"Australia's largest tax case" revisited: a nail in the coffin for the objective approach to determining the deductibility of expenses?

APrior to the introduction of the tax consolidation regime, tax considerations often acted as a disincentive for a company to receive dividends from its subsidiary where the company had borrowed money at interest in order to finance the acquisition of its shares in the subsidiary in question. Corporate groups would commonly carry out restructures in order to eliminate the existence of this disincentive, which was known as a "dividend trap". The effectiveness for taxation purposes of one such corporate restructure was considered by the Full Court of the Federal Court in Spassked Pty Ltd v FC of T, a case said by the Australian Taxation Office to be "Australia's largest tax case". At issue was the deductibility of interest expenses incurred on loans taken out by an in-house finance company, and the Court held that the expenses in question could not be used to reduce non-dividend income that was not effectively exempt from taxation. With the High Court denying the taxpayer special leave to appeal, the decision in Spassked represents yet another successful attack in recent times on the financing practices of corporate groups which for long had gone unchallenged. Commentators to date have largely been unquestioning of the outcome of the case, but this article critically analyses the decision and argues that the judgments are fundamentally flawed because the Court misapplied certain long standing principles of income tax law. This is unfortunate because, even though the particular result sought to be achieved by the restructure in Spassked is now attainable as a consequence of government policy that is embodied in the tax consolidation regime, under the positivist doctrine of stare decisis the reasoning adopted by the Full Court of the Federal Court in Spassked continues to be of potential relevance in relation to the broad and proper application of the general deduction provision.