Advanced Holdings Pty Limited as trustee for The Demian Trust v Commissioner of Taxation
[2020] FCA 1479
•15 October 2020
FEDERAL COURT OF AUSTRALIA
Advanced Holdings Pty Limited as trustee for The Demian Trust v Commissioner of Taxation [2020] FCA 1479
File numbers: NSD 803 of 2018; NSD 988 of 2018;
NSD 848 of 2018; NSD 989 of 2018;
NSD 849 of 2018; NSD 1009 of 2018;
NSD 850 of 2018; NSD 1010 of 2018;
NSD 851 of 2018; NSD 599 of 2019;
NSD 985 of 2018; NSD 1172 of 2019;
NSD 986 of 2018; NSD 1173 of 2019
NSD 987 of 2018;Judgment of: DAVIES J Date of judgment: 15 October 2020 Catchwords: TAXATION – appeals under pt IVC of the Taxation Administration Act 1953 (Cth) – whether beneficial interest in joint venture property created in joint venturers by joint venture agreement – no intention in joint venture agreement to create trust relationship – whether repayments under loan facility on revenue account – where loan facility replaced earlier loans used to acquire trading stock – whether original borrowings on revenue account – Avco Financial Services Ltd v Commissioner of Taxation (Cth) [1981] HCA 6; 150 CLR 510, Thiess Toyota Pty Ltd v Commissioner of Taxation [1978] 1 NSWLR 723 and Federal Commissioner of Taxation v Cadbury-Fry Pascall (Aust) Ltd (in vol liq) (1979) 10 ATR 55 distinguished – even if original borrowings were on revenue account subsequent refinancing was not in substitution but was undertaken to augment the capital of the taxpayer and related companies – borrowings and fees on borrowing facility not deductible expenses
TRUSTS AND TRUSTEES – whether valid appointment of trustee company – interpretation of trust deed and trust documents – no valid appointment of purported trustee company – whether company held property on constructive trust or as trustee de son tort – no trust arose on facts of case – company held property in its own right
TAXATION – circularity of present entitlements of beneficiaries under trust distribution – consideration of whether trustee liable to trustee beneficiary non-disclosure tax under s 102UK of Income Tax Assessment Act 1936 (ITAA 1936) (Cth) – whether trust falls within “family trust” exclusion in s 102UC – family trust election validly made – election satisfied test in s 272-80(4A) of sch F of ITAA 1936 to apply to earlier year – whether s 99A of ITAA 1936 applies in context of circular present entitlements – construction of s 99A – trustee liable to taxation on additional income under s 99A of the ITAA 1936 as a result of circular entitlements
Legislation: Conveyancing Act 1919 (NSW) ss 66F, 66G
Evidence Act 1995 (Cth) s 128
Income Tax Assessment Act 1936 (Cth) ss 95, 97, 99A, Div 6D, ss 102UC, 102UD, 102UK, 102UM, s 264, sch 2F, sub‑div 272-D, ss 272-75, 272-80, 272‑85, 279-90(5)
Income Tax Assessment Act 1936-1944 (Cth) s 51(1)
Income Tax Assessment Act 1997 (Cth)
Taxation Administration Act 1953 (Cth) pt IVC, sch 1, s 353-10
Treasury Laws Amendment (2019 Tax Integrity and Other Measures No. 1) Act 2019 (Cth) sch 4
Explanatory Memorandum, Tax Laws Amendment (2007 Measures No. 4) Bill 2007 (Cth)
Explanatory Memorandum, Treasury Laws Amendment (2019 Tax Integrity and Other Measures No. 1) Bill 2019 (Cth)
Cases cited: Avco Financial Services Ltd v Commissioner of Taxation (Cth) [1981] HCA 6; 150 CLR 510
Barnes v Addy (1874) LR 9 Ch App 244
Commercial & General Acceptance Ltd v Commissioner of Taxation (Cth) [1977] HCA 47; 137 CLR 373
Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389
