FEDERAL COURT OF AUSTRALIA P & G Rocca Pty Ltd v Commissioner of Taxation [2002] FCA 732 INCOME TAX - deduction – disallowance of expenditure of interest on money borrowed and on-lent to another entity to purchase property and other outgoings in respect of the property – whether outgoings incurred in carrying on a business for the purpose of gaining or producing assessable income – significance of company structure and trust arrangements to factual assessment of whether outgoings were allowable deductions under s 51(1) of the Income Tax Assessment Act 1936 (Cth). Income Tax Assessment Act 1936 (Cth), s 51(1) AGC (Advances) Ltd v Commissioner of Taxation (1975) 132 CLR 175 – referred to Amalgamated Zinc (De Bavay's) Ltd v Commissioner of Taxation (1935) 54 CLR 295 – referred to Commissioner of Taxation v Anovoy Pty Ltd (2001) ATC 4197 - referred to Commissioner of Taxation v Hatchett (1971) 125 CLR 494 – cited Commissioner of Taxation v Riverside Road Lodge Pty Ltd (In Liquidation) (1990) 23 FCR 305 – referred to Federal Commissioner of Taxation v E.A. Marr and Sons (Sales) Pty Ltd (1984) ATC 4580 – referred to Federal Commissioner of Taxation v Snowden & Willson Pty Ltd (1958) 99 CLR 431 – discussed Federal Commissioner of Taxation v Total Holdings (Australia) Pty Ltd (1979) 43 FCR 217 – referred to Fletcher v Commissioner of Taxation (1991) 173 CLR 1 – applied Griffin Coal Mining Co Ltd v Federal Commissioner of Taxation (1990) 90 ATC 4870 – discussed John Fairfax & Sons Pty Ltd v Federal Commissioner of Taxation (1959) 101 CLR 30 - cited Lodge v Federal Commissioner of Taxation (1972) 128 CLR 171 – discussed Lunney v Federal Commissioner of Taxation (1958) 100 CLR 478 – discussed Magna Alloys & Research Pty Ltd v Federal Commissioner of Taxation (1980) 11 ATR 276 – cited Robert G. Nall v Federal Commissioner of Taxation (1937) 57 CLR 695 – referred to Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47 – cited Softwood Pulp and Paper Ltd v Commissioner of Taxation (1976) 76 ATC 4339 – discussed Steele v Commissioner of Taxation (1997) 73 FCR 330 – referred to Steele v Deputy Commissioner of Taxation (1999) 197 CLR 459 – discussed W Nevill & Co v Federal Commissioner of Taxation (1937) 56 CLR 290 – referred to P & G ROCCA PTY LTD (ACN 007 899 596) v COMMISSIONER OF TAXATION S.18 of 2000 MANSFIELD J 11 JUNE 2002 ADELAIDE IN THE FEDERAL COURT OF AUSTRALIA SOUTH AUSTRALIA DISTRICT REGISTRY S.18 OF 2001 BETWEEN: P & G ROCCA PTY LTD (ACN 007 899 596) APPLICANT AND: COMMISSIONER OF TAXATION RESPONDENT JUDGE: MANSFIELD J DATE OF ORDER: 11 JUNE 2002 WHERE MADE: ADELAIDE THE COURT ORDERS THAT: 1. The application is dismissed. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA SOUTH AUSTRALIA DISTRICT REGISTRY S.18 OF 2001 BETWEEN: P & G ROCCA PTY LTD (ACN 007 899 596) APPLICANT AND: COMMISSIONER OF TAXATION RESPONDENT JUDGE: MANSFIELD J DATE: 11 JUNE 2002 PLACE: ADELAIDE REASONS FOR JUDGMENT introduction 1 This is an appeal against decisions made by the respondent to disallow in full objections to amended assessments made by the respondent for the applicant's taxable income for the financial years ended 30 June 1991, 30 June 1992, 30 June 1993 and 30 June 1994. 2 The amended assessments were issued on 14 March 1996 in relation to the financial year ending 30 June 1991, and on 14 June 1996 in relation to the other three financial years. The applicant objected to those amended assessments by notices of objection dated 9 May 1996 and 31 July 1996 respectively. The disallowance of those objections was made and notified on 10 January 2000. 3 The issues in respect of each of the decisions are the same. They are whether the applicant is entitled to have deducted from its income in respect of each of those financial years expenses which consist of interest paid on funds borrowed, and then on-lent to an associated entity to finance the purchase of certain property situated at the corner of Main South Road and Flagstaff Hill Road, Darlington in the State of South Australia (the Darlington property), and of rates and taxes paid by the applicant in respect of the Darlington property. The applicant at no time has been the registered owner of the Darlington property. There was some dispute between the applicant and the respondent as to the precise amounts paid by the applicant for interest and bank charges, and for council rates, water rates and land tax, for those four financial years in respect of the Darlington property. That dispute was resolved between the parties during the hearing. 4 The basic facts are not contentious. On 5 April 1990 the applicant contracted to purchase the Darlington property for $1.7 million. On 10 May 1990 the Darlington Property Unit Trust (the Darlington Trust) was established. Its trustee was Accor Pty Ltd (Accor). Settlement of the contract for sale and purchase of the Darlington property took place on 15 May 1990. The purchaser nominated by the applicant was Accor. It became the registered owner of the Darlington property. The purchase price was financed by moneys borrowed by the applicant from the Commonwealth Bank of Australia (the CBA) for that purpose, by way of a bill of exchange facility. There was no formal or written loan agreement between the applicant and Accor, nor any such loan agreement between the applicant and the Darlington Trust, nor at that time or subsequently any agreement recorded in writing in any form by which the applicant became entitled to occupy the Darlington property either from Accor or from the Darlington Trust. 5 During the years of income in question, the applicant claimed as deductions the interest and bank charges it paid to the CBA in respect of the borrowed moneys, and the council rates, water rates and land tax which it paid in relation to the Darlington property. Neither Accor nor the Darlington Trust has paid to the applicant any amount in respect of those interest payments, nor any reimbursement for the payment of the claimed deductions. 6 At the time of the purchase of the Darlington property, the applicable town planning regulations of the local government authority in the Happy Valley Council (the Council) did not permit the construction and operation of a retail business of the kind which the applicant was then conducting at two other sites. On 15 July 1993, the applicable town planning regulations were altered to enable that sort of business to be operated from the Darlington property. On 4 October 1994 development approval was granted for the construction of premises at the Darlington property for the purpose of operating such a business at that site. On 31 March 1995, the applicant applied for a permit to build a retail store to conduct such a business at that site. It commenced to construct that premise. Completion of the building took place in about August 1995. 7 In the meantime, following negotiations which took place from about March 1995, the applicant sold its business, including the right to operate a business at the Darlington property, to Marlows Ltd (Marlows), which duly incorporated a company under the name Rocca Bros (SA) Pty Ltd to do so. That contract was dated 4 July 1995 and was settled on 1 August 1995. Marlows or its nominee Bendaharah Pty Ltd, a subsidiary of Marlows, as part of that agreement, agreed to lease from Accor the Darlington property for a period of 10 years, with a renewal option of 10 years. Rent was paid to Accor in accordance with the lease agreement entered into as part of the settlement from 1 August 1995. By that time, the retail store building on the Darlington property had largely been completed. In fact, in some respects, that building was altered from the initial plans in response to requirements of Marlows. BACKGROUND 8 The basic facts are, the applicant contends, necessary to be viewed in the light of a much more significant background. Again, it is not a background which in much respect is the subject of contention. 9 The applicant was incorporated on 11 June 1979, and changed its name to Rocca Bros Pty Ltd on 25 June 1979. It subsequently changed its name again to its present name following the settlement of the sale and purchase contract with Marlows and Rocca Bros (SA) Pty Ltd on 1 August 1995. At all times, its directors have been Gino Rocca (Jim Rocca) and Pasquale Rocca (Pat Rocca). They are brothers. Its issued capital comprises 5,000 A Class ordinary shares and 5,000 B Class ordinary shares. Each of Jim Rocca and Pat Rocca hold one A Class ordinary share. Rocca Nominees Pty Ltd as trustee of the Gino Rocca Trust and Altea Pty Ltd as trustee of the Pat Rocca Property Trust each holds 2,499 A Class shares and 2,500 B Class shares. That arrangement reflects the 50/50 sharing which existed between Jim Rocca and Pat Rocca at all times in respect of their business interests. 