Firth v Federal Commissioner of Taxation
This case involved the deductibility of interest expense incurred by the taxpayer in respect of limited recourse equity investment loans. Judgement was handed down on 13 September 2001.
The taxpayer had taken out limited recourse loans in order to purchase shares. Under such loans the lenders right of recovery of the principal were limited to enforcement against the shares bought with the loan funds. The term of each loan was about one year and interest rates were around 17.3% to 19.3% pa. The Commissioner argued that a portion of the interest paid by the taxpayer constituted a capital protection fee which protected the borrower from liability to repay the principal if the market value of the shares fell below the original purchase price and hence was not deductible. The Commissioner was of the view that this portion of the interest was incurred for a purpose other than to service or maintain borrowed funds.
The Court held that the taxpayer was in the business of trading shares and that the interest expenditure was incurred in gaining the taxpayer’s assessable income. The Court further held that the greater risk in the loan reflected by the higher interest rate did not mean that the transaction should be "artificially broken down into one involving a multiplicity of purposes when, as a matter of commercial substance, there was but one purpose".