Commissioner of Taxation v Bamford [2010] HCA 10; 240 CLR 481
Commissioner of Taxation v BHP Billiton Ltd [2019] FCAFC 4; 263 FCR 334
Commissioner of Taxation v Sharpcan Pty Ltd [2019] HCA 36; 93 ALJR 1147
Consul Development Pty Limited v DPC Estates Pty Limited [1975] HCA 8; 132 CLR 373
Dubai Aluminium Co Ltd v Salaam [2002] UKHL 48; [2003] 2 AC 366
Federal Commissioner of Taxation v Cadbury-Fry Pascall (Aust) Ltd (in vol liq) (1979) 10 ATR 55
Federal Commissioner of Taxation v Hunter Douglas Ltd (1983) 14 ATR 629
Gibson Motor Sport Merchandise Pty Ltd & Ors v Forbes & Ors [2005] FCA 749
Harmer v Commissioner of Taxation [1991] HCA 51; 173 CLR 264
HP Mercantile Pty Ltd v Hartnett [2016] NSWCA 342
Imam Ali Islamic Centre v Imam Ali Islamic Centre Inc [2018] VSC 413
Kelly v Kelly [2007] NSWSC 1076
Korda v Australian Executor Trustees (SA) Limited [2015] HCA 6; 255 CLR 62
Mara v Browne [1896] 1 Ch 199
Nolan v Nolan [2004] VSCA 109
Ronpibon Tin NL and Tongkah Compound NL v Federal Commissioner of Taxation [1949] HCA 15; 78 CLR 47
The Texas Co (Australasia) Ltd v Federal Commissioner of Taxation [1940] HCA 9; 63 CLR 382
Thiess Toyota Pty Ltd v Commissioner of Taxation [1978] 1 NSWLR 723
Walker v Corboy (1990) 19 NSWLR 382
XL Insurance Co SE v BNY Trust Company of Australia Limited [2019] NSWCA 215
Registry: New South Wales Division: General Division National Practice Area: Taxation Number of paragraphs: 170 Date of hearing: 15-17 June 2020 Counsel for the Applicants: Mr N Williams SC with Ms C Burnett and Mr D Lewis Solicitor for the Applicants: Lionheart Lawyers Counsel for the Respondent: Mr M J O’Meara SC with Mr R A Jedrzejczyk Solicitor for the Respondent: Australian Government Solicitor ORDERS
NSD 803 of 2018 BETWEEN: ADVANCED HOLDINGS PTY LIMITED AS TRUSTEE FOR THE DEMIAN TRUST
Applicant
AND: COMMISSIONER OF TAXATION
Respondent
ORDER MADE BY:
DAVIES J
DATE OF ORDER:
15 OCTOBER 2020
THE COURT ORDERS THAT:
1.Within 14 days the parties provide by email to the Chambers of Justice Davies a draft form of order in each of the related Federal Court proceedings giving effect to these reasons.
2.If the parties are not in agreement regarding an appropriate form of order as to costs, within 14 days each party is to file and serve written submissions of no more than three (3) pages and, subject to any further order, the Court will then determine the issue of costs on the papers.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
DAVIES J:
INTRODUCTION
The applicants in these related Federal Court (FCA) and Administrative Appeals Tribunal (AAT) proceedings are companies and individuals associated with Mr Charbel Demian (Mr Demian) and his family (collectively the Demian Group). These proceedings concern the taxation consequences for the Demian Group arising out of the sale of three properties by Lewisham Estates Pty Ltd (Lewisham Estates) as trustee for the Lewisham Estates Trust for the income year ended 30 June 2013 (2013 income year) and assessments and amended assessments that the respondent (the Commissioner) issued to the applicants on various alternative bases as a result of an audit of the Lewisham Estates Trust. The applicants have challenged the excessiveness of those assessments and amended assessments under pt IVC of the Taxation Administration Act 1953 (Cth) (TAA 1953). Altogether, there are 29 related FCA and AAT proceedings as detailed in Appendix A. Orders and directions were made on 13 December 2019 that the 29 related proceedings be heard together.
