Re Commissioner of Taxation v Mercantile Credits Limited [1986] FCA 36 (21 February 1986)

FEDERAL COURT OF AUSTRALIA

Re: THE COMMISSIONER OF TAXATION
And: MERCANTILE CREDITS LIMITED
Nos. NSW G314 and G315 of 1985
Income Tax Assessment Act 1936

COURT

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Bowen C.J.
Wilcox J.
Burchett J.

CATCHWORDS

Income Tax Assessment Act 1936 - Withholding tax - Extension of loan originally exempt under ss. 128G and 128H - Whether the extension produced a new "loan raised in pursuance of a contractual obligation entered into on or before 20 May 1983" within s. 128G(3) - Meaning of "loan raised" - Distinction between agreement to vary a contract and agreement to rescind and replace a contract - Importance of intention.

Income Tax Assessment Act 1936, ss. 128A, 128E, 128G and 128H

Acts Interpretation Act 1901, s. 13 (1)

Mercantile Credits Ltd. v. Federal Commissioner of Taxation (1985) 61 A.L.R. 331

Morris v. Baron (1918) A.C. 1

British and Beningtons Ltd. v. North Western Cachar Tea Company Ltd. (1923) A.C. 48

Tallerman and Company Proprietary Limited v. Nathan's Merchandise (Victoria) Proprietary Limited [1957] HCA 10; (1957) 98 C.L.R. 93

United Dominions Corporation (Jamaica) Ltd. v. Shoucair (1969) 1 A.C. 340

Attorney-General v. South Wales Electrical Power Distribution Company (1920) 1 K.B. 552

Connolly v. Keating (No. 1) (1903) 1 I.R. 353

Reed International Ltd. v. Inland Revenue Commissioners (1975) 2 W.L.R. 622

Burnes v. Trade Credits Ltd. (1981) 1 N.S.W.L.R. 93

B.S. Lyle Limited v. Chappell (1932) 1 K.B. 691

Roberts v. I.A.C. (Finance) Pty. Ltd. (1967) V.R. 231

Eldridge and Morris v. Taylor (1931) 2 K.B. 416

HEARING

SYDNEY
21:2:1986

ORDER

The appeals be dismissed.

The appellant pay the respondent's costs of the appeals.

NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

DECISION

The question debated upon these appeals is whether, by virtue of s. 128G of the Income Tax Assessment Act 1936, certain interest payments made in respect of two loans, obtained by the respondent Mercantile Credits Limited from overseas corporations, were exempt from withholding tax. It was not in dispute that, if the terms of s. 128G were satisfied, the respondent was entitled to certificates under s. 128H.

2. By Division 11A of Part III of the Income Tax Assessment Act 1936, provision is made for the imposition of withholding tax upon dividends and interest paid to persons not resident in Australia. Where withholding tax is payable, by Division 4 of Part VI of the Act, obligations are cast upon, amongst others, borrowers paying interest, to make appropriate deductions and remit moneys to the Commissioner of Taxation. Interest upon certain overseas loans has been exempted from withholding tax, and one of the exempting provisions is s. 128G, which reads as follows:

"(1) This section applies to interest in
respect of a loan where -

(a) the loan was raised outside Australia;

(b) if the loan was raised by the issue of
bearer debentures, the debentures were
issued outside Australia by a company,
the loan was raised in a currency other
than the currency of Australia and the
interest is or was paid outside
Australia in a currency other than the
currency of Australia; and

(c) the Commissioner has issued a
certificate under section 128H in
respect of the loan.

(2) Tax is not payable, and shall be deemed
not to have been payable, in accordance with
this Division in respect of interest to which
this section applies.

(3) This section does not apply to interest
paid on or after the date of commencement of
this sub-section in respect of a loan raised
in pursuance of a contractual obligation
entered into on or after 20 May 1983."

3. During the year 1982, the respondent obtained two loans, each of $US5,000,000.00, from Mellon Bank N.A. of Hong Kong ("Mellon") and Samuel Montagu and Co. Limited of London ("Montagu"), respectively. The agreement relating to the Mellon loan was dated 15 March 1982, and included a provision with respect to the period of the loan as follows:

"1.5 'Term of the Facility' means the period
commencing on 15th March 1982 and ending
-

1.5.1 on a date on which the Facility
hereby created shall have been
terminated in accordance with the
terms hereof by either party, or

1.5.2 if not so terminated on 15th
March 1984, or

1.5.3 if not so terminated, and the
parties so agree before the
expiration of the said period of
two (2) years, on such later date
as the parties shall agree in
writing."

