FEDERAL COURT OF AUSTRALIA Commissioner of Taxation v Anovoy Pty Ltd [2001] FCA 447 INCOME TAX – deduction – whether outgoing of interest on money borrowed to effect renovations to dwelling house purchased by taxpayer years earlier, allowable outgoing under first positive limb of s 51 of Income Tax Assessment Act 1936 (Cth) – whether outgoings of interest incurred in gaining or producing assessable income – whether Administrative Appeals Tribunal elided application of first positive limb with capital outgoing exception. Inglis v Federal Commissioner of Taxation (1979) 40 FLR 191 discussed Steele v Federal Commissioner of Taxation (1997) 73 FCR 330 discussed Steele v Deputy Commissioner of Taxation (1999) 197 CLR 459 discussed Steele v Deputy Commissioner of Taxation (1996) 31 ATR 510 referred to Wharf Properties Ltd v Commissioner of Inland Revenue of Hong Kong 97 ATC 4225 referred to Minister for Immigration and Ethnic Affairs v Wu Shan Liang (1996) 185 CLR 259 referred to Travelodge Papua New Guinea Ltd v Chief Collector of Taxes (1985) 85 ATC 4432 discussed Commercial and General Acceptance Ltd v Federal Commissioner of Taxation (1977) 137 CLR 373 referred to Federal Commissioner of Taxation v Whitfords Beach Pty Ltd (1982) 150 CLR 355 referred to Federal Commissioner of Taxation v Montgomery (1999) 198 CLR 639 discussed Statham v Federal Commissioner of Taxation (1988) 89 ATC 4,070 discussed Commissioner of Taxation v Emmakell Pty Ltd (1990) 22 FCR 157 discussed Hyundai Automotive Distributors Pty Ltd v Australian Customs Service (1998) 81 FCR 590 discussed Administrative Appeals Tribunal Act 1975 (Cth) s 44, 44(1) Income Tax Assessment Act 1936 (Cth) ss 25(1), 51, 51(1) Health Act 1911 (WA) ss 135, 139 COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA v ANOVOY PTY LIMITED W 133 OF 2000 LEE, CARR AND LINDGREN JJ 23 APRIL 2001 PERTH IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY W 133 OF 2000 ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA APPELLANT AND: ANOVOY PTY LIMITED RESPONDENT JUDGES: LEE, CARR AND LINDGREN JJ DATE OF ORDER: 23 APRIL 2001 WHERE MADE: PERTH THE COURT ORDERS THAT: 1. The appeal be allowed. 2. The respondent pay the appellant's costs of the appeal. 3. The cross-appeal be dismissed. 4. The cross-appellant pay the cross-respondent's costs of the cross-appeal. 5. The orders made on 14 July 2000 in proceeding WAG 122 of 1997 be set aside and in lieu of those orders, it be ordered that: (a) the "appeal" be dismissed; (b) the applicant (Anovoy Pty Ltd) pay the costs of the respondent (Commissioner of Taxation of the Commonwealth of Australia). Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY W 133 OF 2000 ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA APPELLANT AND: ANOVOY PTY LIMITED RESPONDENT JUDGES: LEE, CARR AND LINDGREN JJ DATE: 23 APRIL 2001 PLACE: PERTH REASONS FOR JUDGMENT LEE AND LINDGREN JJ: Introduction 1 This appeal concerns the deductibility for income tax purposes of certain interest payments made by the respondent ("the Taxpayer") in the years ended 30 June 1991 and 30 June 1992. The appellant ("the Commissioner") succeeded on the Taxpayer's application to the Administrative Appeals Tribunal ("the Tribunal") for review of the Commissioner's objection decision, but the Taxpayer succeeded on its "appeal" to this Court under s 44 of the Administrative Appeals Tribunal Act 1975. The Commissioner now appeals from the latter decision. 2 The Notice of Appeal gives as grounds of appeal various errors which the Commissioner asserts the primary Judge made in relation to the construction and application of subs 51(1) of the Income Tax Assessment Act 1936 (Cth) ("the Act"). At the relevant time that subsection provided, relevantly, as follows: "All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital¼nature,¼." The subsection can be seen to have two positive limbs (sometimes referred to as a single limb) and an exception (or exclusion). The first positive limb is indicated by the words "to the extent to which they are incurred in gaining or producing the assessable income". The second positive limb is indicated by the words "to the extent to which they¼are necessarily incurred in carrying on a business for the purpose of gaining or producing such income". The exception, so far as relevant to this case, is indicated by the words "except to the extent to which they are losses or outgoings of capital, or of a capital … nature". The second positive limb was not relied upon on the appeal. 3 It is also convenient to set out here part of subs 25(1) of the Act which provided, at relevant times, as follows: "The assessable income of a taxpayer shall include: (a) where the taxpayer is a resident: the gross income derived directly or indirectly from all sources whether in or out of Australia;¼" 4 Before the primary Judge, the Commissioner conceded that the capital outgoing exception in subs 51(1) was foreclosed to him by the decision of the High Court in Steele v Deputy Commissioner of Taxation (1999) 197 CLR 459 which had been given after the Tribunal decision. The High Court reversed the judgment given by majority in the Full Court of this Court in that case ((1997) 73 FCR 330) which had been relied on by the Tribunal in certain respects noted below. Indeed, the hearing of the appeal before his Honour had been deferred pending the outcome of the appeal to the High Court in Steele. Background facts 5 The following summary of the background facts is based on the reasons for decision of the primary Judge. Later, however, we will refer, in more detail, to the Tribunal's findings. 6 Peter Radosevich had been a director of the Taxpayer since its incorporation in 1981. The only other director was his partner Saskia Vogel. In July 1983, the Taxpayer acquired a property at Lot 284 Bagot Road, Subiaco ("the Property") with which the proceeding has been chiefly concerned. The Property incorporated a home known as "Totterdell Hall". It had been constructed in the 1920's by Sir Joseph Totterdell, a former Lord Mayor of Perth. It was described in a report on Municipal Heritage for the Subiaco City Council as a "two storey residence featuring ornate ceilings and fire places, exterior verandahs, balconies, bay windows, & chimney pots." It was said to be important for its creative and innovative design. 7 The zoning of the Property at the time of its purchase by the Taxpayer was "Town Centre" under the City of Subiaco Town Planning Scheme No. 1. This meant that it was excluded from the general residential zone, but a "Residential R100" use was permitted. This was a high-density residential zoning ("R100" refers to 100 residential units per hectare). With the consent of the Town Planning Board (as it then was), certain non-residential uses could be approved by the Council in its discretion. These included offices, shops and some other commercial uses. 8 The Tribunal said that it was prepared to assume that the zoning would have permitted the Property to be used as a "gallery/restaurant" and that if the Taxpayer had lodged an application when it acquired the Property to use it for that purpose, approval would most likely have been granted. The relevance of such a use appears below. 9 At the date of purchase, Totterdell Hall had been declared unfit for human habitation under s 135 of the Health Act 1911 (WA)and a "work order" had been issued under s 139 of that Act requiring it to be returned to a habitable condition. 10 On 1 March 1983, the Council wrote to the real estate agent who sold the Property advising of the declaration and order and also of the Council's intention that under the then proposed City of Subiaco Town Planning Scheme No. 3 the Property be rezoned "Residential R80". The letter advised that an effect of the proposed rezoning would be to "remove the discretion which is now existing in respect to non-residential uses". 11 In fact that rezoning from "Town Centre" to "Residential R80" occurred on 30 March 1984. The new zoning permitted the Property to be used for single house, attached house, grouped dwelling and multiple housing purposes. Certain uses were forbidden. The zoning permitted yet other uses only with Council approval following special consideration by Council. There was only one of these uses, namely, a "shop", but a "shop" was defined to include a café. A shop use was permissible only following a process which included advertisement, provision for objections and a right of appeal. A change of zoning from R80 to a commercial zoning would require the approval of the Council, public consultation and the approval of the Minister for Planning. 12 The agent advertised the Property for auction on 12 March 1983. A sign at the front of the property advertising it for sale stated: "Auction on Site. Building suitable for redevelopment as restaurant, boarding house, doctor's surgery, residence, home unit site ZONING: Town Centre." The Property was passed in at auction. 