CATCHWORDS INCOME TAX - taxpayer's claim for deduction under s.51l - whether interest payments constitute outgoings of taxpayer - sufficiency of evidence. Income Tax Assessment Act 1936, s.5l. DR. GLENISTER SHEIL V. COMMISSIONER OF TAXATION FOR THE COMMONWEALTH OF AUSTRALIA NO. G.160 OF 1986 COMMISSIONER OF TAXATION FOR THE COMMONWEALTH OF AUSTRALIA V. DR. GLENISTER SHEIL NO. G.159 OF 1986 NORTHROP, SPENDER AND GUMMOW JJ. BRISBANE 19 MAY, 1987. IN THE FEDERAL COURT OF AUSTRALIA ) ) QUEENSLAND DISTRICT REGISTRY ) No. G.160 of 1986 ) ) GENERAL DIVISION JUDGE MAKING ORDER: DATE OF ORDER: WHERE MADE: No. G.159 of 1986 QN APPEAL FROM THE SUPREME COURT OF QUEENSLAND BETWEEN : DR. GLENISTER SHEIL Appellant AND: COMMISSIONER OF TAXATION FOR THE COMMONWEALTH OF AUSTRALIA Respondent AND BETWEEN: COMMISSIONER OF TAXATION FOR _THE COMMONWEALTH OF AUSTRALIA Appellant AND: DR. GLENISTER SHEIL Respondent MINUTE OF ORDER NORTHROP, SPENDER AND GUMMOW JJ. 19 MAY 1987. BRISBANE THE COURT ORDERS THAT: (a) In the 1986):- 1. The appeal to this Court is allowed with costs. 2. The orders of the Supreme Court of Queensland appeal by the Commissioner (Q. No.G 159 varied so that they provide that - (a) (b) (c) the taxpayer's appeal to that Court be allowed in part, mamely as to $4072 for deductions, the assessment otherwise be confirmed, the assessment be remitted to the Commissioner for amendment in accordance with the findings as to the said $4072 for deductions in the reasons for judgment of the Supreme Court of Queensland, and of are (d) the Commissioner pay the taxpayer's costs of and incidental to the proceedings in the Supreme Court of Queensland, limited in respect of the hearing to one day. (b) In the appeal by the taxpayer (Q. No. G 160 of 1986):- The appeal to this Court is dismissed with costs. NOTE: Settlement and Entry of Orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY GENERAL DIVISION No. G.160 of 1986 No. G.159 of 1986 ON APPEAL FROM THE SUPREME COURT OF QUEENSLAND BETWEEN : DR. GLENISTER SHEIL Appellant AND: COMMISSIONER OF TAXATION FOR THE COMMONWEALTH OF AUSTRALIA Respondent AND BETWEEN: COMMISSIONER OF TAXATION FOR THE COMMONWEALTH OF AUSTRALIA Appellant AND: DR. GLENISTER SHEIL Respondent CORAM: Northrop, Spender, and Gummow JU. DATE: 19 May 1987 PLACE: Brisbane REASONS FOR JUDGMENT THE COURT: These appeals, by the taxpayer and by the Commissioner come to this Court from the Supreme Court of Queensland. The appeals were, by order of this Court, consolidated and the taxpayer was given the carriage of the preparation of the Record. The proceedings in the Supreme Court arose out of the disallowance by the Commissioner of a 2. deduction claimed under section 51 of the Income Tax Assessment Act 1936 ("the Act") by the taxpayer in his return of income for the year ended 30 June 1977. The deduction claimed therein was $48,934 for interest and charges on moneys borrowed from Midland Credit Limited ("Midland Credit"). The Supreme Court allowed the deduction claimed, as to part only, viz $18,875, and this led to the appeals by both taxpayer and Commissioner. In a letter written by his accountants to the Commissioner dated 29 May 1978 (which by agreement was treated as the taxpayer's notice of objection to digallowance of the claimed deduction),it was said that the claim to the deduction arose in the following circumstances: "al in June 1976 the taxpayer negotiated 4 loan for $350,000.00 from Midland Credit Ltd. for a period of two years. At the insistence of that Company the security documents comprised a charge over all the assets of Fermoy Pty., Ltd., a bill of mortgage over seven parcels of freehold owned by the taxpayer and a guarantee by the taxpayer and his wife. Although 1t was the intention of the parties that the loan was to the taxpayer, the principal debtor named in the documents was Fermoy Pty.Ltd. Dd) the purpose of the loan was to enable the taxpayer to invest approximately $400,009.90 im an enterprise in the U.S.A. established by himself and another Australian to raise rabbits commercially. A Queensland Company, Thumpa Industries Pty.Ltd. and a U.S.A. Corporation, Thumpa Industries Inc. were formed to control the investment; c) the loan funds from Midland Credit Ltd. were received by the taxpayer as follows:- llth June 1976 $250,000.00 31st August 1976 70,000.00 28th January 1977 30,000.00 $350,000.00 None of these monies was received by Fermoy Pty.Ltd. The taxpayer paid the funds to Thumpa Industries Pty.Ltd. which company transferred the bulk of the funds by way of loan to Thumpa Industries Inc. (U.S.A.) ; d) at all times Fermoy Pty.Ltd. has regarded itself as a nominee for the taxpayer and we have sighted Directors' Minutes of Thumpa Industries Pty.Ltd. which state that the loan from the taxpayer to that Company and the loan by that Company to Thumpa Industries Inc. (USA) are interest free repayable on demand by the creditor ; e) all the interest paid to Midland Credit Ltd. passed through the cash records of Fermoy Pty.Ltd. as principal debtor, but was charged to the taxpayer in that Company's [i.e. Fermoy's] records. The borrowing charges were paid some by the taxpayer and some by Fermoy Pty.Ltd. and charged to the taxpayer. f) the amount of $338,339.54 shown in the taxpayer's Balance Sheet at 30th June, 1977 as an