The agreement relating to the Montagu loan was entered into by what was apparently called a "Facility Letter" dated 16 June 1982, but amended 2 August 1982, and as amended included a provision as follows:

"9. Repayment

Subject to Clause 12 (Cl. 12 was a
default clause) hereof the Advance shall
be repaid in one amount either 18 months
after drawdown or on 31st March 1984,
whichever date falls earlier. However
we hereby agree to consider any request
received from MCL (i.e. the respondent)
prior to 31st March 1984 to renew this
facility. Any renewal would be subject
to terms and conditions to be discussed
and agreed at that time."

4. Shortly after the making of each loan, a certificate was sought by the respondent under s.128H. The certificates sought were issued, and it is accepted by the Commissioner that each loan was raised outside Australia. But the controversy upon these appeals had its origin in later events. By an offer in writing dated 2 March 1984, made by Mellon, accepted by the respondent on or about 9 March 1984, that is shortly before 15 March 1984, the date when the term of the loan by Mellon would have ended under paragraph 1.5 of the agreement of 15 March 1982, the reference to 15 March 1984 in that paragraph was amended to 15 March 1987, and the reference to a period of two years was amended so as to refer to a period of five years. Also, by letter dated 28 February 1984 Montagu confirmed its agreement "to extend this Facility (i.e. the loan by it to the respondent previously referred to) for a period of three years", and suggested an amendment of the agreement, as follows:

"Our Facility Letter should now be amended as
follows:

Clause 9: Repayment

Delete in its entirety and substitute
therefor

'Subject to Clause 12 hereof all amounts
outstanding under this Facility shall be
repaid in one amount on 6th March 1987'.

All other terms and conditions of the
Facility Letter remain unaltered."

This suggested amendment was accepted in writing by the respondent on or about 7 March 1984, over three weeks before the date specified for repayment failing renewal.

5. Applications were made by the respondent for extension of the certificates previously granted in respect of the loans under s.128H, but were refused by the Commissioner, who took the view that s.128G(3) applied to exclude from the benefit of the section all interest paid after the arrangements extending the periods of the loans. The respondent then applied for judicial review of the Commissioner's decisions. There was a challenge in limine to the right of the respondent to proceed under the Administrative Decisions (Judicial Review) Act 1977, but this was determined against the Commissioner by Morling J. (Mercantile Credits Ltd. v. Federal Commissioner of Taxation (1985) 61 ALR 331), and from that decision there has been no appeal. The hearing proceeded, and by the judgment which has been appealed to this Court it was declared that the interest in dispute in each case was interest to which s.128G applies.

6. For the appellant Commissioner it was argued that new contractual obligations came into existence, in respect of each loan, in March 1984, after the date critical for the application of s.128G. It was submitted that more than a variation of contract was involved, since the date of repayment of a loan is one of the essential terms of the agreement. Counsel referred to the well-known decisions in Morris v. Baron (1918) AC 1 and British and Beningtons Ltd. v. North Western Cachar Tea Company Ltd. (1923) AC 48, where a distinction was drawn between a later agreement that varies an earlier agreement (even, perhaps, in so important a respect as the salary agreed in a contract of engagement of a music hall artist - see per Lord Dunedin in Morris v. Baron at p 25), and a later agreement that is inconsistent with the earlier to an extent which requires the conclusion that the parties intended to rescind and replace it.

7. It is unquestionable that the date of repayment is a most important term of a contract of loan, though in each of these cases the original contract clearly contemplated that the parties might mutually agree to change the date they had appointed, and the later agreement purported, whilst changing the date, to leave the original contract otherwise intact. To Mellon's proposal for amendment there was added the following:

"All words used in this amendment shall have
the same meanings as in the aforementioned
agreement and all other terms and conditions
of the said agreement shall remain in full
force and effect."

Montagu's confirmation of the amendment to the term of its loan contained, as the quotation made from it earlier in these reasons shows, a precisely similar reservation. It is plain that so far as it was open to the parties to do so, they intended merely to vary the contracts, not to rescind and replace them. In Tallerman and Company Proprietary Limited v. Nathan's Merchandise (Victoria) Proprietary Limited [1957] HCA 10; (1957) 98 CLR 93 at 144 Taylor J. said: "The determining factor must always be the intention of the parties as disclosed by the later agreement." (See also per Kitto J. at p.135.) The Privy Council in United Dominions Corporation (Jamaica) Ltd. v. Shoucair (1969) 1 AC 340 at 348 also described the doctrine of Morris v. Baron (supra) as "based on the intention of the parties."