13 The Taxpayer paid $100,000 for the Property. The price was furnished by way of a $10,000 equity in Mr Radosevich's private home at Ashfield which was acquired by the vendor, a $10,000 cash contribution and $80,000 borrowed by the Taxpayer from Alliance Acceptance Co Limited. Payments of interest on that borrowing were allowed by the Commissioner as deductible and the present dispute does not relate to them. 14 The Taxpayer's principal business was the sale of second hand motor vehicles (including "doing them up and then selling them") and, from 1985, the renting out of cars under the name "Apex Car Rentals". In the years 1989 to 1993, the Taxpayer carried on another business called "Lee's Hire" from premises in Subiaco. That business involved the hiring out of building equipment, such as tools and scaffolding. Through the Taxpayer and associated companies which he controlled, Mr Radosevich also carried on a courier business and a property rental and development business. 15 On 13 July 1983, Mr Radosevich wrote to the Council advising that it was the Taxpayer's purpose to restore and renovate the premises to their "original splendour". He sought permission from the Council to live in the premises while the restoration work was proceeding, notwithstanding their "unfit for human habitation" status. The proposed restoration was still as a single residence. The Tribunal noted that if there was a reply from the Council to Mr Radesovich's letter, it was not tendered in evidence. 16 In March 1984, Mr Radosevich visited the United States of America. While there, he saw a combined gallery and café called the "Merchant of Venice" in a part of Los Angeles called "Venice". He said that after that visit, he decided to "tizzy up" the Property "to make it look like it had been there for centuries" and to use it as a venue for the selling of works of art and "architectural antiques". 17 In November 1984, that is, nearly 18 months after the Taxpayer's acquisition of the Property, Mr Radosevich submitted sketch plans to the Council setting out proposed alterations and additions. These were still for what was plainly a single residence containing several bedrooms, a sauna and a bar. They were approved by Council in January 1985 as conforming to the new "Residential R80" zoning. Indeed, the Tribunal observed that any plan to convert the premises to offices and/or a restaurant/gallery would, being a non-residential use, have required special approval (no doubt, after the advertisement/objection/appeal procedure had taken its course). 18 The premises remained in a derelict state until 1988 when Mr Radosevich began carrying out renovations and additions, borrowing progressively funds amounting to (apparently) approximately $140,000 for that purpose. The renovations and additions were still consistent with use of the Property as a single residence, although it was common ground before the Tribunal that the work actually carried out bore little resemblance to the plans which had been approved by the Council in January 1985. 19 It was the borrowing for the purpose of the renovations and additions which gave rise to the payments of interest in the years ended 30 June 1991 and 30 June 1992, the deductibility of which is in issue. In fact the interest on that borrowing paid and claimed in the various years was as follows: 1988 $5,883 1989 $26,505 1990 $18,424 1991 $35,084 1992 $33,385 The Taxpayer made losses in the years preceding 1991 and those years are not of present concern. 20 In 1989, the Taxpayer purchased the property next door to the Property, Lot 286 Bagot Road. Subsequently, an associated company, Bewick Holdings Pty Ltd acquired Lot 290 Bagot Road. 21 A local real estate agent valued the Property in May 1989. The valuation suggested that in its then condition, a listing of it for sale should be at between $540,000 and $600,000. According to the valuation, if the renovations were completed it would not be unreasonable to expect a price exceeding $750,000. The valuation was not challenged before the Tribunal. 22 The Tribunal stated by reference to this valuation that the improvements effected by the Taxpayer had significantly enhanced the sale value of the Property. It added that if the Taxpayer had sold the Property in mid 1989 and obtained a sale price roughly within the range suggested by the agent, the Taxpayer "would have been taxed on the profit, the gain being calculated by deducting the holding costs, including the interest paid to effect the improvements". Procedural background 23 On 24 March 1994, the Taxpayer lodged Notices of Objection dated 22 March 1994 to amended assessments of income tax issued on 25 January 1994 in respect of the years ended 30 June 1991 and 30 June 1992, based on the Commissioner's disallowance of deductions for the interest. On 23 November 1995 the Commissioner decided to disallow the Taxpayer's objections and notified the Taxpayer of those decisions. 24 On 1 December 1995 the Taxpayer lodged with the Tribunal an application for review of the objection decisions. There was evidence before the Tribunal that during the year ended 30 June 1992, Mr Radosevich and Ms Vogel resided in the laundry/garage forming part of the Property and that for that year the Taxpayer returned an amount of $1,040 as "rent" income. On 3 October 1997 the Tribunal affirmed the objection decision for the year of income ended 30 June 1991 and varied that for the year of income ended 30 June 1992 by allowing an amount of $1,040 by way of allowable deduction. 25 The Taxpayer "appealed" to the Court under subs 44(1) of the Administrative Appeals Tribunal Act 1975 (Cth) from the Tribunal's decision. On 14 July 2000, the primary Judge ordered that the Tribunal's decision be set aside, that the matter be remitted to the Tribunal to be determined according to law without the hearing of further evidence save by consent of the parties, and that the Commissioner pay the Taxpayer's costs of the proceeding. Findings and reasoning of the Tribunal 26 The Tribunal made the following findings: (1) The Taxpayer purchased the Property intending to restore it as a single residence; (2) The Taxpayer appreciated that at a price of $100,000 the Property offered "a potential to make a profit, whether [it] was to be restored as a residence, converted to offices or just swept out and re-sold there and then"; (3) The Property was not acquired to be a future residence of Mr Radosevich and Ms Vogel; (4) The Property was acquired because Mr Radosevich "wanted to invest in bricks and mortar to build up an equity in his business"; (5) At the time of the purchase, Mr Radosevich was acutely aware that at $100,000 the Property was a bargain, requiring no more activity than to sweep the place out and comply with minor repair requirements of the Council to enhance its value substantially; (6) The Property never was and never would be converted into "an art gallery/restaurant"; (7) The Taxpayer did in fact carry out renovations of the Property so that it would be used as a single residence; (8) The full value of the Property could not be realised until the building was totally renovated; (9) Shortly after the Property was acquired, Mr Radosevich and Ms Vogel moved into the top floor which they used as their residence until they were prosecuted and convicted for living on premises declared "unfit for human habitation", after which it "seem[ed to the Tribunal] that they moved to the newly erected laundry cum garage, which was built at the back of 284, before moving to No 286". 27 There were three particular findings in pars 63 to 67 of the Tribunal's Reasons for Decision, set out below, which we wish to emphasise (those three findings are emphasised by us): "63. In other words, I am satisfied the explanation for [Mr Radosevich's] acquiring [the Property] is that he wanted to invest in bricks and mortar to build up an equity in his business and was acutely conscious that this property, at $100,000, was a bargain, requiring no more activity on his part than to sweep the place out and comply with the minor repair requirements demanded by Council to substantially enhance its value. Had someone offered [Mr Radosevich] to take [the Property] off his hands at a sufficient profit, I have likewise little doubt that he would have sold it and looked for other properties in that price range. 64. On the other hand, it is the Crown's case that [the Property] was always intended to be the residence of [Mr Radosevich] and [Ms Vogel], and that the idea of resale at a profit surfaced for the first time in [Mr Radosevich's] revised witness statement of 28 April 1997 as a result of the decision in Steele v FCT 97 ATC 4239. It is true that the 'personal residence' intent certainly fits in with all the contemporaneous evidence (statements to the Finance Company, the application for a building licence, the plans drawn¼, the relevant zoning, etc). Nevertheless, for the reasons already set out above, I accept that it was at no time in [Mr Radosevich's] contemplation that [the Property] was to be converted into his own residence, but rather that he knew that whatever was done with the property he could not go wrong. To the extent that he and his partner did move into the property during part of the time it was being renovated, I find to be purely incidental and relevant only to the extent that it may lead to some kind of apportionment. 