The parties have distilled the matters for determination to three sets of issues. The first set of issues concerns the determination of the Lewisham Estates Trust’s net income as defined in s 95 of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) for the 2013 income year. The second set of issues concerns which entities are assessable on the net income of the Lewisham Estates Trust for the income year 2013. The third set of issues concerns the penalty assessments. The third set of issues relating to the penalty assessments arises for determination in separate review proceedings in the AAT and this judgment is to be read in conjunction with the corresponding AAT decision.
FIRST SET OF ISSUES: NET INCOME OF THE LEWISHAM ESTATES TRUST FOR THE 2013 INCOME YEAR
The facts relevant to this set of issues were largely not disputed and are substantially taken from the applicants’ written submissions.
On 20 March 1998, the Demian Trust was established by a deed of trust between Mavis Valerie Cunneen as settlor and Tramdell Pty Ltd (Tramdell) as trustee (Demian Trust Deed).
In May 1998, Tramdell resigned as trustee of the Demian Trust and Demian Holdings Pty Ltd (Demian Holdings) was appointed trustee.
In May 2003, the Lewisham Estates Trust was established as a unit trust by a unit trust deed (Lewisham Trust Deed) between Advanced Holdings Pty Ltd (Advanced Holdings) as initial unitholder and Lewisham Estates as trustee. The trustee of the Lewisham Estates Trust at all material times has been Lewisham Estates.
On 20 June 2003, Lewisham Estates entered into a Deed of Put and Call Option with Callmask Pty Ltd (Callmask), under which the parties entered into put and call options for the sale by Callmask to Lewisham Estates of land at 78-90 Old Canterbury Road, Lewisham, New South Wales (78-90 Old Canterbury Road). Clause 2.5 provided for the payment of an option fee by Lewisham Estates in two instalments of $500,000 each. Lewisham Estates paid the first of these instalments on 23 June 2003.
On 21 June 2003, Lewisham Estates entered into a contract to purchase the land at 72-76 Old Canterbury Road, Lewisham, New South Wales (72-76 Old Canterbury Road) for a purchase price of $1 million. On 18 August 2003, Lewisham Estates entered into a mortgage in favour of National Australia Bank Limited (National Australia Bank) securing $700,000 in respect of this land. The contract settled on 21 August 2003 and the mortgage was subsequently registered in respect of the land.
On 8 January 2004, Lewisham Estates entered into a contract to purchase the land at 62 Old Canterbury Road, Lewisham, New South Wales (62 Old Canterbury Road) for a purchase price of $510,000. On 24 June 2004, Lewisham Estates entered into a mortgage in favour of Perpetual Trustee Company Limited (Perpetual Trustee) securing $408,000 in respect of that land. That same day the contracts settled and the mortgage was subsequently registered in respect of the land.
On 27 April 2005, Lewisham Estates paid to Callmask the second instalment of the option fee under the Deed of Put and Call Option. It did so after the time permitted by that deed, but Callmask agreed to accept the late payment in consideration for Lewisham Estates paying an additional $250,000 at the time of settlement of the sale of the land at 78‑90 Old Canterbury Road.
In August 2005, pursuant to the Deed of Put and Call Option, Lewisham Estates acquired the land at 78-90 Old Canterbury Road for a purchase price of $8.6 million, which was in addition to the two instalments of $500,000 previously paid as the option fee and the $250,000 fee paid for Callmask accepting late payment of the second instalment of the option fee.
About the same time, Shimden Pty Ltd (Shimden), another company controlled by Mr Demian, acquired the land at 8 William Street, Lewisham, New South Wales (8 William Street) for a purchase price of $525,000. It did so as bare trustee for Lewisham Estates, with Lewisham Estates providing the purchase price. Shimden subsequently transferred title to the land to Lewisham Estates for $1 later the same day.
