Watson as trustee for the Murrindindi Bushfire Class Action Settlement Fund v Commissioner of Taxation, [2020] FCAFC 92

The taxpayer was the scheme administrator of an arrangement for the distribution of the $300 million agreed to be paid by the defendants in a class action suit arising out of the 7 February 2009 Murrindindi bushfire. In the income year ended 30 June 2016, interest income of $8,355,722 accrued on the bank deposits and the taxpayer (as Scheme Administrator) incurred $4,341,327 in costs and expenses in administering the Distribution Scheme. The overwhelming majority of the work carried out was to oversee the assessment of claims made by group members, which almost entirely consisted of legal and other fees of the taxpayer’s staff and fees or disbursements paid to those engaged to assist in assessing the claims of the various group members. The costs related to the derivation of interest income were minimal. In issue in this appeal was whether costs and expenses incurred by the taxpayer in the administration of the Distribution Scheme were deductible pursuant to s 8-1 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997), which provided that:

1. 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.

And went on to provide:

2. However, you cannot deduct a loss or outgoing under this section to the extent that:

1. it is a loss or outgoing of capital, or of a capital nature; …

The Court dismissed the appeal, finding (at paras 39, 42 and 48):

The activities conducted by the taxpayer pursuant to the Distribution Scheme were conducted by him in implementing and administering the Distribution Scheme. Such activities lacked the character of activities conducted as a business. …

… [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.

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 statute 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 (at paras. 42, 48):

[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.