investment in Thumpa Industries Pty.Ltd. has been reconciled with that company's records. The amount of $9,962.64 shown as an investment in Thumpa Industries Inc. (U.S.A.) ec represents funds expended directly in respect of that corporation." We should say immediately that the evidence before the Supreme Court of Queensland and accepted there (and in certain respects not disputed by the taxpayer on the appeal to this Court) shows a significantly different sequence of events. We will deal further with this later in these reasons. But the above narration will serve to identify the principal participants in the transactions in question. Thumpa Industries Inc ("Thumpa America") was incorporated in the State of Washington on or before 10 March 1976. On that date it filed with the Secretary of State its Articles of Incorporation. These showed as first directors the taxpayer, a Mr Arnold G. Wilson and a Mr Thomas E. Habersetzer, the latter two with addresses in Washington. On or shortly after 10 March 1976, the Secretary of Thumpa America was directed by the Board of Directors to issue 2900 shares, 1000 to each of Mr Wilson and the taxpayer, and 900 to Mr Habersetzer. Thumpa Industries Pty.Ltd. ("Thumpa Australia") was incorporated in Queensland in 1975. At the time of the material events in this case, the directors were the taxpayer and Mr Wilson. The taxpayer's wife became a director 1n December 1976. The shareholding was divided equally between Mr Wilson and the taxpayer. The taxpayer, his wife and brother are medical practitioners. He was a Senator in the Parliament from 1974-1981, and was re-elected in 1984. Fermoy Pty Ltd ("Fermoy") is a Queensland Company incorporated in 1964. The directors and shareholders were the taxpayer, his wife, and his brother. It was the medium for the conduct of a surgical private hospital in Brisbane; the taxpayer also, as his personal enterprise, conducted Dungarvan Private Hospital in Brisbane. The taxpayer's brother appears to have had no interest in Thumpa Australia or Thumpa America. The Commissioner having disallowed the claim in respect of moneys borrowed from Midland Credit and other claims to deductions in respect of the same and other years of income, the objections were treated as appeals and forwarded to the Queensland Supreme Court. The only issues that remained at the hearing of the appeals to this Ccurt concerned the Supreme Court's treatment of the deduction of $48,934 claimed in respect of twelve monthly payments of interest on moneys borrowed from Midland Credit. Of this, his Honour treated $18,875 as properly allowable as a loss or outgoing of the taxpayer within the meaning of s.51(1) of the Act. This led, as we have said, to appeals by both parties to this Court. The Commissioner submits that none of the interest payments should have been allowed, the taxpayer that all of them should have been. We should add that the taxpayer also was denied by the Commissioner a deduction claimed, 1n respect of the vear of income ended 30 June 1977, for $6088 for "Borrowing Charges re Loan Midland Credit Ltd." The primary judge dismissed the taxpayer's claim in respect of this sum and no appeal was before us against that decision. His Honour's reasoning appears in the following passage: The second issue is the disallowance of a claim of $6,088.00 for borrowing charges concerning the loan. The Commissioner argues that the latter is not demonstrated to have been expended, and there is considerable point in this argument. There is no supporting documentary material 6. whatever, save that counsel for the appellant points to an item in the appellant's personal ledger showing a payment of $6,792.00 to the solicitors for Midland and it is understandable that this may well have been for various costs relating to legal and other matters required in the loan transaction, as is customary. However, the amount does not correspond, andthe payment is shown to have been in the preceding financial year, 1976, which is consistent with the time of the transaction. Although some reasonable latitude should be given for the appellant's difficulties in proof consequential upon the death of his accountant, this is a significant single item, the payment of which should be easily proved from the appellant's own papers which would be expected to have been preserved for this appeal, particularly as his accountant was alive until recently. Moreover, there does not appear to be the same difficulty from destruction of papers such as was the case with Thumpa Australia. The appellant's evidence was generally vague and imprecise on this issue also, which is understandable concerning complex financial matters so long ago; and he is manifestly in honest, if understandable. error concerning the arrangement of his financial matters by his advisers at the time. His belief that he paid the disputed sum is probably the result of confusion with his payment made in the preceding financial year: In the result, this expenditure in the relevant period has not been proved. The essence of the Commissioner's primary complaint before us was that his Honour erred in not reaching a conclusion to like effect in respect of the claim for ten of the twelve interest payments on the Midland Credit loan which were received by Midland Credit in the year of