65. On the above finding of fact, can the taxpayer succeed? I think not. The expenditure for which deductions were claimed may have been relevant to preserve [the Property] as a source of future income, but such expenditure does not become an outgoing incurred in gaining or producing future assessable income merely because [the Taxpayer] intends to use the property some time in the future to produce assessable income. As Brennan J (as he then was) noted in Inglis v FCT 80 ATC 4001: 'If a capital asset is not being used to produce assessable income, though it is intended for use in the future to produce assessable income, expenditure in merely preserving the asset until it is so used is not deductible. Rather, being expenditure upon a capital asset not employed in producing income, it has the character of a capital outgoing.' (at 4004) 66. It is thus fatal to the taxpayer's claim that it failed to demonstrate any – or any sufficient – connection for purposes of s 51(1) between the outgoings on interest and the future income producing activity from [the Property]. Indeed, whatever 'commitment' may be said to arise on the evidence is so vague as to be dismissed out of hand. To give but one example, [Mr Radosevich] made no attempt at any relevant time to obtain Council approval for his restaurant/gallery project. Instead, he kept adding to and altering [the Property], so that it grew like Topsy. 67. I find that any necessary connection between the outgoing and future income earning activity is not satisfied merely on proof that [the Taxpayer] is a company turning over every stone to see whether something may be hidden underneath which can, by one means or another, be turned to future profit; see FCT v Brand 95 ATC 4633 per Lee and Lindgren JJ at 4646-7, and per Tamberlin J at 4649)." (the word 'intends' was emphasised in the original) According to the learned primary Judge, the finding expressed in par 67 above was in terms referable to the first limb of subs 51(1) and made it unnecessary for the Tribunal to consider the further question whether the interest payments were outgoings of a capital nature, that is, fell within the exception. Nonetheless, it did so. The primary Judge said that it did so without making explicit that it was proceeding on the hypothesis that the payments fell within the first limb. 28 The Tribunal considered the capital outgoings exception chiefly by reference to the decision of the Full Court in Steele v Federal Commissioner of Taxation (1997) 73 FCR 330. At the time of the Tribunal's decision, the application for special leave to appeal against that decision was pending before the High Court. The majority in the Full Court (Burchett and Ryan JJ, Carr J dissenting) supported characterisation of the interest payments in that case as capital outgoings. The Tribunal noted that the Commissioner relied on that majority view, and that the Taxpayer sought to distinguish Steele on the basis that in that case there was no thought on the part of the taxpayer to sell the property in question. However, the Tribunal found the suggested distinction to be without substance. The learned Deputy President stated (at par 92): "If the majority decision in Steele (by which I am bound) is the current law, the present claim must fail on my finding that the advantage sought by the payment of interest was the creation of a capital asset. On this finding, the interest paid on the renovations will be deductible from whatever profit is generated if and when the property is sold. In other words, there being no income generated throughout the period of the alterations and additions (I have ignored for present purposes some minor windfall 'rent' said to have been paid by the directors for the use [of] the premises as a residence), the claim to deduct the interest comes at a point too soon to be properly allowable. I find no inconsistency in that view with the line of cases, beginning with Ronpibon Tin NL & Tongkah Compound NL v FCT (1949) 78 CLR 47 at 56, which have consistently determined that the reference to 'the assessable income' in s 51(1) refers not to the assessable of the accounting period, but to income generally." 29 Having concluded that the Taxpayer's claim must fail, the Tribunal went on to consider the question of apportionment. As noted earlier, it found that Mr Radosevich and Ms Vogel had lived in the Property in 1992. It was prepared to assume that in that year Mr Radosevich's loan account with the Taxpayer was debited to the extent of $1,040. It was for this reason that while the Tribunal upheld the objection decision in respect of the 1991 tax year, it varied the one for 1992 by allowing an amount of $1,040 by way of deduction. Reasoning of the primary Judge 30 Before his Honour, there were some 22 grounds of appeal of which only those relating to the characterisation of the interest payments are presently relevant. By the time of his Honour's decision, the High Court had decided the appeal in Steele v Deputy Commissioner of Taxation (1999) 197 CLR 459. His Honour observed that in that case the Tribunal had treated the interest paid (on the purchase price for land) as being, save for a small amount apportioned by reference to agistment income, of a capital nature and that the Tribunal's decision was upheld in this Court at first instance ((1996) 31 ATR 510) and, by majority, on appeal ((1997) 73 FCR 330). 31 The primary Judge noted that the High Court (Gleeson CJ, Gaudron, Gummow and Callinan JJ, Kirby J dissenting) rejected the view that the interest payments were capital in nature, and, particularly, the view that they could be treated as being capital in nature for a time and as being on revenue account later when a motel was constructed on the land and started to produce income. 32 Having rejected the basis on which the majority in the Full Court had decided the case, that is, that the interest payments were outgoings of a capital nature, the High Court was required to attend to the question whether the first limb of subs 51(1) applied. In this respect the view of Carr J, who had dissented in the Full Court, generally commended itself to their Honours. Gleeson CJ, Gaudron and Gummow JJ paraphrased at [41] what Carr J had said: "¼it was extremely difficult to envisage any use of the property within the contemplation of the appellant which would not have produced assessable income. If the appellant had gone ahead with her plans to develop a motel complex then that would have produced assessable income. If, on the other hand, she had decided not to go ahead with the development, perhaps because it was too expensive, or because she could not find a suitable partner, then her only apparent alternative was to resell the land, or her interest in it. As things turned out, that is what happened. Having regard to the original purpose for which she acquired the land, Carr J said, any profit on a resale would have constituted assessable income. He considered that from the time the appellant acquired the land she had embarked on a profit-making undertaking or scheme. In those circumstances, the appellant's operations were, in his view, sufficiently linked to the derivation of assessable income to be capable of falling within the first limb of s 51(1)." 33 The Commissioner conceded before the primary Judge in the present case that he could not assert, in the light of the High Court decision in Steele, that the Taxpayer's interest payments were outgoings of a capital nature. On the question whether they fell within the first limb of subs 51(1), his Honour thought, particularly having regard to pars 65, 66 and 67 of the Tribunal's reasons set out earlier, that the Tribunal had "elided the criteria of deductibility under the first limb of s 51(1) with the characterisation of the interest payments as capital outgoings". His Honour referred to the Tribunal's quotation of the passage from the judgment of Brennan J in Inglis v Federal Commissioner of Taxation (1979) 40 FLR 191 at 195 which the Tribunal set out in par 65 of its Reasons for Decision (set out earlier). His Honour noted that the Taxpayer had acquired the Property for a profit-making purpose, even though the timing and precise manner of the implementation of that purpose had not been crystallised. He thought that the Tribunal's application of the Full Court decision in Steele had affected its application of the first limb of subs 51(1). While acknowledging that there was inconvenience for the Taxpayer in a remittal of the matter to the Tribunal, his Honour thought that was the only proper course to take (in the High Court in Steele, Callinan J, unlike Gleeson CJ, Gaudron and Gummow JJ, would not have remitted the matter to the Tribunal but would have decided that the interest payments were deductible and therefore set aside the objection decision). Grounds of appeal and of cross-appeal 34 The Commissioner relies on the following five grounds of appeal: "1. The learned judge erred in finding that the Administrative Appeals Tribunal's application of the decision of the Full Federal Court in Steele v FCT (1997) 73 FCR 330 had affected its application of the first limb of s 51(1) of the Income Tax Assessment Act 1936 ("the Act") and the matter should be remitted to the Tribunal to apply the correct legal principles. 