Commissioner of Taxation v Riverside Road Lodge Pty Ltd (in liq) (1990) 23 FCR 305 90 ATC 4567 21 ATR 499 Steele v Deputy Commissioner of Taxation 99 ATC 4242 (1999) 197 CLR 449 41 ATR 139 Federal Commissioner of Taxation v Total Holdings (Aust) Pty Ltd (1979) 79 ATC 4279 (1979) 24 ALR 401 9 ATR 885 Commissioner of Taxation v Sleight 2004 ATC 4477 (2004) 136 FCR 211 55 ATR 555
Subject references: Deductions and expenses Interest expenses