income ended 30 June 1977. We turn now to the principal events. The taxpayer in his capacity as a Senator was approached by Mr Wilson. Mr Wilson had a scheme for commercial rabbit breeding and in the course of providing assistance in dealings with governmental authorities the taxpayer himself took up a financial interest in the venture. Thumpa Australia was formed as we have described and property was acquired at Tenterfield, New South Wales. This was worth about $50,000. The necessary governmental approvals to the pursuit of the venture in Australia were not forthcoming. Mr Wilson travelled to the United States and set about establishing the venture in that country. Mr Wilson told the taxpayer of the funding requirements for the American venture and the taxpayer set about raising finance in Australia. Meanwhile, Thumpa America was formed in the State of Washington in the manner we have already described and an American partner was introduced into the United States operations. The documentary evidence discloses that approaches were made by the taxpayer in the period July 1975 - February 1976 to institutions including Bank of New South Wales, AGC (Advances) Ltd., and Bank of Queensland Ltd. These did not bear fruit. However, on 11 May 1976 Midland Credit wrote to its solicitors in Brisbane instructing them to act for it in a loan of $359,000 to Fermoy for a period of 3 years with a minimum of 3 months at an unterest rate of 17 1/2% reducing to 15 1/2% 1f paid within 7 days of the due date. The letter went on to list the security as including a first mortgage over "Fermoy Medical Hospital Complex" together with personal guarantees of the taxpayer and Dr M.E.A. Shiel (the taxpayer's wife). The original instructions received by Messrs Stephens Barbeler and Grant, the solicitors for Fermoy and the taxpayer, appear to have been that the money was to be advanced to the taxpayer personally. Instructions were received from the taxpayer. The lender insisted upon the transaction following the form outlined in the letter of 11 May 1976. It appears that Thumpa Australia was not acceptable as the borrower because although it had the land at Tenterfield this was not sufficient security for the loan, given the limited value of that land. We should add that the copy of the letter of 11 May 1976 in evidence has the words Fermoy Pty.Ltd which appear next to the word "borrower" struck out and written in manuscript beside them "Glenister Sheil". In expectation of the settlement of the transaction Messrs Richard Stephens and Barbeler prepared a written authority whereby Fermoy authorised Midland Credit through its solicitor to disburse all moneys in connection with the advance to Fermoy in accordance with the directions of Messrs Richard Stephens and Barbeler. That firm was described therein as Fermoy's solicitors. The document bears the date 8 June 1976 and wae signed by the taxpayer as a director of Fermoy. The direction was sent to Midland Credit or its solicitor in advance of the settlement. The settlement took place in the offices of Messrs Richard Stephens and Barbeler on the afternoon of 11 June 1976. This was a Friday. The evidence includes a deed dated with that date between Fermoy and Midland Credit which recites an agreement to advance the sum of $350,000 to Fermoy and creates a charge by Fermoy on all its assets to secure that advance. It acknowledges that of the $350,000, $250,000 was received on the llth June 1976 and provides that the principal will be repaid on llth June 1978 (not 1979 as one might have expected for a three year loan facility). The deed was executed under the common seal of Fermoy in the presence of the taxpayer and his wife. The evidence also includes a deed of guarantee dated llth June 1976 between the taxpayer and his wife as sureties and Midland Credit as principal creditor. The deed recites the Fermoy deed of charge and contains a guarantee to Midland Credit of all moneys owing thereunder. In his oral evidence the taxpayer emphasised that in his view he was the borrower and that Fermoy was merely acting as his agent. The taxpayer's wife gave evidence to like effect. Both said that on the llth June 1976 in the offices of the solicitors the taxpayer indicated to his accountant and the solicitor Mr Barbeler that the documentation for the Midland Credit loan should not show Fermoy as borrower. However Mr Barbeler gave evidence that by the time he had received instructions it had been fairly well established that Fermoy was to be named as the borrower. By the time the transaction was settled on llth June 1976 1t must have been quite clear to the taxpayer that so far as Midland Credit was concerned 1t was only prepared to lend moneys to Fermoy and that it was looking to security from Fermoy as well as to the personal guarantees of the taxpayer and his wife. Either concurrently with or shortly after the conclusion of the settlement, but in a separate room, there were two meetings of directors of Fermoy. At the first it was resolved inter alia that the Company execute the deed of charge to secure 10. the advance of $350,000 by Midland Credit. At the second the directors of Fermoy resolved as follows: "The intention being at all times that Senator Dr. Glenister Sheil be the principal debtor, and this Company being named as