2. The learned judge erred in not affirming that the Respondent's expenditure was not deductible under s 51(1) of the Act because there was not a sufficient connection between the expenditure and the production of assessable income. 3. The learned judge erred in not affirming that the Respondent's expenditure was not deductible under s 51(1) of the Act because, if and when Lot 284 Bagot Road, Subiaco is put to profitable resale, it will be deductible against the gross proceeds generated by the sale to calculate the loss realised or the income derived and assessable from the sale. 4. If the Tribunal did make a finding or findings affected by the application of incorrect legal principles (which is not conceded), the learned judge erred in remitting the matter to the Tribunal and should have held that on the correct legal principles there was only one conclusion open, viz that the Respondent's expenditure was not deductible under s 51(1) of the Act. 5. The learned judge should have held that on applying the correct legal principles to the facts as found by the Tribunal the Respondent's expenditure was not deductible under s 51(1) of the Act." 35 The Taxpayer cross-appealed from the primary Judge's order that the matter be remitted to the Tribunal on the following grounds: "(a) The learned Judge at first instance erred in law in deciding that it was necessary for the matter to be remitted to the Administrative Appeals Tribunal for the making of further findings of fact; (b) The learned Judge at first instance erred in law in not holding that, on the findings of fact already made by the Administrative Appeals Tribunal, the elements necessary for a finding that the outgoings satisfied the criteria for deductibility under section 51(1) are present; and (c) The learned Judge at first instance erred in law in not holding that the Respondent's interest outgoings were incurred in gaining or producing the Respondent's assessable income or were necessarily incurred in carrying on a business for the purpose of gaining or producing such income." Reasoning on the present appeal 36 It will be recalled that the first ground of appeal is as follows: "The learned judge erred in finding that the Administrative Appeals Tribunal's application of the decision of the Full Federal Court in Steele v FCT (1997) 73 FCR 330 had affected its application of the first limb of s 51(1) of the Income Tax Assessment Act 1936 ("the Act") and the matter should be remitted to the Tribunal to apply the correct legal principles." 37 In our respectful opinion, the appeal succeeds on this ground. 38 Whether the payments of interest made in the years ended 30 June 1991 and 30 June 1992 were deductible depends on whether they fell within the first positive limb of subs 51(1), that is, whether they were an outgoing of the Taxpayer incurred by it in gaining or producing assessable income. 39 The Taxpayer did not suggest that there was any assessable income of the Taxpayer down to the time of the hearing before the Tribunal in May and June 1997, in the gaining or production of which those outgoings of interest were incurred. This, however, is not determinative. The authorities were reviewed by the learned primary Judge and we will not repeat that exercise. The Tribunal did not misunderstand what the first positive limb of subs 51(1) required. It seems sufficient for the purposes of this case to say that the outgoings must be incurred in the course of activity in gaining or producing assessable income, whether or not it transpires that assessable income is in fact gained or produced by the activity. 40 Interest was paid in the 1991 and 1992 tax years in discharge of the Taxpayer's legal obligation arising from its borrowing arranged in 1998 and the consequential drawing down of funds to finance the renovations and additions. The immediate function of the payment of the interest was to obtain the use of money over time, but the Tribunal was required to ask, and it did ask, whether the effecting of the renovations and additions formed part of an income generating activity. Although the interest paid on the initial borrowing of $80,000 to assist the Taxpayer in the funding of the purchase was not in issue, it was also relevant for the Tribunal to inquire, as it did, into the Taxpayer's objective in acquiring the Property. 41 It is important to appreciate that the Tribunal found the evidence relied on by the Taxpayer, and, in particular, the testimony of Mr Radosevich, to be unsatisfactory. The Tribunal was clearly not satisfied that the renovations and additions were effected in the course of any particular income generating activity. The most the Tribunal thought could be said was that the Property was acquired, and the renovations and additions were effected, to create a bricks and mortar asset, the market value of which, the Taxpayer appreciated, would inevitably exceed the money outlaid, for whatever advantage the Taxpayer might choose to derive from the asset in the future. 42 In our view, a proper analysis of the Tribunal's reasons for decision reveals that it duly applied the first positive limb of subs 51(1) of the Act, then separately applied the capital outgoings exclusion, understood in accordance with the majority view in the Full Court of this Court in Steele. 43 The Tribunal reached its conclusion on the application of the first positive limb of subs 51(1) in the first three sentences of par 65. The first of those sentences poses the question: "On the above finding of fact, can the taxpayer succeed?" The "finding of fact" is a reference either to the three findings in pars 63 and 64 (that Mr Radosevich acquired the Property "to invest in bricks and mortar to build up an equity in his business", that at $100,000 the Property was a "bargain" and that he "could not go wrong") or to all the findings of fact made down to par 65 (set out above) culminating in those three findings – the difference does not matter. 44 In the second sentence of par 65, the Tribunal answered in the negative the question it had posed for itself in the first sentence. 45 In the third sentence, it encapsulated its reason for that negative answer as follows: "The expenditure for which deductions were claimed may have been relevant to preserve [the Property] as a source of future income, but such expenditure does not become an outgoing incurred in gaining or producing future assessable income merely because [the Taxpayer] intends to use the property some time in the future to produce assessable income."(emphasis in original) Down to this point, the Tribunal's reasoning is unexceptionable. 46 The Tribunal next quoted from the reasons for judgment of Brennan J in Inglis v Federal Commissioner of Taxation (1979) 40 FLR 191 ("Inglis") (the Tribunal quoted from the Australian Tax Cases report of the case at 80 ATC 4001). In Inglis, all pastoral activities on the pastoral property in question had ceased by the end of the calendar year 1969 and the disputed deductions were claimed in respect of expenditures and depreciation of plant and machinery in the years ended 30 June 1974 and 30 June 1975. The Tribunal set out two sentences from Brennan J's reasons for judgment in that case but not the third and final sentence in his Honour's paragraph. All three sentences are as follows (we have emphasised the third which the Tribunal did not set out): "If a capital asset is not being used to produce assessable income, though it is intended for use in the future to produce assessable income, expenditure in merely preserving the asset until it is so used is not deductible. Rather, being expenditure upon a capital asset not employed in producing income, it has the character of a capital outgoing. The expenditure related to Lammermuir appears unconnected with any activity for the production of future income, and does not qualify for deduction under the first limb of s 51(1)." 47 In the present case, the Tribunal was concerned, and understood it was concerned, with the interest on borrowings totalling approximately $140,000 used to effect the renovations and additions to the Property. The whole of that amount was used to effect the renovations and additions. In these circumstances, we see no error in the Tribunal's having treated the purpose and function of the payment of the interest as the same as the purpose and function of the effecting of the renovations and additions. 