Statement of Facts, Issues and Contentions - Rule 320(3) Form 59

This document presents the statement of facts, issues and contentions in accordance with Rule 320(3) Form 59. The case involves the deductibility of interest expenses incurred by a holding company that borrowed $3 billion from a finance company and issued the loan to its subsidiary at an interest-free term. The commissioner disallowed the deduction on the grounds that the loan was not used for the principle revenue generating activity of the company and the interest expense was considered capital in nature. The statement argues that the interest expense is deductible under section 8-1 of the Income Tax Assessment Act 1977 as it was incurred for the purpose of gaining or producing assessable income and was not of capital nature. The subsidiary company has continuously used the funds for business activities and has not paid any dividend to the holding company. The statement also discusses the various cases and conditions that determine the deductibility of interest expenses. The document includes references to relevant legislation and scholarly articles.

Rule 320(3)
Form 59 Statement of facts, issues and contentions
STATEMENT OF FACTS, ISSUES AND CONTENTIONS
1. Facts
The facts of the current case are as follows:
a) The holding company that is Holdco Pty. Ltd. is holding 100% shares in the
subsidiary Subco. The company is operating within the country with the help of the
subsidiaries that are being held by the holding company. The subsidiary is
conducting its operation in the oil and gas exploration activities.
b) The holding company has not decided to operate as a consolidated company or
group.
c) Due to this fact the holding and the subsidiary company will be treated as separate
entities.
d) The holding company i.e. Holdco has engaged itself in the borrowing of $3 billion
from a finance company called as Finch. The amount that has been borrowed by the
company is carrying an interest element of around 9%.
e) The holding company has issued the loan to the subsidiary company Subco at an
interest free term.
f) The reason for giving the amount to the subsidiary was to ensure that the same is
being utilized for the purpose of carrying out the business activities of the company.
g) It is seen that as on 30th of June 2015 the company has incurred interest expenditure
to the tune of $270 million.
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h) The holding company is claiming the same to be deductible from the income that is
being earned by the company.
i) The deduction that is being claimed by the company is in accordance with the
provisions that are being laid down by the statute in the section 8-1 of the Income
Tax Assessment Act 1977 (Legislation.gov.au, 2018).
j) The holding company is in full compliance with the various interest withholding tax
obligations.
k) It has also been clearly established that Subco has not paid any sort of dividend to
Holdco for the year ended 30th June 2015.
l) It is also seen that Subco is not yet profitable.
2. Issues
The issue in respect of which the statement is being issued is regarding the interest that
has been expended by the company for the tax year. The deduction of the same has not been
allowed by the commissioner on the following grounds:
a) He is of the opinion that the principle amount of the loan has to been utilised for the
purpose of carrying out the principle revenue generating activity of the company.
b) The amount of expenditure in respect of the interest amount of the company has been
considered to be of capital in nature or capital all by itself.
3. Contentions
To determine the deductibility of the amount of interest that is to be paid by the
company the reference pf the various rules and regulations laid out in the section 8-1 of the
Income tax Assessment act have been objectively observed, complied with and implemented:
The wordings that have been laid down in the section in respect of the same are as follows:
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a) The amount has been incurred by the taxpayer for the purpose of gaining or producing
assessable income. In addition to that the amount that has been expended by the
company is not of capital nature, is a loss, or of a capital, is of private or of domestic
in nature (King, 2016).
b) The amount that has been incurred by the taxpayer has been incurred on a necessary
basis for the purpose of carrying out of the business that is solely responsible for the
purpose of generation of assessable income for the taxpayer. In addition to that the
loss or the outgoing is not of capital nature or of a capital or is of private or domestic
in nature.
In addition to the above mentioned condition there are several other cases that have been
illustrated by the statute for the purpose of ascertaining the whether or not the outgoing
capital or the loss that has been borne by the company for the relevant tax year is deductible
or not by satisfying all the requirements that are being laid down in the section 8-1 of the
ITAA. The cases are as follows:
a) The interest expense that have been incurred by the entity must have direct connection
with the various operations or the activities that more directly gain or produce the
assessable income of the taxpayer and not be of capital, private or domestic in nature.
The test that is being taken for the purpose of ascertainment of the same is a test of
character and the question that is being answered is in respect of the question that
whether all the circumstances have been factored in for the purpose of ascertainment
of the result of the test that is being taken (Yu & Halog, 2015).
b) It is a general principle that the character of the interest of the money is ascertained
based on the reference to the objective circumstances of the use to which the
borrowed funds are being put by the borrower. However proper consideration must be
given to all the circumstances including the nature of the business that is being carried
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out by the taxpayer, the main purpose of the borrowed funds, and the nature of the
series of transaction of which the borrowed funds have become an element. There are
some cases wherein the subjective purpose, intention, or motive may be considered
relevant for the purpose of deciding the deductibility of the interest amount from the
assessable income of the taxpayer.
c) The presence of a trail that will establish the relationship between the borrowed
money and the principle revenue generating activity of the company. The reason for
its presence is that the same will demonstrate a relevant connection between the
interest on the amount that has been borrowed by the entity and the principle income
producing activity. The approach is generally adopted for the non-business taxpayers.
The same can be applied to those cases too where in the amount that is borrowed by
the company are directly channelized to a specific purpose like the structure of the
business. One example could be that an entity engages in the arranging of huge funds
for the purpose of transacting an offshore acquisition.
d) It is not always appropriate or necessary to conduct a tracing of the borrowed money.