The land at 78-90 Old Canterbury Road and 8 William Street was acquired using funds borrowed from Capital Finance Australia Limited (Capital Finance). A mortgage in favour of Capital Finance was registered in respect of both parcels of land.
On 5 January 2006, Demian Holdings Pty Ltd (Demian Holdings) and Riverlands Estate Pty Ltd entered into a facility agreement (the Riverlands Facility Agreement) with Abacus Funds Management Limited (Abacus).
On 31 March 2010, Lewisham Estates in its personal capacity and in its capacity as trustee of the Lewisham Estates Trust, Shimden and Summer Hill Business Estate Pty Ltd (Summer Hill) in its personal capacity and in its capacity as trustee of the Camellia Estate Trust entered into a facility agreement with Abacus (the Facility Agreement). Lewisham Estates also entered into a mortgage in favour of Abacus in respect of 62 Old Canterbury Road, 72‑76 Old Canterbury Road, 78-90 Old Canterbury Road and 8 William St (collectively the Lewisham Properties). On 8 April 2010 Abacus lodged a caveat over the Lewisham Properties. A mortgage in favour of Abacus was later registered against 72‑76 Old Canterbury Road, 78‑90 Old Canterbury Road and 8 William St.
On 1 April 2010, Lewisham Estates in its personal capacity and in its capacity as trustee of the Lewisham Estates Trust and Summer Hill in its personal capacity and in its capacity as trustee of the Camellia Estate Trust entered into a Call Option Agreement with Abacus. On 24 June 2010 Abacus exercised its call option under that Call Option Agreement so that on 30 June 2010, Lewisham Estates and Summer Hill entered into a joint venture agreement with Abacus (joint venture agreement). The proper construction of the joint venture agreement is one of the key issues in dispute in this proceeding.
On 1 and 3 August 2010, Lewisham Estates drew down on the Facility Agreement in the amounts of $8,703,431.38 and $1,350,350, which were used to discharge the mortgages granted in favour of Capital Finance and National Australia Bank.
In July 2012, Lewisham Estates entered into a contract to sell the land at 72-76 Old Canterbury Road and 78-90 Old Canterbury Road for a sale price of $48.5 million. That contract settled on 13 August 2012. After payment of rates, legal fees and agent’s fees, Abacus received a bank cheque for $46,039,960.13 together with $1,356,978.08 from the deposit and, subsequently, a further $453,023 that had been held in a solicitor’s trust account. These amounts were applied by Abacus in discharge of the liabilities of Lewisham Estates under the Facility Agreement, as well as the liabilities of Summer Hill under the Facility Agreement and the liabilities of the borrowers under the Riverlands Facility Agreement. Lewisham Estates did not receive any cash.
On 23 April 2013, Lewisham Estates sold the land at 62 Old Canterbury Road for a sale price of $565,000. After payment of rates, legal fees, agent’s fees and amounts owing to a first ranking mortgagee, Lewisham Estates received a bank cheque for $117,618.66 together with $42,159 from the deposit.
Lewisham Estates subsequently sold the land at 8 William Street on 31 May 2016 for a sale price of $1,610,000.
In issue with respect to the calculation of the net income of the Lewisham Estates Trust is:
(a)whether, as the applicants contend, Lewisham Estates held 50% of its interest in the Lewisham Properties on trust for Abacus. The determination of this issue depends on the proper construction of the joint venture agreement entered into by Lewisham Estates and Abacus;
(b)whether an amount of $6,229,962 (or, alternatively $12,459,923) is to be deducted from the net income of the Lewisham Estates Trust for the 2013 income year on the basis it was a repayment of a “revenue borrowing”. This issue requires determination as to whether the amounts borrowed by Lewisham Estates were on revenue account and whether, as contended by the applicants, the amounts paid to discharge the revenue borrowings in excess of the amounts borrowed are allowable as deductions to the Lewisham Estates Trust;
(c)whether certain other discrete amounts are properly deductible from the net income of the Lewisham Estates Trust for the 2013 income year.
