Watson – Full Federal Court of Australia finds that expenses incurred in administering a litigation settlement fund were not deductible from the related interest income

A trust for distributing $300M in class action damages to the class claimants earned $8.4M in interest income on the funds and incurred $4.3M in various expenses in assessing the claims of the various claimants before distributing the damages. The costs related to the derivation of the interest income were minimal. The Australian taxing act provided:

You can deduct from your assessable income any loss or outgoing to the extent that:

1. it is incurred in gaining or producing your assessable income; or
2. it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

In finding that such expenses were not deductible because there was no business and that such expenses were capital expenditures, the Full Federal Court of Australia stated:

[T]he taxpayer, in administering the Fund, was not turning his talent to account for money but was administering a court-approved scheme for the distribution of a settlement sum agreed upon by parties to a class action. ...

Properly analysed, the costs of administering the scheme were costs incurred in the course of effecting the distribution of the settlement sum to claimants entitled to share in the settlement sum, and thus costs incurred on capital account. The requirement that the settlement sum be held in interest-bearing accounts pending distribution as part of the Distribution Scheme does not give the costs of administering the scheme the character of revenue outgoings.

Neal Armstrong. Summary of Watson as trustee for the Murrindindi Bushfire Class Action Settlement Fund v Commissioner of Taxation [2020] FCAFC 92 under s. 18(1)(b) – capital expenditure v. expense – oversight or investment management.