Court Decisions
Intra-group interest not deductible
20.08.2010
The Federal Court has held that interest incurred by a taxpayer on intra-group borrowings as part of a scheme to eliminate a dividend trap in the group was not an allowable deduction for the 1991, 1993 and 1994 income years (IEL Finance Ltd v FCT [2010] FCA 898). The same result was reached by a Full Federal Court in earlier proceedings involving the 1992 income year (Spassked Pty Ltd v FCT [2003] FCAFC 282).
In early 1998, the way that funding for the industrial equity group of companies was structured was fundamentally altered. Very briefly, IEL Finance Ltd (IEF) was the existing in-house finance company for the group. Spassked Pty Ltd (Spassked) was incorporated to borrow funds at a commercial rate of interest (which would be capitalised) and borrowed approximately $3.7 billion during the 1988, 1989 and 1990 years. Group Investment Holdings Pty Ltd (GIH) was incorporated with a constitution which permitted it to allot A Class shares (which carried the right to both franked and unfranked dividends) and B Class shares (which carried the right to franked dividends only). Spassked applied most the borrowed funds in subscribing for A class shares in GIH.
Among the perceived attractions in this and other aspects of the arrangement that was implemented were that:
● franked dividends could be distributed to IEL, and unfranked dividends could be distributed to GIH, without being subsumed in a dividend trap; and
● the IEL Group would be able to maximise the value of tax losses available to be transferred to other members of the group, by minimising the wastage of tax losses and ensuring the availability of tax rebates under sec 46 ITAA 1936.
Emmett J concluded that there was not, in any of the 1991, 1993 and 1994 income years, any intention or expectation, on the part of those responsible for the decision as to whether to make assessable distributions to Spassked, that Spassked would, at any foreseeable time in the future, derive assessable income that could be referrable to the interest expenses that it was incurring to IEF in those income years.
The Commissioner alternatively relied on the general anti-avoidance provisions of Part IVA ITAA 1936. In this regard Emmett J said that, on the assumption that the interest expenses incurred would otherwise be allowable deductions, it was “certainly arguable” that Part IVA would not apply.
Although he considered that having regard to the earlier proceedings, there were “cogent reasons” for concluding that the taxpayers ought not to be permitted to rely on the contentions raised in the present proceedings, Emmett J decided the matters by reference to the substantive issues.
