Dram Nominees Pty Ltd and Commissioner of Taxation
Document type: Impact of Court Decisions Report
Venue: Administrative Appeals Tribunal (VT2004/42-46)
Judgment date: 10 November 2006
Date published: 18 June 2007

Summary of decision:
This was a factual case concerning the claim for interest deductions on loans obtained to finance expenditure on rented premises. There was not sufficient evidence to substantiate the nexus between the interest claimed and the rental income.

Overview of facts:
These were applications to review decisions of the Commissioner in relation to objections lodged by Dram Nominees Pty Ltd against assessments of income tax, as result of an audit, for years ended 1995 to 2000. | The applicant claimed that it purchased 2 properties under a contract dated 3/12/84 for a total of $60,000. The vendor was an associated company and the contract provided for a deposit of $6,000 with the balance payable on 3/9/90. Dram was registered as proprietor on 19/3/91. A permit for erection of an upper storey was issued in October 1984 in the name of the associated company and construction took place in February 1985. | The primary issue in this case was the claim for interest deductions on loans obtained to finance expenditure on rented premises. | The Applicant was not able to produce evidence of actual payment of the purchase price nor of the precise amount or payment of the subsequent capital expenditure. While there was some evidence of borrowing and the existence of a bank overdraft, there was no direct evidence connecting the borrowings and interest paid, to specific expenditure on the property. | here was no evidence provided as to the payment of the deposit of $6,000 or the balance of $54,000. It was submitted that the total amount of the purchase price must have been funded directly or indirectly by commercial debt. No accounting evidence was provided notwithstanding that formal accounts had been prepared by an accounting firm for each of the relevant years. A model account was drawn up in an attempt to reconcile the estimated capital expenditure on the premises and borrowings. Mr Pascoe said that they added little to the evidence needed to satisfy the onus of proof given that their starting point was the reasonable assumptions arising from the memories of the directors. The absence of any expert accounting evidence was noted by Mr Pascoe. | Issues Decided by the Court or Tribunal | The primary issue in this case was the claim for interest deductions on loans obtained to finance expenditure on rented premises. | A major problem in this case was that the applicant was not able to produce evidence of actual payment of the purchase price, nor of the precise amount or payment of the subsequent capital expenditure. There was some evidence of borrowing and the existence of a bank overdraft was provided, but the nexus between the interest claimed and the rental income was not substantially established. | The AAT decided that the Applicant was entitled to an income tax deduction for interest being 36.42% of the amount claimed. The Applicant was only able to provide evidence to establish and substantiate its interest claim to this extent.

Issues decided:
The primary issue in this case was the claim for interest deductions on loans obtained to finance expenditure on rented premises. A major problem in this case was that the applicant was not able to produce evidence of actual payment of the purchase price, nor of the precise amount or payment of the subsequent capital expenditure. There was some evidence of borrowing and the existence of a bank overdraft was provided, but the nexus between the interest claimed and the rental income was not substantially established. The AAT decided that the Applicant was entitled to an income tax deduction for interest being 36.42% of the amount claimed. The Applicant was only able to provide evidence to establish and substantiate its interest claim to this extent.

ATO view of decision:
This was a case decided on its facts. | The decision of the AAT was open to it as the Applicant's claims for a deduction for interest expenses was allowed only to the extent to which the Applicant was able to provide evidence to establish and substantiate those claims

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

Legislative references: Income Tax Assessment Act 1936 51(1) Income Tax Assessment Act 1997 8-1
Case references: Steele v Deputy Commissioner of Taxation (1997) 154 ALR 438 (1997) 97 ATC 4239 (1997) 35 ATR 285 FC of T v Roberts; FC of T v Smith 92 ATC 4380 (1992) 23 ATR 494
Subject references: Income tax Rented property Interest on borrowed funds Date of contract of sale Whether funds borrowed to meet expenditure