R & D Holdings Pty Ltd v Deputy Commissioner of Taxation [2006] FCA 981

FEDERAL COURT OF AUSTRALIA

R & D Holdings Pty Ltd v Deputy Commissioner of Taxation [2006] FCA 981 TAXATION – appeals against objection decisions of Deputy Commissioner of Taxation in relation to tax years ending 1997, 1998 and 1999 TAXATION – appeal in relation to 1998 tax year – whether net income of trust distributed to applicant included amount assessable under s 70-35 of Income Tax Assessment Act 1997 (Cth) – amount attributable to revaluation of land and buildings – whether property incorrectly treated as trading stock – whether property held for purposes of sale in the ordinary course of business – whether necessary to show an identifiable business "trading in" property in question - definition of trading stock – evidence of purpose of trustee in relation to holding of land – building designed as strata building for sale or lease of lots – whether un-subdivided lots lacked marketability so as to not amount to trading stock TAXATION – appeals in relation to 1997, 1998 and 1999 tax years – mortgage of property – interest calculated daily and capitalised unless paid monthly – mortgagee in possession through relevant income years – deductions claimed in respect of interest liabilities capitalised – whether an allowable deduction under s 51(1) of Income Tax Assessment Act 1936 (Cth) or s 8-1 of 1997 Act – whether interest incurred in gaining or producing assessable income – whether certainty of future payment a pre-requisite to deductibility TAXATION - losses transferable under s 80G of 1936 Act – whether applicant entitled to deductions for losses transferred by wholly owned subsidiary – change in beneficial ownership – whether losses transferable under sub-div 170-A of 1997 Act – whether "same business test" satisfied – what constitutes carrying on of a business – consequences of mortgagee entering into possession MORTGAGES – business conducted on mortgaged property – mortgagee entered into possession – agents appointed by mortgagee in possession to receive rents and manage property – whether applicant still carrying on business despite mortgagee in possession – rights and obligations of mortgagee under Real Property Act 1900 (NSW) and mortgage agreement TAXATION – penalty imposed in relevant tax income years under ss 226H and 226K of 1936 Act – whether tax shortfall caused by recklessness of taxpayer or tax agents – whether unarguable position taken – evidence of advice to taxpayer and tax agents on deductibility of losses – whether advice sought with regards to transferability of losses – whether taxpayer or advisers positively adverted to applicable law Held: (1) Property held for the purpose of development, strata subdivision and sale of subdivided lots – sale of lots in the "ordinary course of business" – property held for dual purpose of sale or lease of subdivided lots – the language of s 70-10 does not require that business of trading in land should be carried on with some regularity or system for that land to constitute trading stock - property trading stock for the purpose of s 70-35 of 1997 Act (2) Where interest liability has been incurred on loan of monies for purposes of gaining income, it will be characterised as a loss or outgoing not only if the liability has been discharged but also if it has been capitalised – despite inability to pay interest, the nature and character of the interest liability did not change – certainty of actual payment is not a legal prerequisite to deductibility of losses - in relation to 1997, 1998 and 1999 tax years applicant entitled to deductions for interest liability incurred by wholly owned subsidiary (3) Applicant entitled to transfer of losses from group company in relation to 1997 tax year. (4) Applicant not entitled to transfer of losses in relation to 1998 and 1999 tax years – transfer company did not carry on a business at all in the relevant periods – mortgagee in possession carried on business pursuant to statutory and mortgage rights – same business test not satisfied (5) Penalty tax properly imposed under s 226H and 226K of 1936 Act – despite advice sought on deductibility of tax losses, no reasonable consideration given to applicability of loss transfer provisions of 1997 Act – in exercising "reasonable care" a taxpayer and or its advisers should positively advert to or form a reasoned view on, the application of the law - two companies and their advisers did not positively engage with the questions (i) whether transferor was, in the circumstances, "carrying on a business"; and (ii) what was the significance of mortgagee being in possession and managing the property Taxation Administration Act 1953 (Cth) s 14ZZ Income Tax Assessment Act 1997 (Cth) Div 170, subdiv 170A, s 8-1(1), s 70-10, s 70-35, s 165-10, s 165-12, s 165-13, s 165-210, s 170-35 Income Tax Assessment Act 1936 (Cth) s 6(1), s 36(1), s 51(1), s 80A, s 80C, s 95, Part VII, s 222C(1), s 226H, s 226K Tax Law Improvement Act 1997 (Cth)Pt 1, Sch 5, s 70-5, s 70-10 Real Property Act 1900 (NSW) s 57(2)(b), s 58, s 60, s 63 Corporations Act 2001 (Cth) s 494 Conveyancing Act 1919 (NSW) s 106, s 115(2), s 115(8)