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Federal Court of Australia - Full Court |
Last Updated: 8 April 2011
FEDERAL COURT OF AUSTRALIA
Commissioner of Taxation v Ashwick (Qld) No 127 Pty Ltd [2011] FCAFC 49
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Citation:
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Commissioner of Taxation v Ashwick (Qld) No 127 Pty Ltd [2011] FCAFC
49
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Appeal from:
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Ashwick (Qld) No 127 Pty Ltd (ACN 010 577 456) v Commissioner of Taxation
[2009] FCA 1388
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Parties:
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File numbers:
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VID 34 of 2010
VID 35 of 2010 VID 36 of 2010 VID 37 of 2010 |
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Parties:
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COMMISSIONER OF TAXATION v ELFIC PTY LTD (ACN 007 606 206)
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File numbers:
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VID 38 of 2010
VID 39 of 2010 VID 40 of 2010 |
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Parties:
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COMMISSIONER OF TAXATION v EFG SECURITIES PTY LTD (ACN 005 489
029)
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File number:
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VID 41 of 2010
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Parties:
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COMMISSIONER OF TAXATION v EFG AUSTRALIA PTY LTD (ACN 006 357
035)
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File number:
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VID 42 of 2010
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Parties:
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COMMISSIONER OF TAXATION v EFG TREASURY PTY LTD (ACN 050 431
699)
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File number:
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VID 43 of 2010
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Parties:
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COMMISSIONER OF TAXATION v EFG INVESTMENTS PTY LTD (ACN 006 169
955)
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File number:
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VID 44 of 2010
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Parties:
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COMMISSIONER OF TAXATION v FOSTER’S GROUP LTD (ACN 007 620
886)
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File number:
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VID 45 of 2010
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Parties:
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COMMISSIONER OF TAXATION v AMAYANA PTY LTD (ACN 006 908 738)
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File number:
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VID 46 of 2010
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Parties:
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COMMISSIONER OF TAXATION v NEXDAY PTY LTD (ACN 003 621 681)
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File number:
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VID 47 of 2010
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Judges:
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BENNETT, EDMONDS AND MIDDLETON JJ
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Date of judgment:
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Catchwords:
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INCOME TAX – group of companies
– finance group within larger group – intra-group loans –
unpaid principal and interest written
off as bad – whether unpaid
principal written off as bad allowable deductions under ss 25-35(1)(b) or
8-1 of the Income Tax Assessment Act 1997 (Cth) – whether loans
made by lender in the ordinary course of a business of lending money –
whether business of lending
money had ceased in respect of loans made after a
certain date – whether unpaid interest written off as bad allowable
deductions
under ss 25-35(1)(a) or 8-1 – whether unpaid interest
written off as bad properly brought to account as assessable income in year in
which
it accrued – whether cash or accruals basis of accounting
appropriate.
INCOME TAX – whether interest on
intra-group loans allowable deductions under s 8-1 – whether incurred
in carrying on business for
the purpose of producing assessable income within
s 8-1(1)(b) – to be determined objectively by reference to the
relationship
between what the expenditure is for and the taxpayer’s
undertaking or business – subjective motive not relevant in a
case such as
this – whether an outgoing of a capital nature within
s 8-1(2)(a).
INCOME TAX – Part IVA of the Income Tax Assessment Act 1936
(Cth) – whether a ‘scheme’ – whether a tax benefit
obtained in connection with a scheme – amount of
tax benefit so obtained a
function of the counterfactual – the counterfactual must be a prediction
that is sufficiently reliable
for it to be regarded as reasonable –
whether purpose of obtaining a tax benefit can be attributed to a person or
persons who
entered into or carried out the scheme as the dominant purpose of
that person or those persons – relevance of other possibilities
which the
taxpayer might have undertaken if the scheme had not been entered into in
determining whether such a purpose should be
attributed.
Held: Appeals dismissed.
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Legislation:
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Income Tax Assessment Act 1997 (Cth)
ss 25-35(1)(a), 25-35(1)(b), 8-1
Income Tax Assessment Act 1936 (Cth) Pt IVA Explanatory Memorandum to the Income Tax Law Amendment Bill (No. 2) 1981 (Cth) |
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Cases cited:
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Abbott v Philbin [1960] UKHL 1; [1961] AC 352
cited
Arthur Murray (NSW) Pty Limited v Federal Commissioner of Taxation [1965] HCA 58; (1965) 114 CLR 314 cited Australian National Hotels Ltd v Federal Commissioner of Taxation (1988) 19 FCR 234 referred to Ballarat Brewing Co Limited v Federal Commissioner of Taxation [1951] HCA 35; (1951) 82 CLR 364 cited BHP Billiton Petroleum (Bass Strait) Pty Ltd v Commissioner of Taxation [2002] FCAFC 433; (2002) 126 FCR 119 cited Brent v Federal Commissioner of Taxation [1971] HCA 48; (1971) 125 CLR 418 cited British American Tobacco Services Limited v Federal Commissioner of Taxation [2010] FCAFC 130; (2010) 189 FCR 151 referred to Coal Developments (German Creek) Pty Ltd v Commissioner of Taxation [2008] FCAFC 27; (2008) 166 FCR 140 cited Coles Myer Finance Limited v Federal Commissioner of Taxation [1993] HCA 29; (1993) 176 CLR 640 cited Commissioner of Inland Revenue v The National Bank of New Zealand (1976) 2 NZTC 61,150 applied Commissioner of Taxation (WA) v Newman [1921] HCA 37; (1921) 29 CLR 484 cited Commissioner of Taxation v Bivona Pty Ltd (1990) 21 FCR 562 referred to Commissioner of Taxation v Citibank Ltd & Ors [1993] FCA 436; (1993) 44 FCR 434 cited Commissioner of Taxation v Citylink Melbourne Limited [2006] HCA 35; (2006) 228 CLR 1 cited Commissioner of Taxation v EA Marr & Sons (Sales) Ltd [1984] FCA 213; (1984) 2 FCR 326 referred to Commissioner of Taxation v Hart [2004] HCA 26; (2004) 217 CLR 216 referred to Commissioner of Taxation v Unilever Australia Securities Limited [1995] FCA 1086; (1995) 56 FCR 152 referred to Commissioner of Taxes (SA) v Executor Trustee and Agency Co of South Australia Ltd [1938] HCA 69; (1938) 63 CLR 108 referred to Commonwealth of Taxation v Roberts and Smith [1992] FCA 363; (1992) 37 FCR 246 referred to CPH Property Pty Ltd v Federal Commissioner of Taxation [1998] FCA 1276; (1998) 88 FCR 21 referred Donaldson v Commissioner of Taxation [1974] 1 NSWLR 627 cited Epov v Federal Commissioner of Taxation [2007] FCA 34; (2007) 65 ATR 399 cited Essenbourne Pty Ltd v Federal Commissioner of Taxation (2002) ATR 629 cited Favaro v Federal Commissioner of Taxation (1996) 34 ATR 1 referred to Federal Commissioner of Taxation v AXA Asia Pacific Holdings Ltd [2010] FCAFC 134; (2010) 189 FCR 204 cited Federal Commissioner of Taxation v BHP Billiton Finance Ltd [2010] FCAFC 25; (2010) 182 FCR 526 referred to Federal Commissioner of Taxation v Lenzo [2008] FCAFC 50; (2008) 167 FCR 255 cited Federal Commissioner of Taxation v Midland Railway Co of Western Australia Ltd [1952] HCA 5; (1952) 85 CLR 306 cited Federal Commissioner of Taxation v Mochkin [2003] FCAFC 15; (2003) 127 FCR 185 cited Federal Commissioner of Taxation v National Commercial Banking Corporation of Australia Ltd [1983] FCA 302; (1983) 50 ALR 322 referred to Federal Commissioner of Taxation v Orica Ltd [1998] HCA 33; (1998) 194 CLR 500 cited Federal Commissioner of Taxation v Peabody [1994] HCA 43; (1994) 181 CLR 359 cited Federal Commissioner of Taxation v Spotless Services Limited (1996) 186 CLR 404 cited Federal Commissioner of Taxation v Spotless Services Limited (1995) 62 FCR 244 cited Federal Commissioner of Taxation v Tasman Group Services Pty Ltd [2009] FCAFC 148; (2009) 180 FCR 128 referred to Federal Commissioner of Taxation v Trail Bros Steel & Plastics Pty Ltd [2010] FCAFC 94; (2010) 186 FCR 410 cited Fletcher v Federal Commissioner of Taxation [1991] HCA 42; (1991) 173 CLR 1 distinguished Futuris Corporation Limited v Federal Commissioner of Taxation [2010] FCA 935; 2010 ATC 20-206 cited GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation [1990] HCA 25; (1990) 170 CLR 124 referred to Hallstroms Pty Ltd v Federal Commissioner of Taxation [1946] HCA 34; (1946) 72 CLR 634 referred to International Nickel Australia Ltd v Federal Commissioner of Taxation [1977] HCA 49; (1977) 137 CLR 347 cited J & R O’Kane & Co v Commissioners of Inland Revenue (1922) 126 LT 707 cited J Rowe & Son Pty Ltd v Federal Commissioner of Taxation [1971] HCA 80; (1971) 124 CLR 421 cited Joshua Brothers Proprietary Limited v Federal Commissioner of Taxation [1923] HCA 3; (1923) 31 CLR 490 cited Kidston Goldmines Limited v Commissioner of Taxation (1991) 30 FCR 77 referred to Levin & Co Ltd v Commissioner of Inland Revenue [1963] NZLR 801 distinguished Macquarie Finance Ltd v Commissioner of Taxation (2004) 210 ALR 508 referred to Macquarie Finance Ltd v Commissioner of Taxation (2005) 146 FCR 77 referred to Magna Alloys & Research Pty Ltd v Federal Commissioner of Taxation [1980] FCA 150; (1980) 33 ALR 213 applied McCutcheon v Federal Commissioner of Taxation [2008] FCA 318; (2008) 168 FCR 149 cited Modern Permanent Building & Investment Society (in liquidation) v Federal Commissioner of Taxation [1958] HCA 11; (1958) 98 CLR 187 cited Nilsen Development Laboratories Pty Ltd v Federal Commissioner of Taxation [1981] HCA 6; (1981) 144 CLR 616 cited Spassked Pty Ltd v Commissioner of Taxation [2003] FCAFC 282; (2004) 136 FCR 441 referred to St George Bank Ltd v Federal Commissioner of Taxation [2009] FCAFC 62; (2009) 176 FCR 424 referred St George Bank v Commissioner of Taxation [2008] FCA 453; (2008) 69 ATR 634 referred to Steele v Deputy Commissioner of Taxation [1999] HCA 7; (1999) 197 CLR 459 referred to Texas Company (Australasia) Ltd v Federal Commissioner of Taxation [1940] HCA 9; (1940) 63 CLR 382 referred to Ure v Federal Commissioner of Taxation [1981] FCA 9; (1981) 50 FLR 219 distinguished Commissioner of Taxation v AXA Pacific Holdings Ltd, No. M165 of
2010, 11 March 2011 (Special Leave Application, High Court of Australia)
Australian Government, Treasury Discussion Paper: Improving the
operation of the anti-avoidance provisions in the income tax law
(18 November 2010)
RW Parsons, Income Taxation in Australia – Principles of Income,
Deductibility and Tax Accounting, Law Book Company Limited, 1985 [6.111];
[11.43] – [11.45]; [11.53]; [11.248].
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Place:
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Melbourne
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Division:
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GENERAL DIVISION
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Category:
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Catchwords
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Number of paragraphs:
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Solicitor for the Appellant:
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Australian Government Solicitor
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Counsel for the Respondents:
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Mr A Myers QC with Mr G Davies QC and
Mr F O'Loughlin |
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Solicitor for the Respondents:
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Corrs Chambers Westgarth
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IN THE FEDERAL COURT OF AUSTRALIA
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AND:
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DATE OF ORDER:
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WHERE MADE:
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THE COURT ORDERS THAT:
Note: Settlement and entry of orders is dealt with in Order 36 of
the Federal Court Rules.
The text of entered orders can be located using
Federal Law Search on the Court’s website.
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IN THE FEDERAL COURT OF AUSTRALIA
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VICTORIA DISTRICT REGISTRY
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GENERAL DIVISION
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VID 38 of 2010
VID 39 of 2010 VID 40 of 2010 |
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ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
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BETWEEN:
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COMMISSIONER OF TAXATION
Appellant |
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AND:
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ELFIC PTY LTD (ACN 007 606 206)
Respondent |
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JUDGES:
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BENNETT, EDMONDS AND MIDDLETON JJ
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DATE OF ORDER:
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8 APRIL 2011
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WHERE MADE:
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SYDNEY (HEARD IN MELBOURNE)
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THE COURT ORDERS THAT:
Note: Settlement and entry of orders is dealt with in Order 36 of
the Federal Court Rules.
The text of entered orders can be located using
Federal Law Search on the Court’s website.
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IN THE FEDERAL COURT OF AUSTRALIA
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VICTORIA DISTRICT REGISTRY
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GENERAL DIVISION
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VID 41 of 2010
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ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
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BETWEEN:
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COMMISSIONER OF TAXATION
Appellant |
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AND:
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EFG SECURITIES PTY LTD (ACN 005 489 029)
Respondent |
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JUDGES:
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BENNETT, EDMONDS AND MIDDLETON JJ
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DATE OF ORDER:
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8 APRIL 2011
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WHERE MADE:
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SYDNEY (HEARD IN MELBOURNE)
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THE COURT ORDERS THAT:
Note: Settlement and entry of orders is dealt with in Order 36 of
the Federal Court Rules.
The text of entered orders can be located using
Federal Law Search on the Court’s website.
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IN THE FEDERAL COURT OF AUSTRALIA
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VICTORIA DISTRICT REGISTRY
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GENERAL DIVISION
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VID 32 of 2010
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ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
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BETWEEN:
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COMMISSIONER OF TAXATION
Appellant |
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AND:
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EFG AUSTRALIA PTY LTD (ACN 006 357 035)
Respondent |
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JUDGES:
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BENNETT, EDMONDS AND MIDDLETON JJ
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DATE OF ORDER:
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8 APRIL 2011
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WHERE MADE:
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SYDNEY (HEARD IN MELBOURNE)
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THE COURT ORDERS THAT:
Note: Settlement and entry of orders is dealt with in Order 36 of
the Federal Court Rules.