The joint venture agreement issue
By a joint venture agreement entered into on 30 June 2010, two joint ventures were formed on the terms and conditions set out in the agreement – one between Lewisham Estates in its personal capacity and as trustee of the Lewisham Estates Trust and Abacus (Lewisham joint venture) and the other between Summer Hill in its personal capacity and as trustee of the Camellia Estate Trust and Abacus (Summer Hill joint venture): cl 2 of the joint venture agreement. The present case is concerned only with the Lewisham joint venture.
The applicants contended that this agreement operated to create a 50% equitable interest in Abacus in the Lewisham Properties, and accordingly the Lewisham Estates Trust only beneficially derived 50% of the proceeds of the sale, with the other 50% being beneficially derived by Abacus. Whether such an interest was created depends on whether an intention to create that interest was explicitly or impliedly expressed in the joint venture agreement, as an express trust does not exist unless the parties so intended: Korda v Australian Executor Trustees (SA) Limited [2015] HCA 6; 255 CLR 62 at 69 [3], 73 [11] per French CJ, 100 [109] per Gageler J, 123 [204]–[205], 124 [208] per Keane J. Absent an explicit declaration of such an intention, the Court must determine from a construction of the agreement whether such an intention should be inferred. Importantly, such an intention cannot be imputed simply from the label “joint venture”. As the authorities show, there is no settled common law meaning of “joint venture” and joint ventures can take many forms, with different legal arrangements as between the parties: Gibson Motor Sport Merchandise Pty Ltd & Ors v Forbes & Ors [2005] FCA 749 (Gibson Motor Sport Merchandise) at [76]–[81]; Commissioner of Taxation v BHP Billiton Ltd [2019] FCAFC 4; 263 FCR 334 at 359 [100] per Thawley J. Recognisable and common characteristics of joint ventures include participants holding proprietary interests in the assets of the joint undertaking – often, but not necessarily, as tenants-in-common – but the holding of such interests is not a necessary legal incident of a joint venture: Gibson Motor Sport Merchandise at [80]. Nor can an intention to create a trust be imputed simply from the fact that the parties have agreed to engage in a joint undertaking for mutual commercial gain. In each case, it will depend on the particular contract between the parties.
The central provisions of the joint venture agreement said by the applicants to express that intention are cls 2.1 and 5.
Clause 2.1 set out the purpose of the joint venture. It provided that:
Abacus and Lewisham Estates form and agree to engage in an unincorporated joint venture for the purposes of holding, developing managing and dealing with [the Lewisham Properties] in furtherance of the Project in respect of [the Lewisham Properties] on and subject to the terms and conditions set out in this document.
Clause 5 of the joint venture agreement set out the “interests” of the joint venturers. It provided:
Subject to this document, the Joint Venturers:
(a) hold their respective interests in the Joint Venture;
(b) own the Joint Venture Assets as tenants in common, except for the Property, which is held for the Joint Venture by one of the Joint Venturers unless otherwise agreed;
(c) will share all losses, expenses and outgoings of the Joint Venture; and
(d) share all capital and profits of the Joint Venture,
in the Agreed Proportions.
By cl 1.1:
(a)“Joint Venturers” meant, in relation to the Lewisham joint venture, Lewisham Estates and Abacus;
(b)“Agreed Proportions” meant, in relation to the Lewisham joint venture, Lewisham Estates as to 50% and Abacus as to 50%;
(c)“Property 1” meant the Lewisham Properties and “Property”, in the relevant context, meant Property 1; and
(d)“Joint Venture Assets” included that “Property” and “property of every kind provided, purchased, acquired or created by or on behalf of the Joint Venturers for the purpose of the Joint Venture, including any rights and entitlements of the Joint Venture under any agreements executed in accordance with this document”.
The applicants contended that language of “holding” in cl 2.1 and “is held by” in cl 5(b) evince the necessary intention to create a trust, in that the “holding” of the Lewisham Properties was part of the purpose of the Lewisham joint venture and cl 5(b) expressly provided that the Lewisham Properties were “held” by one of the joint venturers for each of the joint venturers in the proportion of 50% each.
