Rawson Finances Pty Ltd v Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Federal Court of Australia (NSD 1067 of 2012)
Judgment date: 5 March 2013
Date published: 22 July 2013

Summary of decision:
Outlines the ATO response to a decision of the Full Federal Court, about whether the AAT erred in law in deciding that the taxpayer sufficiently discharged its onus of proof to establish that the relevant transactions were pursuant to a loan arrangement.

Overview of facts:
During the 1997 and 1998 income years, the taxpayer received a total of $4.75 million from Mercantile Discount Bank of Israeli (Bank). | From 1997 until 2008, the taxpayer made sporadic payments to the Bank and claimed interest deductions. The documentation in support of the purported loans was limited. There were no loan documents, no security, no guarantee, and no consistent stream of payment amounts. The payments that were made were inconsistent with the alleged rate of interest. | The taxpayer's evidence consisted of some correspondence between the Bank and the taxpayer during the course of the purported loan. The taxpayer had several witnesses, two of which, a former employee of the Bank and an expert as to Israeli banking law, were unavailable for cross-examination. | The Tribunal found that the funds received by the taxpayer from the Bank were loans and that the payments made were allowable deductions. | The Commissioner appealed to the Federal Court on the basis that the factual findings and inferences made by the Tribunal were not open to it; and that the Commissioner had been denied procedural fairness before the Tribunal, for example by the admission into evidence of statements of witnesses who were unavailable for cross-examination by the Commissioner. The Commissioner also relied on the ground that the Tribunal had erroneously reversed the taxpayer's onus of proof under subparagraph 14ZZK (b)(i) of the TAA 1953. | In the Federal Court, Edmonds J reversed the Tribunal's decision, allowing the Commissioner's appeal. His Honour's decision was based on a finding that the Tribunal had erred in law in applying subparagraph 14ZZK (b)(i) and that there were fundamental deficiencies in the taxpayer's evidence such that the Tribunal's finding was not open on the evidence. | The taxpayer then appealed to the Full Federal Court. | Issues decided by the court | The taxpayer's grounds of appeal were that: • there were fundamental deficiencies in the taxpayer's evidence and the taxpayer had not discharged its onus of proof, in essence because the finding that there was a loan was not open on the facts. • the Tribunal erred in law in applying subparagraph 14ZZK (b)(i) of the TAA 1953, with the effect that the onus provisions had been reversed. | • there were fundamental deficiencies in the taxpayer's evidence and the taxpayer had not discharged its onus of proof, in essence because the finding that there was a loan was not open on the facts. • the Tribunal erred in law in applying subparagraph 14ZZK (b)(i) of the TAA 1953, with the effect that the onus provisions had been reversed. | The Commissioner filed a Notice of Contention that the Commissioner was denied procedural fairness; characteristics of the alleged loan were ignored; the finding that the loan was genuine was so unreasonable that no reasonable decision-maker would have made it; material facts in relation to the interest payments were ignored; the process of reasoning was so illogical and irrational that it was an error of law. | Jagot J, with whom Nicholas J agreed, and Jessup J allowed the taxpayer's appeal. The plurality agreed there was no procedural fairness.

Issues decided:
The taxpayer's grounds of appeal were that: • there were fundamental deficiencies in the taxpayer's evidence and the taxpayer had not discharged its onus of proof, in essence because the finding that there was a loan was not open on the facts. • the Tribunal erred in law in applying subparagraph 14ZZK (b)(i) of the TAA 1953, with the effect that the onus provisions had been reversed. • there were fundamental deficiencies in the taxpayer's evidence and the taxpayer had not discharged its onus of proof, in essence because the finding that there was a loan was not open on the facts. • the Tribunal erred in law in applying subparagraph 14ZZK (b)(i) of the TAA 1953, with the effect that the onus provisions had been reversed. The Commissioner filed a Notice of Contention that the Commissioner was denied procedural fairness; characteristics of the alleged loan were ignored; the finding that the loan was genuine was so unreasonable that no reasonable decision-maker would have made it; material facts in relation to the interest payments were ignored; the process of reasoning was so illogical and irrational that it was an error of law. Jagot J, with whom Nicholas J agreed, and Jessup J allowed the taxpayer's appeal. The plurality agreed there was no procedural fairness.

ATO view of decision:
There are no significant implications from the decision on other cases as the decision turned on its particular facts in relation to the characteristics of the loan.

Administrative treatment:
Implications for ATO precedential documents (Public Rulings & Determinations etc) | Not applicable.

Legislative references: Taxation Administration Act 1953 (Cth) s 14ZZK Administrative Appeals Tribunal Act 1975 (Cth) s 33 s 44
Case references: Areffco v Commissioner of Taxation [2011] AATA 932 56 AAR 263 125 ALD 340 Australian Broadcasting Tribunal v Bond [1990] HCA 33 170 CLR 321 64 ALJR 462 21 ALD 1 94 ALR 11 Bailey v Commissioner of Taxation [1997] HCA 11 136 CLR 214 51 ALJR 429 7 ATR 251 13 ALR 41 77 ATC 4096 Parramatta City Council v Pestell [1972] HCA 59 128 CLR 305 46 ALJR 662 27 LGRA 72 [1972-73] ALR 811 Seltsam Pty Ltd v McGuiness [2000] NSWCA 29 49 NSWLR 262 [2000] Aust Torts Reports 63,565 (81-547) 19 NSWCCR 385 Re Sharkey v Commissioner of Taxation [2007] AATA 1435 66 ATR 878 95 ALD 509 2007 ATC 2218 [2008] ALMD 441 Tisdall v Webber 193 FCR 260 [2011] FCAFC 76 122 ALD 49 [2011] ALMD 5260
Subject references: Offshore loans Burden of proof Error of law Procedural fairness