48 As the High Court explained in Steele, the interest on the borrowing was an outgoing on revenue, not capital, account (see Gleeson CJ, Gaudron and Gummow JJ at [29], [30]). The first question which arises is whether the Tribunal's use of the word "thus" in par 66 indicates a specific reference back to the "capital outgoing" characterisation in the second sentence quoted from Brennan J's reasons for judgment in Inglis. 49 The word "thus" occurred as the third word in par 66 which was set out earlier. The full sentence in which that word occurred is the following: "It is thus fatal to the taxpayer's claim that it failed to demonstrate any – or any sufficient – connection for [the] purposes of s 51(1) between the outgoings on interest and the future income producing activity from [the Property]." (our emphasis) In the next sentence the Tribunal said that any "commitment" to income producing activity was "so vague as to be dismissed out of hand". 50 The passage from Brennan J's reasons for judgment in Inglis is introduced by the Tribunal's words "As Brennan J … noted in Inglis v FCT …:". That is, the passage was cited to reinforce the unexceptionable statements of the Tribunal which precede it. Similarly, the whole of pars 66 and 67 except the word "thus" in par 66 is unexceptionable. It is only if the word "thus" is linked specifically to the immediately preceding "capital outgoing" sentence that error can be found. 51 In our opinion, this reading of the Tribunal's statement of its reasons does not give sufficient weight to the context – to all that precedes and follows Brennan J's "capital outgoing" sentence and the Tribunal's word "thus" – and it gives undue weight to that sentence and to that word. The word "thus" means, in context, "as all that precedes shows". In our view, it is not a reasonable reading to select out of all that precedes only the immediately preceding sentence and to regard the Tribunal's conclusion as contaminated by an implied characterisation of the interest in the present case as a capital outgoing. Furthermore, the sentence in its entirety makes it plain that the Tribunal directed its mind to the question required to be answered under the first limb of subs 51(1), namely, had the taxpayer demonstrated that there was sufficient connection between the outgoings of interest and the production of income in the future from an income-producing activity connected with the Property. At that point the Tribunal was not concerned with determining whether the outgoings could be said to have had the character of capital. That question was addressed separately by the Tribunal in subsequent paragraphs. 52 We turn next to the Tribunal's treatment of the Full Federal Court judgment in Steele. This commenced in par 68, the opening words of which were: "Not surprisingly, the respondent placed heavy reliance on the decision in Steele." The opening words of par 69 were: "It is therefore necessary to examine Steele in some detail." 53 After a lengthy account of Steele, the Tribunal stated in par 87: "It seems to me that if the majority decision in Steele survives a challenge to the High Court, the reasoning in the Travelodge case [Travelodge Papua New Guinea v Chief Collector of Taxes 85 ATC 4432] will no longer be good law, a decision which, although handed down under the New Guinea Tax Act, has been generally accepted as relevant and applicable in this country the sections dealing with deductibility being identical in both countries." 54 The Tribunal expressed the opinions, first, that Steele could not be distinguished from the instant case on its facts and, secondly, that the Travelodge case was inconsistent with the reasoning which found favour with the majority in the Full Court of this Court in Steele and with the advice of their Lordships in the Privy Council in Wharf Properties Ltd v Commissioner of Inland Revenue of Hong Kong 97 ATC 4225 (which the majority judges in Steele had cited as providing "strong reinforcement" for their own views). 55 Importantly, the Tribunal concluded its consideration of the reasons of the majority in Steele in par 92 of its Reasons for Decision which we set out earlier. In that paragraph, the Tribunal purported to apply the majority's view. If the Tribunal's decision rested on par 92, it would be shown by the High Court's reversal of the Full Federal Court to have been infected by error of law ("If the majority decision in Steele (by which I am bound) is the current law, the present claim must fail on my finding that the advantage sought by the payment of interest was the creation of a capital asset"). But we think the better view is that par 92 is the culminating paragraph in the Tribunal's treatment of the majority view expressed in the Full Federal Court in Steele which commenced in par 68, and that that treatment is discrete from the discussion of the first positive limb of subs 51(1) which precedes par 68. To express the matter differently, the Tribunal was giving in pars 68-92 the supposed "capital outgoing" exclusion of the interest payments as an independent and alternative ground for its decision that the payments were not deductible, and although that alternative ground can no longer stand in the light of the High Court's reversal of the Full Court, what the Tribunal said in the paragraphs preceding par 68 in relation to the payments' failure to satisfy the first positive limb of subs 51(1) remains unaffected by it. 56 Paragraph 93 of the Tribunal's Reasons for Decision was as follows: "Ingeniously Mr O'Connor [counsel for the Taxpayer] sought comfort from the fact that [the Taxpayer] was a company, whereas Mrs Steele was an individual. Having regard to the acceptance by the majority in Steele of the ratio in Wharf Properties, a case involving a development company, I have concluded that if such distinction was ever valid, it has not survived the reversal of the Travelodge case." Whatever may be said of this paragraph, it also did not affect the Tribunal's conclusion reached on "sufficiency of connection" by the end of par 67 referred to earlier. 57 Finally, in pars 94 and 95 the Tribunal referred to the minority view of Carr J in the Full Court of this Court in Steele which the Tribunal observed it was not in a position to follow. The Tribunal said, however, that his Honour had referred, favourably to deductibility under the first positive limb of subs 51(1), to Mrs Steele's "commitment to the building and sale of 80 townhouses". It will be recalled that in the present case, by contrast, the Tribunal had stated in par 66 that any "commitment" of the Taxpayer was "so vague as to be dismissed out of hand". The point is that in this respect for the purposes of subs 51(1) the Tribunal distinguished the present case from Steele on its facts. 58 It follows from our reasons above that in our opinion the learned primary Judge should have dismissed the application before him with costs and that the present appeal should be allowed, leaving intact the Tribunal's decision. This makes it unnecessary for us to address the other grounds of appeal. The cross-appeal, being dependent on the failure of the first ground of the appeal, falls away. Conclusion 59 We would: · allow the appeal and dismiss the cross-appeal, in each case with costs; · order that the orders made by the learned primary Judge on 14 July 2000 in proceeding WAG 122 of 1997 be set aside; and · in lieu of those orders, order that the decision of the Tribunal made on 3 October 1997 in proceedings WT 95/88 and WT 95/89 be affirmed, and that the present respondent (the Taxpayer) pay the costs of the present appellant (the Commissioner) of the proceeding below (WAG 122 of 1997). I certify that the preceding fifty-nine (59) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Lee and Lindgren. Associate: Dated: 23 April 2001 IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY W 133 OF 2000 ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Appellant AND: ANOVOY PTY LTD Respondent JUDGES: LEE, CARR & LINDGREN JJ DATE: 23 APRIL 2001 PLACE: PERTH REASONS FOR JUDGMENT CARR J: Introduction 60 I have had the advantage of reading, in draft form, the joint reasons for judgment of Lee and Lindgren JJ in this matter in which their Honours set out the factual and procedural background. I am grateful to them for sparing me that task. I can thus proceed directly to the question whether any of the grounds of appeal are made out. I now turn to those grounds. Ground 1: "The learned judge erred in finding that the Administrative Appeals Tribunal's application of the decision of the Full Federal court in Steele v FCT (1997) 73 FCR 330 had affected its application of the first limb of s 51(1) of the Income Tax Assessment Act 1936 ("the Act") and the matter should be remitted to the Tribunal to apply the correct legal principles". 61 The learned primary judge expressed the opinion (see paragraph 44 of his reasons) that the Tribunal appeared to have elided the criteria of deductibility under the first limb of s 51(1) with the characterisation of the interest payments as capital outgoings. I agree, respectfully, with that assessment. 