10 The business relationship between the two brothers has existed for many years. It first started in about 1964. It concerned initially the operation of a service station situated at Bridge Road, Para Hills, in the State of South Australia (the Para Hills property). The petrol station at the Para Hills property was erected in part with funds borrowed from the Commonwealth Trading Bank under the financial arrangements which were subsequently taken over by the CBA. The petrol station business initially operated as a partnership under the name Rocca Bros Motor Engineering Co. and then for many years through Rocca Bros Motor Engineering Co. Pty Ltd (Motor Engineering). The business commenced operating on 23 November 1964. In a practical sense, both Pat Rocca and Jim Rocca ran the petrol station business together. I accept that, as between them, Jim Rocca was the "partner" most involved in financial and administrative affairs and Pat Rocca was the "partner" most involved in the activities of running the petrol station business and later the business known as Rocca Bros. I also accept Pat Rocca's evidence that, in his mind, despite the corporate and trust structure which evolved with respect to the "partnership" over time, he always treated the arrangements as being on the basis of 50/50 ownership by himself and his brother. 11 The complex structure, of which only part is relevant to this case, is described to the extent necessary below. It was put in place on the recommendation of an accountant Eric Robins without Pat Rocca fully appreciating its nature or its legal significance. That is not to say that he had no awareness that various corporate entities and trusts were being established, as he clearly in a very general sense had that awareness and signed the necessary papers. I refer to the extent of his understanding of why those structures were being put in place below. I accept that at a day-to-day level they were not treated as different entities in a practical sense. It is a complex and detailed structure as, over the years, Jim Rocca and Pat Rocca have owned many properties Eric Robins remained the accounting adviser to the applicant, and to Jim Rocca and Pat Rocca in relation to their business interests at all times material to this appeal until 1993. Until 1979, the Para Hills property had been owned by Pat Rocca for many years through Nazron Pty Ltd. The more formal structures of ownership which emerged from 1979, and thereafter, followed Jim Rocca and Pat Rocca consulting Eric Robins. It was he who advised them about separating ownership of the Para Hills property from the business operating at that property, and subsequently his further advice resulted in the corporate and trust structure which existed at times material to this application. 12 The applicant from 1979 operated the petrol station business as trustee of the Rocca Bros Trading Trust (the Trading Trust) which was established on 15 June 1979. It is not necessary to refer to the unit holders of the Trading Trust. From July 1984 the applicant ran Rocca Bros on its own behalf, rather than as a trustee for the Trading Trust. The Trading Trust was wound up. 13 In 1979, the business changed to that of a do-it-yourself retailer of motor vehicle spare parts and accessories, trading under the name "Rocca Bros". At about that time, the Para Hills property was transferred to Roccas Land Services Pty Ltd (Land Services), a company incorporated on 13 June 1979 and which was trustee of the Rocca Bros Investment Trust, established on 15 June 1979. The units in that trust were held equally by the trustees of trusts then representing the separate interests of the families of Jim Rocca and Pat Rocca. Jim Rocca and Pat Rocca at all times have been directors of Land Services, and Land Services remained trustee of that trust again at all material times. Those structures were established on the advice of Eric Robins. 14 The applicant operated the petrol station business without any formal lease from Land Services. It did not pay rent, at least not in any regular way. It paid all rates, taxes and other outgoings on the Para Hills property, and it paid for the refurbishment and maintenance of the petrol station premises. 15 The Para Hills property required alteration for the proposed new business of Rocca Bros, as well as significant expenditure on stock. The financial resources for those matters came from within the business of the applicant, and no additional external borrowings were then undertaken. Jim Rocca described the position as follows: "The only thought that Pat and I had was that we owned everything equally. There was to be no separation or distinction between the land and the business in our view. I never knew exactly which company or trust owned what. I left those details to Robins." The way in which the applicant was able to pay for the premises upgrade and alterations, and for the new stock, was not specifically addressed by either Jim Rocca or Pat Rocca. Nor did they then, or later, address whether or how the applicant accounted for any funds drawn upon for those expenditures. They were simply aware that the necessary funds came from within "the business". Nor does it appear that any formal contract for the sale and purchase of the petrol station business from Motor Engineering to the applicant, or any agreement in relation to any internal funding arrangements, was ever entered into. Eric Robins was left to deal with such matters, presumably by book entry. 16 The change of the nature of the business did not lead to any more formalised arrangements between the applicant as the operator of Rocca Bros and Land Services as the proprietor of the Para Hills property. No rental agreement was entered into, and no rent paid by the applicant to Land Services. Land Services did not operate a bank account. The only bank account was that operated by Motor Engineering, and from 1979 by the applicant. It paid for rates and taxes and other outgoings with respect to the Para Hills property, but both Jim Rocca and Pat Rocca were aware that Eric Robins then somehow treated those payments as being loans by the applicant to Land Services, and as a liability of Land Services, in the financial records of those two companies. The financial statements of the applicant during the 1980s show amounts debited for rent payable to Land Services in some but not all financial years. In the later years of the 1980s and in respect of the 1991, 1992, 1993 and 1994 financial years, the financial statements record rent paid by the applicant to Land Services. Jim Rocca was generally aware of those entries. The rental debit is not at a commercial rental rate. He understood that, by book entry, it was to provide Land Services with sufficient funds to meet the outgoings on the Para Hills property. The debit entries, I find, were made by Eric Robins without the specific instruction of either Jim Rocca or Pat Rocca, though made with their authority under his retainer with them. 17 In 1980, shortly after the refurbishment of the petrol station, the Para Hills property burnt down. The premises were significantly under insured. Jim Rocca and Pat Rocca decided to rebuild, and to build premises specifically for a do-it-yourself spare motor parts retailer. The applicant borrowed funds from the CBA for that purpose, and for restocking. That borrowing was secured by a mortgage over the Para Hills property granted by Land Services. The business recommenced operating shortly before Christmas 1980. The communications with the CBA confirm that the borrowing from the bank was made by the applicant, and the security was the mortgage granted by Land Services. 18 The business of the applicant under the name Rocca Bros thrived. It enabled attention to be given to expansion. Jim Rocca and Pat Rocca engaged a market researcher to identify a preferred area to open a second shop, and within that area to identify the best available site. At that time (the early 1980s) their preferred area was the "Golden Mile" as it was then called, being a stretch of road frontage along South Road at Darlington leading to Flagstaff Hill. That included or is adjacent to the Darlington property. The sites then inspected were not suitable for the purpose. 