The main consideration in such cases will have to be given on the ascertainment of
the fact that whether the funds that have been borrowed by the entity are being used
for the purpose of replacing the funds that were acquired for other source of funds for
the purpose of business.
e) The interest on the amount of borrowed funds will not be deductible just because the
same has been utilized for the purpose of preserving the assessable income producing
assets of the company.
f) Interest on the amount that has been borrowed by the entity for the purpose of
carrying out the business of the entity will not be deductible by the entity if the same
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are not utilised for the purpose of business or the income producing activity of the
entity.
g) The amount of the interest that is incurred by the entity will not be allowed as
deduction the extent the same is being utilised for the purpose of private or domestic
purposes, gaining or producing income that is exempt in nature.
It has to be objectively understood that the prime reason for the making available
capital to the subsidiary company by the holding company is to ensure that the same
is able to carry out its business activities. It is also important to make available the
funds for ensuring that the subsidiary company while performing the various business
activities is not faced with the challenge of capital requirement. Hence it can be
objectively analysed that the amount that has been borrowed by the holding company
has been used up by the subsidiary company for the purpose of business activities
only. Therefore the subsidiary company has been able to fulfil the condition that was
being laid down in the statute that the amount that is being borrowed for which the
company is claiming the corresponding interest must be utilised for the purpose of
business. It has to be noticed that the condition has been fulfilled even if the activities
have not been directly performed by the holding company directly but the same have
bene conducted by the subsidiary company.
The interest that has been incurred by the holding company in respect of the funds
that has been borrowed by it from the finance company is in respect of the business
that is to be carried out by the subsidiary. The reason for the same is that the it would
have not been possible for the entity to carry out its activities without the financial
assistance that was received by it from the holding company (Lal et al., 2017).
Numerous amount of factors and the circumstances have to be kept in mind for the
purpose of ascertainment of the nature of the amount of interest that is being paid by
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the entity. Among the various uses to which the funds are put to use by the entity the
ultimate utilisation of the funds that have been arranged by the entity has to be
ensured. After the nature of the amount that has been arranged by the entity has been
adjudged, it was found that the same was being used for the purpose of carrying out
the various business activities. Therefore, the amount that has been borrowed by the
holding company and the corresponding interest that has to be paid by it to the
company from which it has borrowed the money should be allowed as deduction.
In addition to that tracing has been conducted in respect of the amount that has been
borrowed by Holdco Pty. Ltd. to Subco. Pty. Ltd. The conclusion of the tracing pf the
amount borrowed by the company has ensured that the same has been utilised for the
purpose of carrying out the various economic activities of the entity.
As the amount that has been borrowed by the company is utilised for the purpose of
carrying out the various business activities of the entity as is ascertained from the
tracing of the funds of the company, the same has not been utilised for the purpose of
preservation of the assets of the company. Therefore, doesn’t violate the rule that has
been stated out in the section 8-1 of the Income Tax Assessment Act 1977 (Cobiac et
al., 2017).
The subsidiary company has not discontinued making use of the funds that were made
available to it by the Holding company. The reason being that the funds were
continuously being utilised for the purpose of carrying pout the various business
activities of the entity. Due to the fact that the principle amount has been continuously
being utilised for the purpose of carrying out the business activity of the entity, the
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interest pertaining to the same will also be considered to be continuously utilised for
the purpose of carrying out various business activities. This suggests that the same has
not ceased in being utilised for the purpose of carrying out the business activities.
Furthermore, the interest that is being incurred on the part of the company has not
been utilised for the purpose of any sort of domestic or private use. The same amount
is also not in the nature of the capital or is not capital in itself. In addition to that the
principle amount corresponding to the amount of interest incurred by the holding
company for the relevant year has not been utilised for the generation of any sort of
income that is exempt in nature. Hence the deduction in respect of the interest
expenditure must be made available to the entity (McGee, Devos & Benk, 2016).
4. Extension of time
5. Annexures
Certificate:
This statement of facts, issues and contentions is put forward in accordance with the
instructions of the appellant, (name), and it complies with the Supreme Court Civil Rules
2006.
Date:
Signed by (name)
Appellant/Appellant’s solicitor (delete whichever is inapplicable)
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References:
Cobiac, L. J., Tam, K., Veerman, L., & Blakely, T. (2017). Taxes and subsidies for
improving diet and population health in Australia: a cost-effectiveness modelling
study. PLoS medicine, 14(2), e1002232.
King, A. (2016). Mid market focus: The new attribution tax regime for MITs: Part
1. Taxation in Australia, 50(10), 590.
Lal, A., Mantilla-Herrera, A. M., Veerman, L., Backholer, K., Sacks, G., Moodie, M., ... &
Peeters, A. (2017). Modelled health benefits of a sugar-sweetened beverage tax
across different socioeconomic groups in Australia: A cost-effectiveness and
equity analysis. PLoS medicine, 14(6), e1002326.
Legislation.gov.au. (2018). Legislation.gov.au. Retrieved 18 June 2018, from
https://www.legislation.gov.au/Details/C2017C00336
McGee, R. W., Devos, K., & Benk, S. (2016). Attitudes towards tax evasion in Turkey and
Australia: A comparative study. Social Sciences, 5(1), 10.
Yu, M., & Halog, A. (2015). Solar photovoltaic development in Australia—a life cycle
sustainability assessment study. Sustainability, 7(2), 1213-1247.
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