62 Even assuming that on an "appeal" such as this, the Tribunal's reasons are to be given a "beneficial construction" in the sense referred to in Minister for Immigration and Ethnic Affairs v Wu Shan Liang (1996) 185 CLR 259 at 271-272, in my opinion, it can be seen, at least on a balance of probabilities, that the Tribunal has run its consideration of the first limb and the capital exception of s 51 together. I acknowledge the strength of the argument to the contrary expressed in the joint reasons of Lee and Lindgren JJ, but I differ, respectfully, with their conclusions. 63 As the primary judge noted, the Tribunal relied upon two sentences from Brennan J's reasons for judgment in Inglis v Federal Commissioner of Taxation (1980) 80 ATC 4001 at 4004 as being fatal to the Taxpayer's claim that the interest payments were deductible, because the Taxpayer had failed to demonstrate any or any sufficient connection between the outgoings on interest and the future income-producing activity from the Property. This can be seen from paragraphs 65 and 66 of the Tribunal's reasons, and from the use of the word "thus" in the introductory words of paragraph 66. In my opinion, "the above finding of fact" referred to in the opening words of paragraph 65 is the Tribunal's finding of fact in paragraph 64 "… that it was at no time in [the Taxpayer's] contemplation that [the Property] was to be converted into [Mr Radosevich's] own residence, but rather he knew that whatever was done with the property he could not go wrong." 64 It must be conceded, as senior counsel for the appellant submitted in argument, that the passage from Inglis quoted by the Tribunal was part of a paragraph in which Brennan J considered whether the expenditure in question in that case qualified for deduction under the first limb of s 51(1). But I think that the manner in which the Tribunal focussed on those two sentences referring, as they did, to a capital asset and the expenditure having the character of a capital outgoing, led it astray and into the application of the reasoning of the majority of the Full Court of this Court in Steele. That reasoning was not concerned with the first limb. It was only concerned with the capital exception. 65 As his Honour also noted, the passage quoted by the Tribunal from Inglis dealt with the character of certain expenses as capital outgoings. The Tribunal appears to have overlooked the fact that the expenditure in issue in Inglis was not (or might have been only to a very small extent) the payment of interest. It was in that context, i.e. expenditure in merely preserving a capital asset (a farm) which was at the time not being used to produce assessable income, that Brennan J's description of such expenditure having the character of a capital outgoing, should have been understood. Some indication of the relevant items of expenditure in Inglis can be gained from the reasons for judgment of Davies J at 4,008. Expenditure of a capital nature may be non-deductible but, depending on the circumstances, interest on money borrowed to finance such expenditure may be deductible. For example, expenditure on extensive renovations to put a property in a condition in which it may be occupied by a tenant would probably be characterised as capital expenditure, but interest paid on moneys borrowed to finance that expenditure could well be deductible. That, as I see it, lies at the heart of what was decided by the High Court of Australia in Steele. 66 In Steele at 468, Gleeson CJ, Gaudron and Gummow JJ observed that it only becomes necessary to consider the exceptions to s 51(1) if it has already been concluded, or accepted by hypothesis, that one or other of the positive limbs applies. 67 Apart from a brief reference in paragraph 67 of its reasons (to which I return below) the Tribunal did not adopt the approach of first considering the first limb of s 51(1) and (if it found the necessary connection) considering the capital exception. 68 The Tribunal can be seen to have relied, very heavily, on the majority decision of the Full Court of this Court in Steele. At paragraph 83 of its reasons the Tribunal observed that the majority in Steele in the Full Court of this Court had concluded that the use to which the borrowed funds in that case were put was to purchase a capital asset and that on the facts found by the Tribunal in that matter, that was "… fatal to the issue of deductibility". At paragraph 92 the Tribunal said this: "If the majority decision in Steele (by which I am bound) is the current law, the present claim must fail on my finding that the advantage sought by the payment of interest was the creation of a capital asset. On this finding, the interest paid on the renovations will be deductible from whatever profit is generated if and when the property is sold. In other words, there being no income generated throughout the period of the alterations and additions … the claim to deduct the interest comes at a point too soon to be properly allowable." 69 At paragraph 28 of its reasons the Tribunal had observed that if the Taxpayer had sold the Property in mid 1989 at a sale price within the range of the valuation obtained in May 1989 (see para 21 of Lee and Lindgren JJ's reasons) it would have been taxed on the profit, the gain being calculated by deducting the holding costs "including the interest paid to effect the improvements". 70 The Tribunal was acutely aware (see paragraphs 68, 77 and 87) that, on the reasoning of the majority of the Full Court of this Court in Steele, Bredmeyer J's decision in Travelodge Papua New Guinea Ltd v Chief Collector of Taxes (1985) 85 ATC 4432 did not reflect Australian law. In Travelodge, Bredmeyer J held that interest on borrowed moneys used to finance construction of a hotel, and rates and rent paid during the construction period, did not fall within the capital exception in s 68(1) of the Income Tax Act 1981 (PNG) which was relevantly in identical terms to s 51(1) of the Act. The joint judgment of the High Court in Steele (at 471) expressly held that Travelodge was in accordance with Australian law. 71 I have referred above to paragraph 67 of the Tribunal's reasons, where the Tribunal said this: "67. I find that any necessary connection between the outgoing and future income earning activity is not satisfied merely on proof that [the Taxpayer] is a company turning over every stone to see whether something may be hidden underneath which can, by one means or another, be turned to future profit: see FCT v Brand 95 ATC 4633 per Lee and Lindgren JJ at 4646-7, and per Tamberlin J at 4649)." 72 Taken out of context that paragraph might well be seen as a finding that the interest expenditure did not fall within the first limb of s 51(1). The primary judge thought so (see para 13 of his reasons). But the whole context, both before and after that paragraph, was one of the Tribunal characterising the interest expenditure as being a capital outgoing. I think, with respect, that his Honour was overly-generous to the Tribunal in his assessment of paragraph 67. 73 As the High Court noted in Steele, one does not get to that exception unless it has already been concluded or accepted by hypothesis that one or other of the positive limbs applies. The Tribunal made no such conclusion or hypothesis. Whilst I concede that the matter is not entirely free from doubt, in my view, it is sufficiently apparent, particularly but not exclusively from paragraphs 65 and 66 of its reasons, that the Tribunal applied the principles relating to characterisation of expenditure as being on capital account as somehow simultaneously deciding the issue of whether the first limb applied. 74 The Commissioner conceded at first instance in this matter that it could not be asserted that the Taxpayer's interest expense was an outgoing of a capital nature. In those circumstances the Taxpayer is entitled to a clear finding of fact about the application of the first limb of s 51(1). His Honour noted the inconvenience for the taxpayer in remitting the matter to the Tribunal, but said that that was the only proper course. 75 Each of the parties in the appeal contend [the appellant in Grounds 4 and 5 of the Notice of Appeal and the respondent in its Notice of Cross-Appeal] that his Honour erred in remitting the matter to the Tribunal. The appellant contended that the only conclusion open was that the expenditure was not deductible under s 51(1). The respondent contended that on the findings of fact made by the Tribunal, his Honour should have found that the interest outgoings satisfied the criteria for deductibility under s 51(1). I deal with those matters below, but turn next to Ground 2. Ground 2: "The learned judge erred in not affirming that the Respondent's expenditure was not deductible under s 51(1) of the Act because there was not a sufficient connection between the expenditure and the production of assessable income." 