The text of entered orders can be located using
Federal Law Search on the Court’s website.
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IN THE FEDERAL COURT OF AUSTRALIA
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VICTORIA DISTRICT REGISTRY
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GENERAL DIVISION
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VID 43 of 2010
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ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
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BETWEEN:
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COMMISSIONER OF TAXATION
Appellant |
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AND:
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EFG TREASURY PTY LTD (ACN 050 431 699)
Respondent |
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JUDGES:
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BENNETT, EDMONDS AND MIDDLETON JJ
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DATE OF ORDER:
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8 APRIL 2011
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WHERE MADE:
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SYDNEY (HEARD IN MELBOURNE)
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THE COURT ORDERS THAT:
Note: Settlement and entry of orders is dealt with in Order 36 of
the Federal Court Rules.
The text of entered orders can be located using
Federal Law Search on the Court’s website.
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IN THE FEDERAL COURT OF AUSTRALIA
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VICTORIA DISTRICT REGISTRY
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GENERAL DIVISION
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VID 44 of 2010
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ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
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BETWEEN:
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COMMISSIONER OF TAXATION
Appellant |
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AND:
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EFG INVESTMENTS PTY LTD (ACN 006 169 955)
Respondent |
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JUDGES:
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BENNETT, EDMONDS AND MIDDLETON JJ
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DATE OF ORDER:
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8 APRIL 2011
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WHERE MADE:
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SYDNEY (HEARD IN MELBOURNE)
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THE COURT ORDERS THAT:
Note: Settlement and entry of orders is dealt with in Order 36 of
the Federal Court Rules.
The text of entered orders can be located using
Federal Law Search on the Court’s website.
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IN THE FEDERAL COURT OF AUSTRALIA
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VICTORIA DISTRICT REGISTRY
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GENERAL DIVISION
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VID 45 of 2010
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ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
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BETWEEN:
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COMMISSIONER OF TAXATION
Appellant |
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AND:
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FOSTER’S GROUP LTD (ACN 007 620
886)
Respondent |
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JUDGES:
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BENNETT, EDMONDS AND MIDDLETON JJ
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DATE OF ORDER:
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8 APRIL 2011
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WHERE MADE:
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SYDNEY (HEARD IN MELBOURNE)
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THE COURT ORDERS THAT:
Note: Settlement and entry of orders is dealt with in Order 36 of
the Federal Court Rules.
The text of entered orders can be located using
Federal Law Search on the Court’s website.
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IN THE FEDERAL COURT OF AUSTRALIA
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VICTORIA DISTRICT REGISTRY
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GENERAL DIVISION
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VID 46 of 2010
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ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
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BETWEEN:
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COMMISSIONER OF TAXATION
Appellant |
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AND:
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AMAYANA PTY LTD (ACN 006 908 738)
Respondent |
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JUDGES:
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BENNETT, EDMONDS AND MIDDLETON JJ
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DATE OF ORDER:
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8 APRIL 2011
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WHERE MADE:
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SYDNEY (HEARD IN MELBOURNE)
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THE COURT ORDERS THAT:
Note: Settlement and entry of orders is dealt with in Order 36 of
the Federal Court Rules.
The text of entered orders can be located using
Federal Law Search on the Court’s website.
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IN THE FEDERAL COURT OF AUSTRALIA
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VICTORIA DISTRICT REGISTRY
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GENERAL DIVISION
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VID 47 of 2010
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ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
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BETWEEN:
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COMMISSIONER OF TAXATION
Appellant |
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AND:
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NEXDAY PTY LTD (ACN 003 621 681)
Respondent |
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JUDGES:
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BENNETT, EDMONDS AND MIDDLETON JJ
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DATE OF ORDER:
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8 APRIL 2011
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WHERE MADE:
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SYDNEY (HEARD IN MELBOURNE)
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THE COURT ORDERS THAT:
Note: Settlement and entry of orders is dealt with in Order 36 of
the Federal Court Rules.
The text of entered orders can be located using
Federal Law Search on the Court’s website.
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VICTORIA DISTRICT REGISTRY
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GENERAL DIVISION
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VID 34 of 2010
VID 35 of 2010 VID 36 of 2010 VID 37 of 2010 |
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ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
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BETWEEN:
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COMMISSIONER OF TAXATION
Appellant |
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AND:
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ASHWICK (QLD) NO 127 PTY LTD (ACN 010 577
456)
Respondent |
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IN THE FEDERAL COURT OF AUSTRALIA
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VICTORIA DISTRICT REGISTRY
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GENERAL DIVISION
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VID 38 of 2010
VID 39 of 2010 VID 40 of 2010 |
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ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
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BETWEEN:
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COMMISSIONER OF TAXATION
Appellant |
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AND:
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ELFIC PTY LTD (ACN 007 606 206)
Respondent |
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IN THE FEDERAL COURT OF AUSTRALIA
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VICTORIA DISTRICT REGISTRY
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GENERAL DIVISION
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VID 41 of 2010
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ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
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BETWEEN:
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COMMISSIONER OF TAXATION
Appellant |
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AND:
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EFG SECURITIES PTY LTD (ACN 005 489 029)
Respondent |
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IN THE FEDERAL COURT OF AUSTRALIA
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VICTORIA DISTRICT REGISTRY
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GENERAL DIVISION
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VID 42 of 2010
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ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
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BETWEEN:
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COMMISSIONER OF TAXATION
Appellant |
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AND:
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EFG AUSTRALIA PTY LTD (ACN 006 357 035)
Respondent |
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IN THE FEDERAL COURT OF AUSTRALIA
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VICTORIA DISTRICT REGISTRY
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GENERAL DIVISION
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VID 43 of 2010
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ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
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BETWEEN:
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COMMISSIONER OF TAXATION
Appellant |
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AND:
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EFG TREASURY PTY LTD (ACN 050 431 699)
Respondent |
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IN THE FEDERAL COURT OF AUSTRALIA
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VICTORIA DISTRICT REGISTRY
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GENERAL DIVISION
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VID 44 of 2010
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ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
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BETWEEN:
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COMMISSIONER OF TAXATION
Appellant |
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AND:
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EFG INVESTMENTS PTY LTD (ACN 006 169 955)
Respondent |
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IN THE FEDERAL COURT OF AUSTRALIA
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VICTORIA DISTRICT REGISTRY
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GENERAL DIVISION
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VID 45 of 2010
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ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
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BETWEEN:
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COMMISSIONER OF TAXATION
Appellant |
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AND:
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FOSTER'S GROUP LTD (ACN 007 620 886)
Respondent |
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IN THE FEDERAL COURT OF AUSTRALIA
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VICTORIA DISTRICT REGISTRY
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GENERAL DIVISION
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VID 46 of 2010
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ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
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BETWEEN:
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COMMISSIONER OF TAXATION
Appellant |
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AND:
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AMAYANA PTY LTD (ACN 006 908 738)
Respondent |
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IN THE FEDERAL COURT OF AUSTRALIA
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VICTORIA DISTRICT REGISTRY
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GENERAL DIVISION
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VID 47 of 2010
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ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
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BETWEEN:
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COMMISSIONER OF TAXATION
Appellant |
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AND:
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NEXDAY PTY LTD (ACN 003 621 681)
Respondent |
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JUDGES:
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BENNETT, EDMONDS AND MIDDLETON JJ
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DATE:
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8 APRIL 2011
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PLACE:
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MELBOURNE
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REASONS FOR JUDGMENT
BENNETT J:
Dated: 8 April 2011
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VICTORIA DISTRICT REGISTRY
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GENERAL DIVISION
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VID 34 of 2010
VID 35 of 2010 VID 36 of 2010 VID 37 of 2010 |
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ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
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BETWEEN:
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COMMISSIONER OF TAXATION
Appellant |
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AND:
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ASHWICK (QLD) NO 127 PTY LTD (ACN 010 577
456)
Respondent |
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IN THE FEDERAL COURT OF AUSTRALIA
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VICTORIA DISTRICT REGISTRY
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GENERAL DIVISION
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VID 38 of 2010
VID 39 of 2010 VID 40 of 2010 |
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ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
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BETWEEN:
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COMMISSIONER OF TAXATION
Appellant |
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AND:
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ELFIC PTY LTD (ACN 007 606 206)
Respondent |
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IN THE FEDERAL COURT OF AUSTRALIA
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VICTORIA DISTRICT REGISTRY
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GENERAL DIVISION
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VID 41 of 2010
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ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
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BETWEEN:
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COMMISSIONER OF TAXATION
Appellant |
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AND:
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EFG SECURITIES PTY LTD (ACN 005 489 029)
Respondent |
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IN THE FEDERAL COURT OF AUSTRALIA
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VICTORIA DISTRICT REGISTRY
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GENERAL DIVISION
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VID 42 of 2010
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ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
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BETWEEN:
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COMMISSIONER OF TAXATION
Appellant |
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AND:
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EFG AUSTRALIA PTY LTD (ACN 006 357 035)
Respondent |
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IN THE FEDERAL COURT OF AUSTRALIA
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VICTORIA DISTRICT REGISTRY
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GENERAL DIVISION
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VID 43 of 2010
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ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
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|
BETWEEN:
|
COMMISSIONER OF TAXATION
Appellant |
|
AND:
|
EFG TREASURY PTY LTD (ACN 050 431 699)
Respondent |
|
IN THE FEDERAL COURT OF AUSTRALIA
|
|
|
VICTORIA DISTRICT REGISTRY
|
|
|
GENERAL DIVISION
|
VID 44 of 2010
|
|
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
|
|
BETWEEN:
|
COMMISSIONER OF TAXATION
Appellant |
|
AND:
|
EFG INVESTMENTS PTY LTD (ACN 006 169 955)
Respondent |
|
IN THE FEDERAL COURT OF AUSTRALIA
|
|
|
VICTORIA DISTRICT REGISTRY
|
|
|
GENERAL DIVISION
|
VID 45 of 2010
|
|
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
|
|
BETWEEN:
|
COMMISSIONER OF TAXATION
Appellant |
|
AND:
|
FOSTER'S GROUP LTD (ACN 007 620 886)
Respondent |
|
IN THE FEDERAL COURT OF AUSTRALIA
|
|
|
VICTORIA DISTRICT REGISTRY
|
|
|
GENERAL DIVISION
|
VID 46 of 2010
|
|
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
|
|
BETWEEN:
|
COMMISSIONER OF TAXATION
Appellant |
|
AND:
|
AMAYANA PTY LTD (ACN 006 908 738)
Respondent |
|
IN THE FEDERAL COURT OF AUSTRALIA
|
|
|
VICTORIA DISTRICT REGISTRY
|
|
|
GENERAL DIVISION
|
VID 47 of 2010
|
|
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
|
|
BETWEEN:
|
COMMISSIONER OF TAXATION
Appellant |
|
AND:
|
NEXDAY PTY LTD (ACN 003 621 681)
Respondent |
|
JUDGES:
|
BENNETT, EDMONDS AND MIDDLETON JJ
|
|
DATE:
|
8 APRIL 2011
|
|
PLACE:
|
MELBOURNE
|
REASONS FOR JUDGMENT
EDMONDS J:
INTRODUCTION
(1) A debt written off as bad by EFGA, for both outstanding principal and unpaid interest, in respect of its loan to ELFIC;
(2) a debt written off as bad by EFGA, for both outstanding principal and unpaid interest, in respect of its loan to EFGS;
(3) a debt written off as bad by Amayana, for unpaid interest, in respect of its loan to EFGA;
(4) a debt written off as bad by EFGT, for unpaid interest, in respect of its loan to EFGA; and
(5) a debt written off as bad by FGL, for unpaid interest, in respect of its loan to EFGT.
|
Expression or Entity
|
Acronym or Abbreviation
|
|
Amayana Pty Ltd
|
Amayana
|
|
AML Finance Corporation Limited
|
AML Finance
|
|
Ashwick (Qld) No 127 Pty Ltd
|
Ashwick
|
|
Bank Bill Rate
|
BBR
|
|
EFG Australia Pty Ltd
|
EFGA
|
|
EFG Financial Limited
|
EFG Financial
|
|
EFG Investments Pty Ltd
|
EFGI
|
|
EFG Securities Pty Ltd
|
EFGS
|
|
EFG Treasury Pty Ltd
|
EFGT
|
|
Elders Lensworth Finance Limited Group
|
Lensworth
|
|
Elders Rural Finance Limited
|
Elders Rural Finance
|
|
ELFIC Pty Ltd (formerly Elders Finance and Investment Co Limited)
|
ELFIC
|
|
FBG Treasury Aust Pty Ltd
|
FBGTA
|
|
Finance group
|
Collectively the subsidiaries of FGL which from time to time made up the
Finance group
|
|
Foster’s Group Ltd (formerly IXL Ltd)
|
FGL
|
|
Foster’s Group or group
|
Collectively FGL and its subsidiaries from time to time including those
within the Finance group
|
|
Harlin Holdings Pty Limited
|
Harlin
|
|
the 1936 Act
|
|
|
the 1997 Act
|
|
|
Nexday Pty Ltd
|
Nexday
|
|
Reasons
|
The reasons for judgment of the learned primary judge
|
|
Reduction of Assets Management Committee
|
RAMCO
|
|
The appellant Commissioner of Taxation
|
the Commissioner
|
ISSUES ON THE APPEALS
‘8. The issues [on the appeals] are:
(1) Whether EFGA was entitled to claim as deductions pursuant to s 25-35(1)(b) or s 8-1 of the Income Tax Assessment Act 1997 (“the 1997 Act”), the amount of $1,202,441,116 in respect of its loan to ELFIC and the amount of $100,009,232 in respect of its loan to EFGS written off by it as bad debts in the 1998 year. Resolution of this issue requires determination of the following questions:-
(i) whether, after January 1990, EFGA conducted a business of lending money;
(ii) alternatively, whether money lent by EFGA to ELFIC and EFGS after January 1990 was money it lent in the ordinary course of its business of lending money;
(2) Whether the respondents in Table 1 below were entitled to deduct bad debts written off in respect of loans to borrowers as shown in the table.