19 On 21 October 1983, the Rocca family through Alcester Pty Ltd acquired a property at 59-69 Port Road Thebarton (the Port Road property) to establish a second Rocca Bros store. Shortly after that acquisition, further property just to the rear of the Port Road property was acquired to provide rear access. I treat it as part of the Port Road property. The acquisition of the Port Road property was subject to the condition that approval would be granted for the erection of a second Rocca Bros store at that site. That approval was obtained and construction of premises for a second Rocca Bros store was undertaken. The CBA also approved the transaction and, in principle, had agreed to provide the funds necessary to settle and to develop the property. The Port Road property was registered in the name Rocca's Holdings (1983) Pty Ltd (1983 Holdings). 1983 Holdings then held the Port Road property as trustee for The Rocca Bros Property Trust, established on 1 July 1982. A fully drawn loan of $850,000 was procured from the CBA. It was applied in part on account of 1983 Holdings to purchase the Port Road property and associated expenses in relation to the purchase, and the balance (slightly in excess of $400,000) was paid to the account of the applicant. It was still the case that neither Land Services nor 1983 Holdings operated bank accounts. All financial transactions concerning the operations of the Rocca Bros business were made through the applicant's bank account. At the end of each financial year, it was then left to Eric Robins to arrange for the appropriate adjustments to be made by book entries through the various entities. Any payments required to be made to the CBA were made from the account of the applicant. 20 On 1 March 1984 a formal lease between 1983 Holdings as lessor and the applicant as lessee with respect to the Port Road property was entered into for three years at an annual rental of $120,000. I find that lease was entered into on the advice of Eric Robins, and that the rental amount was fixed at a level which would enable 1983 Holdings to meet the repayment obligations and interest obligations to the CBA with respect to the borrowing and associated costs. The applicant continued to pay directly the rates and taxes and other outgoings on the Port Road property. How those payments were dealt with in the financial accounts at year end was left to Eric Robins. The financial statements for The Rocca Bros Property Trust (of which 1983 Holdings was trustee) for 30 June 1986 show the rental paid by the applicant with respect to the Port Road property in that year had increased from $122,080 the previous year to $190,320. It had no other income. That rental payment was sufficient to meet ongoing interest charges to the CBA, sundry expenses and to allow substantial distribution to the unit holders of that trust, which were in turn property trusts for the benefit of the families of Jim Rocca and Pat Rocca. Its balance sheet shows that, in the books of the Rocca "group of companies", the borrowing had been undertaken by 1983 Holdings as trustee of The Rocca Bros Property Trust. The balance sheet of The Rocca Property Trust also has an asset loan to the applicant of some $329,852. The rental "arrangement" appears to have continued then, although the loan appears to have been fully repaid by the end of the financial year ended 30 June 1988. No rental payments were physically made by the applicant to 1983 Holdings. I suspect that the progressively increasing loan account of the applicant with 1983 Holdings reflected its rental liability, which was being left in the applicant for working capital. There were further acquisitions of property associated with the Port Road property and which became part of the Port Road property in 1984, 1986 and 1990. The property purchased in 1986 was to provide warehousing facilities for the Rocca Bros business. It was purchased by Jim Rocca as trustee for the newly formed "The Rocca Bros Pty Ltd Superannuation Fund". That section of the Port Road property which was owned by the trustee for the Rocca Bros Pty Ltd Superannuation Fund was the subject of a commercial rental which was actually paid by the applicant. purchase of the darlington property 21 To secure a site for the further expansion of the Rocca Bros business, and to counter competition from competitors, especially in the southern metropolitan area of Adelaide, from about 1988 Jim Rocca and Pat Rocca commenced looking for a further site to develop a Rocca Bros store in that area. They had consulted with the CBA to ensure that finance would be available. They commissioned a market researcher to assist in the process, including to assess the financial viability of such an expansion. 22 I accept that, following careful investigation, the Darlington property was identified as a very suitable site for the proposed expansion. On 5 April 1990, the applicant contracted to purchase the Darlington property for $1.7 million. I further accept that its purpose then, through both Jim Rocca and Pat Rocca, was ultimately to establish a third Rocca Bros store there. It was also part of their intention by the acquisition of the Darlington property to prevent any competitor from acquiring what both Jim Rocca and Pat Rocca regarded as an excellent site for operating such a business as Rocca Bros. Both were aware that it would be necessary for the council zoning regulations to be altered, as those then current prohibited a commercial retail shop such as that necessary for a Rocca Bros store being established there. There were significant size limitations. At the time the prescribed shop size limit was 250 m2. Their existing Rocca Bros stores operated from premises of 750 m2 and 1000 m2. Ultimately, when a "Rocca Bros" store opened at the Darlington property, it was of the order of 1600 m2. Despite those problems, and in the face of unpreparedness on the part of the vendor to accept any form of conditional contract, the contract signed was unconditional. Settlement took place on 15 May 1990. The purchaser was Accor. The vendor agreed to accept $1.4 million at settlement, with the balance of $300,000 payable later. Jim Rocca and Pat Rocca decided to take the commercial risk of procuring the Darlington property in the expectation of the zoning regulations changing. They had had some informal discussions with the Council through its Town Clerk which did not lead them to the view that a change in zoning was not possible. Jim Rocca was told by the Town Clerk that the Council was trying to reclassify the zoning for the area, not just for the Darlington property, and that he expected the rezoning to go through without any extensive delay. There has been no evidence to contest that version. That evidence was received only as Jim Rocca's evidence of what he was told, and not as to the truth of what he was told. On the basis of his evidence, I find that both Jim Rocca and Pat Rocca believed that within a period of 12 to 18 months after acquisition of the Darlington property, the Council was likely to procure a change to the zoning in a way that would enable the Darlington property to be redeveloped as a Rocca Bros store. 23 Jim Rocca explained: "… As with all of the other properties, the view that I had was that Pat and I were buying the Darlington premises and Pat and I were going to own the Darlington premises as we did with all of the other properties. It did not matter in whose name the Darlington premises was, Pat and I owned everything." The choice of the applicant or its nominee as purchaser was unimportant to them. They recognised that Eric Robins would then advise them which entity should actually own the Darlington property. 24 Jim Rocca then approached the CBA for formal approval for an increase in the existing facilities available to the applicant by $1.7 million to finance the purchase. The bank's internal documents show that it placed significant focus on the net profitability of the applicant to ensure that there was the capacity to service the proposed increase in the funding facility. On 24 April 1990 the CBA formally approved the increased facility at $1.7 million to be available to the applicant, subject to the bank being given increased security coverage by a mortgage of the Darlington property. 25 In the meantime, Jim Rocca had informed Eric Robins about the purchase and sought advice from him as to which entity should acquire the Darlington property. On Eric Robins' advice, the purchasing entity was Accor, a company incorporated on 19 February 1973. On 10 May 1990, Jim Rocca and Pat Rocca became its directors. It appears to have been a company within the private Jim Rocca interests before that time, as members of his family had been its previous directors. Accor from 10 May 1990 was jointly controlled by Jim Rocca and Pat Rocca. It became the trustee of the Darlington Trust, as noted earlier also established on 10 May 1990. The unit holders of the Darlington Trust are two companies as trustees of certain family trusts of Jim Rocca and Pat Rocca. The CBA was apparently satisfied with that ownership and share structure. 