TAXATION POINTS

Evening Post, Volume CXXIII, Issue 60, 12 March 1937, Page 11

TAXATION POINTS

ESTATE'S INCOME

DEDUCTION DISALLOWED

INTEREST ON LOAN

No part of the interest payable upon moneys borrowed by the Public Trustee as executor of the will of the late Robert Hannah, boot manufacturer, for the purpose of paying death duties charged upon the estate is allowed to be deducted in computing the assessable income derived by the estate. A decision to that effect was given by Mr. Justice Smith in a reserved judgment delivered in the Supreme Court yesterday afternoon on a case stated between the Public Trustee, as appellant, and the Commissioner of Taxes, as respondent.

The question for determination was whether, as a matter of law, all or any part of the interest payable upon the moneys borrowed by the appellant for the purpose of paying death duties charged upon the estate was deductible in computing the assessable income derived by the estate.

"It was submitted," said his Honour, "that by raising money on mortgage and paying the death duties the executor was enabled to retain the whole estate in his hands and so to maintain the income which the whole of the assets would produce, whereas if the executor had sold part of the assets to pay the death duties, he would have reduced the income and there would . have been less income tax to pay. Why, then, it was said, should not the estate be permitted to deduct the interest payable on the mortgage as an expense exclusively incurred in the production of the assessable income? "This argument overlooks the fact that an executor who raises money to pay the death duties is likely to do so in order to avoid a forced sale, particularly in a time of depression, and to conserve the capital values of the estate, an advantage'which might much more than offset the disadvantages involved in the payment of interest. STATE COLLECTS TWICE. "But it was also said that if the interest paid on the money raised were not deductible, the State would get double income tax, firstly from the mortgagee on the interest paid to him, and secondly from the estate to the extent by which . the estate's income tax was increased by the non-allow-ance of the deduction. That, however, is the result in other cases, where an interest payment. is not properly allowable as a deduction.

' "The true position," said the Judge, "is that the question to be decided must, as counsel recognised, be decided upon the proper interpretation of the Statute. In other words, the question whether a deduction is to be allowed must be determined by the rules regulating the assessment of income tax and not By rules regulating what might or might not be allowed in. the preparation of a balance-sheet or a profit-and-loss account for a company, a firm or an individual. . . - "NOT TO PRODUCE INCOME." "In the present case, the question is not whether the expenditure was incurred for the purposes of the taxpayer's trade, but whether it was exclusively incurred in the production of his assessable income. In my opinion, the proper view is that the impositon of death duties upon the capital assets is in no way'legally connected with the question whether the estate is producing or is capable of producing an assessable income. The duties would be imposed whether it was so or not: And the direct purpose of the payment of interest .on money borrowed to pay those duties is not to produce assessable income, but to relieve the capital assets of a burden imposed on them without relation to their income-producing capacity as such." The appeal was dismissed, with costs against the appellant, for whom Mr. H. E. Evans appeared. Mr. E. S. Smith conducted the case for the respondent.

FARM DWELLING

PRODUCING ASSET ?

DEPRECIATION LOSS

Income tax questions were the subject of another reserved decision given by Mr. Justice Smith yesterday afternoon. The appellants were Cyril Paul Hunter, of Akitio, and Thomas Percy Hunter, of Porangahau, both sheep farmers, and the respondent was the Commissioner of Taxes. The questions to be decided were:— 1. Whether depreciation on a farm dwelling house on a sheep station was allowable during each of the years ended on June 30, 1934, and June 30, 1935. 2. Whether the interest payable on the unpaid death duties for the year ended June 30, 1934, was a permissible deduction from the assessable income for that year. 3. Whether the .interest attributable to that portion of the loan raised on June 28. 1934, to pay the death duties was a permissible" deduction from the assessable income for the year ended June 30, 1935. , "The real question," said his Honour, "is whether the depreciation on the house on the sheep station, attributable to each year in question, was a loss exclusively incurred in the production of the assessable income for each such year, and that depends upon whether the dwelling house was exclusively used for that purpose during those years. . HOUSE A NECESSARY PART. "In the ordinary course, a trader's private residence is not exclusively employed in the production of his assessable income, but it appears that a sheep farmer's house has been regarded in a different light. The view has-been taken that the house on a sheep farm or run is, when it is occupied by those who control and direct the sheep farming operations, a necessary part of the whole producing asset. Upon this basis, the question arises whether the house loses its character as a producing agent whenever it ceases to be occupied by the sheep-farmer or his managers or agents, even though the cessation of use be but temporary. "It was contended for the Commissioner that if the house is not occupied at all, during any particular income year, by some person engaged in the work of producing income from the farm, the house cannot be said to be exclusively used for the purpose of producing assessable income. On the other hand, it was contended that if this test were applied to the premises it should also be applied to the implements, utensils, or machinery, and that if that were done, curious results would ensue. Does the Act, it was said, contemplate that the Commissioner should inquire whether every plough and shears had been put into actual use in each year? In my opinion, the argument for (he Commissioner is not sound. BUSINESS PRACTICE NEEDED. "This is a case in which I think that Jjjhe proper construction of the section * Requires the application of business

practice. ... So long as the implements and machinery do remain, in a J business sense, a part of the whole I producing, asset for the time being, they are entitled to an allowance for depreciation. In other words, the production of assessable income for any year is the income arising from that which constitutes, when viewed from a business standpoint, the whole producing asset for the time being, whether individual parts of the plant are actually used in a particular year or not. I think that the same qualification must apply to 'premises.' QUESTIONS ANSWERED. "It does not. appear to me from the case stated that the relation of the house to the sheep farm has been considered in the way I have indicated, and the only answer which I think should be given at the present stage to the first question is that if, when viewed from a business standpoint, the house be duly found to have remained during the years in question, or either of them,-a part of the whole producing asset, then depreciation is allowable against the income of any such year in such amount as the Commissioner thinks just. If, on the contrary, it is not so found, then no depreciation is allowable.

"In my opinion," said the ' Judge, "the reasoning in Hannah's case disposes of the second and third questions in this case; and the answer to each of those questions,as they are expressed at the beginning of this judgment is 'No.'"