Table 1: Bad debt deductions
Taxpayer |
Income Year |
Amount of deduction |
Provision under which deduction claimed |
EFGT |
1998 |
$525,260,163 (unpaid interest on loans to EFGA) |
25-35(1)(a) or 8-1 |
FGL |
1998 |
$401,058,393 (unpaid interest on loans to EFGT) |
25-35(1)(a) or 8-1 |
Amayana |
1999 |
$133,165,341 (unpaid interest on loans to EFGA) |
25-35(1)(a) or 8-1 |
EFGA |
1998 |
Unpaid interest on loans to ELFIC and EFGS |
25-35(1)(a) or 8-1 (if not allowable under s 25-35(1)(b)) |
(3) Whether the respondents in Table 2 below were entitled to deduct interest expense on borrowings from lenders as shown in the table.
Table 2: Interest expense deductions
|
Taxpayer
|
Income Year
|
Amount of deduction
|
Borrowings from
|
|
EFGT
043/2010 |
1998
|
$47,514,675
(s 8-1)
|
FGL
|
|
Amayana
046/2010 |
1998
|
$16,875,354
(s 8-1) |
FBGTA
|
|
EFGA
042/2010 |
1998
|
$57,645,096
(s 8-1) |
EFGT
|
|
EFGA
042/2010 |
1998
|
$25,036,634
(s 8-1) |
Amayana
|
|
ELFIC
040/2010 |
1995
|
$95,293,880
(s 51(1)) |
EFGA
|
|
ELFIC
039/2010 |
1996
|
$106,399,661
(s 51(1)) |
EFGA
|
|
ELFIC
038/2010 |
1997
|
$93,156,592
(s 51(1)) |
EFGA
|
|
EFGS
041/2010 |
1997
|
$6,804,054
(s 51(1)) |
EFGA
|
(4) Whether the Commissioner was entitled to make the determinations set out in Table 3 below pursuant to s 177F of the 1936 Act. That issue arises only if:
(i) Amayana, EFGT, EFGA, ELFIC and EFGS were entitled to deductions, pursuant to either s 8-1 of the 1997 Act or s 51(1) of the 1936 Act, for interest they incurred on loans from FBGTA, FGL, EFGT, Amayana or EFGA, as the case may be;
(ii) EFGT, Amayana and FGL were entitled to deductions, pursuant to s 25-35(1)(a) or s 8-1 of the 1997 Act, for unpaid interest they wrote off in respect of loans made to EFGA and or EFGT, as the case may be;
(iii) EFGA either carried on the business of lending money or alternatively did not carry on the business of lending money but was entitled to deductions pursuant to s 25-35(1)(a) or s 8-1, for unpaid interest it wrote off in respect of loans it made to ELFIC and EFGS;
(iv) Ashwick, Nexday and EFGI were, consequently, entitled to deductions for losses transferred to them by EFGA, EFGT, FGL, ELFIC, EFGS or Amayana as the case may be.
Table 3: Section 177F determinations
Taxpayer |
Income year |
Tax benefit disallowed ($) |
Interest deductions |
||
Amayana |
1998 |
16,875,354 |
EFGT |
1998 |
47,514,675 |
EFGA |
1998 |
82,681,730 |
ELFIC |
1995 |
95,293,880 |
|
|
1996 |
106,399,661 |
1997 |
93,156,592 |
|
EFGS |
1996 |
7,504,175 |
|
|
1997 |
6,804,054 |
Bad debt deductions |
||
FGL |
1998 |
401,058,393 |
Amayana |
1999 |
134,165,341 |
EFGT |
1998 |
525,260,163 |
EFGA |
1998 |
976,023,874 |
Transferred losses |
||
Ashwick |
1997 |
30,213 |
|
|
1998 |
23,628 |
2001 |
145 |
|
Nexday |
2000 |
139,290 |
EFGI |
1996 |
739,340 |
(5) Whether Ashwick was entitled to be paid its costs of VID861/2006. As the [primary] judge noted at [[274] of his] Reasons, ... that proceeding was overtaken by VID125 of 2007. His Honour initially dismissed VID861 /2006 and made no order as to the costs of that proceeding. That order was subsequently varied by consent to provide that the Commissioner pay Ashwick’s costs of VID861/2006 The Commissioner’s consent was given without prejudice to any appeal rights he may have in respect of the costs order. The Commissioner says that if he is successful in one or more of the other appeals, the costs order should be set aside, and Ashwick should be ordered to pay the Commissioner’s costs of the proceeding up to and including 16 February 2007;
(6) Whether any of the respondents is liable to additional tax pursuant to s 226 or s 226L of the 1936 Act as set out in Table 4 below. If the Commissioner was entitled to make the determinations he did pursuant to s 177F of the 1936 Act, the respondents are liable to additional tax pursuant to s 226(2) of the 1936 Act. Alternatively, it is submitted that in the event that it is held that a respondent was not entitled to a deduction or transferred loss claimed in an income year, s 226L applies to impose additional tax on that respondent because:
(i) there was a “tax shortfall” within the meaning of s 222A(1) for that year;
(ii) that shortfall was caused by the respondent in a taxation statement treating an income tax law as applying in relation to a scheme in a particular way;
(iii) the relevant scheme was a “tax avoidance scheme” within the meaning of s 224(1) of the 1936 Act.
Under each provision, the additional tax is to be imposed at the rate of 25% on the tax shortfall, on the basis that the respondent had a reasonably arguable position that Part IVA did not apply.
Table 4: Penalties imposed
Taxpayer |
Income Year |
Penalty |
FGL |
1998 |
$2,781,834.12 |
EFGT |
1998 |
$4,260,348.62 |
Amayana |
1998 |
$1,518,781.86 |
EFGA |
1998 |
$5,892,219.44 |
EFGI |
1996 |
$70,201.80 |
Ashwick |
1997 |
$2,719.17 |
Ashwick |
1998 |
$2,126.52 |
Nexday |
2000 |
$12,536.10 |
ELFIC |
1995 |
$1,932,285.21 |
ELFIC |
1996 |
$722,719.17 |
ELFIC |
1997 |
$1,027,582.11 |
EFGS |
1997 |
$371,579.76 |
THE PRIMARY JUDGE
(1) The deductibility of bad debts written off;
(2) the deductibility of interest expenses incurred by borrowing companies within the group;
(3) the deductibility of losses transferred to loss transferee companies in the group; and
(4) the application of Pt IVA of the Income Tax Assessment Act 1936 (Cth) (‘the 1936 Act’) to the scheme identified by the Commissioner,
the primary judge made, in relation to specific taxpayers, findings of fact in addition to those made at [5] to [63] of his Reasons.
THE STATUTORY PROVISIONS
‘(1) You can deduct a debt (or part of a debt) that you write off as bad in the income year if:
(a) it was included in your assessable income for the income year or for an earlier income year; or
(b) it is in respect of money that you lent in the ordinary course of your *business of lending money.’
‘(1) You can deduct from your assessable income any loss or outgoing to the extent that:
(a) it is incurred in gaining or producing your assessable income; or
(b) it is necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income.
Note: Division 35 prevents losses from non-commercial business activities that may contribute to a tax loss being offset against other assessable income.
(2) However, you cannot deduct a loss or outgoing under this section to the extent that:
(a) it is a loss or outgoing of capital, or of a capital nature; or
(b) it is a loss or outgoing of a private or domestic nature; or
(c) it is incurred in relation to gaining or producing your *exempt income or your *non-assessable non-exempt income; or
(d) a provision of this Act prevents you from deducting it.
For a summary list of provisions about deductions, see section 12-5.
(3) A loss or outgoing that you can deduct under this section is called a general deduction.’
‘[177C]
(1) Subject to this section, a reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to:
(a) an amount not being included in the assessable income of the taxpayer of a year of income where that amount would have been included, or might reasonably be expected to have been included, in the assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out; or
(b) a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out; or
...
and for the purposes of this Part, the amount of the tax benefit shall be taken to be:
...
(d) in a case to which paragraph (b) applies—the amount of the whole of the deduction or of the part of the deduction, as the case may be, referred to in that paragraph;
...
(2) A reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as not including a reference to:
...
(b) a deduction being allowable to the taxpayer in relation to a year of income the whole or a part of which would not have been, or might reasonably be expected not to have been, allowable to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out where:
(i) the allowance of the deduction to the taxpayer is attributable to the making of a declaration, agreement, election, selection or choice, the giving of a notice or the exercise of an option by any person, being a declaration, agreement, election, selection, choice, notice or option expressly provided for by this Act or the Income Tax Assessment Act 1997, except one under Subdivision 960-D of the Income Tax Assessment Act 1997; and
(ii) the scheme was not entered into or carried out by any person for the purpose of creating any circumstance or state of affairs the existence of which is necessary to enable the declaration, agreement, election, selection, choice, notice or option to be made, given or exercised, as the case may be; or
...
[177D]
This Part applies to any scheme that has been or is entered into after 27 May 1981, and to any scheme that has been or is carried out or commenced to be carried out after that date (other than a scheme that was entered into on or before that date), whether the scheme has been or is entered into or carried out in Australia or outside Australia or partly in Australia and partly outside Australia, where:
(a) a taxpayer (in this section referred to as the relevant taxpayer) has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme; and
(b) having regard to:
(i) the manner in which the scheme was entered into or carried out;
(ii) the form and substance of the scheme;
(iii) the time at which the scheme was entered into and the length of the period during which the scheme was carried out;
(iv) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;
(v) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme;
(vi) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;
(vii) any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out; and
(viii) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi);
it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme or of enabling the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers).’
DEDUCTIONS FOR BAD DEBTS
EFGA
‘After June 1990, EFGA radically changed the nature of its business. It ceased to borrow funds from external lenders and looked, instead, to lenders within the Foster’s Group. It conducted its activities through RAMCO for the benefit of the Foster’s Group as a whole, rather than of EFGA’s own business. Consistently with that change, it ceased lending to make a profit. That was done by eliminating, from 1 September 1990, the inter-entity interest rate margin, including that charged to ELFIC and EFGS’
to support a submission that EFGA’s business of lending money ceased around the June – September 1990 period. The submission did not go so far as saying that, at about that time, EFGA ceased business altogether. However, in response to the question from the bench: ‘What business was henceforth carried on?’, came the answer:
‘What we say is that from 30 June 1990 its activities were confined to serving the purposes of its parent company in maximising the realisation of the assets that were held by the finance group.’
I deal with this contention at [40] below.
‘[T]he activities of EFGA during the wind-up period were ... in the ordinary course of its business of lending money. It is true that during that period EFGA ceased to charge the previous inter-entity rate of interest on loans to Finance Group borrowers but that was merely in recognition of the precarious financial states of those subsidiaries and the need for EFGA to make its own contribution to a quick and effective realisation of group assets. There was, I consider, an actual and continuing intention by those managing EFGA to carry on during the wind-up period its business of lending money although the carrying on of the same business was directed to a different end or purpose. In that sense the intention of those controlling EFGA during the wind-up period coincided with that regarded by Barwick CJ in Fairway Estates Pty Ltd v Federal Commissioner of Taxation (1970), supra, at 163, as satisfying the relevant test.’
(1) From 1 September 1990 EFGA ceased to charge a margin over its cost of funds to ELFIC and EFGS (Reasons [101] and 123]);
(2) the employment of funds advanced to ELFIC and to EFGS was not profitable for EFGA as it had been before 1990 (Reasons [101] and [124]);
(3) EFGA carried on its activities after 1990 at the direction of others including, ultimately, FGL (Reasons [124]);
(4) the internal provision of loan funds to ELFIC and EFGS from 1989 was not a part of a coherent course of conduct but occurred as individual responses from time to time to external exigencies created by circumstances of the external financial climate (Reasons [228]).
‘A trader who wishes to retire from business may wind up his business in several ways; he may sell his concern as a going concern, or he may auction off his stock. But there is another way quite as effectual, and that is by continuing to carry on his business in the ordinary way, but not replenishing his stock which he has accumulated as it is sold. Then he will leave himself with no stock, and therefore he can retire from business. But the fact that he realises stock in the process of carrying on the trade as he has hitherto done will effectuate both purposes.’
(1) At 156, Lockhart J said:
‘Although the evidence about the activities of UAS is sparse, it was the finance arm of UAL until 1983. UAS ceased trading thereafter on the short term money market, issued no further debenture stock and made no subsequent loans to companies in the Unilever Australia group including UAL. Nevertheless, it continued to service the loans which were still outstanding including the receipt of interest upon loans made by it to members of the UAL group and the payment of interest upon moneys borrowed by it. I note that the report of the directors on the balance sheet and accounts of UAS for the year ended 31 December 1987 stated that UAS’s principal activity was to provide finance to the Unilever group of companies through the existing issue of debentures and that there had been no significant change in the nature of UAS’s activities during the year.
In my opinion it was in the ordinary course of the business of UAS as a finance company to make the necessary arrangements to repay moneys borrowed by it and to service the payment to it of moneys lent by it. UAS’s business did not come to an end after the defeasance arrangements had been made. Its business included always the elements of borrowing, lending and repaying moneys borrowed, servicing the loans including receipt of interest. It was a necessary incident of UAS’s business that its debts would be discharged. UAS’s business was continuing at all material times.
The defeasance arrangements were unusual, but, they nevertheless generated profit or gain to UAS in the course of its business activities which was income according to ordinary concepts.
