Australia’s largest tax case

A team of lawyers and paralegals from AGS Sydney acted for the Commissioner of Taxation in tax appeal proceedings in Spassked Pty Ltd & Ors v Commissioner of Taxation where Spassked, a wholly owned subsidiary of Industrial Equity Ltd (IEL) sought a deduction of over $880 million for the 1992 tax year. Judgment in favour of the Commissioner was handed down in February 2003 in the Federal Court by Justice Lindgren.

Spassked had claimed deductions for interest which accrued on money borrowed from the group’s internal finance company. The company claimed that the interest was incurred for the purpose of generating returns by way of dividend and was therefore deductible under section 51(1) of the Income Tax Assessment Act 1936. If Spassked had been successful, there would have been flow-on consequences in later years, with total claims for losses by the taxpayer in the order of $3.2 billion.

The funds raised by the loans (approximately $3 billion) were channelled around the IEL group (which comprised several hundred companies) in a complex web of share subscriptions, inter-company loans and loan repayments, and the evidence showed that there was a great disproportion between the only dividends received (approximately $14 million in the relevant year) and the interest expense incurred. The Commissioner argued that the interest was not incurred for an income-producing purpose but rather in the pursuit of other objectives designed to minimise the group’s tax liability.

The taxpayer served on the Commissioner nearly 200 volumes of evidentiary material and the ‘discovery’ phase in April–May 2001 entailed a review of over 600 volumes of documents. Preparation of the Commissioner’s evidence involved producing lengthy ‘financial narratives’ by an expert witness for over 35 companies which illustrated the share transactions and cash flows and demonstrated the effect of the transactions upon the group as a whole. The result was 45 volumes of narratives and supporting documents and flowcharts, and some 65 volumes of correspondence.

One of the biggest challenges was in managing the sheer quantum of documents to review and determine what was relevant. The planning for the hearing also involved organising and arranging action plans to manage and keep abreast of all aspects of the case, counsel requests and the number of documents needed at court. The hearing was another milestone, running for three weeks of court time and involving large legal teams on both sides.

Justice Lindgren held that the deductions were not allowable. The consequence for the IEL group of companies was that tax benefits arising from the utilisation of these accumulated losses were not available to shelter other income arising from the group’s trading activities. His Honour also found it was not necessary to consider the application of the general antiavoidance provision in Part IVA of the Act. The company appealed to the Full Federal Court against the decision. On 8 December 2003 the Full Federal Court (Hill, Gyles and Lander JJ) in a unanimous decision dismissed the appeal. On 10 December 2004 the High Court refused the taxpayer’s application for special leave to appeal the decision.