Willersdorf-Greene v Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Administrative Appeals Tribunal (2008/2147-2149; 2008/4832-4834)
Judgment date: 28 August 2009
Date published: 4 December 2009
Decision outcome: Partially Adverse

Summary of decision:
Outlines the Tax Office response to this case, which primarily concerned whether interest on a loan used to satisfy a guarantee is deductible, where the later loan was taken out after the relevant income producing opportunity related to the guarantee had passed.

Overview of facts:
The taxpayer was approached by friends to secure an investor to finance their investment in a scheme to import fuel into Australia and distribute it. Under the belief that he could derive commission income from the scheme, the taxpayer procured an investor to lend money to his friends' company. The investor required the taxpayer and his friends to guarantee repayment of the loan by the company, and to agree to execute mortgages over their respective houses. | When the company did not honour the repayments, the taxpayer discovered that he had been the victim of a scam perpetuated by his friends. After the investor and the taxpayer had explored ways to recover the moneys lent, the investor instructed the taxpayer to mortgage his property in accordance with the guarantee agreement. The investor foreclosed on the mortgage, and the taxpayer took out two loans to pay the reduced amount that the investor agreed would fulfil the taxpayer's guarantee. The taxpayer claimed deductions for interest and borrowing expenses associated with these loans in the 2005, 2006 and 2007 years. | In the 2005, 2006 and 2007 years, the taxpayer also claimed deductions for work related travel, motor cycle and home office expenses. | On audit, the expenses were disallowed and penalties (25%) for lack of reasonable care were imposed. During the course of proceedings before the Tribunal, the Commissioner accepted that the various home office expenses were allowable. | Issues decided by the court or tribunal | While the Tribunal found that the taxpayer's involvement in the fuel 'scheme' did not amount to the carrying on of a business, it found that he was engaged in activities that were clearly directed to gaining or producing commission income for himself. There was a connection between the taxpayer giving the guarantee and the investor making the loan that would lead to the taxpayer gaining or producing income (paragraphs 75 and 76). | The entering into of the guarantee gave rise to a contingent liability that would become an actual liability if the repayment by the company did not occur. The taxpayer later borrowed money to meet his actual liability under the guarantee and to avoid proceedings being taken against him by the investor. The taxpayer was aware that the borrowing would not lead to the gaining or producing of any income at that time or in the future. The prospect of gaining any commission income under the fuel 'scheme' was long gone (paragraph 83). | However, the necessary connection that initially existed between the contingent liability under the guarantee and the activities directed at the prospect of gaining commission income remained when the investor exercised its rights under the guarantee, even though the prospect of such income, by then, had gone. The investor's claim was a necessary consequence of the loss of its investment, and of the taxpayer having given the guarantee. The foundation of the claim was in the original fuel scheme arrangements. The interest and the borrowing expenses incurred in relation to the guarantee were deductible. The Tribunal also distinguished two earlier Tribunal decisions about interest expenses incurred on moneys borrowed to honour guarantees on the basis that the guarantees given in those cases did not have the necessary connection with any income earning activities of the taxpayers (paragraph 92). | The Tribunal was not satisfied that the taxpayer had incurred the travel expenses, and was also not satisfied that the taxpayer had properly substantiated the interest and borrowing expenses incurred. The Tribunal affirmed the Commissioner's calculation of the depreciation allowable on the motor cycle and the imposition of penalties of 25% for failure to take reasonable care in relation to the deduction claims disallowed.

Issues decided:
While the Tribunal found that the taxpayer's involvement in the fuel 'scheme' did not amount to the carrying on of a business, it found that he was engaged in activities that were clearly directed to gaining or producing commission income for himself. There was a connection between the taxpayer giving the guarantee and the investor making the loan that would lead to the taxpayer gaining or producing income (paragraphs 75 and 76). The entering into of the guarantee gave rise to a contingent liability that would become an actual liability if the repayment by the company did not occur. The taxpayer later borrowed money to meet his actual liability under the guarantee and to avoid proceedings being taken against him by the investor. The taxpayer was aware that the borrowing would not lead to the gaining or producing of any income at that time or in the future. The prospect of gaining any commission income under the fuel 'scheme' was long gone (paragraph 83). However, the necessary connection that initially existed between the contingent liability under the guarantee and the activities directed at the prospect of gaining commission income remained when the investor exercised its rights under the guarantee, even though the prospect of such income, by then, had gone. The investor's claim was a necessary consequence of the loss of its investment, and of the taxpayer having given the guarantee. The foundation of the claim was in the original fuel scheme arrangements. The interest and the borrowing expenses incurred in relation to the guarantee were deductible. The Tribunal also distinguished two earlier Tribunal decisions about interest expenses incurred on moneys borrowed to honour guarantees on the basis that the guarantees given in those cases did not have the necessary connection with any income earning activities of the taxpayers (paragraph 92). The Tribunal was not satisfied that the taxpayer had incurred the travel expenses, and was also not satisfied that the taxpayer had properly substantiated the interest and borrowing expenses incurred. The Tribunal affirmed the Commissioner's calculation of the depreciation allowable on the motor cycle and the imposition of penalties of 25% for failure to take reasonable care in relation to the deduction claims disallowed.