(2) At 187, Hill J said:
‘The present is not a case where UAS, in the relevant sense, put an end to its business by virtue of the defeasance transaction. Rather, although UAS had resolved not to expand its business but run it down, its business was still continuing. That business included the receipt of interest on funds lent out by it and the payment of interest on moneys borrowed by it. It continued at the least until the moneys borrowed had been repaid and indeed perhaps thereafter, or at least while moneys were owing to it, by Unilever related companies.’
|
Year
|
ELFIC’s payments and repayments in respect of its
borrowings from EFGA
$ |
|
1991
|
343,269,727
|
|
1992
|
95,370,771
|
|
1993
|
196,085,655
|
|
1994
|
68,159,243
|
|
1995
|
27,429,722
|
|
1996
|
5,151,937
|
|
1997
|
197,559,461
|
|
1998
|
75,682,570
|
|
Total
|
1,008,709,086
|
|
Year
|
ELFIC’s payments and repayments in respect of its
borrowings from EFGA
$ |
|
1990
|
18,398,065
|
|
1991
|
5,188,793
|
|
1992
|
9,258,872
|
|
1993
|
4,864,981
|
|
1994
|
765,078
|
|
1995
|
27,020
|
|
1996
|
48,455
|
|
1997
|
4,132,235
|
|
1998
|
0
|
|
Total
|
42,683,502
|
‘The respondent’s activities consisted principally of the borrowing and lending of money. By far the greatest proportion of its income consisted of interest on moneys lent and its largest outgoing was interest on moneys borrowed from overseas. There was no suggestion that any of the relevant transactions were shams. Even if it were right to describe the role of the respondent in its activities of lending money, as counsel for the Commissioner did, as a “conduit” for its parent company or other members of the group, that begs, not answers, the question whether the activities of the respondent are correctly characterised as its principal business consisting of the lending of money.’
‘While it may be accepted that the business was being financed by SBC, this does not inevitably lead to the conclusion that SBC was carrying on the business. It is a trite proposition that, where a subsidiary, even if wholly owned by a parent company, carries on a business, the business is that of the subsidiary not the parent. Irrespective of how closely it may monitor the business activities of the subsidiary, the parent does not itself carry on those activities but is engaged in the separate business of a parent or holding company which is, normally, the receipt of income in the form of dividends from the subsidiary.’
‘The fact that Finance was the vehicle which financed the Group entities selected by BHPB as the vehicles through which the Group's investment decisions were executed, does not make Finance's business an appendage to the business of the Group as a whole; any more than it makes Finance a mere conduit of BHPB’s business.’
EFGT, FGL and Amayana
(1) There must be a debt (the first requirement);
(2) the debt, or part of the debt, must be written off as bad in the year of income (the second requirement); and
(3) the debt must be in respect of an amount included in the taxpayer’s assessable income in the current or a prior year (the third requirement).
(1) First, he submitted that the interest was returnable on a cash basis rather than on an accruals basis because none of EFGT, FGL and Amayana carried on a business of lending money; as no interest had been received, there was nothing to be included in the assessable income;
(2) secondly, he submitted that the respective taxpayers had ‘no real intention or expectation that the interest would be paid’; accordingly, the return of interest did not give a substantially correct reflex of the taxpayer’s true income in the years before the debts were written off.
(1) ELFIC and EFGS suffered losses continually from 1988. By the end of the 1990 year each had negative shareholders’ funds. It follows from FGL’s decision to cease all but its brewing business and divest itself of all other assets, that the Finance group entities’ balance sheets could not improve but only decline as the asset realisation program proceeded;
(2) EFGA management recognised at least by April 1991 that EFGA would not even break even in future years without the provision of interest-free funding especially given the declining capacity of ELFIC and EFGS to satisfy their obligations to EFGA as their assets were reduced;
(3) the capacity of ELFIC, EFGS and EFGA to satisfy their interest obligations was further reduced by the economic circumstances which prolonged the asset realisation program and forced further expenditure on the acquisition and holding of property assets;
(4) the removal of the strategic hold assets from the Finance group to the New Lensworth Group in 1997, to the subsequent benefit of FGL suggests that there was no intention that the internal funding entities were to be paid the interest they charged;
(5) with particular respect to Amayana, its prospects of being paid the interest it continued to charge were even more remote. It remained an unsecured creditor of EFGA, ranking behind EFGT and FGL after the security structure was established in 1991. Later, it acquired further debt to facilitate the sale of EFG Financial Limited.
‘Taken as a whole the Australian cases show that accountancy evidence may be important, and they emphasise that in every case the ideal is what Dixon J. called “a substantially correct reflex” of the particular taxpayer’s income; but they seem to me to provide no ground for thinking that the tax legislation allows a business enterprise, not operating generally on a cash basis, in computing its gross profits to ignore doubtful debts, even if through the technique of a suspense account that approach may be made acceptable for general accounting purposes.’ (Emphasis added.)
‘Where the lending of money is an aspect of a taxpayer’s business, such that the loans are revenue assets, interest on those loans will it seems be subject to accounting on a accruals basis. This may be the consequence of the New Zealand Court of Appeal decision in National Bank of N.Z. Ltd v C.I.R. (NZ) (1977) 77 ATC 6001. The principle of that case may extend to a taxpayer who trades in debts, to a life insurance company that invests in debts, and to a taxpayer that engages in a business of investing involving the switching of investments. The last situation was the facts, as understood by Gibbs J., in London Australia Investment Co. Ltd [1977] HCA 50; (1977) 138 CLR 106.’
At [11.44] and [11.45], he wrote:
‘Where a taxpayer carries on a business, one judgment will be made as to the appropriate basis of accounting in regard to all items that are active income of that business. ...
If a taxpayer is held to conduct one business of selling and repairing motor cars, he will account on one basis, almost certainly on an accruals basis, for all items of active income of that business.’
Finally at [11.53], he wrote:
‘A doubt that a claim to a receipt will be followed by an actual receipt does not prevent or qualify derivation. The New Zealand Court of Appeal so held in National Bank of N.Z. Ltd (1977) 77 A.T.C. 6001. The taxpayer’s doubts may be expressed by writing-off under s. 63 the whole or some part of the amount derived as a bad debt, and a failure to obtain payment may give rise to a deduction for a loss under s. 51 (1). National Bank resulted in a change in bankers’ practice. Prior to that case the practice was that so much of an amount of interest receivable whose actual receipt was doubted would not be treated as income derived. Since the case the practice has become to include the full amount of interest receivable.’
(1) The circumstances of Amayana and EFGT (and EFGA) were that they had borrowings that related directly to the loans which they had made on which interest accrued (Reasons [51], [52], [118], [119], [123], [145], [160]). The accruing liability for interest on their borrowings was the cost to them of using loan funds to earn income by lending at interest. In circumstances where a legal or jurisprudential approach is required to determine whether a liability has been incurred to found a deduction (Coles Myer Finance Limited v Federal Commissioner of Taxation [1993] HCA 29; (1993) 176 CLR 640 at 662 – 663 per Mason CJ, Brennan, Dawson, Toohey and Gaudron JJ), and where a pecuniary obligation must become due in the sense of a presently existing liability to have been incurred (Nilsen Development Laboratories Pty Ltd v Federal Commissioner of Taxation [1981] HCA 6; (1981) 144 CLR 616 at 623, per Barwick CJ and at 627 per Gibbs J), bringing amounts of interest to account as and when they accrue gives a more reliable reflex of the lending companies’ assessable income – both the lending companies’ liabilities for interest and their entitlements to interest would be brought to account in the same period to which they relate: cf., J Rowe & Son Pty Ltd v Federal Commissioner of Taxation [1971] HCA 80; (1971) 124 CLR 421 at 448 per Menzies J.
(2) Further, these companies and FGL had interest entitlements accrue in recoverable form – interest was ordinarily calculated on a daily basis and capitalised monthly – which allowed further interest to be charged on any accrued but unpaid amounts (Reasons [19], [20]). Accruals in such circumstances have sufficiently come home to be regarded as derived.
(3) The structure of the Assessment Acts is such that a deduction arises upon the writing off of a bad debt that has previously been included in assessable income. The Assessment Acts do not call for consideration of the debtor’s capacity to pay a debt as a condition of and before its inclusion in assessable income of the creditor. To the contrary, the Assessment Acts contemplate inclusion in assessable income and the allowance of a subsequent deduction if and when it is ascertained that the debt is bad and is written off: National Bank of New Zealand per Cooke J at 61,168; National Commercial Banking Corp at 119 – 121.
DEDUCTIONS FOR INTEREST EXPENSES
EFGA, EFGT, ELFIC, EFGS and Amayana
(1) in gaining or producing assessable income;
(2) in the course of carrying on their respective businesses;
(3) for the purpose of gaining or producing assessable income through the conduct of their respective businesses.
(1) The primary judge erred in relying on Australian National Hotels Ltd v Federal Commissioner of Taxation (1988) 19 FCR 234 (Reasons [200]) to find the interest revenue in nature;
(2) the respective taxpayers incurred the interest to serve the purposes of FGL;
(3) the respective taxpayers incurred the interest expense with respect to funds intended to be employed by way of permanent capital.
‘[T]here is a danger ... in substituting for the words of the subsection language which does not appear in it. The statutory issue is whether the interest outgoing was incurred in (ie in the course of) the income-producing activity or, in the case of the second limb of the subsection, whether the interest outgoing was incurred in (ie in the course of) the business activity which is directed towards the gaining or producing of assessable income’
not whether the interest expenses were incurred for the purpose of gaining or producing assessable income. See too Magna Alloys & Research Pty Ltd v Federal Commissioner of Taxation [1980] FCA 150; (1980) 33 ALR 213 at 215-216 per Brennan J.
‘The fact that money is re-lent at a lower rate of interest than the rate at which it was borrowed does not necessarily mean that the liability to pay the interest cannot properly be seen as having been incurred wholly in earning the assessable income and as being of neither a private nor domestic nature. Even where no business is carried on, circumstances can obviously exist in which money borrowed wholly for the purposes of earning income by way of re-lending can only, in the event, be re-lent at a rate of interest lower than the rate payable in respect of the original loan. Again, notwithstanding the fact that it may always have been intended to re-lend borrowed money at a rate of interest lower than that payable in respect of the original borrowing, the liability to pay the interest may plainly have been wholly incurred in earning assessable income where it is expected or hoped that the re-lending will also lead to assessable income in another form being derived or preserved, such as, for example, dividends on shares held in the company to which the money is lent at a favourable rate. Yet again, plain miscalculation or lack of business understanding or anticipated subsequent lending at higher rates could conceivably lead to the position where it was plain that a liability to pay interest on borrowed money at a higher rate than the rate payable in respect of an immediate re-lending had been incurred wholly in earning assessable income.’ (Emphasis added.)
‘In the ordinary case where the income which is expected to flow from an outgoing offers an obvious commercial explanation for incurring it the relevant characterization can readily be determined by reference to the gaining or producing of that income. In the more complex case, however, where there is no such obvious commercial explanation, the solution of the problem of characterization must be derived from a weighing of the many aspects of the whole set of circumstances including direct and indirect objects and advantages which the taxpayer sought in making the outgoing.’ (Emphasis added.)
‘One of the most difficult aspects of the problem of characterizing an outgoing is the assessment of what, if any, weight is to be given to indirect objects which a taxpayer had in mind in incurring the outgoing. Such objects form part of the relevant circumstances by reference to which the problem of characterization must be resolved. There is however no rigid principle which can be applied in determining what, if any, weight should be given to them. In the ordinary case, such as, for example, where the immediate object achieved by the outgoing is the production of assessable income which is commensurate with the amount of the outgoing or where it is clear that the outgoing was for the purchase of stock-in-trade or the acquisition of services or hire of equipment used in earning assessable income, indirect objects or motives of a personal or domestic character will plainly not prevent the characterization of the outgoing as having been incurred in earning assessable income (see, for example, Cecil Bros. Pty. Ltd. v. Federal Commissioner of Taxation [(1964) [1964] HCA 82; 111 CLR 430]; Federal Commissioner of Taxation v. Phillips [(1978) [1978] FCA 28; 36 FLR 399]. In other cases, the immediate object or effect of an outgoing will not suffice either to explain or to characterize it. In such cases, indirect objects or motives can assume a sometimes decisive importance.’ (Emphasis added.)
‘[I]t is commonly possible to characterize an outgoing as being wholly of the kind referred to in the first limb of s. 51(1) without any need to refer to the taxpayer’s subjective thought processes. That is ordinarily so in a case where the outgoing gives rise to the receipt of a larger amount of assessable income. In such a case, the characterization of the particular outgoing as wholly of a kind referred to in s. 51(1) will ordinarily not be affected by considerations of the taxpayer’s subjective motivation. If, for example, a particular item of assessable income can be earned by making a lesser outgoing in one of two possible ways, one of which is a loss or outgoing of the kind described in s. 51(1) and the other of which is not, it will ordinarily be irrelevant that the taxpayer’s choice of the method which was tax deductible was motivated by taxation considerations or that the non-deductible outgoing would have been less than the deductible one. In such a case, the objective relationship between the outgoing actually made and the greater amount of assessable income actually earned suffices, without more, to characterize the whole outgoing as one which was incurred in gaining or producing assessable income. If the outgoing can properly be wholly so characterized, it “is not for the Court or the commissioner to say how much a taxpayer ought to spend in obtaining his income, but only how much he has spent” [Cecil Bros Pty Ltd v Federal Commissioner of Taxation [1964] HCA 82; (1964) 111 CLR 430 at 434].
The position may, however, well be different in a case where no relevant assessable income can be identified or where the relevant assessable income is less than the amount of the outgoing. Even in a case where some assessable income is derived as a result of the outgoing, the disproportion between the detriment of the outgoing and the benefit of the income may give rise to a need to resolve the problem of characterization of the outgoing for the purposes of the sub-section by a weighing of the various aspects of the whole set of circumstances, including direct and indirect objects and advantages which the taxpayer sought in making the outgoing. Where that is so, it is a “commonsense” or “practical” weighing of all the factors which must provide the ultimate answer. If, upon consideration of all those factors, it appears that, notwithstanding the disproportion between outgoing and income, the whole outgoing is properly to be characterized as genuinely and not colourably incurred in gaining or producing assessable income, the entire outgoing will fall within the first limb of s. 51(1) unless it is either somehow excluded by the exception of “outgoings of capital, or of a capital, private or domestic nature” or “incurred in relation to the gaining or production of exempt income”. If, however, that consideration reveals that the disproportion between outgoing and relevant assessable income is essentially to be explained by reference to the independent pursuit of some other objective and that part only of the outgoing can be characterized by reference to the actual or expected production of assessable income, apportionment of the outgoing between the pursuit of assessable income and the pursuit of that other objective will be necessary.’