principal debtor in all documents associated with the loan from Midland Credit Ltd. at the request of that Company and as detailed in the attached statement signed by the Chairman, it is hereby resolved that this Company is to act as nominee only for Senator Dr. Glenister Sheil in all matters concerning the said loan." At about 3.00pm on the afternoon of the llth June 1976 a cheque from Midland Credit for the advance of $250,000 was taken to the branch of the Commercial Bank of Australia in George Street, Brisbane, for transfer to the credit of an account titled "The Manager, Thumpa Industries Pty.Ltd." at the Wynnum branch of the same bank. The sum of $250,000 appears as a credit to that account on the lith June 1976. The cheque did not appear in the evidence, nor does there appear the form of any direction, under the document dated 8 June 1976, by Fermoy's solicitor to Midland Credit pursuant to which the $250,000 represented by the cheque was disbursed. Mr Barbeler gave evidence suggesting the cheque was payable to the taxpayer personally. If this was so then presumably it may have been endorsed by him to Thumpa Australia before it was banked. On the lst September 1976 a further credit was made to the account of Thumpa Australia at Wynnum, this being of $70,000, and on 1 February 1977 there was a further credit of $30,000. His Honour found that these payments represented the balance of ll. the advance of $350,000 made by Midland Credit. No challenge was made to his Honour's finding in this respect. His Honour also found that Thumpa Australia received these moneys as an interest free loan from the taxpayer, repayable on demand. As regards Fermoy, the auditors of that company in their report for that company in respect of the year ended 30 June 1978 referred to a "Special Loan" by that Company of $350,000 to the taxpayer and to a loan to it by Midland Credit "due for repayment on the same day". That reflects the inference we would draw from the facts we have outlined. By letter dated 6th July 1976 the taxpayer wrote as follows to the directors of Thumpa Australia: "With reference to the $273,400.00 (1.e. $23,400 additional) standing to my credit in the books of the Company at 30th June 1976 being in respect of funds loaned by me for ultimate investment in Thumpa Industries Inc., I hereby state that the said amount plus any further funds which I may lodge with the Company shall be regarded as an interest free loan repayable at my demand." Prior to receipt of the $250,000 on 11th June 1976, Thumpa Australia already owed the taxpayer $23,400. Hence the reference in this letter to $273,400. The evidence also included minutes of meetings of directors by Thumpa Australia held on 7th July 1976 attended by the taxpayer and his wife in which it was resolved as follows: 12. "LOAN ACCOUNT- A letter from Senator Dr. SENATOR DR. Sheil dated 6th July, 1976 GLENTSTER SHEIL: was tabled. After discussion it was resolved that all moneys loaned by Senator Dr. Sheil to this Company should be interest free and repayable on demand. LOAN ACCOUNT - It was resolved that all THUMPA INDUSTRIES INC: moneys loaned by this Company to Thumpa Industries Inc. should be interest free and repayable on demand." The auditor's report in respect of Fermoy as at 30th June 1978 referred to a special loan by that Company to the taxpayer amounting to $350,000, repayable on 1lith June 1979 and to a current liability of the company Midland Credit Ltd in the same sum due for repayment on the same day. A page extracted from an otherwise unclearly identified ledger, the page being headed "Loan Fermoy Pty.Ltd", shows a loan of $250,000 to Thumpa Australia as outstanding on 30th June 1976. It also shows a further indebtedness of $70,000 by Thumpa Australia on the 31st August 1976 and of $30,000 on 28th January 1977. There ig a paucity of documentary evidence concerning the financial arrangements between Thumpa Australia and Thumpa America. The evidence includes a copy of an audited balance sheet of Thumpa America as at 30th September 1976. His Honour found that with the exception of $50,000 withheld from the initial receipt of $250,000 the balance of $300,000 "was sent by 13. Thumpa Australia to Thumpa America" as "an interest free loan" and that, in spite of this, "the funds really went to Mr Wilson who, acting apparently with the general authority given to him by {the taxpayer] applied half of it to the subscriptions for their shares by each of the appellant and himself, and that capital, together with that supplied by the American shareholder was then used by Thumpa America in setting up and operating its business". The venture was a failure and Thumpa America was unable to make any repayments to Thumpa Australia. His Honour allowed the taxpayer's appeal in respect of $18,875 on the footing that $135,000 was applied to the taxpayer's subscription for further shares, the original 10090 in Thumpa America, and that "the proportionate amount of interest paid for that sum [$135,000] was about $18,875." We turn now to the facts concerning interest payments made in the year ending 30 June 1977. The only documents in the possession or power of Midland Credit concerning the loan to Fermoy and payments in respect thereof at the time of the hearing below were six leaves comprising 1ts ledger card Other papers had been destroyed some years after the final repayment date in 1979. The ledger shows receipt of interest payments as follows: 14. Due Date Sum of Interest Outstanding Paid Principal (1) 11 July 1976 $3224. 