Ermelinda Kovacs and Lindsay Muir, instructed by the Australian Government Solicitor, successfully appeared for the Respondent before the Full Court of the Federal Court of Australia in the recently decided Charles Apartments Pty Limited v Commissioner of Taxation [2025] FCAFC 180. Justices Logan, Downes and Goodman dismissed the appeal with costs.

The appeal involved the construction and application of s 8-1 of the Income Tax Assessment Act 1997 (Cth) in the context of the Appellant’s claim for an interest deduction.

The Appellant contended that part of the $4.87 million payment it made pursuant to a guarantee of a $27 million facility discharged a liability it had to pay interest under an intra-group loan. The intra-group loan had refinanced the Appellant’s prior borrowing from St George Bank. There was no dispute that the original borrowing from St George Bank was used in the course of the Appellant’s business.

A summary of the Full Court’s observations is set out below:

1. Nexus: In considering the question of “nexus” under s 8-1(1), the Tribunal had impermissibly adopted “but for” reasoning. Their Honours observed that “‘[b]ut for’ reasoning in relation to … a deduction claimed under s 8-1 … can have Siren-like attraction, and it is apt to lure those who sail on fiscal waters onto the rocks of failing to apply the language of the statute to the facts”.

2. Refinancing principle: Their Honours observed that at a factual level, the Appellant faced “an insurmountable difficulty in bringing its claim within the ‘refinancing principle'”. Their Honours stated “as the Commissioner submitted, after [the Appellant] made the payment of $4,870,223.34 [to Suncorp], there was nothing left to pay to [the intra-group lender]….there was no “nexus” between the payment of the net proceeds to Suncorp and the original borrowing from St George Bank.”

3. Payments under guarantee: Their Honours explained that “there is no general principle that payments under guarantees are always expenditures of capital or of a capital nature”. However, the Full Court concluded, having regard to the factors in Sun Newspapers Ltd and Associated Newspapers Ltd v F C of T (1938) 61 CLR 337, that the whole of the payment made by the Appellant to Suncorp was either an outgoing of capital or of a capital nature (or both). It resulted in the “discharge of the mortgage security over the Charles Street Properties and in the reduction accordingly of [the Appellant’s] potential liability as a guarantor in respect of the Suncorp Facility”.

A copy of the judgment may be found here.