26 The financial statements for the applicant to 30 June 1990 show no rental expense paid by the applicant to Accor with respect to the Darlington property. The notes to its balance sheet show as an asset a loan to Accor as trustee of the Darlington Property Trust of $1,775,013 and they show a liability under commercial bills to the CBA of $2,027,000 (including the $1.7 million advanced to purchase the Darlington property). 27 In short, Accor paid for the Darlington property with funds advanced to it by way of loan from the applicant. The loan was informal. It was interest free. The source of those funds to the applicant was the CBA. development of the darlington property 28 The applicant in mid 1990 arranged and paid for the demolition of existing dilapidated buildings at the Darlington property and, in accordance with a requirement of the Council, it removed overgrown vegetation and revegetated the Darlington property. The applicant put up a billboard at the Darlington property announcing that it was the site of a proposed new Rocca Bros store. 29 Following settlement of the Darlington property, Jim Rocca regularly pursued the Council to promote and encourage the proposed rezoning, principally through the Town Clerk and the Town Planner. He initially hoped and expected that rezoning to be passed by the end of 1991, that is within about 18 months of the purchase of the Darlington property. As time progressed, it became apparent to him that, whatever the reason, the rezoning would not proceed that quickly. 30 In about May 1990, Jim Rocca and Pat Rocca together made a further significant decision with respect to their business affairs. They decided that they needed an integrated stock control and accounting system to control the two existing Rocca Bros stores and the one Rocca Bros store proposed for the Darlington property. They later engaged an accountant to review their existing computer systems, Jacobus Johannas (Jack) de Leeuw. He commenced employment with the applicant as a financial controller in October 1992 and remained in that position until October 1995. In about early 1993, they decided to terminate the retainer of Eric Robins. 31 The applicant first engaged a computer consultant Links Computer Systems (Links) to design an appropriate software program for their purposes, and to secure and install computer facilities to implement their objectives. The specifications included the capacity to handle three Rocca Bros stores. That contract with Links was first made either in late 1990 or in early 1991. It did not result in a satisfactory outcome, and that consultancy was terminated at the end of 1991. A further contractor, Disk Computer Solutions, was engaged to achieve the same objectives. At that time, the specifications included the capacity to handle a fourth Rocca Bros store. The proposal of Disk Computer Solutions was very expensive. Their work was completed during 1993, and following staff training and other implementation issues, the computer system operated from about April 1994. The cost involved was in the order of $.75 million and was paid from the available resources of the applicant. 32 In the meantime, the proposed rezoning by the council had progressed. At the time the Darlington property was acquired, the property was in a "local commercial zone" but with significant restrictions upon development property sizes. The prospect of upgrading the development plan for the area had been under consideration since 1988. In October 1992 the council released a draft of a proposed revised development plan for public inspection and comment. In the light of public comment, the draft was revised and a final draft approved by the Council and submitted to the relevant Minister for approval. On 15 July 1993, the City of Happy Valley Centre and Commercial Supplementary Development Plan was proclaimed. Under that plan, the Darlington property fell into the "mixed commercial (Darlington) zone", effectively enabling the development of a Rocca Bros store at the Darlington property, subject to formal planning approval and building approvals. 33 The applicant did not move promptly to proceed with the development of the Darlington property. It was aware, at least by 30 November 1992, of the draft proposed development plan, and that proposed planning changes would enable the Darlington property to be used for a Rocca Bros store subject to meeting some specific and reasonably stringent design controls concerning access, car parking, layout, vehicular movement and outdoor advertising. The consultant to whom the applicant then turned recommended that the applicant make a submission objecting to the proposed provisions relating partly to shop use and to outdoor advertising, as the proposed plan would impose additional constraints upon the applicant's potential activities and would have an effect on the redevelopment potential of the site. The applicant did not give any such instructions to the consultant, as the perceived additional restrictions were not of particular significance to either Jim Rocca or Pat Rocca. 34 I accept that one reason why the applicant did not then move promptly to develop plans for a Rocca Bros store at the Darlington property was its cash flow. The cash committed to the design and installation of the new computer system was very substantial. It was considerably more than they expected. They decided to complete that process and to ensure that it was fully and satisfactorily operating before starting the building development at the Darlington property. That time came towards the end of 1993. By that time Mr Robins had been replaced as the accountant to the Rocca Family Group. 35 They discussed their plans with their new accountant, Jeffrey Johnston of BDO Nelson Parkhill. He was first engaged from 14 September 1993. Over the following few months, he discussed with Jim Rocca and Pat Rocca the financial performance of their business, the cash flow in particular, and the various options available to secure funds for the development of the Darlington property. He was responsible for securing Mr Redin in March 1994 to draw plans to develop a Rocca Bros store at the Darlington property. It is noteworthy, as well, that when Mr Johnston was engaged, he was told that the applicant was then contemplating selling or floating its business generally, partly because Pat Rocca at that time was in poor health and the frequent approaches to sell the business received over the years were therefore looking a little more attractive. The financial performance of the Rocca Bros stores was at that time perceived to be not as good as previously had been the case, perhaps in part by the withdrawal of cash resources for items such as the computer replacement program. From about early 1994, the focus of Mr Johnston was on procuring a means for getting further capital funds into the applicant store to develop the Darlington property as a Rocca Bros store. He prepared a draft information memorandum which involved possibly selling the Rocca Bros business or part of it, or securing further investors into the applicant. I accept Mr Johnston's evidence that he himself had an open mind about the best way to proceed. Towards the end of 1994, the draft information memorandum had progressively become more refined to provide for the sale and lease back of the Darlington property with the store erected on it, or for a partial investor into the Rocca Bros business. 36 In the meantime, as noted, a builder Geoff Redin was selected to design the proposed new Rocca Bros store at the Darlington property. He formally consulted with Jim Rocca and Pat Rocca for the first time on 11 March 1994. Thereafter there was considerable consultation between them and Mr Redin, and their staff. Mr Redin on behalf of the applicant dealt regularly with the Council officers, the Department of Road Transport regarding access plans, and prepared discussion site plans and sketch plans for their consideration. 