76 The appellant, in his submissions, urged upon us certain factual matters as showing that there was not a sufficient connection between the respondent's expenditure and the production of expected assessable income. Those included the fact that the Property had not been used by the respondent for income production in the 14 years between acquisition in July 1983 and the Tribunal hearing in June 1997. It was said that the evidence established that the only potential income-earning use for the Property was its resale, which would occur by unknown means at an unknown time in the future. The renovations of the Property should, so it was put, have reached completion in 1992 at the latest, but work had ceased in 1991 and nothing further had been done to the Property. If it was intended to use the Property for income production before resale, there was no plan by which that was to occur. The alleged plan of turning the Property into an art gallery and restaurant lacked sufficient substance and any enthusiastic and continuing endeavour, and had been emphatically rejected by the Tribunal. The appellant contended that the respondent had not "fixed on any use of" the Property to generate assessable income. There had not been continuing efforts to achieve the generation of income from the Property. 77 In my view, as was explained in the joint judgment of the High Court in Steele at 476, the resolution of the issue of whether there was sufficient connection between the expenditure and the generation of income in this matter is a judgment of fact which should be made by the Tribunal. The Tribunal's approach to the application of the first limb of s 51(1) in the present matter was very similar to its approach to that question in Steele. That approach was criticised by all members of the Full Court of this Court in Steele, and was held by the High Court to amount to error of law. Examples of such reasoning can be seen at paragraph 58, 61 and 67 of the Tribunal's reasons. The Tribunal should make its judgment afresh with the benefit of the High Court's decision in Steele. Ground 3: "The learned judge erred in not affirming that the Respondent's expenditure was not deductible under s 51(1) of the Act because, if and when [the Property] is put to profitable resale, it will be deductible against the gross proceeds generated by the sale to calculate the loss realised or the income derived and assessable from the sale." 78 His Honour rejected the Commissioner's contention to the above effect by saying (at para 48) this: "… If that were so then it would seem that the majority in Steele [a reference to the majority in the High Court of Australia] significantly misconceived the operation of the first limb of s 51(1). That is not an argument which can be entertained in this Court. Nor is it consistent with the general principles of deductibility under s 51 and its statutory predecessors discussed earlier." 79 Senior counsel for the appellant submitted that both of the two reasons, given by his Honour above, were wrong. 80 The appellant submitted that there was a long-standing and widespread view that outgoings in respect of profit-making undertakings were to be taken into account in determining the overall profit or loss, usually upon realisation of the asset. The tax relief for those costs was, so it was argued, to be deferred until the profit-making undertaking was completed. If the profit-making undertaking were abandoned, for example if the asset were converted to private use, no deductions would have been allowed. However, if the decision below prevailed, those costs would be deductible as they were incurred, and if the undertaking were later abandoned the taxpayer would continue to enjoy the tax relief already afforded, there being no statutory provision enabling any clawback. The practical effect of what was described as "such a change in tax accounting practice" would, so it was contended, be widespread. Many thousands of taxpayers who bought speculative investments would bring forward their tax relief for ongoing expenses with a timing advantage for periods that could often be counted in decades. Furthermore, such a change would, so the appellant submitted, "… disturb the present congruity in the timing of tax relief which exists between singular profit-making undertakings on the one hand and capital gains tax on the other." 81 The appellant's argument depends upon the proposition that the gross receipts obtained by the taxpayer from the sale of the Property would lack the character of income from which deductions would be allowable under s 51(1). That is, that only the net profit would be taken into assessable income. 82 The appellant relied upon the distinction (between gross receipts and net profits as assessable income) drawn by Mason J in Commercial and General Acceptance Ltd v Federal Commissioner of Taxation (1977) 137 CLR 373 at 381-383, and discussed further by his Honour in Federal Commissioner of Taxation v Whitfords Beach Pty Ltd (1982) 150 CLR 355 at 382-383 (see also Gibbs CJ at 363-367). The appellant also relied upon the following passage from the reasons of the majority in Federal Commissioner of Taxation v Montgomery (1999) 198 CLR 639 at 675-676: "It may be that the distinction drawn by Mason J in Commercial and General Acceptance Ltd v Federal Commissioner of Taxation is not absolute. That is, there may be cases where it would be possible to characterise the same set of transactions of receipt and outgoings as either gross receipts that are revenue receipts (against which the outgoings are to be allowed as deductions) or as giving a net amount that alone is to be characterised as income. But the nature of the distinction can, perhaps, be seen as exemplified by the treatment of a singular adventure in the nature of trade or business, that is notundertaken in the course of some other, wider business activity. There, it may be said, that only the profit (the net amount) is income according to ordinary concepts and that the gross receipts are not revenue receipts against which deductions are to be allowed." 83 But it must be noted that the majority went on to say this (at 676): "By contrast, however, if the singular adventure is undertaken in the course of a wider business, the gross receipts, as opposed to the net profit from the adventure, are properly characterised as revenue receipts. Against this background, it can be seen that the references to "profit" or "gain" are not to be read as denying that a singular transaction may give rise to a gross receipt properly classed as a revenue receipt. No doubt, as was said in [Federal Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199 at 215]: "The periodicity, regularity and recurrence of a receipt has been considered to be a hallmark of its character as income in accordance with the ordinary concepts and usages of mankind." But so too, as the definition of income from (or derived from) personal exertion recognises, "the proceeds of any business carried on by the taxpayer either alone or as a partner with any other person" are income in accordance with the ordinary concepts and usages of mankind. The singularity of a transaction may very well invite close attention to whether it is in business. The singularity of a transaction may suggest that there is a mere realisation of a capital asset or change of investment rather than a transaction on revenue account. The purpose of profit-making may be an important consideration in deciding these questions. But, as Myer demonstrates, a singular transaction, in business, even if unusual or extraordinary when judged by reference to the transactions in which the taxpayer usually engages, can general a revenue receipt." 84 The appellant submitted that this issue had not arisen for consideration in Steele because in that case the High Court was dealing with more than a singular transaction for a profit-making resale, but also with activities which "were moving towards a business" of operating a motel and leasing and selling townhouses. The connection between the expense and the income-producing activity was, so it was put, sufficient for deductions to be capable of being allowed on an ongoing basis under the first limb of s 51(1). In those circumstances, where the whole of the activity was directed towards the carrying on of an income-producing business, a contention that the expenditure was deductible at the end of the venture in calculating the income derived did not arise. The appellant contended that this issue had not been the subject of argument by the parties or consideration by the High Court in Steele. 85 It is thus necessary to examine what was decided by the High Court in this regard in Steele. 86 I think that it is fair to say that this question of immediate deductibility of interest expenditure in a situation where the assessable income might comprise only a net profit rather than income in accordance with ordinary concepts, was not considered in Steele. But that is not to say that the facts in Steele and the facts in the present case are sufficiently different to exclude the application of the reasoning of the High Court in Steele to the disposal of this matter. In particular, I do not think that it is sufficiently clear that in the present matter the taxpayer only stood to receive assessable income by disposing of the Property at a profit. 