8. But it is unnecessary to pursue the question whether what happened in each of these cases amounted to a variation of the contract of loan, or its rescission with the substitution of a fresh contract. For, whether there was a variation or a fresh contract, the issue upon which s.128G(3) turns is whether the interest was paid "in respect of a loan raised in pursuance of" (a new contractual obligation). It would not be enough to find a contractual obligation entered into after 20 May 1983, unless it could also be said that in pursuance of it a loan was raised.

9. When s.128G was amended in 1983 by the insertion of sub-s.(3), the draftsman used language which was already employed in sub-s.(1) of the section to identify the kind of loan the interest upon which was exempted by the section - a "loan (that) was raised outside Australia". Sub-s. (1) is concerned with where a loan was raised, and sub-s.(3), in a derivative way, with when it was raised. In ordinary usage the raising of a loan seems to refer to the procurement of the moneys lent rather than their retention (see generally Shorter Oxford English Dictionary (1980) Vol.2, page 1741, the third group of meanings of the word "raise" which includes its use in the sense of raising money; Chow Yoong Hong v. Choong Fah Rubber Manufactory (1962) AC 209 at 216; Agricultural Mortgage Corporation v. Inland Revenue Commissioners (1978) 1 Ch 72 at 98-9, 105; Attorney-General v. South Wales Electrical Power Distribution Company (1920) 1 KB 552 at 555; Connolly v. Keating (No. 1) (1903) 1 IR 353; Reed International Ltd. v. Inland Revenue Commissioners (1975) 2 WLR 622 at 632, referred to on appeal (1975) 3 WLR 413 at 418; article by J.G. Monroe 1969 B.TR 289 at 291). There is also a clear distinction between the making of a loan and the extension of the term of a loan (Attorney-General v. South Wales Electrical Power Distribution Company (supra); and cf. Burnes v. Trade Credits Ltd. (1981) 1 NSWLR 93 at 95).

10. A number of the cases cited were analysed by Morling J. in his judgment, and it is unnecessary to repeat his discussion here.

11. The usage in Division 11A accords with the suggested understanding of what is the raising of a loan. The Division commences with s.128A, sub-s.(5) of which reads as follows:

"(5) For the purposes of this Division -

(a) the borrowing of moneys by a company by
means of the issue of a number of
debentures in one borrowing operation
shall be deemed to be the raising of a
loan;

(b) subject to paragraph (a), each receipt
of moneys by a borrower under a
contract under which moneys are to be,
or may be, advanced by way of loan
shall be deemed to be the raising of a
loan; and

(c) the moneys received by the raising of a
loan, less the expenses of borrowing,
shall be deemed to be the loan moneys
in respect of the loan."

s.128A forms a sub-division headed "Interpretation". That heading is deemed by s.13(1) of the Acts Interpretation Act 1901 to be part of the Act.

12. If an agreement for the retention of a loan, or the retention of it, for a further period, constituted a raising of it, how would the exemption (conferred by s.128G) dependent upon the place of raising be applied? It would not be consonant with any imaginable legislative intent to confer an exemption on a loan, not procured outside Australia, simply because arrangements for its extension were concluded outside Australia. And on the other hand, if the mere retention of the moneys were to be looked at as the raising of a loan, in the case of an extension, it would seem to follow that an originally exempt loan, utilised in compliance with s.128H (which specifies permissible uses of exempt loans plainly including uses within Australia), would have lost its exemption, upon being extended prior to 20 May 1983, precisely because of its compliance with s.128H. For if the retention of the moneys was in Australia, not outside it, and that retention was the raising of the loan, the loan could not satisfy the requirement of s.128G(1) that it must be a loan raised outside Australia. The legislature when it enacted sub-s.(1), using language later adopted in sub-s.(3), is not likely to have intended such consequences, which would not have ensued if the raising of a loan is to be understood as generally occurring at its inception and as being unaffected by subsequent extensions.

13. Furthermore, at the time sub-s.(3) was inserted (by Act No. 25 of 1983) in s.128G, Division 11A already contained another exemption (provided by s.128E(1)) which related, inter alia, to interest on moneys lent to a company before 5 May 1967, or after that date "in pursuance of a contractual obligation entered into before that date to lend to the company a specific amount". Sub-s.(3) of s.128E provided:

"(3) Where the period for which moneys have
been lent is extended, the extension shall,
for the purposes of sub-section (1), be
deemed to be a loan of the moneys to which
the extension applies on the day as from
which the extension has effect."

14. The fact that no similar provision was inserted in s.128G when sub-s.(3) of that section was enacted as part of a series of amendments to Division 11A, which must have involved some revision by the draftsman of the entire Division, strengthens the view that an extension of a loan does not involve the raising of a loan. Had Parliament intended to remove the exemption conferred by s.128G, where a subsequent extension of a loan occurred, as it had done in relation to s.128E, a precedent lay ready to hand; but Parliament did not choose to follow that precedent.