37 On 8 June 1994, the applicant formally submitted to the Council its application for development approval of a Rocca Bros store at the Darlington property. The application was duly advertised. It attracted some objections. The Council itself expressed concern about certain features of the proposal. Town planners were engaged to assist in supporting the application. An issue concerning possible soil contamination arose in August 1994 through the Department of Environment and Natural Resources, and required attention. On 4 October 1994 the applicant was notified by the Council of provisional development planning consent, subject to conditions. By the end of 1994, the applicant had not resolved upon how to finance the construction of the building. It appears that the ready cash resources previously generated by the Rocca Bros business was acknowledged as not being sufficient for that purpose, having regard to other commitments. The funding options discussed included selling part of the Rocca Bros business by privately selling some shares in the applicant, or selling the Darlington property to discharge debt to the CBA and having another independent entity build the premises and then lease the developed premises to the applicant to operate a Rocca Bros store there, or floating the applicant as a public company, or setting up a new list company which would buy the Rocca Bros business from the applicant. None of those options eventuated. 38 Despite the uncertainty about the source of funds to build a Rocca Bros store at the Darlington property, the completion of the plans was pursued. The conditions imposed in the conditional building approval were progressively addressed. There is no indication in the evidence that Jim Rocca and Pat Rocca did not maintain their plan to build a Rocca Bros store at the Darlington property in the near future. 39 The application for building approval was lodged on 31 March 1995. That approval was procured and the building work undertaken. As noted above, certain changes were made to the building plans as a result of requirements of Marlows once it became clear that the applicant was to sell its business to Marlows and that Accor would grant to Marlows or its nominee a long term lease of the Darlington property. 40 The process of seeking building approval, and the building process, was overtaken by the involvement of Ray Della-Polina, the managing director of Marlows. Marlows is a retailer of auto motor parts and accessories in Western Australia, and more recently in South Australia and Victoria. Its business was somewhat akin to the Rocca Bros business. He had known Jim Rocca for many years initially through contact at the Australian Automotive After Market Association, National Council, and they developed a friendship. He had from time to time expressed an interest to Jim Rocca in acquiring the Rocca Bros business in South Australia. Until March 1995, discussions about selling the Rocca Bros business to Marlows, or some form of merger of the two businesses, had been informal and spasmodic only. They had never progressed to any serious consideration. In about March 1995, Jim Rocca telephoned him to indicate that he and Pat Rocca were then prepared to discuss the sale of the Rocca Bros business in South Australia. They had a series of meetings looking at various options. 41 There were factors which then operated on the minds of Jim Rocca and Pat Rocca which made any such proposal worth considering. Those factors were their ages, and their concern about what would happen to the Rocca Bros business in the future when they were no longer able to operate it. There were no members of their families who had expressed an interest in time taking over the running of the Rocca Bros business. There was no obvious "heir" apparent. They had discussed with Mr Johnston their longer term plans, including in the not too distant future their retirement. Pat Rocca at the time did not enjoy good health, and his capacity to continue to contribute to the running of the Rocca Bros business as he had in the past was uncertain. The desirability of further capital being injected into the Rocca Bros business was also an ongoing issue. In that context, when Mr Della-Polina expressed a renewed interest in acquiring the Rocca Bros business in about March 1995, his expression of interest was not discounted as it had previously been. 42 In March 1995 Mr Della-Polina came to Adelaide to review the business of the applicant with a view to negotiating the purchase of its business. He dealt principally with Jim Rocca on behalf of the applicant. Negotiations quickly led to agreement about the price and terms, subject to Marlows undertaking due diligence. In May 1995, heads of agreement were signed and on 4 July 1995 a formal agreement for the sale and purchase of the business of Rocca Bros by the applicant to Marlows was entered into. As part of that agreement, Land Services as owner of the Para Hills property, 1983 Holdings as owner of the Port Road property, and Accor as owner of the Darlington property agreed to, and did, lease to Marlows or its nominee each of those premises for 10 years with a right of renewal for a further 10 years. Marlows incorporated a subsidiary to operate the Rocca Bros business in South Australia. The agreement was settled on 1 August 1995. The leases were duly granted. Since then, rent under the leases has been paid. In the case of the Darlington property, that rent has of course been paid to the applicant. The settlement sum enabled the applicant to pay off its indebtedness to the CBA, including its borrowings for the purchase of the Darlington property. consideration 43 The applicant contends that the interest and bank charges paid by it in respect of the borrowing from the CBA to finance the purchase of the Darlington property (in reality, the discount on commercial bills issued by the CBA for that purpose), and the amounts paid by it to meet rates and taxes payable in respect of the Darlington property, in the financial years ended 30 June 1991, 30 June 1992, 30 June 1993 and 30 June 1994 are deductible under s 51(1) of the Income Tax Assessment Act 1936 (Cth) (the ITAA). Neither the applicant nor the respondent claims that there is any need to differentiate between any of those four financial years, nor between the outgoings paid by way of interest and those paid for rates and taxes, except in one limited respect. 44 Section 51(1) of the ITAA provides: " 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 capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income." As can be seen, s 51(1) has two alternative positive limbs, namely that the expenses or outgoings "to the extent to which they are incurred in gaining or producing the assessable income" are deductible, and alternatively that the expenses or outgoings "to the extent to which they … are necessarily incurred in carrying on a business for the purpose of gaining or producing such income" are deductible. It also has two exceptions, the relevant one of which for present purposes is that conveyed by the words "except to the extent to which they are losses or outgoings of capital, or of a capital private or domestic nature". See the discussion by Lee and Lindgren JJ in Commissioner of Taxation v Anovoy Pty Ltd [2001] FCA 447 at [2]; (2001) ATC 4197. 45 The applicant contends that the interest and the other outgoings fall within each of the positive limbs of s 51(1), and that they were not outgoings of capital, or of a capital private or domestic nature. The respondent contends to the contrary in relation to each of those matters, save that it is accepted that the interest and the other outgoings were not of a domestic nature. It also accepts that the interest paid on monies borrowed to acquire the Darlington property is not of a capital nature: Steele v Deputy Commissioner of Taxation (1999) 197 CLR 459 (Steele). 46 The parties are agreed as to the relevant principles. In particular, it is accepted that there must be a sufficient nexus between the incurring of the interest liabilities and the other outgoings and the gaining or producing of assessable income to fall within the first limb of s 51(1): see e.g. Commissioner of Taxation v Riverside Road Lodge Pty Ltd (In Liquidation) (1990) 23 FCR 305 (Riverside Lodge). It is not necessary that the expenditure did not in fact produce assessable income, as the focus is upon whether it was incurred for that purpose and with a sufficient nexus between the expenditure and the production of the applicant's assessable income: see W Nevill & Co. v Federal Commissioner of Taxation (1937) 56 CLR 290. Nor does it matter that the expenditure was incurred in respect of assessable income in a financial year other than that in which the expenditure was incurred: Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47 at 56 (Ronpibon). The reference to "assessable income" is a reference to the assessable income of the taxpayer generally, and not to the assessable income in the particular year in which the outgoing or expenditure was incurred or paid: AGC (Advances) Ltd v Commissioner of Taxation (1975) 132 CLR 175 per Mason J at 197; Fletcher v Commissioner of Taxation (1991) 173 CLR 1 at 16 (Fletcher). 