‘Ordinarily, where a taxpayer borrows money for the purpose of acquiring shares carrying rights to a dividend the interest on the funds borrowed will be deductible without reference to subjective matters. But, equally, where no dividends are derived by the taxpayer from the investment and especially where, as here, it appears that no dividend was intended to be paid on those shares for an indefinite time, the result would be very different, for in such a case the occasion of incurring the interest in the year of income would not be found in gaining or producing assessable income at all. In the present case the question whether dividends were to be paid on the shares acquired by Spassked was the subject of considerable evidence and a conclusion was drawn which was adverse to the appellants.
...
Submission one — did the learned primary judge err in considering subjective purpose?
We have dealt with this matter in the above discussion of the law. From that discussion it follows that the learned primary judge did not err in taking into account, in the limited way his Honour did, evidence adduced by the appellants as to the subjective purpose of Spassked and particularly in relation to the acquisition by it of the shares in GIH.’
‘It can be accepted that a holding company can itself carry on a business, which may be referred to as the business of a holding company: Brookton Co-operative Society Ltd v Commissioner of Taxation (Cth) [1981] HCA 28; (1981) 147 CLR 441 at 469-470. The taxpayer in Total Holdings on the facts of that case was held to carry on such a business.
...
His Honour found, it would seem, that Spassked was not carrying on such a business. Indeed it was more likely on the facts that it was IEL which was the holding company carrying on a business than Spassked. What is clear here is that the only assessable income which Spassked could possibly derive were the dividends it might receive from GIH if it were allowed to receive any dividends. Despite a submission on behalf of the appellants that Spassked was acting to further the ends of the corporate group (presumably the group of which it was the holding company, although in reality Spassked was acting to further the ends of IEL) this would not, of itself, make the interest it incurred deductible. The present case is wholly different from EA Marr & Co where the intermediate holding company leased items of plant from a finance company and made the plant available to the subsidiaries rent free.’
‘Some business decisions are good, some are bad. Indeed, with the benefit of hindsight some may be seen as negligent or even profligate. The point may be made by considering the arm's length external borrowing by the IEL Group to make the corporate acquisitions in question. Some of those acquisitions might have been successful and some might have failed. In hindsight, some may have been doomed to failure. However there would be little doubt as to the deductibility of interest on all of those borrowings.
The same principle does not apply to purely intra-group arrangements with no external aspect. All of the relevant arrangements were between companies with the same beneficial ownership. Many of the companies involved, including Spassked, had no external role at all. The arrangements involving those companies were inherently variable at the will of the ultimate board of directors. They do not reflect the exercise of business judgment in the relevant sense. Thus, the requisite connection or relationship between the outgoing and the earning of assessable income is not to be inferred but must be positively established. The trial judge found that that had not been done. I agree. Further, the inherently variable nature of the arrangements explains why the one error by the trial judge was of no consequence in the result.’
‘Given a sufficient identification of what the expenditure is for and the character and scope of the taxpayer’s income-earning undertaking or business, the question whether expenditure is incurred for the purpose of carrying on a business or for the purpose of gaining or producing assessable income does not depend upon the taxpayer’s state of mind. The relationship between what the expenditure is for and the taxpayer’s undertaking or business determines objectively the purpose of the expenditure.’
(1) As to ELFIC, he found that the fact that interest expenses were significantly greater than the income it derived was a reflection of the financial difficulties experienced by ELFIC’s external customers in the late 1980s which resulted in diminished returns to ELFIC on the circulating capital deployed in its business. Further, his Honour held (Reasons [176]): ‘It does not follow that, because the core business was being wound down, the interest expenditure incurred in continuing the business was not wholly expended in carrying on the business’. In this latter respect, he relied on what Beaumont J and Hill J said in Unilever Australia Securities at 165 and 187 respectively, in contrast to what a Full Court of this Court said in Coal Developments (German Creek) Pty Ltd v Commissioner of Taxation [2008] FCAFC 27; (2008) 166 FCR 140 at [19] in respect of expenditure incurred after the business has been sold, or has otherwise ceased to be carried on by the taxpayer: Reasons [176] – [178];
(2) as to EFGA, he found that for essentially the reasons outlined in relation to the claim by ELFIC to deduct its interest expenses that the interest incurred by EFGA on its borrowings from EFGT was deductible. The expenditure was calculated to effect from a practical and business point of view the continuing provision of funds at interest to the Finance group subsidiaries to enable them to maintain their businesses as going concerns until they could be disposed of or closed down as part of the wind-up operation. That provision of funds was the central function which EFGA had assumed in the conduct of its business: Reasons [185];
(3) as to Amayana, he found that the reasons already outlined in respect of the claims for deductions in respect of interest by ELFIC and EFGA compel the same conclusion as to the claim for interest by Amayana. The funds which Amayana had borrowed had been used to derive assessable income in the form of interest from EFGA. The interest which Amayana had been required to pay represented the recurrent or periodic cost to it of securing those funds. There was, he considered, a frequent and often nice exercise of business judgment in conducting the affairs of Amayana and those of the related party borrowers from it. Moreover, Amayana’s liability to pay interest to FGL was tied to Amayana’s own income-producing purposes. He did not regard Amayana’s prospect of receiving that income in the form of interest as ‘illusory’ at the time when the interest was charged: Reasons [189];
(4) as to EFGS, he found that the reasons outlined above in relation to the claim made by ELFIC for a deduction in respect of interest applied with equal force to the corresponding claim by EFGS. The money borrowed from EFGA was used in the course of the business of EFGS which included the derivation of income and during the wind-up the realisation of loans to external customers and other interest-bearing assets. These considerations were reinforced by the accession of EFGS during the wind-up to the management of the Finance group’s interest in the ‘Akron’ bloodstock joint venture: Reasons [194];
(5) as to EFGT, he found that:
‘For the reasons already explained in respect of the claims by EFGA and Amayana to deduct interest, I have concluded that the similar claim by EFGT should have been allowed. The money which EFGT had borrowed from FGL was genuinely advanced to borrowers and deposit and interest was genuinely charged on it. Except for the interposition of the security structure, those transactions essentially continued the same income-producing activity which had been carried on since 1986. I do not regard the creation of the security structure or the purpose for which it occurred as having any relevant bearing on the entitlement of EFGT to claim a deduction for interest expenses actually incurred’: Reasons [198].
(1) After 1990 EFGA ceased to charge a margin over its cost of funds to ELFIC and to EFGS: Reasons [123];
(2) the employment of funds advanced to ELFIC and to EFGS was not profitable for EFGA as it had been before 1990: Reasons [124];
(3) EFGA carried on its activities after 1990 at the direction of others, including, ultimately, FGL: Reasons [124];
(4) the internal provision of loan funds to ELFIC and EFGS from 1989 was not part of a coherent course of conduct but occurred as individual responses from time to time to external exigencies created by circumstances of the external financial climate: Reasons [228].
(1) To protect FGL from the risk that equity funding would become available to third party litigation creditors of the companies in the Finance group (before the security structure was put in place in or about October 1991);
(2) interest was referred to as necessary for taxation and statutory requirements, maintained for technical reasons and as a notional cost of capital. The main concern was to ensure that inter-company accounts matched. Ultimately, then, it was preferable to book the interest on the debts owing by EFGA and later, EFGT, to notionally balance out the additional costs to FGL in funding the Finance group;
(3) as well as because of previously expressed concerns with respect to litigation creditors, EFGA’s request for interest-free funding in April 1991 was rejected and the practice of charging interest on debt it owed was maintained because of the adverse impact interest-free funding would have on FGL’s ability to pay a dividend (which would be reduced by the interest expense FGL would otherwise have to bear as the ultimate source of funding to the Finance group).
(1) Commenced lending to EFGA in or about October 1991, some months after EFGA acknowledged, by its request for interest-free funding, that it would be unable to meet future funding costs;
(2) functioned as nothing more than a funding conduit to EFGA to secure funding provided by FGL for the purposes of protecting FGL from third party litigation creditors of Finance group companies.
‘[W]hat governs the issue is the business purposes for which the outgoing was incurred from the point of view of the taxpayer company. The controlling factors are those which arise from the character of the business or undertaking and the relation which the expenditure or the liability to make it bore to the carrying on of the business or the gaining of assessable income.’
And as Brennan J responded at 222 in Magna Alloys & Research:
‘Once the “controlling factors” are ascertained, the business purposes for which an outgoing is incurred may be determined. In that step towards characterization, the taxpayer’s state of mind has no part to play. His purpose or motive is not a controlling factor of the purpose to be attributed to the incurring of the expenditure. But in ascertaining the controlling factors, the taxpayer’s state of mind may have a significant evidentiary role to play, and by leading to the ascertainment of the controlling factors, it may even be the determinative element in characterizing expenditure in a particular case. Nevertheless, the taxpayer’s state of mind — whether intention, or purpose, or motive — is evidentiary only.
What the taxpayer has in mind may bear upon “the character of the business or undertaking” in showing the scope of his business or undertaking. The taxpayer is at liberty to determine for himself what the scope and nature of his business or undertaking shall be and how it shall be conducted, the Act having no effect upon those matters but taking “the result of the taxpayer’s activities as it finds them”: per Williams J in Tweddle v FC of T [1942] HCA 40; (1942) 7 ATD 186 at 190; [1942] HCA 40; 2 AITR 360 at 364. Fullagar J, referring to the operation of “necessarily” in the second limb of s 51(1), said in Snowden & Willson Pty Ltd, supra, (99 CLR at 444; 7 AITR at 317): “It means for practical purposes that, within the limits of reasonable human conduct, the man who is carrying on the business must be the judge of what is ‘necessary’.” And thus what the taxpayer says are the character and scope of his business or undertaking is evidence of what its character and scope are in fact.’ (Emphasis added.)
‘Some kinds of recurrent expenditure made to secure capital or working capital are clearly deductible. Under the Australian system interest on money borrowed for the purpose forms a deduction. So does the rent of premises and the hire of plant. No doubt the difficulty of assigning an outgoing to capital or income is often very great.’
This passage has been repeatedly relied on over the years.
‘As was explained in Australian National Hotels Ltd v Commissioner of Taxation [(1988) 19 FCR 234 at 239 – 241], interest is ordinarily a recurrent or periodic payment which secures, not an enduring advantage, but, rather, the use of borrowed money during the term of the loan. According to the criteria noted by Dixon J in Sun Newspapers Ltd v, Federal Commissioner of Taxation [(1938) 61 CLR 337 at 359-363], it is therefore ordinarily a revenue item. This is not to deny the possibility that there may be particular circumstances where it is proper to regard the purpose of the interest payments as something other than the raising or maintenance of the borrowing and thus, potentially, of a capital nature,’ (See, for example, RW Parsons, Income Taxation in Australia at [6.111].)
‘However, in the usual case, of which the present is an example, where interest is a recurrent payment to secure the use for a limited term of loan funds, then it is proper to regard the interest as a revenue item, and its character is not altered by reason of the fact that the borrowed funds are used to purchase a capital asset. The fact that the asset has not yet become, and may never become, income-producing may be relevant to a decision as to whether the case falls within the first limb of s 51(1). However, once it is determined, or accepted by hypothesis, that the interest is, during the relevant year, an outgoing incurred in gaining or producing the taxpayer’s assessable income [or in carrying on a business for that purpose], (even though no assessable income is derived during that year, and no such income may ever be derived), the circumstance that the capital asset has produced no income is not a reason to conclude that the interest is an outgoing of a capital nature.’ (Emphasis added.)
‘If the capital is raised by loan, an investment of the borrowed moneys in a business will ordinarily remain an investment of capital, and the same consequences will follow. But there is a special feature of loan capital, which flows from the ephemeral nature of a loan. The cost of securing and retaining the use of the capital sum for the business, that is to say, the interest payable in respect of the loan, will be a revenue item. It creates no enduring advantage, but on the contrary is a periodic outgoing related to the continuance of the use by the business of the borrowed capital during the term of the loan.’
‘The emphasis their Honours place is on “the ephemeral nature” of the loan. In the circumstances of the present case the close relationship between the notes and the preference shares, as well as the fact that MBL can ensure the loan is never repayable but that an investor is left commercially only with MBL preference shares, can be seen to produce a different result. The present case is not concerned with the cost of acquiring or maintaining a loan of an ephemeral character, but rather with the cost of a capital raising which so far as MBL is concerned is the cost of a permanent injection of capital. The circumstance that the capital is in the present conditions used to make loans to Macquarie Leasing is not determinative.’
(1) It is said that the loans here manifest the features of ‘permanent capital’ rather than ‘debt’ but apart from that bald statement, the manifestation is not explained by reference to any distinguishing criteria in characterising ‘permanent capital’, on the one hand, and ‘debt’ on the other, let alone identifying the criteria referable to ‘permanent capital’ exhibited by the loans to the relevant respondent taxpayers in the present case.
(2) It is said that the funds borrowed by EFGT, Amayana and EFGA were poured into:
(i) ‘tottering subsidiaries’ (a phrase taken from Levin); and
(ii) at FGL’s direction to protect the investment FGL had been forced to make following withdrawal of EFGA’s external funding lines.
The fact that the subsidiary borrowers were in financial difficulty at the time loans (‘underlying loans’) to them were made or that the underlying loans were made at the direction of the ultimate parent company does not convert the interest outgoings, on loans (‘funding loans’) made to fund the underlying loans, from outgoings of a revenue nature to outgoings of a capital nature. To suggest otherwise would be to deny deductibility for interest incurred on moneys borrowed to fund interest-bearing loans to borrowers in financial difficulty, or where such loans were made at the direction of the lender’s parent. These matters are irrelevant to the issue of the characterisation of the interest outgoings on the funding loans as being on revenue or capital account.
(3) It is said that none of the relevant respondent taxpayers were seeking to derive income for itself or to conduct business for that purpose but to maximise profits in the interests of FGL and its shareholders. But it is not in dispute that the relevant respondent taxpayers did derive income for themselves, and in amounts approximating, or in some cases even exceeding, their annual interest outgoings; and that they did carry on business. Every subsidiary company that carries on business and derives income in the process is doing so for itself even though its profits ultimately enure for the benefit of its parent and its shareholders. Even if, as one would hope to be the case in a well-run business, the subjective motivation or purposes of those who controlled the relevant respondent taxpayers extended to maximising profits for the ultimate benefit of FGL and its shareholders, that would not convert what was otherwise be an outgoing of a revenue nature into one of a capital nature.
