Case Note on Fletcher Essay

The facts of this case were that the revenuepayer (and three opposites in confederacy) entered a complex scheme, which involved the partnership, and annuity and loan arrangements. The scheme was financed through a series of round robin cheques and promised stiff minuss in the starting quin long time of the 15-year intend. A number of documents were exchanged notwithstanding no cash payments were do. This was calculated to retrograde neutral cash flows with high tax deductions initially and high taxable income, specially in the last atomic number 23 years. A feature of the scheme was that at that place was an chance to terminate it in the last five years. In the pertinent year the partnership derived assessable income of $170,000 and claimed deductions of $360,000.The emersion before the salute was whether the taxpayers were entitled to a deduction for pursual. A lot of effects were argued before the case reached the advanced Court but before the just Court the Commissioners contention was that the interest deduction should apportioned and disallowed under s 51(1) to the extent that it authorizeed the partnership income.Their Honours indicated that if a taxpayers be in lineage income were slight than the actual income, the deductions would be deductible. However, if the costs hand the income derived, the taxpayers single-valued function for reservation the expenditure may be relevant in characterizing and apportioning the expenditure for the aim of the general deduction provision. This may allow in the taxpayers answer for incurring the expenditure. Manson CJ, Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ state (at ATR 622-3) The position may, however, well be antithetic in the case where no relevant assessable income can be determine or where the relevant assessable income is less than the amount of the crushthe disproportion between extraverted and income, the whole outgoing is properly to be characterized as genu inely and not colourably incurred in gaining or producing assessable income, the entire outgoing will fall within the first limb of s 51(1) unless it is somehow excluded by the exception of.Their Honours concluded that the issue of whether the taxpayers interest deduction would be allowable depended on the determination of whether the 15-year annuity plan would in fact runs its adept course. The matter wasremitted to the Administrative Appeals courtyard to determine, as a matter of fact, whether the scheme would run its full 15 years or whether it would be terminated before the last five years. In the former situation, the assessable income would exceed deductions and the interest would be an allowable deduction under s 51(1). In the latter(prenominal) situation, an explanation must be desire for the excess of deductions of some $2.7m over assessable income and to the extent that the explanation lay in substantial tax advantages, the outlays were not incurred in gaining assessab le income. On the issue of whose aspiration must be considered, the court made the following comments In the circumstances of the grant case, its determination involves consideration not plainly of the purposes of the taxpayers but also of the purposes of those who advised them and acted on their behalf and whose acts (and intentions) as agents must, as the Second Tribunal expressly pointed out, be imputed to the principals.Reduced to its ingrained elements, if income exceeds outgoings, the taxpayers motives are largely irrelevant. If there is no assessable income or outgoings exceed income, a practical and common hotshot weighing up of all factors is warranted, including the taxpayers motive. As was anticipated in Phillips case, a disparity between outlay and income may trigger a to a greater extent rigorous examination of a squelch or arrangement. As was suggested in Ures case, the absence of a commercial mastication pro quo will raise questions close to the purpose of the expenditure. Where there is a threefold purpose, or a purpose other than income production, expenditure is to be apportioned and there will be circumstances where purpose may mean subjective purpose or motive.