Whilst the “holding” of the Lewisham Properties was part of the purpose of the joint venture, it is necessary to read cl 2.1 as a whole. As provided in cl 2.1, the purpose of “holding” was “in furtherance of the Project in respect of” the Lewisham Properties. The joint venture agreement did not define the meaning of the word “Project”. However, cl 1.1 provided that capitalised expressions not defined in that agreement had the meanings given in the Call Option Agreement. The word “Project” was defined in the Call Option Agreement as follows:
Project means the project to enhance and realise the value of the Property by obtaining rezonings and selling the Property after rezonings are obtained and with a view to distributing returns to the participants in the Project, being initially the Owner of the Property and, if the call option is exercised, the Owner and the Grantee.
Clause 2.1 of the joint venture agreement must also be read in conjunction with clause 2.1(a) of the Call Option Agreement, which provided:
In consideration of the payment of the Call Option Fee by [Abacus], [Lewisham Estates] grants to [Abacus] an option for [Abacus] to purchase a 50% joint venture interest in the Project.
The applicants argued that cl 2.1(a) of the Call Option Agreement must be construed in light of Recital B to the Call Option Agreement which provided that:
[Lewisham Estates] has agreed with effect on the Effective Date to grant to [Abacus] an option, for [Abacus] to purchase [the Lewisham Properties].
The “Effective Date” was defined as the date of the document.
Thus, what was purchased by the exercise of the call option was a “joint venture interest in the Project” – that is, an interest in the set activities and agreed distribution of proceeds relating to the Lewisham Properties. I accept the submission for the Commissioner that Recital B to the Call Option Agreement is to be understood as a reference to the acquisition option provided for in cl 16 of the joint venture agreement, which was annexed in draft form to the Call Option Agreement. Clause 16 provided, relevantly:
16.1 Grant of Call Option
Each Owner grants to Abacus an option for Abacus to purchase the Property.
16.2 Irrevocable offer
This Acquisition Option constitutes an irrevocable offer by the Owner to sell the Property to Abacus and does not give rise to a conditional contract for the sale of the Property.
16.3 Exercise of Acquisition Option during the Acquisition Option Period
Abacus may exercise the Acquisition Option during the Acquisition Option Period by giving the following to the Owner:
(a) a completed Acquisition Option Notice;
(b) a Contract signed by Abacus, with all details completed; and
(c) a cheque payable to the Owner or to the relevant financiers to whom the Senior Debt is owed for the Acquisition Option Price.
…
That construction is consistent with the contractual scheme and gives the provisions a sensible commercial meaning, whereas the applicants’ contention that cl 2.1(a) of the Call Option Agreement operated to give Abacus an option to acquire a 50% beneficial interest in the Lewisham Properties disregards the clear words of that provision.
Clause 2.1 of the joint venture agreement must also be read in conjunction with cl 5 of that agreement, which defines the “interests of the joint venture”. When read together as a whole, the provisions do not evince an intention for Abacus to hold a 50% equitable interest in the Lewisham Properties. First, there is no explicit provision to that effect to be drawn from the language of “holding” and “is held for”. Secondly, read in context, the language of “holding” and “is held for” does not convey the imputation contended by the applicants. Significantly, the intention of the joint venturers as expressed in cl 5(b) was for the parties to own the joint venture assets as tenants in common “except for” the Lewisham Properties. With respect to those properties, there was to be no joint ownership but, rather, the agreement and contractual obligation was for those properties to be held “for the joint venture”, or as the Commissioner put it, to be “devoted to” the purpose of the joint venture, that is, the development and realisation of those properties as a joint commercial undertaking with the view to sharing the proceeds as provided for in cl 6 of the joint venture agreement. Contrary to the applicants’ submission, the expressions “hold” and “holding” would not be otiose if Abacus did not have a proprietary interest in the Lewisham Properties. The parties to the joint venture agreement could agree, as they did by cl 6, to share the losses, expenses and outgoings of the joint venture without the transfer of an equitable interest in the Lewisham Properties to Abacus.