(4) The same comment can be made of the Commissioner’s observation that the funding was provided in what was, in effect, the informal liquidation of the Finance group in circumstances where there was an insufficiency of shareholders’ funds and no profits for distribution; as it can of his observation that funding was needed to shore up the insufficiency in shareholders’ funds long enough to secure an orderly realisation of the residual assets to meet the investments in the capital structures of ELFIC and EFGS whilst limiting equity funding to optimise recoveries in the light of possible claims by litigants. There are business considerations which dictate how the business is carried on in pursuit of its business objectives. Even if all of these considerations were uppermost in the minds of those charged with responsibility in the decision-making process involved in the making of the underlying loans, as to which there is no finding, this would not alter the essential character of the interest on the funding loans in the objective circumstances as found, namely, that the loans were income-producing and made in the ordinary course of business of the relevant respondent taxpayers, irrespective of how those businesses may be described.
‘I do not overlook that there is authority for the proposition that further loans advanced to salvage loans made in the course of the normal activity of a money-lending company partake of the nature of the original advances and do not thereby become capital; but the appellant here was in a somewhat different situation from that of the appellant in Calders Ltd. v Commissioners of Inland Revenue 1944 S.C. 433; (1944) 26 T.C. 213. Here the appellant had a large capital investment in Snowcraft, and moreover had a liability under its guarantee to the bank. Inevitably, one would think, when considering whether or not further loans would be advanced, the protection of the capital position of Snowcraft must have arisen in the minds of the appellant's directors and would have influenced them. But it is not necessary to go as far as that. The onus is on the appellant to show that those loans were not of the character claimed by the Commissioner, that is that they were not of a capital nature and were made wholly in the earning of the assessable income of the appellant. Whilst I am prepared to say that the appellant discharged that onus in respect of loans made up to 1 August 1958, it certainly has not discharged the onus in respect of loans made after that date. In these circumstances I find myself, as does Turner J., unable to say that the whole of the £75,000 is necessarily deductible. Whether all that sum or less should be allowed depends, as Turner J. points out, on a number of considerations which were not really canvassed before us.’
For these reasons, very little, if anything, can be drawn from the decision. It certainly does not support a conclusion based on the facts found by the learned primary judge that, while EFGA’s money-lending activities prior to 1990 are conceded to be on revenue account, such activities after that time were on capital account.
LOSS TRANSFEREE COMPANIES – ASHWICK, NEXDAY AND EFGI
1. Ashwick 1997:
$30,213
1998: $23,628
2001: $145
2. Nexday 2000: $139,290
3. EFGI 1996: $739,340
were available to be transferred to the relevant transferee in the relevant year(s) and is/(are) allowable deduction(s) to that transferee in that/(those) year(s).
PART IVA
(1) The acts referred to by the Commissioner did not constitute a scheme within the meaning of Pt IVA: Reasons [226] – [228];
(2) even if they did constitute a scheme, each respondent did not obtain a tax benefit in connection with the scheme within the meaning of s 177C: Reasons [229] – [237];
(3) even if the respondent did obtain a tax benefit in connection with the scheme, having regard to the matters referred to in s 177D(b) it would not be concluded that any person who entered into the scheme or any part thereof did so for the sole or dominant purpose of enabling the respondent to obtain a tax benefit: Reasons [238] – [270].
(1) Foster’s Group management accepted in 1991 that the interest so charged could not be paid, having particular regard to the terms of the memorandum of April 1991 by which the Finance group requested interest-free funding and the subsequent memorandum from Latchford to Johnson, dated 26 August 1991 in which alternative means of addressing EFGA’s deficiency of net assets as at 30 June 1991 were, again, considered.
(2) FGL’s funding of the Finance group was protected from litigation creditors by the security structure which was put in place in October 1991 and was sufficient to secure the residual assets of the Finance group;
(3) the charging, capitalising and compounding of interest at successive levels of the financing structure provided multiple deductions in respect of the debt funding needed to support ELFIC and EFGS for an aggregate amount well in excess of the actual cost to the Foster’s Group and when it was reasonable to conclude that the corresponding interest income flows to group companies would be reversed by bad debt deductions given ELFIC and EFGS could not pay interest;
(4) Finance group assets regarded as capable of returning a profit were deliberately removed in 1997, having particular regard to the creation of the New Lensworth Group.
Scheme
‘I accept that course of conduct may constitute a “scheme” even if it occurs as part of a larger series of transactions; see Federal Commissioner of Taxation v Consolidated Press Holdings Ltd (2001) 207 CLR 235, at 254 [52]. However, the internal provision of loan funds to ELFIC and EFGS from 1989 was not part of a coherent course of conduct but occurred as individual responses from time to time to external exigencies created by circumstances of the external financial climate. The fact that intra-group loans were made at interest does not signify the existence of a scheme. Intra-group loans had commenced before 1989. Moreover, the loans from external sources which they replaced had also been at interest and the charging of interest has been adequately explained by the need to preserve an index by which the performance or profitability of borrowers within the Finance Group could be measured.’
‘“[S]cheme” is defined, in s 177A(1), in terms that may not always permit the precise identification of what are said to be all of the integers of a particular “scheme”. So much follows from the inclusion, within the statutory meaning, not only of arrangements that are not and are not intended to be enforceable by legal proceedings, but also “any scheme, plan, proposal, action, course of action or course of conduct”. This definition is very broad It encompasses not only a series of steps which together can be said to constitute a “scheme” or a “plan” but also (by its reference to “action” in the singular) the taking of but one step. The very breadth of the definition of “scheme” is consistent with the objective nature of the inquiries that are to be made under Pt IVA.’
[T]here is no basis to be found in the words used in Pt IVA for the introduction of some criterion additional to those identified in the Act itself. There is no reference to a scheme having some commercial or other coherence.’ (Emphasis added.)
(1) charging of interest by each of FGL, Amayana, EFGT and EFGA; and
(2) incurring of interest expense by Amayana, EFGT, EFGA, ELFIC and EFGS,
throughout the 1990s, constituted a course of conduct within the meaning of ‘scheme’ in s 177A(1).
(1) the allocation of loan repayments to creditor companies as between principal and interest;
(2) the writing-off of outstanding debts by each of EFGA, EFGT and FGL in the 1998 year and by Amayana in the 1999 year; and
(3) the transfer of losses to profitable companies in the Group and the terms of those transfers,
were ‘actions’ or ‘a course of action’ within the definition of ‘scheme’ in s 177A(1).
(1) In relation to ELFIC and EFGS, the:
(i) continued charging of interest by EFGA on debts owing by ELFIC and EFGS after April 1991, including ELFIC’s and EFGS’s claims for deductions for interest on the debts owing to EFGA; and
(ii) loss transfers by ELFIC and EFGS,
were together a scheme;
(2) in relation to EFGA, the:
(i) continued charging of interest on the loans to ELFIC and EFGS after April 1991;
(ii) writing off by EFGA of debts owed by ELFIC and EFGS that were bad; and
(iii) transfers by EFGA of losses resulting from the bad-debt write-offs and interest incurred on its debts owing to EFGT,
were together a scheme;
(3) in relation to EFGT, the:
(i) charging of interest by EFGT on debts owed to it by EFGA and the charging of interest by FGL on debts owed to it by EFGT after October 1991;
(ii) writing off by EFGT of debts owed by EFGA that were bad; and
(iii) transfer of losses resulting from the deductions claimed by EFGT for bad debts written off, and from interest incurred on its debts owing to FGL,
were together a scheme;
(4) in relation to Amayana, the:
(i) charging of interest by Amayana on debts owed to it by EFGA and the charging of interest by FBGTA on debts owed to it by Amayana after July 1990;
(ii) writing off by Amayana of debts owed to it by EFGA that were bad, and
(iii) transfer of losses resulting from the deductions claimed by Amayana for bad debts written off, and for interest incurred on its debts owing to FBGTA,
were together a scheme; and
(5) in relation to FGL, the:
(i) charging of interest by FGL on debts owed to it by EFGT after October 1991;
(ii) writing off by FGL of debts owed to it by EFGT that were bad; and
(iii) transfer of losses resulting from the deductions claimed by FGL for bad debts written off,
were together a scheme.
Tax Benefit
(1) for EFGA – deductions claimed in the 1998 year of income for the write-off of debts comprising outstanding loan principal and unpaid accrued interest in respect of loans to ELFIC and EFGS, and for interest expenses incurred on borrowings from Amayana and EFGT;
(2) for ELFIC and EFGS – deductions claimed (in the 1995 to 1997 years of income and 1996 and 1997 years of income, respectively) for interest expenses incurred on borrowings from EFGA;
(3) for FGL – deductions claimed in the 1998 year of income for the write-off of debts comprising unpaid accrued interest on loans to EFGT;
(4) for EFGT – deductions claimed in the 1998 year of income for interest expenses incurred on borrowings from FGL and for the write-off of debts comprising unpaid interest accrued on loans to EFGA;
(5) for Amayana – deductions claimed in the 1998 year of income for interest expenses incurred on borrowings from FBGTA and in the 1999 year of income for the write-off of debts comprising unpaid interest accrued on loans to EFGA;
(6) for Ashwick, Nexday and EFGI – the deductions for transferred losses derived from the deductions referred to in paras (1) to (5) above.
Objective prediction
(1) The focus of s 177C is the identification of an activity – the prediction of events that would have or might reasonably have expected to have taken place in the absence of the scheme: Trail Bros at [47]; AXA Asia Pacific Holdings at [131].
(2) In the case of a deduction, s 177C(1)(b) provides that it is an objective inquiry as to what would have been allowed or might reasonably be expected to have been allowed as a deduction had the scheme not been entered into or carried out: Epov v Federal Commissioner of Taxation [2007] FCA 34; (2007) 65 ATR 399 at [62]; Peabody at 385 – 386; Trail Bros at [24]. It is an objective fact whether a taxpayer obtained a tax benefit in relation to a scheme to which Pt IVA applies: Peabody at 382; Hart at [37]; Trail Bros at [23]; AXA Asia Pacific Holdings at [126].
(3) When predicting the events which would or might have taken place, that question is assessed on the assumption that the scheme had not been entered into or carried out: Federal Commissioner of Taxation v Lenzo [2008] FCAFC 50; (2008) 167 FCR 255 at [121]. Section 177C requires the entirety of the scheme to be ignored: Trail Bros at [28]; see also Peabody, cf. Lenzo at [121] and [136].
(4) But that is not the entire question posed by s 177C. The rest of the question involves the objective enquiry of predicting the particular activity or the events that would or might reasonably be expected to have taken place in the absence of the scheme. The identification of the activity or events does not necessarily preclude any element of the scheme: AXA Asia Pacific Holdings at [131] – [133]. Of course, it cannot be the same complete set of events giving rise to the scheme: Trail Bros at [28] – [29].
(5) The integers relevant to the objective enquiry are not limited, and will be different in each case: Trail Bros at [30].
(6) A fact is not disqualified from consideration merely by reason of it having been an element of the scheme which was in place. To the contrary: what the taxpayer in fact did in the commercial circumstances which existed is likely to shed much light on what they would have done in the absence of the scheme, and in some cases to be, as a matter of prediction, elements of that counterfactual: AXA Asia Pacific Holdings at [132].
Relevance of evidence from taxpayer
(7) How the taxpayer establishes that there is no tax benefit is a matter for it: Trail Bros at [36].
(8) It is conceivable that a taxpayer may not lead positive evidence of an alternative postulate because, for example, the result of any objective enquiry of the alternative postulate is inevitable: AXA Asia Pacific Holdings at [139]. Futuris Corporation Limited v Federal Commissioner of Taxation [2010] FCA 935; 2010 ATC 20-206 provides an example of a case where the taxpayer did not lead any direct evidence, but established the alternative postulate through expert evidence.
(9) It is relevant to have regard to the evidence of the taxpayer as to the steps it says it would have undertaken or would have been likely to undertake in the absence of the scheme: Federal Commissioner of Taxation v Spotless Services Limited (1996) 186 CLR 404 at 423 – 424.
(10) The taxpayer may lead evidence that it would have undertaken a particular activity, or adopted a particular course in lieu of the scheme. If a taxpayer has given evidence of what he or she would have done but for entering the scheme, that evidence will be relevant and useful to the extent to which it reveals facts or matters that bear upon the objective determination of the alternative postulate: Trail Bros at [36]; AXA Asia Pacific Holdings at [139]; Federal Commissioner of Taxation v Mochkin [2003] FCAFC 15; (2003) 127 FCR 185 at 209 – 210.
(11) The taxpayer can give evidence as to what it would have done in the absence of the scheme, provided foundation facts are given to support what would otherwise be a bald speculative statement: McCutcheon v Federal Commissioner of Taxation [2008] FCA 318; (2008) 168 FCR 149 at 163 – 164; AXA Asia Pacific Holdings at [140].
The actual rejection of some alternatives is relevant
(12) The taxpayer’s actual rejection of an alternative at the relevant time will be important evidence in determining what would have been expected to have occurred: Spotless Services at 422, 424; Federal Commissioner of Taxation v Spotless Services Limited (1995) 62 FCR 244 at 284 – 285. In Spotless Services, the Court considered that the taxpayer’s actual rejection of one alternative to the scheme to be relevant to its conclusion that only one alternative remained open to the taxpayer.
Deduction does not need to be of the ‘same kind’
(13) In a deduction case, if it can be predicted that, if the relevant scheme had not been entered into or carried out, the taxpayer would have done something which would give rise to a deduction being allowable to it of an equivalent amount, and the prediction is sufficiently reliable as to be regarded as reasonable, there will be no tax benefit: CPH Property at 32 and 40 (see Corrigenda to 139 FCR); [1998] FCA 1276; (1998) 98 ATC 4983 at 4998 per Hill J. See also Essenbourne at [45] per Kiefel J.