47 In Ronpibon, the Court (Latham CJ, Rich, Dixon, McTiernan and Webb JJ) said at 56-57: "For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to that end. The words "incurred in gaining or producing the assessable income" mean in the course of gaining or producing such income." Their Honours added at 57: "In brief substance, to come within the initial part of the sub-section it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income or, if none be produced, would be expected to produce assessable income. It is by this standard that the question raised by the present cases must be determined." In Lunney v Federal Commissioner of Taxation (1958) 100 CLR 478 per Williams, Kitto and Taylor JJ at 497 and in Lodge v Federal Commissioner of Taxation (1972) 128 CLR 171 per Mason J at 174-175, it was pointed out that it is not sufficient to come within the first limb of s 51(1) that the expenditure be incidental and relevant for the purpose of producing the assessable income. It must also be incurred in the course of gaining or producing that income. The absence of that causative connection was the element leading to the claims for deductions in each of those cases being unsuccessful. The expression "incurred in" means "incurred in the course of" gaining or producing assessable income: Amalgamated Zinc (De Bavay's) Ltd v Commissioner of Taxation (1935) 54 CLR 295 per Latham CJ at 303 and per Dixon J at 309; Riverside Lodge at 311. 48 The resolution of the issue ultimately involves a judgment of fact: see Federal Commissioner of Taxation v Total Holdings (Australia) Pty Ltd (1979) 24 ALR 401 per Lockhart J at 406, and per Carr J in Steele v Commissioner of Taxation (1997) 73 FCR 330 at 365, referred to with approval in the majority judgment in Steele at 476 [49]. The determination of the issue of fact is, however, a complex one. In Fletcher, the Court (Mason CJ, Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ) said at 17-18: "The question whether an outgoing was, for the purposes of s 51(1), wholly or partly 'incurred in gaining or producing the assessable income' is a question of characterization. The relationship between the outgoing and the assessable income must be such as to impart to the outgoing the character of an outgoing of the relevant kind. It has been pointed out on many occasions in the cases that an outgoing will not properly be characterized as having been incurred in gaining or producing assessable income unless it was 'incidental and relevant to that end'. It has also been said that the test of deductibility under the first limb of s 51(1) is that 'it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income or, if none be produced, would be expected to produce assessable income. So to say is not, however, to exclude the motive of the taxpayer in making the outgoing as a possibly relevant factor in characterization for the purposes of the first limb of s 51(1). At least in a case where the outgoing has been voluntarily incurred, the end which the taxpayer subjectively had in view in incurring it may, depending upon the circumstances of the particular case, constitute an element, and possibly the decisive element, in characterization of either the whole or part of the outgoing for the purposes of the sub-section. In that regard and in the context of the sub-section's clear contemplation of apportionment, statements in the cases to the effect that it is sufficient for the purposes of s 51(1) that the production of assessable income is 'the occasion' of the outgoing or that the outgoing is a 'cost of a step taken in the process of gaining or producing income' are to be understood as referring to a genuine and not colourable relationship between the whole of the expenditure and the production of such income." 49 The process of fact finding is therefore not the result of the application of a rigid test, but is a conclusion based upon consideration of all the circumstances, some of which may point in one direction and some in the other, and some of which will in the particular case bear greater significance than others. Where, as here, no assessable income was ultimately derived from the Darlington property until August 1995 when it was leased to Marlows Ltd or its nominee, and no assessable income was ultimately derived from the Darlington property by the applicant as distinct from Accor, the characterisation of the outgoings may involve consideration of the objects and advantages which the applicant sought to achieve in making those outgoings: see e.g. Robert G. Nall Ltd v Federal Commissioner of Taxation (1937) 57 CLR 695 at 708-709. 50 The applicant contends that the relevant circumstances are very like those in Steele, and that the result reached in that case should be reflected in this matter. In Steele, the taxpayer purchased land with the intention of building and operating a motel. The development did not proceed, and after some years the land was sold. In the intervening years, the taxpayer had explored other possible uses of the land of an income-producing character. The Court concluded that the taxpayer's claim for a deduction under s 51(1) in respect of interest paid on monies borrowed by the taxpayer for the purpose of acquiring the land may be valid. It remitted the matter to the primary decision-maker to address that question afresh. That simplified precis of the facts is sufficient for present purposes. 51 One question which the Court resolved in that matter, and which is acknowledged to apply directly to the present application, is that the interest incurred by the taxpayer on the borrowing used to purchase the land was not an outgoing "of a capital nature". It was an outgoing to secure the use, for a limited time, of loan funds: see Steele at 466-472. It thus became necessary to address the first limb of s 51(1). The majority judgment at 476 recognised that the taxpayer did not appear to have envisaged any use of or dealing with the land other than one which would produce assessable income. In that case, therefore, there was no need to address separately the purpose of the taxpayer in borrowing the funds and the use to which those borrowed funds were applied. Their Honours said at 475 [44]: "The temporal relationship between the incurring of an outgoing and the actual or projected receipt of income may be one of a number of facts relevant to a judgment as to whether the necessary connection might, in a given case, exist, but contemporaneity is not legally essential, and whether it is factually important may depend upon the circumstances of the particular case." See also the discussion by Callinan J in Steele at 496. His Honour agreed with the reasons of the majority judgment, except as to the final orders to be made. 52 In this matter, on the basis of my findings, there are significant similarities with the facts in Steele. The applicant borrowed funds from the CBA for the purpose of those funds being applied to purchase the Darlington property. It intended at that time, and therefore at least in the years of income under consideration, to cause a building to be erected on the Darlington property to operate a third Rocca Bros store. Although from about mid 1993, when the applicant engaged Mr Johnston as its accountant, and perhaps a little earlier, it recognised that the fulfilment of that purpose might require further capital input from an outside source, its intention was at all relevant times to operate a Rocca Bros store at the Darlington property, and to produce assessable income by doing so. At no time was some alternative use of the Darlington property contemplated which did not involve it being a location at which the applicant would derive assessable income. 53 Counsel for the applicant acknowledged, however, the fact peculiar to this matter that the owner of the Darlington property was not the applicant, but Accor. Before considering that aspect, I will deal with the contention of counsel for the respondent that the interest and other outgoings were incurred "too soon" to qualify as deductions under s 51(1). 54 I do not think that the interest expenditure was entirely preliminary to the gaining or production of assessable income. I reject the respondent's contention to that effect. Two of the cases referred to by the respondent in this context, namely Softwood Pulp and Paper Ltd v Commissioner of Taxation (1976) 76 ATC 4339 and Griffin Coal Mining Co Ltd v Federal Commissioner of Taxation (1990) 90 ATC 4870 were cases where the expenses of feasibility studies for new business ventures were disallowed. In my view, those cases are distinguishable. In this case, I have found that at all material times the applicant had the commitment to operate a Rocca Bros store at the Darlington property. It may well be that that commitment arose at the time of the acquisition of the Darlington property to forestall business competitors getting access to that property. But that was a timing consideration only. Unlike the two cases mentioned, I am satisfied the commitment to building a Rocca Bros store existed from 1980. 