Every so often a case comes along that stops you in your tracks—not because the tax concepts are new, but because it shows what happens when the fundamentals are missed. The Federal Court’s decision in Charles Apartments Pty Ltd v Commissioner of Taxation [2025] FCA 461 is one of those cases.
It’s about a claimed interest deduction that was entirely disallowed. A whopping $1.87 million wiped out. And it all hinged on a few key issues: the character of the payment, the quality of the documentation, and the narrowness of the arguments made at the Tribunal level.
Let’s unpack what happened—and why this case should be front of mind for every accountant advising clients involved in property development, intragroup loans, or related-party transactions.
The Background: A Familiar Structure
Charles Apartments was set up in 2001 as a special purpose company to acquire, develop, and eventually sell three adjoining properties in Parramatta—numbers 6, 8, and 10 Charles Street. Classic setup. The initial funding came via St George Bank. Later, that was refinanced under a much larger $27 million facility from Suncorp, which consolidated borrowings across the Demian Group.
Now, here’s the twist: Charles Apartments didn’t borrow directly from Suncorp. Instead, it received $3 million through an intragroup loan from another Demian Group entity. The money was used to pay out St George. On paper, the group had its financing sorted.
By 2010, the project had stalled, and the fallback plan was to sell the land. Three sale contracts were executed and settled for $5 million. That income was declared in the 2011 tax return. So far, all fairly normal.
The Fourth Contract: Where Things Got Messy
Then came the curveball: a fourth contract.
On the same day as the final land sale, a separate agreement was executed between two other group entities—Advanced Communications and Chapel Business Centre. This contract was for $3.85 million and related to the “D.A. Documents”—that is, the development applications and plans for the site.
But none of this was disclosed to the bank. And none of it was returned as income by Charles Apartments.
The Commissioner took the view that at least part of that $3.85 million represented value that properly belonged to Charles Apartments. After a review and objection, $946,000 was added to its assessable income. Importantly, the company never physically received that amount—it was booked to another group entity.
The Tribunal: A Mixed Result
At the Administrative Appeals Tribunal, Charles Apartments challenged the income inclusion. It argued that it wasn’t party to the fourth contract and hadn’t received the funds. But the Tribunal found otherwise: there was a clear commercial linkage between the land sales and the development documents. The documents added value. They were part of the same overall transaction.
So the $946,000 stayed in as income.
Now here’s where things got interesting. Charles Apartments had claimed a deduction for $1.87 million in interest on the intragroup loan. The interest, they said, had accrued between 2003 and 2010 and was finally paid out of the sale proceeds. The Tribunal accepted that—but limited it to the $1.87 million actually paid.
When Charles Apartments tried to argue for an additional deduction—on the basis that its income had gone up by $946,000—the Tribunal didn’t consider it.
Why?
Because that argument wasn’t raised at the right time. The taxpayer had only run a single-track case: “don’t include the income.” They never said, “but if you do, give us a matching deduction.”
The Federal Court: Harsh But Fair
On appeal, the taxpayer argued that the Tribunal should have considered the deduction as a “consequential step.” In other words, if assessable income goes up, then logically the related deduction should too.
The Federal Court wasn’t buying it.
Justice Wheatley held that the Tribunal had no obligation to consider arguments that weren’t raised. There was no procedural unfairness. The taxpayer had made a choice—it ran its case narrowly, and that choice came at a cost.
But then came the Commissioner’s cross-appeal.
And that’s where things went from bad to catastrophic.
The Real Killer: It Wasn’t Interest After All
The Commissioner argued that even the original $1.87 million deduction should be disallowed. Why? Because it wasn’t actually interest under a loan. Instead, it was a payment made under a guarantee.
Remember: Charles Apartments didn’t borrow directly from Suncorp. It guaranteed the group’s loan facility. And when the lead borrower defaulted, Charles Apartments had to make good under the guarantee—using the sale proceeds.
And payments made under a guarantee? They’re capital in nature. Not deductible under section 8-1.
The Court agreed. The Tribunal, it said, had applied the wrong test. Instead of analysing the use of the borrowed funds, it had fallen back on a kind of “but for” logic—i.e. “but for this payment, we couldn’t have derived the income.”
That’s not the right approach. You’ve got to trace the funds and ask: what were they actually used for? In this case, they discharged a capital obligation. Game over.
So What Are the Lessons?
If you’re advising clients in this space, here are some key takeaways:
- Labels don’t control legal character. Just because a payment is recorded as “interest” doesn’t mean it’s deductible. If it arises under a guarantee, it’s capital.
- Deriving income doesn’t create a deduction. The fact that $946,000 was included in assessable income didn’t entitle the taxpayer to a matching deduction—especially where no liability to pay interest arose from those funds.
- Document everything. The intragroup loan had no written agreement. The Tribunal had to rely on oral testimony. That’s never ideal—and here, it cost them.
- Run your case in the alternative. Always give the Tribunal more than one position to consider. If you challenge an income inclusion, argue for a deduction as a fallback.
- Understand nexus. Section 8-1 requires a clear, direct link between the expense and the income-producing activity. A “but for” argument is not enough.
Final Thoughts
The result? An extra $946,000 in assessable income. A $1.87 million deduction wiped out. And likely penalties on top. That’s a painful swing for any taxpayer.
But for us, as advisers, it’s a timely reminder that how something is documented, structured, and argued can make or break a tax position.
If you’re dealing with internal group loans, guarantees, or complex finance structures, go back to first principles. Understand the legal form. Get the paperwork right. And never assume that tax law will let you “follow the money” unless you can prove where that money really came from—and why it was spent.