(14) The allowable deduction identified in the alternative postulate does not need to be of the ‘same kind’ as that claimed as a deduction under the scheme: Trail Bros at [44], [52], [65], despite a suggestion to the contrary in earlier authorities (e.g., Lenzo at first instance (per French J) and Full Court): Trail Bros at [52], [65]. The comparison does not assume, let alone require, that if the scheme had not been effected, the taxpayer would have ordered its affairs in a way that engaged the same provisions of the Act (or engaged the same provisions in the same way) as were said to be applicable to the events and transactions comprising the scheme: Trail Bros at [48], [65].
(15) That does not mean that the taxpayer is at large in pointing to some alternative allowable deduction, having no relevance to the impugned scheme; it is the alternative postulate that provides the limitation: Trail Bros at [65].
Quantitative analysis
(16) If it is determined that the relevant activity would give rise to tax deductions, then the tax benefit is any differential between the amount claimed and the deductions arising from the counterfactual: Trail Bros at [54] and [67].
‘[T]he question in every case must be whether a tax benefit which the Commissioner has purported to cancel is in fact a tax benefit obtained in connexion with a Pt IVA scheme and so susceptible to cancellation at the discretion of the Commissioner.
...
A reasonable expectation requires more than a possibility. It involves a prediction as to events which would have taken place if the relevant scheme had not been entered into or carried out and the prediction must be sufficiently reliable for it to be regarded as reasonable.
...
The Full Court was correct in its conclusion that there was no reasonable expectation that TEP Holdings would have acquired the Kleinschmidt shares as part of the exercise involved in the float. It may be added that, in any event, even if TEP Holdings had been able to acquire the Kleinschmidt shares in its own right and not as trustee, it would appear that there would have been no present entitlement on Mrs. Peabody’s part to any proportion of any profit arising from the sale of those shares.’
And what the High Court said in Peabody has its source not only in the words of the statute, but in what was said in the Explanatory Memorandum circulated by the Treasurer of the day when the Income Tax Law Amendment Bill (No 2) 1981 was introduced into the House of Representatives. In relation to s 177E, it read:
‘In brief, this section is a self contained code, within the framework of Part IVA, designed to apply to schemes of a dividend stripping kind which would otherwise effectively place company profits in the hands of shareholders in a tax-free form.
Schemes of the kind to which section 177E is directed could on occasions come within the general ambit of section 177D, but section 177E is needed for situations where, for example, although profits are in fact stripped from a company, it may not be a reasonable hypothesis that, but for the scheme, the profits would have been paid as dividends. But for the scheme they would formally have remained in the company, at least for the time being. If that were so in a particular case, the situation would not fall within section 177D because there would not, under section 177C, be a “tax benefit” – i.e., an amount not included in assessable income that but for the scheme would have been, or might reasonably be expected to have been, included.’ (Emphasis added.)
(1) That after July 1990 FBGTA would not have charged any interest on debts owed to it by Amayana;
(2) that after July 1990 Amayana would not have charged interest on debts owed to it by EFGA;
(3) that after October 1991 FGL would not have charged any interest on debts owed to it by EFGT;
(4) that after October 1991 EFGT would not have charged any interest on debts owed to it by EFGA; and
(5) that after April 1991 EFGA would not have charged any interest on debts owed to it by ELFIC and EFGS;
‘In July 1990, another wholly owned subsidiary of FGL, Amayana Pty Ltd (“Amayana”) made a loan of $34.8 million to EFGA using funds which Amayana had borrowed from its subsidiary, FBG Treasury Aust Pty Ltd [“FGBTA”]. Both the loan from [FBGTA] to Amayana and that from Amayana to EFGA were at the standard intra-company interest rates charged by [FBGTA].’
And, as between FGL and EFGT and EFGT and EFGA, the October 1991 date presumably has its provenance in his Honour’s finding at Reasons [41]:
‘From October 1991, loans were made by the Foster’s Group to the Finance Group through EFGT under a Security Note arrangement.’
And, as between EFGA and ELFIC and EFGS, the April 1991 date presumably has its provenance in his Honour’s finding at Reasons [39]:
‘In April 1991, EFGA made a request to the Foster’s Group for $400 million in interest-free funding, in order to eliminate a budgeted loss for the 1992 financial year and to prevent external auditors from requiring additional provisioning of $60 million in the Finance Group accounts. That proposal was rejected by the Board of FGL.’
Purpose
‘It was accepted that the imputation to a taxpayer of a dominant purpose after consideration of the matters enumerated in s 177D(b) requires a comparison between the arrangement which effectuated the scheme and any alternative arrangement into which the taxpayer might have entered had the taxpayer not entered into the scheme arrangement.’
What his Honour said has its provenance in what was said by Gummow and Hayne JJ in Hart at [66], namely:
‘To draw a conclusion about purpose from the eight matters identified in s 177D(b) will require consideration of what other possibilities existed.’
In British American Tobacco Services Limited v Federal Commissioner of Taxation [2010] FCAFC 130; (2010) 189 FCR 151 at [53], a Full Court of this Court seemed to take the matter even further by suggesting that:
‘In addressing s 177D(b)(i) – (v) and (vii) ... it was not only open but is usually required in assessing the dominant purpose of a scheme [to undertake a] ... comparison between the Scheme carried out and the counterfactual ...’
not just ‘other possibilities’.
This extract from the Full Court’s reasons is also noteworthy because of what Gummow and Hayne JJ said in Hart at [62], [63]; their Honours made it clear, in no uncertain terms, that talking about ‘the dominant purpose of a scheme’ as Hill J did in the Full Court in that case, is not what s 177D requires; it requires consideration of the purposes to be attributed to the relevant persons who entered into or carried out the scheme or any part of the scheme.
‘There is no basis to be found in the words used in Pt IVA for the introduction of some criterion additional to those identified in the Act itself.’
Manner in which the scheme was entered into or carried out – s 177D(b)(i)
‘[T]he features identified by the Commissioner as going to “manner” were explicable as actuated by a dominant purpose other than the obtaining of a tax benefit.’
He then proceeded to deal with each feature identified by the Commissioner as going to ‘manner’ and explained why each was explicable as actuated by a dominant purpose other than the obtaining of a tax benefit.
‘It has to be borne in mind that the question of dominant purpose will usually be determined at the time when the alleged scheme was entered into; see Vincent v Commissioner of Taxation [2002] FCAFC 291; (2002) 124 FCR 350, at 372. In the present case some of the matters relied on by the Commissioner such as the charging of interest to subsidiaries within the Finance Group predated the time ascribed by the Commissioner to entry into the scheme.’
The particular funding arrangements that occurred in and after November 1989 were responsive to the exigencies that arose from time to time by reason of external economic factors. Nothing about the manner in which the lending from EFGA was effected indicated a tax purpose.
The form and substance of the scheme – s 177D(b)(ii)
‘Although the form of the funding by EFGA to ELFIC and to EFGS, and by EFGT and Amayana to EFGA, was debt, in substance it was equity, After January 1990 it was likely that ELFIC and EFGS would be unable to repay money lent by EFGA, and that EFGA would be unable to repay its loans. Nevertheless, EFGA supported ELFIC and EFGS and Amayana and FGL (through EFGT from October 1991) lent to EFGA. The terms of the loans did not include any definite repayment date. Although interest was charged it was not paid. The “loans” therefore bore the hallmarks of equity.’
Time of entry into alleged scheme and length of period during which it was carried out – s 177D(b)(iii)
‘[I]nterest continued to be capitalised over a period of years after it became apparent that the interest could not be paid and after capital protection considerations which underpinned the charging of interest had fallen away.’
‘I can discern nothing in the events which occurred at about that time which tends to indicate that a purpose of the relevant actors was to obtain a tax benefit. Those events were a natural consequence, in the light of changed financial circumstances, of pre-existing arrangements between the members of the Foster’s Group as a whole and of the arrangements to which particular members of the Finance Group were parties.
Similarly, the period over which the alleged scheme was carried out does not assist in imputing the requisite purpose to any relevant person. It is clear from the evidence that the period over which various arrangements were maintained between lenders and borrowers within the Foster’s Group was dictated by the time needed to realise assets and make repayments of principal and interest. There is nothing to suggest that any presumptive tax benefit was predicated on an event occurring within, or after the lapse of, a particular period of time.’
The result in relation to the operation of the Act that but for Part IVA would be achieved by the scheme – s 177D(b)(iv)
‘[T]he result of the scheme in relation to the operation of the Act independently of Part IVA, was one for which the Act itself provided namely that interest returned as income could, if never received, be written off as a bad debt. I regard the application of this criterion as neutral on whether an intention to achieve a tax benefit can objectively be imputed to the relevant actors.’
Any change in the financial position of the relevant taxpayer that has resulted,
or will result, or may reasonably be expected to
result from the scheme –
s 177D(b)(v)
Any change in the financial position of a person with a
connection with the relevant taxpayer – s 177D(b)(vi)
(i) The selling down of assets as part of the process of winding down those businesses since those entities were unable to pay interest. The sell down further reduced the income and assets of the Finance group businesses and their ability to pay interest;
(ii) the removal of potentially profitable assets into the New Lensworth Group;
(iii) in Amayana’s case, by the acquisition of EFGA’s debt to EFG Financial.
Finally, the Commissioner submitted that the creditor companies’ financial positions were manipulated to maximise the amount of interest outstanding on debts owed to them.
‘There were clearly changes in the respective financial positions of various members of the Foster’s Group from time to time between 1989 and 2000. ... On balance, I do not regard these changes, or those more specifically indicated by the Commissioner, as strengthening or weakening the inference that the alleged scheme was entered into or carried out for the dominant purpose of obtaining a tax benefit.’
‘The changes identified by the Commissioner under this head were said to be consistent with the dominant purpose of obtaining the tax benefits flowing from the scheme.
Because of the elaborate inter-connected group structure of FGL and its subsidiaries action taken in response to changed financial circumstances in respect of one member of the Group necessarily had repercussion for one or more other members of the Group. However, I do not regard any changes in the financial position of one or more Foster’s Group companies which were connected in that way to a particular taxpayer member of the Group as having any purposive significance of the kind to which s 177D(b)(vi) points. In my view, all of the changes which can be characterised as relevant to this criterion have been evaluated in the application of the criteria erected by sub-paragraphs (i), (iii) and (v) of s 177D(b).’
Any other consequences for the relevant taxpayer or for any person referred to in s 177D(b)(vi) of the scheme being entered into or carried out – s 177D(b)(vii)
Nature of any connection between the relevant taxpayer and any person referred to in s 177D(b)(vi) – s 177D(b)(viii)
‘The inter-connection between companies in the Foster’s group and the fact that they were subject to the overall direction of FGL has already been noted and evaluated in the application of other criteria postulated in s 177D(b). The making of loans and the giving of guarantees and letters of comfort to borrowers within the group which would have been hopelessly insolvent if considered as independent entities, is readily explicable by the need to preserve the financial viability of the Foster’s group as a whole. In my view, those features of the nature of the connection does not support any inference that the dominant purpose of those who administered the connected activities of the Foster’s group was to obtain a tax benefit.’
Conclusion as to Section 177D(b) ‘Purpose’
CONCLUSION
|
I certify that the preceding two hundred and six (206) numbered paragraphs
are a true copy of the Reasons for Judgment herein of the
Honourable Justice
Edmonds.
|
Associate:
Dated: 8 April 2011
|
IN THE FEDERAL COURT OF AUSTRALIA
|
|
|
VICTORIA DISTRICT REGISTRY
|
|
|
GENERAL DIVISION
|
VID 34 of 2010
VID 35 of 2010 VID 36 of 2010 VID 37 of 2010 |
|
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
|
|
BETWEEN:
|
COMMISSIONER OF TAXATION
Appellant |
|
AND:
|
ASHWICK (QLD) NO 127 PTY LTD (ACN 010 577
456)
Respondent |
|
IN THE FEDERAL COURT OF AUSTRALIA
|
|
|
VICTORIA DISTRICT REGISTRY
|
|
|
GENERAL DIVISION
|
VID 38 of 2010
VID 39 of 2010 VID 40 of 2010 |
|
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
|
|
BETWEEN:
|
COMMISSIONER OF TAXATION
Appellant |
|
AND:
|
ELFIC PTY LTD (ACN 007 606 206)
Respondent |
|
IN THE FEDERAL COURT OF AUSTRALIA
|
|
|
VICTORIA DISTRICT REGISTRY
|
|
|
GENERAL DIVISION
|
VID 41 of 2010
|
|
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
|
|
BETWEEN:
|
COMMISSIONER OF TAXATION
Appellant |
|
AND:
|
EFG SECURITIES PTY LTD (ACN 005 489 029)
Respondent |
|
IN THE FEDERAL COURT OF AUSTRALIA
|
|
|
VICTORIA DISTRICT REGISTRY
|
|
|
GENERAL DIVISION
|
VID 42 of 2010
|
|
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
|
|
BETWEEN:
|
COMMISSIONER OF TAXATION
Appellant |
|
AND:
|
EFG AUSTRALIA PTY LTD (ACN 006 357 035)
Respondent |
|
IN THE FEDERAL COURT OF AUSTRALIA
|
|
|
VICTORIA DISTRICT REGISTRY
|
|
|
GENERAL DIVISION
|
VID 43 of 2010
|
|
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
|
|
BETWEEN:
|
COMMISSIONER OF TAXATION
Appellant |
|
AND:
|
EFG TREASURY PTY LTD (ACN 050 431 699)
Respondent |
|
IN THE FEDERAL COURT OF AUSTRALIA
|
|
|
VICTORIA DISTRICT REGISTRY
|
|
|
GENERAL DIVISION
|
VID 44 of 2010
|
|
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
|
|
BETWEEN:
|
COMMISSIONER OF TAXATION
Appellant |
|
AND:
|
EFG INVESTMENTS PTY LTD (ACN 006 169 955)
Respondent |
|
IN THE FEDERAL COURT OF AUSTRALIA
|
|
|
VICTORIA DISTRICT REGISTRY
|
|
|
GENERAL DIVISION
|
VID 45 of 2010
|
|
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
|
|
BETWEEN:
|
COMMISSIONER OF TAXATION
Appellant |
|
AND:
|
FOSTER'S GROUP LTD (ACN 007 620 886)
Respondent |
|
IN THE FEDERAL COURT OF AUSTRALIA
|
|
|
VICTORIA DISTRICT REGISTRY
|
|
|
GENERAL DIVISION
|
VID 46 of 2010
|
|
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
|
|
BETWEEN:
|
COMMISSIONER OF TAXATION
Appellant |
|
AND:
|
AMAYANA PTY LTD (ACN 006 908 738)
Respondent |
|
IN THE FEDERAL COURT OF AUSTRALIA
|
|
|
VICTORIA DISTRICT REGISTRY
|
|
|
GENERAL DIVISION
|
VID 47 of 2010
|
|
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
|
|
BETWEEN:
|
COMMISSIONER OF TAXATION
Appellant |
|
AND:
|
NEXDAY PTY LTD (ACN 003 621 681)
Respondent |
|
JUDGES:
|
BENNETT, EDMONDS AND MIDDLETON JJ
|
|
DATE:
|
8 APRIL 2011
|
|
PLACE:
|
MELBOURNE
|
REASONS FOR JUDGMENT
MIDDLETON J:
|
I certify that the preceding one (1) numbered paragraph is a true copy of
the Reasons for Judgment herein of the Honourable Justice
Middleton.