17 $250,000 (2) 11 August 1976 $3229. 17 $250,000 (3) ll September 1976 $3585. 88 $320,000 (4) 1l October 1976 $4133. 33 $320,000 (5) 11 November 1976 $4133. 33 $320,000 (6) 11 December 1976 $4133. 33 $320,000 (7) ll December 1977 $4133. 33 $320,000 (B) 11 January 1977 $4273. 47 $350,000 (9) 11 March 1977 $4520. 83 $350,000 (10) 11 April 1977 $4520. 83 $350,000 (11) 1l May 1977 $4520. 83 $350,000 (12) 11 June 1977 $4520. 83 $350,000 Total $48,934. 33 Each entry bears a notation "copy to" the Commercial Bank of Australia Ltd, Wynnum. The ledger does not disclose the source of these payments. Fermoy conducted an account at a branch of The National Bank of Australasia Ltd. in Queen Street Brishane and before each monthly payment of interest Midland Credit wrote to Fermoy requesting payment thereof and drawing attention as appropriate to the increases in principal from $256,090 to $320,000 and then $350,000 It appears from the c i) py of the letter of 4 January 1977 which was in evidence that 1t was caples of these letters that were sent to the branch of the Commercial Bank of Australia at Wynnun. The date of each of these letters 1s shown as the first entry of the details of each interest payment. The evidence also contains in respect of each of the seven payments a letter from the bank at Wynnum to Fermoy advising of the remittance of moneys to Fermoy's account with the National Bank of Australasia of moneys "to cover interest payment due" on the Midland Credit loan. The bank statements for the Thumpa Australia account at Wynnum show debits over the period in question corresponding (save for 50 cents in respect of the first 15. two payments) to all but the sixth and seventh payments of interest received by Midland Credit from Fermoy (i.e. except those for December 1976 and January 1977). After the October interest payment the account went into debit in the sum of $3,743.77. It went back into credit sufficiently to meet the November payment but by December 17 was in debit to $3,317 and it remained in debit until $30,000 was credited on 1 February 1977. His Honour found that in respect of all these twelve payments, the interest was paid by Fermoy to Midland Credit and that all but those for December 1976 and January 1977 were paid from moneys received by 1t from Thumpa Australia by payments out of the account into which the principal moneys advanced by Midland Credit had been paid in the manner we have described. No challenge is made to that finding. However, 1t remains to link the taxpayer to those twelve payments of interest such that he has sustained outgoings as claimed by him. As we have mentioned, the taxpayer claimed in his objection that the interest payments by Fermoy were charged to him in the records of Fermoy. The case was, apparently with the acquiescence of the Commissioner, differently presented in the Supreme Court. It was contended that (a) the ten payments by Thumpa Australia ($40,668) were debited against the loan account of the taxpayer in the books of that company and (b) the payments for December 1976 and January 1977 (of $8266) were made personally by the taxpayer to Fermoy. The Supreme Court accepted 16. these submissions (a) and (b). The acceptance of (a) was challenged before us by the Commissioner. Thus this case as to ten of the twelve instalments turns upon matters of fact which must be established by the taxpayer if he is to go on to show that those outgoings satisfy the further criteria presented by s. 51 of the Act. The primary judge's findings as to submission (a) appears in the following passage: "On a comparison between those two years, (1.e. 1976 and 1977) his loan account, after adjustment for other recognisable debits and credits, shows a reduction in the latter year approximately equal to the interest payments made by Thumpa Australia, and there is no other explanation for such a substantial reduction. Although 1t shows other interest payments of its own, that company dces not report in its profit and loss account any interest payments corresponding to those which are in question; and as the loan from the appellant to that company was interest free, there was no obligation upon the latter to make the payments from its own funds and no reason why it should. Finally there 1s no item in the financial papers in any way contrary to the appellant's claim." The findings as to submission (b) were as follows: "There were two instalments of interest not paid by Thumpa Australia, probably because it was in overdraft in its bank account at the time and, so far as one can see, these were made by the appellant personally by way of payment to Fermoy, following the process of reimbursing it for its payment to Midland." We turn first to the challenge by the Commissioner to the holding that ten interest payments by Thumpa Australia to 17. Fermoy (and thence to Midland Credit) were debited to the taxpayer's loan account. Before doing so, we should refer to the evidentiary position in this case, some of our concerns with which will already have become apparent. The record before this Court