55 There were obstacles in its path. The Darlington property was not at the time of its acquisition zoned so that a Rocca Bros store could be built and operated from that site. The size limit of 250 m2 then applicable under the zoning rules was too small. But the applicant, through Jim Rocca, had made inquiries about the prospect of the zoning rules changing. I accept that, on the basis of those inquiries, the applicant believed that the applicable zoning rules would be changed within 18 months to two years of the acquisition of the Darlington property, and that the change would enable a Rocca Bros store to be built and to operate from that site. The setting up of the billboard announcing the plan to establish a Rocca Bros store at the Darlington property is consistent with the commitment which I have found to have existed. The fact that the zoning change took a considerably later period than had been anticipated by the applicant does not affect my view that the commitment to having a Rocca Bros store operating at the Darlington property existed at material times. 56 The availability of financial resources to construct the proposed Rocca Bros store was also an obstacle which the applicant had to face. Its history of finding the necessary cash resources for its redevelopment of the Para Hills property in 1980, and for the development of the Port Road property in the 1980s, in part from its own resources, in my view justifies the evidence of both Jim Rocca and Pat Rocca that, when it was necessary to do so, the necessary financial resources could be secured either internally by using working capital or by further borrowing or a combination of those avenues. They had had no previous difficulties in borrowing such amounts as the applicant required to finance its operations, or to develop the Port Road property. I find that this consideration does not indicate that the proposal to build and operate a Rocca Bros store at the Darlington property was provisional only. 57 I return to the principal matter arising from the parties' contentions, namely whether there was a sufficient nexus between the payments of interest and other outgoings by the applicant and its gaining or producing assessable income. 58 I find that the directors of the applicant, Jim Rocca and Pat Rocca, were each aware in general terms of the reasons why the applicant as operator of the Rocca Bros business was not also the landowner of the Para Hills Property or the Port Road property from which the business then operated. They appreciated the existence of separate land holding companies, Land Services and 1983 Holdings respectively, insulated the Para Hills property and the Port Road property from having to support the liabilities of the Rocca Bros business in the event that it failed. They were each also aware, in a general way, on the advice of Eric Robins, that separate corporate landholding entities had or may have some legitimate "tax effectiveness" in part through the use of family trusts. When the Darlington property was acquired in the name of Accor, I find that they (and the applicant) were aware that a separate landholding company apart from the applicant became the owner of the Darlington property, and that at the time they resolved upon acquiring the Darlington property they were generally aware that such a structure would be established. That is not to reject their evidence that, in a day-to-day sense, they treated the business as a single unit, and that they did not fully understand the detailed corporate and trust structure which evolved with respect to their affairs over many years. But I think it is consistent with the evidence of each of them that they realised that Eric Robins would arrange for the Darlington property to be owned by an entity apart from the applicant, in general terms for the reasons I have referred to above. 59 In my judgment, it is of particular significance in this matter that the borrowed monies were on-lent to Accor, interest free, for the purpose of it purchasing the Darlington property. The outgoings by way of interest were paid to secure access to funds from year to year which were applied, and were intended to be applied, to be onlent to a separate corporate entity so that that second corporate entity could purchase the Darlington property. Both the applicant and that second corporate entity Accor had the same directors, and in a general sense were part of the same "group" of the Rocca family interests. But in legal substance, Accor and the applicant were independent. The shareholders of Accor were individuals or corporate trustees. It was a trustee for the then newly constituted trust, the Darlington Trust. As the directors of both the applicant and Accor were Jim Rocca and Pat Rocca, in practice the two companies would serve the same family interests, and they would act together in pursuance of the family interests of Jim Rocca and Pat Rocca as the common directors decided. 60 But the critical question in this matter is whether, in those circumstances, the payment of the outgoings was incurred in, or in the course of, gaining or producing assessable income of the applicant. Despite the purpose for which the Darlington property was acquired, the applicant did not secure any right to occupy the Darlington property in the years of income to which this application relates. There was no formal written or, on the evidence, oral agreement to lease the Darlington property during those years. Ultimately, in August 1995, Accor leased the Darlington property to the nominee company of Marlows. In the meantime, no payment in the nature of a rental payment was made by the applicant to Accor, or journalised. No arrangement was recorded or made that the applicant would pay the rates and taxes and other outgoings in respect of the Darlington property during those years. No journal entries were made to record in the books of Accor any liability in respect of those outgoings. 61 Those matters lead me to conclude that there is no sufficient nexus between the payments of interest by the applicant, and the payments of other outgoings in respect of the Darlington property, in the financial years under consideration and the gaining or producing assessable income of the applicant. I find that those payments of interest and other outgoings were not made in, or in the course of, the applicant gaining or producing assessable income. Whilst the intention of the applicant was that a Rocca Bros store would be built at the Darlington property and it would then operate that store to generate income, it intended that it would do so only ultimately as a tenant of the applicant. It intended to generate income at the property, but not from the use of the property as an investment. Its role at all times was planned to be as a tenant of Accor, presumably paying some form of rent. The formalisation of the rent arrangements between the applicant and 1983 Holdings in respect of the Port Road property had progressively occurred, and I find would have applied in respect of the Darlington property. 62 Counsel for the applicant urged that the applicant could properly have agreed to pay, and could have paid, rent to Accor for the right to occupy the Darlington property from the time of the acquisition of that property. Such rental payments are likely to have been deductible under the first limb of s 51(1) of the ITAA. Correspondingly, there may have also been an obligation on the part of Accor to pay interest on the monies advanced to it by the applicant. If the interest so payable on the one hand and the agreed rent on the other were in amounts more or less equal to the amount of the outgoings in fact paid by the applicant the subject of the claimed deductions presently in dispute, the result could have been achieved that the applicant would have been entitled to a deduction for the rent paid to the same amount as the present claimed deductions. She submitted that there is no real distinction in substance between such payments, had they been made, and the basis of the presently claimed deductions. 