ATO view of decision:
In essence, the Tribunal has found that the occasion of the interest expenses was the giving of the guarantee, and that the giving of the guarantee was an important part of the arrangement that was likely to be productive of commission income for the taxpayer. The Tax Office accepts that this finding was open to the Tribunal on the particular facts as found, and that the case is distinguishable from cases in which the guarantees related directly to the income earning activities of the relevant companies, and only related indirectly, if at all, to the income earning activities of the guarantors ( Re Pope and Commissioner of Taxation [ 2005 ] AATA 1085 and Re Applicant and Commissioner of Taxation [ 2001 ] AATA 831 ).

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

Legislative references: A New Tax System (Tax Administration) Act (No 2) 2000 Bankruptcy Act 1966 82 Income Tax Assessment Act 1997 Division 4 Division 6 Division 8 Division 25 Division 40 Division 42 (repealed) Division 900 Division 995 Income Tax Assessment Act 1936 23 51 226G Income Tax (Transitional Provisions) Act 1997 Division 40 New Business Tax System (Capital Allowances) Act 2001 2 Sch 1 New Business Tax System (Transitional and Consequential Provisions) Act 2001 2 Sch 1 Taxation Administration Act 1953 Division 284 Tax Law Improvement Act 1997 2 3 Tax Laws Amendment (Repeal of Inoperative Provisions) Act 2006 3
Case references: AAT Case 10,211 95 ATC 319 (1995) 30 ATR 1342 AGC (Advances) Ltd v Federal Commissioner of Taxation (1975) 132 CLR 175 5 ATR 243 5 ALR 208 75 ATC 4057 Amalgamated Zinc (De Bavay's) Ltd v Federal Commissioner of Taxation [1935] HCA 81 (1935) 54 CLR 295 Bank of New South Wales v Permanent Trustee Co of New South Wales Ltd (1943) 68 CLR 1 [1943] HCA 27 Bolton v Stone [1951] AC 850 [1951] 1 All ER 1078 Charles Moore & Co (WA) Pty Ltd v Federal Commissioner of Taxation (1956) 95 CLR 344 [1956] HCA 77 Coal and Allied Operations Pty Ltd v Australian Industrial Relations Commission and Others (2000) 203 CLR 194 174 ALR 585 Drake v Minister for Immigration and Ethnic Affairs (1979) 24 ALR 577 2 ALD 60 46 FLR 409 Expile Pty Limited v Jabb's Excavations Pty Ltd & Anor [2004] NSWSC 284 (2004) 22 ACLC 667 Federal Commissioner of Taxation v Brown (1999) 99 ATC 4600 43 ATR 1 [1997] FCA 721 Federal Commissioner of Taxation v Day [2008] HCA 53 (2008) 236 CLR 163 (2008) 70 ATR 14 2008 ATC 20-064 Federal Commissioner of Taxation v Jones [2002] FCAFC 41 2002 ATC 4135 (2002) 49 ATR 188 Federal Commissioner of Taxation v Maddalena (1971) 45 ALJR 426 2 ATR 541 71 ATC 4161 Federal Commissioner of Taxation v Payne (2001) 202 CLR 93 [2001]HCA 3 2001 ATC 4027 46 ATR 228 Guest v Federal Commissioner of Taxation (2007) 65 ATR 815 [2007] FCA 193 2007 ATC 4265 Inglis v Federal Commissioner of Taxation (1979) 40 FLR 191 10 ATR 493 80 ATC 4001 Joselyn v Berryman (2003) 214 CLR 552 77 ALJR 1233 198 ALR 137 Kidston Goldmines Ltd v Commissioner of Taxation (1991) 30 FCR 77 22 ATR 168 91 ATC 4538 McHale v Watson (1966) 115 CLR 199 [1966] HCA 13 39 ALJR 459 [1966] ALR 513 Molit (No 55) Pty Ltd v Lam Soon Australia Pty Ltd (Administrator Appointed) (1996) 19 ACSR 160 (1996) 63 FCR 391 (1996) 135 ALR 280 Peco Arts Inc v Hazlitt Gallery Ltd [1983] 3 All ER 193 [1983] 1 WLR 1315 Perry v Ellis [1946] SASR 282 Placer Pacific Management Pty Ltd v Federal Commissioner of Taxation (1995) 31 ATR 253 (1995) 95 ATC 4459 R & D Holdings Pty Ltd v Deputy Federal Commissioner of Taxation [2006] FCA 981 2006 ATC 4472 (2006) 64 ATR 71 Re Applicant and Commissioner of Taxation [2001] AATA 831 48 ATR 1107 2001 ATC 136 Re Arnett and Federal Commissioner of Taxation (1998) 39 ATR 1095 98 ATC 2137 Re Confidential and Commissioner of Taxation [2008] AATA 415 2008 ATC 1-002 (2008) 72 ATR 252 Re Drake and Minister for Immigration and Ethnic Affairs (No. 2) (1979) 2 ALD 634 Re Gray and Australian Securities and Investments Commission [2004] AATA 1235 (2004) 86 ALD 230 Re Pope and Commissioner of Taxation [2005] AATA 1085 Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47 [1949] HCA 15 Silbermann v One.Tel Ltd (In liq) (2002) 167 FLR 274 Spriggs v Federal Commissioner of Taxation Riddell v Federal Commissioner of Taxation [2009] HCA 22 72 ATR 148 2009 ATC 20-109 Steele v Deputy Commissioner of Taxation (1999) 197 CLR 459 41 ATR 139 99 ATC 4242 Weyers & Anor v Federal Commissioner of Taxation 2006 ATC 4523 (2006) 63 ATR 268 [2006] FCA 818
Subject references: Income tax Deductions Guarantee Interest Depreciation Penalties