shows the documentary evidence before the Supreme Court to have been of a limited character. For example, it did not include (i) cheques (and supporting records) by means of which there readily would appear the paths along which moneys were disbursed after Midland Credit made the three advances of principal (11) cheques (and supporting records) by means of which moneys were remitted to the United States (i1i) in respect of the relevant periods, bank statements of Fermoy, Thumpa America or the taxpayer (whether trading as the Dungarvan Private Hospital or otherwise), or (iv) the books of account of Thumpa America, Thumpa Australia. Fermoy or the taxpayer (save for limited exceptions in the last two cases). We mention this not to suggest that 1t was incumbent upon the taxpayer to adduce any particular item or items concerned if he were to succeed. The point 15 that the Court below had to deal with the case on the evidence before 1t and whilst the documentary evidence was supplemented and explained by oral evidence of the taxpayer and others, the result was to leave the primary judge with the necessity of making extensive inferences if he were to find the taxpayer had established the stratum of fact which had to be present if the taxpayer were to 18. go on to show that the application of the law to those facts would make out his case for allowing the deductions claimed. His Honour did draw inferences on a number of matters and the result has drawn criticism before us from both parties. No question of the credit of the taxpayer or the other witnesses arises but gaps and uncertainties caused his Honour much difficulty. Thus his Honour described (correctly in our view) the taxpayer's evidence upon a number of issues as "understandably vague" and "unsatisfactory". In relation to the dealings between Thumpa Australia and Thumpa America his Honour was driven by "the paucity of evidence and the general disregard of detail in the arrangements" to rely upon "the general context and commonsense". Again, his Honour described the intentions with which the taxpayer "entered into" the loan transaction with Midland Credit and the arrangement for the payment of interest as "vague and loosely defined". As we have mentioned, no books of Thumpa Australia were in evidence. The taxpayer deposed that "As far as I know it CThumpa Australia] has been woundup." No evidence was given as to whether 1t was a compulsory or voluntary winding up, or when it commenced and concluded. A _ senior clerk of a firm of public accountants gave evidence that, when she started employment there ten years ago, there were records of Thumpa Australia in the 19. firm's strong room. She said that "old records and files" are "disposed of" by the firm after being kept for seven years. That procedure "would have" been followed in the case of MThumpa Australia, she said. We have also commented upon the paucity of documentary evidence concerning Fermoy and Thumpa America. In their report (which we mentioned earlier in these reasons) dated 4 December 1978 (in respect of the year ended 30 June 1978) the auditors of Fermoy said: "The Special loan by the Company to Dr. Glenister Sheil amounting to $350,000 1s shown in the Assets as repayable on llth June, 1979 for the reason that the exactly equal amount owing to Midland Credit Limited and shown as a Secured Current Liability is due for repayment on the same day. Because of the complexities of investments made in the United States of America by Dr. Glenister Sheil out of the funds lent to him by the Company and full details of which are not available tous at this date, we are unable to satisfy ourselves that repayment will be effected by him on the due date." The present proceedings concern events that commenced in 1976 and were instituted upon a letter on behalf of the taxpayer, dated 22 August 1978, requesting the Deputy Commissioner of Taxation to forward the ""appeal" to the Supreme Court of Queensland. A Mr. Cavaye who was described as the taxpayer''s accountant and who was in attendance at the settlement of the Midland Credit transaction in June 1976, died shortly before the hearing in the Supreme Court. If explanation of the paucity of 20. documentary evidence be material in evaluating the taxpayer's case, the circumstances we have outlined are not by any means explained simply by the death of Mr Cavaye. On ordinary principles the taxpayer bore the burden in the Supreme Court of establishing affirmatively, on the balance of probabilities, the facts necessary to make out his case: McCormack v. Commissioner of Taxation (1979) 143 CLR 284 at 301-4, 306, 314, 323. Given the nature and the state of the evidence in the Supreme Court and the nature of the primary judge's findings of fact, which we have discussed earlier in these reasons, we believe 1t 15 open to (and incumbent upon) us to determine the matter for ourselves, subject to giving, as we believe we do, due weight to the conclusions of the learned primary judge: Warren v. Coombes (1979) 142 CLR 531, Taylor v. Johnson (1982-3) 151 CLR 422 at 426-7, cf Heating Centre Pty.Ltd. v. Trade Practices Commission (1986) 65 ALR 429. We return to the challenge by the Commissioner to the holding that payments by Thumpa Australia to Fermoy (and thence to Midland Credit) were debited to the