|
Associate:
Dated: 8 April 2011
Appendix 1
Appendix 2
Appendix
3
Table 1
Payments and repayments made by borrowers to lenders 1990 to 1998
|
Year
|
EFGT to FGL
$ |
EFGA to EFGT
$ |
EFGA to Amayana
$ |
EFGS to EFGA
$ |
ELFIC to EFGA
$ |
Amayana to FBGTA
$ |
|
1990
|
|
|
|
18.4M
|
|
|
|
1991
|
|
|
42M
|
5.2M
|
343M
|
34.1M
|
|
1992
|
135M
|
165M
|
90M
|
9M
|
95M
|
90.2M
|
|
1993
|
149M
|
9M
|
|
5M
|
196M
|
0
|
|
1994
|
143M
|
|
.0006M
|
.8M
|
68M
|
0
|
|
1995
|
153M
|
|
.0008M
|
.03M
|
27M
|
0
|
|
1996
|
48M
|
|
|
.05M
|
5M
|
.009M
|
|
1997
|
318M
|
540M
|
|
4M
|
198M
|
0
|
|
1998
|
93M
|
295M
|
.0008M
|
-
|
76M
|
0
|
|
1990 to 1998
|
1,041M
|
1,010M
|
132M
|
43M
|
1,009M
|
124.3M
|
EFGA
Reported operating profits
(losses)
1985 – 1998
|
Year
|
Reported operating profits (losses) of
EFGA
$ |
|
1985
|
11,401,000
|
|
1986
|
17,502,000
|
|
1987
|
38,561,000
|
|
1988
|
45,108,000
|
|
1989
|
40,549,000
|
|
1990
|
(28,363,000)
|
|
1991
|
(232,955,000)
|
|
1992
|
(782,570,000)
|
|
1993
|
(6,800,000)
|
|
1994
|
(44,184,082)
|
|
1995
|
2,231,701
|
|
1996
|
(126,356,924)
|
|
1997
|
(1,562,914)
|
|
1998
|
(1,422,910)
|
Appendix 3
Table 3
EFGA
Total reported operating revenue,
total reported interest income and total reported interest
expense
1985 – 1998
|
Year
|
Total reported operating revenue
$ |
Total reported interest income
$ |
Total reported interest expense
$ |
|
1985
|
11,420,000
|
0
|
0
|
|
1986
|
20,028,000
|
168,000
|
1,000
|
|
1987
|
239,805,000
|
194,787,000
|
203,630,000
|
|
1988
|
296,493,000
|
222,875,000
|
187,565,000
|
|
1989
|
412,429,000
|
336,714,000
|
326,481,000
|
|
1990
|
408,196,000
|
368,259,000
|
343,737,000
|
|
1991
|
313,025,000
|
254,642,000
|
241,682,000
|
|
1992
|
175,532,000
|
175,515,000
|
161,311,000
|
|
1993
|
120,970,000
|
120,942,000
|
112,511,000
|
|
1994
|
104,173,224
|
104,163,975
|
100,267,066
|
|
1995
|
142,819,386
|
142,684,117
|
140,885,858
|
|
1996
|
159,848,697
|
159,848,697
|
153,330,954
|
|
1997
|
132,080,290
|
132,080,290
|
128,846,043
|
|
1998
|
86,813,428
|
86,813,428
|
83,609,336
|
Appendix 3
Table 4
EFGA
Amounts owed by related
parties
1988, 1990, 1992
|
Related Party
|
Amounts owed to EFGA by related parties as at
30 June
|
||
|
1988
$ |
1990
$ |
1992
$ |
|
|
Elders Finance Limited (Lensworth)
|
51,765,809
|
286,881,211
|
403,187,226
|
|
EFGS
|
1,090,321
|
80,839,862
|
77,516,104
|
|
EFG Services Pty Ltd
|
0
|
1,790,136
|
0
|
|
Elders Futures
|
1,319,160
|
216,598
|
0
|
|
Elders Investment Management Ltd
|
0
|
305,824
|
0
|
|
ELFIC
|
1,332,924,962
|
991,793,213
|
1,300,557,100
|
|
Elders Rural Finance
|
49,670,215
|
18,861,852
|
0
|
|
Elders Trade Financiers Limited
|
24,974,706
|
2,322,249
|
0
|
|
EFGSB UK Limited (Cobbold Roach)
|
2,304,830
|
371,121
|
0
|
|
EFG Administration UK Limited (Elders Keep Brothers Ltd)
|
1,889,702
|
21,308,676
|
0
|
|
EFG Investments UK Limited
|
0
|
106,762
|
0
|
|
Elders Finance Group UK Limited
|
99,388,505
|
52,264,361
|
0
|
|
Elders Finance Holdings (UK) Limited
|
5,945,613
|
29,460,921
|
0
|
|
Elders Finance Limited (UK)
|
0
|
220,758,165
|
0
|
|
Elders Real Estate Limited
|
0
|
9,245,289
|
0
|
|
Elders Finance Inc
|
0
|
14,153,225
|
0
|
|
FGL
|
40,114,125
|
48,000,000
|
48,000,000
|
|
EFGT
|
0
|
0
|
45,352,196
|
|
Elders Malt
|
6,815,998
|
0
|
0
|
|
R&T Agriculture
|
2,225,711
|
0
|
0
|
|
Swisstex Finance Pty Ltd
|
10,720,551
|
0
|
0
|
|
Elders Merchant Finance HK
|
32,258
|
0
|
0
|
|
RTG
|
27,884,600
|
0
|
0
|
|
Elders London
|
25,359,028
|
0
|
0
|
|
Elders Keep Ltd
|
36,610,436
|
0
|
0
|
|
EFL Birmingham
|
15,258,474
|
0
|
0
|
|
EFL Corporate
|
213,721,678
|
0
|
0
|
|
EFIB (Bahrain)
|
60,118,955
|
0
|
0
|
|
EAFL (HK)
|
4,818,565
|
0
|
0
|
|
EFG Sydney
|
770,492
|
0
|
0
|
Appendix 3
Table 5
EFGA
Balances of debts owed to Amayana,
EFGT, FGL, EFG Financial, Elders Finance & Investment Bank and AML
Finance
1989 – 1998
|
Year
|
Balances of debts owed by EFGA to:
|
|||||
|
Amayana
$
|
EFGT
$
|
FGL
$
|
EFG Financial
$
|
Elders Finance & Investment
Bank
$ |
AML Finance
$
|
|
|
1989
|
0
|
0
|
N/A
|
N/A
|
N/A
|
4,708,183
|
|
1990
|
0
|
0
|
155,614,740
|
183,618
|
133,954,872
|
59,469,548
|
|
1991
|
251,690,081
|
0
|
403,147,714
|
101,258,735
|
0
|
495,132,079
|
|
1992
|
214,195,597
|
969,479,476
|
0
|
110,531,196
|
|
0
|
|
1993
|
230,678,439
|
1,226,882,044
|
0
|
120,516,106
|
|
0
|
|
1994
|
245,371,822
|
1,305,027,889
|
0
|
121,389,229
|
|
0
|
|
1995
|
265,838,058
|
1,413,879,053
|
0
|
129,926,436
|
|
0
|
|
1996
|
420,953,007
|
1,531,493,429
|
0
|
0
|
|
0
|
|
1997
|
452,762,985
|
1,087,665,011
|
750
|
0
|
|
0
|
|
1998
|
489,243,394
|
849,965,535
|
0
|
0
|
|
0
|
Appendix 3
Table 6
EFGA
Interest incurred on loan debts
owed to Amayana, EFGT, FGL, EFG Financial, Elders Finance & Investment Bank
and AML Finance
1989 – 1998
|
Year
|
Amayana
$
|
EFGT
$
|
FGL
$
|
EFG Financial
$
|
Elders Finance & Investment
Bank
$ |
AML Finance
$
|
|
1989
|
0
|
0
|
14,219,240
|
10,015
|
14,892,327
|
1,516,856
|
|
1990
|
0
|
0
|
25,305,172
|
18,542
|
17,794,353
|
3,444,859
|
|
1991
|
31,022,110
|
0
|
51,672,304
|
1,915,813
|
13,768,953
|
37,212,030
|
|
1992
|
23,272,972
|
58,919,064
|
15,981,386
|
7,751,362
|
|
15,527,723
|
|
1993
|
16,482,842
|
82,710,022
|
0
|
5,835,423
|
|
0
|
|
1994
|
14,693,383
|
78,147,827
|
0
|
5,234,609
|
|
0
|
|
1995
|
20,466,236
|
108,851,164
|
0
|
7,892,230
|
|
0
|
|
1996
|
23,678,135
|
117,575,840
|
750
|
7,462,247
|
|
0
|
|
1997
|
28,989,033
|
96,503,042
|
750
|
0
|
|
0
|
|
1998
|
25,036,634
|
57,645,096
|
750
|
0
|
|
0
|
Appendix 3
Table 7
EFGA
Total reported assets (net of
provisions)
1990 to 1998
|
Year
|
Total reported assets (net of provisions) of
EFGA
$ |
|
1990
|
1,846,698,000
|
|
1991
|
1,478,135,000
|
|
1992
|
666,691,000
|
|
1993
|
664,011,000
|
|
1994
|
705,560,429
|
|
1995
|
854,279,475
|
|
1996
|
877,995,925
|
|
1997
|
422,595,126
|
|
1998
|
193,117,220
|
Appendix 3
Table 8
EFGT
Reported operating revenue,
interest income and interest expense
1992 –
1998
|
Year
|
Total reported operating revenue
$ |
Total reported interest income
$ |
Total reported interest expense
$ |
|
1992
|
61,559,131
|
61,599,131
|
61,599,131
|
|
1993
|
111,844,168
|
92,826,180
|
93,062,277
|
|
1994
|
87,106,299
|
87,106,299
|
87,067,587
|
|
1995
|
124,679,940
|
124,677,317
|
124,549,218
|
|
1996
|
138,987,259
|
138,987,259
|
139,487,717
|
|
1997
|
112,133,473
|
107,760,172
|
108,171,192
|
|
1998
|
59,599,437
|
59,599,437
|
59,631,683
|
Appendix 3
Table 9
Amayana
Total reported operating
revenue, total reported interest income and total reported interest
expense
1991 – 1999
|
Year
|
Total reported operating revenue of
Amayana
$ |
Total reported interest income of
Amayana
$ |
Total reported interest expense of
Amayana
$ |
|
1991
|
38,464,627
|
38,464,627
|
38,464,627
|
|
1992
|
34,437,029
|
34,437,029
|
34,437,029
|
|
1993
|
16,506,552
|
16,506,552
|
16,506,552
|
|
1994
|
14,693,383
|
14,693,383
|
14,693,383
|
|
1995
|
20,617,455
|
20,466,236
|
20,466,236
|
|
1996
|
22,106,652
|
22,106,652
|
22,106,652
|
|
1997
|
20,267,902
|
20,267,902
|
20,267,902
|
|
1998
|
16,875,354
|
16,875,354
|
16,875,354
|
|
1999
|
0
|
0
|
0
|
Appendix 3
Table 10
FGL
Reported operating revenue and
interest income
1989 – 1998
|
Year
|
Total reported operating revenue
$ |
Total reported interest income
$ |
|
1989
|
5,003,378,000
|
541,311,000
|
|
1990
|
4,883,808,000
|
600,533,000
|
|
1991
|
3,147,798,000
|
473,068,000
|
|
1992
|
609,235,000
|
417,266,000
|
|
1993
|
213,959,000
|
152,923,000
|
|
1994
|
621,400,000
|
103,200,000
|
|
1995
|
352,113,667
|
155,984,658
|
|
1996
|
573,474,616
|
169,802,169
|
|
1997
|
177,226,035
|
164,274,163
|
|
1998
|
327,260,806
|
65,371,572
|
Appendix 3
Table 11
FGL
Opening retained profits or losses,
operating profit after tax, dividends and interest on loans from FGL to
EFGT
1992 – 1998
|
Year
|
Opening retained profits (losses)
|
Operating profit after tax
$ |
Dividends
$ |
Interest on loans from FGL to EFGT
$ |
|
1992
|
(263,924,000)
|
(966,160,000)
|
82,400,000
|
60,759,870
|
|
1993
|
(1,312,354,000)
|
194,173,000
|
189,368,000
|
80,340,400
|
|
1994
|
(1,308,300,000)
|
196,600,000
|
191,900,000
|
68,189,266
|
|
1995
|
(1,303,500,645)
|
204,562,324
|
204,168,914
|
84,305,518
|
|
1996
|
(1,303,453,058)
|
500,205,073)
|
215,760,943
|
88,158,387
|
|
1997
|
284,445,669
|
104,688,969
|
200,636,816
|
76,880,140
|
|
1998
|
188,497,713
|
264,335,256
|
188,395,145
|
47,514,675
|
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