87 It needs to be remembered that the Taxpayer was a company which carried on business selling second-hand vehicles, some of which it repaired or restored before sale. It also operated a car rental business and hired out building equipment. It was a member of a small group of three companies. One of those companies operated a courier service. In 1989 the Taxpayer had purchased the property next door to the Property. Later, the third company in the group, whose business was stated to be "property rental and development and architectural antiques" purchased the further adjoining property. 88 At paragraph 58 of its reasons, the Tribunal said this: "58. Summarising the evidence, whilst I found [Mr Radosevich] to be a witness who, whilst not deliberately distorting the events or his state of mind, nevertheless provided evidence I found less than wholly reliable. However, one thing emerged clearly – namely that [Mr Radosevich] is what one might call a "poddyboy" (a smaller version of what has become known in the West as a "cowboy"), ie a wheeler-dealer willing to grasp at any straw to make a fast buck. His curriculum vitae makes it clear that – unlike Mrs Steele (of whom later) – he ran a number of businesses simultaneously and was constantly on the look-out for – and actively engaged in – other quirky deals designed to yield his company a profit." 89 The Tribunal rejected (see paragraph 64 of its reasons) the appellant's case that the Property was always intended to be the residence of Mr Radosevich and his partner. It accepted that it was at no time in Mr Radosevich's contemplation that the Property would be converted into his own residence. 90 There are also the following findings: "60. I have no doubt that when [Mr Radosevich] or rather [the Taxpayer] first purchased [the Property], it was intended to restore the property as a single residence. I am confident that at $100,000, [Mr Radosevich] realised that it offered a potential to make a profit whether [the Property] was to be restored as a residence, converted to offices or just swept out and re-sold there and then." . . . 63. In other words, I am satisfied the explanation for [the Taxpayer] acquiring [the Property] is that he wanted to invest in bricks and mortar to build up an equity in his business and was acutely conscious that this property, at $100,000, was a bargain, requiring no more activity on his part than to sweep the place out and comply with the minor repair requirements demanded by Council to substantially enhance its value. Had someone offered [Mr Radosevich] to take [the Property] off his hands at a sufficient profit, I have likewise little doubt that he would have sold it and looked for other properties in that price range." 91 In the light of those findings, I do not accept the appellant's submission that the respondent's proposed income-producing activity is necessarily to be characterised as the singular transaction of re-selling the Property for a profit. Nor do I accept the appellant's submission that the gross receipt from a profitable resale of the Property will necessarily not be income according to ordinary concepts. As the majority judgment in Montgomery pointed out (at 676), the decision in Myer demonstrates that: "… a singular transaction, in business, even if unusual or extraordinary when judged by reference to the transactions in which the taxpayer usually engages, can generate a revenue receipt." 92 It would in my opinion be open to the Tribunal, equipped with the guidance provided by the High Court in Steele (and in particular at pp 474-476), to view what was happening during the income tax years ended 30 June 1991 and 1992 as being something like what used to be called "an adventure in the nature of trade". By 1989 the respondent had bought the property adjoining the Property. Later, its very closely-related associate company bought the property adjoining that property. All of the shares in the group of three companies were owned either by Mr Radosevich, Ms Vogel or one or more of the other companies in that group. Income derived by an adventure in the nature of trade has traditionally been regarded as being income according to ordinary usage i.e. gross income – see Parsons "Income Taxation in Australia" para 12.37. 93 I am not suggesting that the evidence necessarily establishes that the Taxpayer was carrying on business in property acquisition, refurbishment and on-sale. However, it was certainly in business. That fact, when coupled with the Tribunal's findings to which I have referred above, in my view puts this matter relevantly on all fours with Steele. 94 In my respectful opinion, his Honour did not err in following the same course (of remitter to the Tribunal) as adopted by the majority of the High Court in Steele. Nor did he err in commenting that the argument that he should do otherwise was not consistent with the general principles of deductibility under s 51 and its statutory predecessors. Grounds 4 & 5: 95 The essence of these grounds was that there was only one conclusion open in this matter i.e. that the expenditure was not deductible under s 51(1). This was based on the contentions advanced under Ground 3 (the net income point) and, in the alternative, that the expenditure was not sufficiently connected with the production of expected future assessable income. The latter point has been dealt with under Ground 2 above. Conclusion on the appeal 96 For the foregoing reasons, I would dismiss the appeal with costs. the cross-appeal 97 There remains the respondent's submission that the primary judge erred in remitting the matter to the Tribunal to be determined according to law. 98 The respondent maintained that the primary judge erred in law in not holding that the elements necessary for a finding that the outgoings satisfied the criteria for deductibility under s 51(1) were "present". 99 There are, of course, cases where this Court, although finding legal error on the part of the Tribunal, has not remitted the matter to it. In Statham v Federal Commissioner of Taxation (1988) 89 ATC 4070 a Full Court declined to remit because it would be a waste of time and costs and oppressive to witnesses to order a re-hearing. In that case the Tribunal had made all the findings of fact necessary to demonstrate that the proceeds of sale of certain land were not assessable income. The same situation occurred in Commissioner of Taxation v Emmakell Pty Ltd (1990) 22 FCR 157 at 166 where Statham was followed by another Full Court. Again in Hyundai Automotive Distributors Pty Ltd v Australian Customs Service (1998) 81 FCR 590 at 599-600 a Full Court declined to remit. But in that case the Full Court found that there was only one conclusion open to the Tribunal. At 599 the Court acknowledged that this would not be an appropriate course where the application of the correct law to the facts may involve questions of fact and degree which are the province of the Tribunal and not this Court. 100 I do not think that this case falls into the same category as those cases. 101 Inconvenient and expensive as it may be, unless the parties can reach agreement, the Tribunal should be ordered to do what it should have done in the first place i.e. properly consider whether, on the facts as found, the Taxpayer was entitled to a deduction under either of the two limbs of s 51(1). No criticism can be levelled against the Tribunal for following the majority of the Full Court in Steele. However, as the High Court has now explained, the majority erred in law and thus led the Tribunal into error in this matter. 102 Given the flamboyant language of the Deputy President of the Tribunal, which not only attracted the criticism of the Full Court in Steele but also of the Full Court in Statham (at 4,074) and the primary judge in this matter, I consider that it would be appropriate for the matter to be heard by a Tribunal differently constituted – see also the comment of the Full Court in Statham at 4,075 in that regard. 103 In my view, the cross-appeal should be dismissed with costs. 104 I would propose the following orders: 1. The appeal be allowed to the extent that paragraph 3 of the orders made on 14 July 2000 be varied by insertion of the words "differently constituted" after the word "Tribunal" and by deletion of the words "without the hearing of further evidence save by consent of the parties". 2. The appeal otherwise be dismissed with costs. 3. The cross-appeal be dismissed with costs. I certify that the preceding forty-five (45) numbered paragraphs are a true copy of the Reasons for Judgment of Justice Carr. A/g Associate: Dated: 23 April 2001 Counsel for the Appellant: Mr R L LeMiere QC and Ms L B Price Solicitor for the Appellant: Australian Government Solicitor Counsel for the Respondent: Mr R K O'Connor QC and Mr B R Lovitt Solicitor for the Respondent: Sceales & Co Date of Hearing: 27 February 2001 Date of Judgment: 23 April 2001