taxpayer's loan account. The balance sheet of Thumpa Industries as at 30 June 1976 showed a liability of $273,400 being an unsecured loan from the taxpayer. The balance sheet as at 30 June 1977 showed an increase to $338,334.54, the difference being $64,939.54. His Honour put it to an officer of the Commissioner who gave oral evidence that 1f $64,939 were subtracted from $100,000 representing additional advances from Midland Credit after the 21. initial $250,000, the balance (some $35,000) "approximates the interest that was paid" Cby Thumpa Industries and debited to the taxpayer's loan accounts]. It will be recalled that of the total of $48,934 received by Midland Credit, $40,668 represented payments from Thumpa Australia to Fermoy's account and that two instalments (comprising $8266) were funded by other means. It was on the strength of this inference as to the cause of the $35,000 change in the Thumpa Australia loan account that his Honour further inferred that the taxpayer had established that the whole of the $40,668 was treated in this way. In our view the taxpayer did not sufficiently make out this part of his case. Prior to 11 June 1976 the taxpayer had already lent Thumpa Australia $23,400. The particular dealing which led to this was not explained. Mention was made in evidence, as we have said, of the purchase by the company of land at Tenterfield but the evidence did not disclose plainly the funding thereof. The taxpayer also referred to a payment in August 1976 in connection with a trip by him to the United States of $10,500 from Dungarvan (a personal account) to Thumpa Industries and the bank statements of that company confirn this. It should also be noted that in the taxpayer's balance sheet which accompanied his return for the year of income in question (viz. that ending 30 June 1977) the investment in Thumpa Industries was shown as $409,411.85. The letter of 29 May 1978 to the Commissioner (to which we have earlier referred) enclosed an amended Balance Sheet as at 30 June 1977. This showed the 22. investment in question as $338,339.54, and it was said in the letter that this sum had been "reconciled" with the records of the debtor Thumpa Industries. Those records presumably still existed in May 1978, and the letter served as an objection by the taxpayer. We have earlier in these reasons discussed the later unavailability of those records. Against this skimpy documentary background, no analysis or explanation was presented in the taxpayer's loan account with Thumpa Australia. We have set out the passage which records the reasoning by which his Honour found for the taxpayer on this issue. In the circumstances we have mentioned, and giving due weight to his Honour's decision, we are, as we have said, unable to find that the taxpayer has made out his case on this issue. We are unable to find on the ordinary balance of probabilities that the ten instalments totalling $40,668, paid from Thumpa Industries' account to Fermoy and thence to Midland Credit were as to the whole or any particular instalment or part thereof, debited to the taxpayer's loan account with Thumpa Industries. We turn now to consider the position as regards the two payments found by his Honour to have been made to Fermoy personally by the taxpayer. No challenge was made to the finding that the payments were ag made. The question then is whether they constituted (in whole or part) outgoings incurred in gaining or producing assessable income or were (in whole or part) necessarily incurred 23. in carrying on a business for the purpose of gaining or producing such income. In our view the outgoings did not bear this character. We give our reasons as follows. Although Thumpa Australia received $350,000 in the manner we have described, it retained $50,000 from the funds it remitted to the United States. The taxpayer clearly controlled Thumpa Australia and his decisions were those of the company. The taxpayer expected the funds received by Thumpa America to be used for capital works and other activities to establish the enterprise and that there would be a period before the enterprise generated income. He was concerned to make certain that for a year funds remained available in Australia to service the interest payments that could become due to Midland Credit. He said he had approached the various financiers on the footing that $300,000 was needed to set up the enterprise and $59,000 to pay the interest. Hence the $50,000 was retained by Thumpa Australia, in words put to and accepted by the taxpayer, "to pay the interest whilst you saw the enterprise through its early stages". In his evidence, the taxpayer said that he expected Thumpa America to repay from its earnings the total of the loan of $350,000 by June 1979 and that it would pay the interest due to Midland Credit after the first year. Of the $350,000 borrowed from Midland Credit, $300,000 was paid to Thumpa America and $50,000 was retained in Australia to provide the source of funds 24. for the payments of interest on the loan for the first year ending on 11 June 1977. This arrangement has the appearance of commercial reality and is consistent with the documentation an evidence before the Court. It is unnecessary to decide whether the $50,000 to which we have referred was in the hands of Thumpa Australia impressed with a trust for the purpose of placing Fermoy in funds to pay interest to Midland Credit (cf Barclays Rank Ltd v. Quistclose Investments Ltd C1970] AC 567, Australasian Conference Association Ltd v Mainline Constructions Pty.Ltd (in liq.)