63 I do not think that the actual nature of the claimed deductions can be ignored. They are for interest paid on monies advanced to the applicant which was then on-lent to Accor interest free so that Accor might purchase the Darlington property, and for rates and taxes and other outgoings paid by the applicant on that property so that Accor might retain that property until it was developed as a Rocca Bros store. As the evidence stands, until the actual development of that store, no lease arrangements were, or were to be, entered into between the applicant and Accor. Whether the claimed deductions were paid by the applicant in, or in the course of, gaining or producing assessable income must be determined against the particular facts as they existed, and not against some other theoretical arrangement between the applicant and Accor which they might have entered into, but did not enter into. 64 I do not consider that the decision in Federal Commissioner of Taxation v Total Holdings (Australia) Pty Ltd (1979) 24 ALR 401 is of particular support to the applicant's contention. In that case, the Court (Northrop, Lockhart and Fisher JJ) found that the taxpayer was entitled to claim as a deduction interest paid by the taxpayer on moneys lent to it by its parent company to the extent that those moneys were applied by the taxpayer to its subsidiary partly lent at a commercial interest rate and some interest free, and in acquiring shares in its subsidiary. Those activities of the taxpayer were found to be designed to render the subsidiary profitable as soon as commercially feasible, and to promote the generation of income by the subsidiary and its subsequent derivation by the taxpayer and in turn its parent. The investment in the subsidiary was said to be part of the taxpayer's business activities. Similar circumstances applied in Federal Commissioner of Taxation v E.A. Marr and Sons (Sales) Ltd (1984) 84 ATC 4580. The taxpayer leased plant from finance companies and made it available to subsidiaries as a means of carrying on its business for the purpose of gaining or producing assessable income. In this matter, the applicant did not lend monies to Accor to secure income from Accor. I do not accept that it was part of the applicant's business to finance property-owning companies so as to earn profits from those companies. 65 In Riverside Lodge, the taxpayer had obtained loans to buy land and to erect and operate a motel on that land. There was no issue about its entitlement to claim deductions for the interest paid on those borrowings. At a later point, it sold the land and buildings to a unit trust, and then leased them back. It continued then to operate the motel business. It was entitled to claim as a deduction the rent for which it was then liable. It was however held to be no longer entitled to claim as a deduction interest on the outstanding loans, even though security on the loans continued to be granted over the land. The ongoing payment of interest was necessary to retain the land, and thus the motel business. That did not mean that the interest payments continued to attract deductibility under s 51(1). The Court (Northrop, Wilcox and Hill JJ) said at 314-315: "… it is no argument for the deductibility of the interest that, unless paid, the income by way of profits on the running of the motel would cease. Rather the case must be resolved by determining whether the essential character of the interest outgoings after the sale and lease-back was such that it can be said that those outgoings were incurred by the respondent in the course of the gaining or production of assessable income or, having regard to the business then carried on by it, they were necessarily incurred by the respondent in carrying on that business." 66 In my view, those remarks can be applied to the present circumstances. I do not regard the character of the interest payments or other outgoings paid in the financial years in issue as being outgoings incurred by the applicant in the course of gaining or producing assessable income. 67 The second limb of s 51(1) is not mutually exclusive of the first limb. As explained by Fullagar J in John Fairfax & Sons Pty Ltd v Federal Commissioner of Taxation (1959) 101 CLR 30 at 40, of the second limb: "The second may be thought to be concerned rather with cases where, in the carrying on of a business, some abnormal event or situation leads to an expenditure which it is not desired to make, but which is made for the purposes of the business generally and is reasonably regarded as unavoidable." 68 The word "necessarily" in the phrase "necessarily incurred in carrying on business for the purpose of gaining or producing" assessable income has been held to mean "clearly appropriate for" rather than "essential": see Federal Commissioner of Taxation v Snowden & Willson Pty Ltd (1958) 99 CLR 431 per Dixon CJ at 436-437 (Snowden); Ronpobin at 56. Snowden also makes it clear that there must be a relationship or nexus between the expenditure or outgoing and the carrying on of the relevant business: see per Dixon CJ at 437 where his Honour said: "What is meant by the qualification [the use of the word 'necessary'] is that the expenditure must be dictated by the business ends to which it is directed, those ends forming part of or being truly incidental to the business." 69 In Magna Alloys & Research Pty Ltd v Federal Commissioner of Taxation (1980) 11 ATR 276, Deane and Fisher JJ at 295 said: "The controlling factor is that, viewed objectively, the outgoing must, in the circumstances, be reasonably capable of being seen as desirable or appropriate from the point of view of the pursuit of the business ends of the business being carried on for the purpose of earning assessable income. Provided it comes within that wide ambit, it will, for the purposes of s 51(1), be necessarily incurred in carrying on that business if those responsible for carrying on the business so saw it. The statement of the relevant question in this composite form finds support in the judgment of Dixon J in FC of T v Midland Railway Co of Western Australia Ltd (1952) 85 CLR 306 at 313;5 AITR 243 at 247 where his Honour said: '… what governs the issue is the business purposes for which the outgoing was incurred from the point of view of the taxpayer company. The controlling factors are those which arise from the character of the business or undertaking and the relation which the expenditure or the liability to make it bore to the carrying on of the business or the gaining of assessable income" (emphasis added)." 70 In my judgment, for the reasons already given with respect to the first limb of s 51(1), I find that the character of the outgoings under consideration in respect of the particular years of income did not have the degree of relationship to the business of the applicant as to make those outgoings part of the carrying on of the applicant's business for the purpose of gaining or producing assessable income. 71 Consequently, in my judgment, the application to the Court must fail. 72 In the light of those conclusions, it is not necessary to deal with the exception or exclusion to the positive limbs of s 51(1), namely that the outgoings not be outgoings of capital, or of a capital private or domestic nature. 73 I note parties are agreed, in the light of Steele, that the interest payments on moneys borrowed from the CBA are not of a capital nature. The respondent contended that those interest payments and the outgoings for rates and taxes are, nevertheless, of a private nature because they were simply to confer a capital benefit on Accor from its ownership of the Darlington property. The respondent in final submissions put no contention that the outgoings for rates and taxes and the like (as distinct from the interest payments themselves) were payments of a capital nature. 74 In Commissioner of Taxation v Hatchett (1971) 125 CLR 494, Menzies J observed at 498: "It must be a rare case where an outgoing incurred in gaining assessable income is also an outgoing of a private nature. In most cases the categories would seem to be exclusive." In Magna Alloys, Brennan J at 290 made the same point with respect to the second limb of s 51(1). It does not necessarily follow as a corollary that an outgoing or expenditure that does not come within either of the positive limbs of s 51(1) is therefore of a private nature. However, it is not necessary to address that question. 75 In my judgment, the application should be dismissed. I certify that the preceding seventy-five (75) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Mansfield. Associate: Dated: 7 June 2002 Counsel for the Applicant: Ms A MacDonald Solicitor for the Applicant: Thomson Playford Counsel for the Respondent: Mr T Murphy Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 12, 13 & 14 June 2001 Date of Judgment: 11 June 2002