15. Counsel for the appellant relied on certain cases decided upon the stringent provisions of moneylending legislation. In B.S. Lyle Limited v. Chappell (1932) 1 KB 691 the Court of Appeal considered a case where a moneylender, the borrower having defaulted, entered into a new agreement for a loan on new terms, involving repayment of the earlier loan, the transaction being effected by the handing over and return of a cheque. It was held there was no valid objection under the United Kingdom Moneylenders Act 1927 to such a transaction. This case cannot properly be seen as departing from the principle of Morris v. Baron (supra), by which the basic test whether a contract has been varied, or rescinded and replaced, depends upon intention, nor is this case concerned with the meaning of the raising of a loan. However, counsel relied upon a passage in the judgment of Scrutton L.J. at p.700 which reads:

". . . I find it difficult to believe that
Parliament intended to render renewals of
loans or of the securities for them on
altered terms impossible by requiring that a
memorandum of the alteration should be signed
before the original loan was made. In my
opinion, when the time for payment of the
original loan has expired without complete
repayment, and the time for repayment is
extended or altered, there is a fresh loan,
and it is sufficient if the memorandum of the
altered terms precedes the commencement of
the extended period. The draftsmanship of
s.6 might be better, but I cannot think that
Parliament intended to render renewals
impossible."

16. But this was in answer to a proposition (see pp. 699-700) "that there could not be a legal memorandum of a renewal of a loan on altered terms, because the Act required a memorandum before the money was lent". It should not be taken to lay down a rule of contract law, as distinct from construction of the meaning of a section of the Moneylenders Act there under consideration, that any extension or alteration of an agreement for loan is a fresh loan. (In any case, its terms would limit the rule to a case where the original period of the loan had already expired before the extension was granted). If Scrutton L.J. meant to state such a broad proposition, which would have been unnecessary to the decision, the judgments of Greer L.J. and Slesser L.J. are inconsistent with it. At p.705 Greer L.J. referred to the terms of the particular agreement, and not any supposed rule of law, as the reason why the new agreement "could not be carried out by a renewal of the old debt with a grant of further time to pay it, plus additional interest." At p. 708, Slesser L.J. dealt with the same section to which Scrutton L.J. had referred:

"Sect. 6 provides that the memorandum must be
signed before the money is lent. If the
terms on which the money is lent are
subsequently varied by agreement between the
parties, but there is no further loan,
difficulties may arise in that the contract
containing the variation of the terms cannot
be signed before the money is lent, as the
varied contract was, ex hypothesi, not in
existence at that time. The method employed
in the present case may have been devised as
a means to overcome this difficulty and to
comply with s.6 of the Act . .". (Emphasis
added.)

17. In Roberts v. I.AC (Finance) Pty. Ltd. (1967) VR 231, Adam J. considered that an extension of a loan might involve its discharge and the making of a fresh loan (see p 238), but he held the particular extension with which he was concerned, for a period of two months, was "a mere variation of the rights and obligations under the original loan contract" (see pp.234, 238). See also Payton v. S G Brookes & Sons Pty. Ltd. (1977) WAR 91.

18. Counsel for the appellant also referred to Eldridge and Morris v. Taylor (1931) 2 KB 416, where a moneylender took a promissory note to secure repayment, upon altered terms, of a loan in respect of which the borrower was in default. When he sued upon the note, it was held that, whether there had been a variation or a substituted agreement, the Moneylenders Act precluded enforcement of the note since there was no copy delivered or sent as required by s.6 of the Act. This case also turned upon the construction of the Act, but Slesser L.J. at p.423 discussed the matter on the footing that the loan was a loan made prior to the new agreement, and Greer L.J. at p.421 suggested that recovery might still be possible in proceedings based on the original loan.

19. Greer L.J.'s suggestion came up for decision by the Privy Council in United Dominion Corporation (Jamaica) Ltd. v. Shoucair (supra). The Board held that an unenforceable agreement increasing the interest, in respect of a loan repayable upon demand, from 9% to 11% (of which the lender said ti "trusted this would only be a temporary measure" - see p.345) was merely a variation which left the original agreement of loan intact and enforceable.

20. None of these cases under the moneylending legislation was concerned with the construction of a section referring to the raising of a loan, and none of them suggests the conclusion that an extension of the period of a loan involves the raising of a loan.

21. For these reasons, which are substantially similar to those of Morling J., the appeals should be dismissed with costs.