(1978) 141 CLR 335 at 353). To the extent that Thumpa Australia did not provide Fermoy with the necessary funds, that company, 1f nothing else were done, risked default under its security. and the taxpayer alone did mot control Fermoy, his brother being an interested party. Further, to the extent that Fermoy risked default, the taxpayer and his wife risked calls upon their personal guarantees. At least in a practical sense, then, the $50,000 was earmarked for use in seeing to payment of interest to Midland Credit. However, the bank account of Thumpa Australia at Wynnum was put to other uses and first went into overdraft. It did not have funds in 1t to enable Thumpa Australia to meet the interest payments for December 1976 and January 1977 and was only in funds sufficient to meet later payments because of a credit of $30,000 on 1 February 1977. This situation had arisen because of the use to which the taxpayer had procured or directed Thumpa Australia to put its funds. 25. The question is, as Deane and Sheppard JJ explained in Ure v. Federal Commissioner of Taxation (1981) 50 FLR 219, at 231-234, one of characterisation. One may concede for immediate purposes that the taxpayer had busied himself in procuring, in the manner we have described, the provision of finance by Midland Credit with the overall object of enhancing the value of the business enterprise to be conducted by Thumpa America. But what must be shown here is what Brennan J. called the required connection (Ure's Case supra p. 223, Magna Alloys and _ Research Pty.Ltd. v. Federal Commissioner of Taxation (1980) 49 FLR 183 at 187-195) between the outgoing (viz the two payments by the taxpayer) and gaining or producing the assessable income. The second limb of s.51 would present a similar issue of necessary nexus with carrying ona business of the required description. We should add that insofar as evidence of the intention of the taxpayer in making these two payments would be relevant to assist his claim to deductions under s.51, his evidence was insufficiently focussed upon these two payments to yield any material that would be of assistance. We have already referred to the understandably vague recall by the taxpayer of matters of detail. In our view, the payments for December 1976 and January 1977 are to be characterised as payments to restore the funds of Thumpa Australia from the depletion that had occurred by making use of those funds for other purposes and to do so by putting Fermoy directly in moneys it otherwise would have received out of 26. the 350,000 retained by Thumpa Australia. This would remove any prospect of calls upon the guarantees of the taxpayer and his wife, or upon the Fermoy security. The payments were not truly incidental and relevant in the necessary sense to the gaining of the taxpayer's assessable income in the sense required for the first limb of Section 51(1) of the Act. Nor were they necessarily incurred in carrying on a business in the sense of the second limb of that provision. There being a lack of the necessary relevance or connection, the case is not one for apportionment; there is not an element within the outgoings that has that necessary relevance to or connection with income derivation (cf Federal Commissioner of Taxation v. Gwynvill Properties Pty.Ltd. (1986) 69 ALR 488 at 507, Parsons "Income Taxation in Australia" paras 9-11, 9-12). It follows that the appeal by the Commissioner' succeeds and that by the taxpayer fails. There was a number of items allowed by way of deductions by the learned primary judge which were not the subject of any appeal. Because of the partial success of the taxpayer below but having regard to the holdings on appeal we believe the appropriate order for costs below should be that the taxpayer should have his costs in the Supreme Court, but limited to one day. 27. The result is that - (a) (b) In the appeal by the Commissioner (Q. No.G 159 of 1986):- 1. The appeal to this Court is allowed with costs. The orders of the Supreme Court of Queensland are varied so that they provide that - (a) the taxpayer's appeal to that Court be allowed in part, namely as to $4072 for deductions, (b) the assessment otherwise be confirmed, (c) the assessment be remitted to the Commissioner for amendment in accordance with the findings as to the said $4072 for deductions in the reasons for judgment of the Supreme Court of Queensland, and {d) the Commissioner pay the taxpayer's costs of and incidental to the proceedings in the Supreme Court of Queensland, limited in respect of the hearing to one day. In the appeal by the taxpayer (Q. No. G 160 of 1986):- The appeal to this Court 1s dismissed with costs. 28. I certify that this and the twenty seven (27) preceding pages are a true copy of the Reasons for Judgment of their Honours Northrop, Spender and Gummow JJ. Associate: MeN acest Date: Iqls(esq. Counsel for Applicant: Counsel for Respondent: Date of Hearing: Date of Judgment: Mr F.L. Harrison Q.C. and Mrs P.M. Wolfe Mr M.J. Greenwood Q.C. and Mr E.J. Read 14 and 15 April 1987 19 May 1987