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Income tax: is that part of the total cost incurred by Company A in acquiring shares in a third unrelated company from Company B under an underwriting agreement, and claimed as interest by Company A, deductible under section 8-1 of the Income Tax Assessment Act 1997 if: (a) company A treated the shares acquired as being on capital account; and (b) the underwriting agreement provided that the total acquisition cost was to include an amount expressed to be interest in relation to the period during which the agreement was current?

No. The essential character of the outgoing under consideration is capital, or of a capital nature, as it formed part of a once only, non-recurrent, payment for the acquisition of shares by Company A which held them as non-trading, non-revenue, assets ( Sun Newspapers Ltd v FC of T (1938) 61 CLR 337).

Also, the outgoing cannot be regarded as interest as there was no loan or debt in existence between Company A and Company B during the currency of the underwriting agreement. Interest can only be ascertained by reference to an obligation to pay a sum of principal moneys, and without that relationship an outgoing cannot be treated as interest ( Reference Re Saskatchewan Farm Security Act [1947] SCR 394 at 411-412; Federal Wharf Co. Ltd v DFC of T (1930) 44 CLR 24 at 27-28). Note: The Addendum to this Determination that issued on 2 September 1998 amends this Determination in relation to the 1997-98 or later income years.

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