Clause 6 of the joint venture agreement deals with the distribution of proceeds as follows:
The Joint Venturers agree that the proceeds of sale of any Joint Venture Assets, any other revenue derived from the Joint Venture or the Joint Venture Assets and any amounts retained under paragraph (c) below are to be applied in the following order of priority:
(a) first, to pay unpaid costs and expenses incurred after the date of the Call Option, and to reimburse Joint Venturers for costs and expenses incurred after the date of the Call Option and not funded by Senior Debt, Abacus Debt or other debt, in each case, in furtherance of the Project;
(b) second, to pay interest and principal due and payable on any Senior Debt secured by the relevant Property;
(c) third, to be retained as a cash reserve to be available to pay forecast costs, expenses, interest and principal referred to in paragraphs (a) and (b);
(d) fourth, to pay principal and any other amounts owing in respect of Senior Debt (whether or not due) until the Senior Debt is discharged in full;
(e) fifth, to pay interest accrued in respect of Abacus Debt;
(f) sixth, to pay principal and any other amounts owing in respect of Abacus Debt (whether or not due) until the Abacus Debt is discharged in full;
(g) seventh, if the Acquisition Option has been exercised, to pay Abacus the Acquisition Option Fee then accrued;
(h) eighth, if the Acquisition Option has been exercised, to reduce the outstanding Acquisition Option Price until the outstanding Acquisition Option Price is reduced to zero;
(i) ninth, to pay the Option Amount to Abacus;
(j) tenth, the balance (if any) to be distributed in the Agreed Proportions between the Joint Venturers in respect of the relevant Property.
The applicants submitted that cl 6 should be read in light of cl 5(c), which provided that Lewisham Estates and Abacus were to “share all losses, expenses and outgoings” of the joint venture as to 50% each. It was argued that the distribution “waterfall” in cl 6 includes payments of such expenses and outgoings, such as sub-cls (a) and (c), which expressly provide for payment of the expenses of the joint venture. It was submitted that the use of the proceeds of sale to pay expenses to be shared as to 50% between each of Lewisham Estates and Abacus meant that the proceeds of sale and other revenue from the Lewisham Properties must be derived beneficially by those two entities. Were it otherwise, it was argued, the expenses would not be shared as to 50% each as required under cl 5(c) – the expenses would be being met wholly by the joint venturer beneficially entitled to those proceeds of sale or other revenue. There are three answers to this submission. First, cl 5(c) is “subject to this document”. Secondly, the fact that cl 5(c) provided for the sharing of losses, expenses and outgoings of the joint venture in the “Agreed Proportions” (namely, 50:50) reflects the proportionate interest of the joint venturers in the joint venture, and that any profits from the proceeds of the sale of “Joint Venture Assets”, after the satisfaction of ranking priorities, was to be divided in equal shares. Clause 5(c) does not indicate or require that Abacus has a 50% equitable estate in the Lewisham Properties. Thirdly, the cascading priority provisions also tell against the applicants’ contention. Notably, those cascading payments included sub-cls 6(e) and (f), which required the proceeds to be applied to pay interest accrued in respect of debts owed to Abacus, principal debt and any other amounts owing to Abacus as priority payments, the effect of which would have been to require the moneys owed to Abacus to be repaid out of its equity in the Lewisham Properties, if it was the case that Abacus had a 50% equitable interest in the Lewisham Properties. Such clauses are inconsistent with an intention that Abacus hold a 50% equitable interest in the property. As provided in cl 6(j), the parties were to share equally in the balance of the proceeds only after the payment of expenses and repayments of debts, including to Abacus.
The applicants also argued that cls 11 and 16 of the joint venture agreement would be inapposite if Abacus only had contractual rights against Lewisham Estates rather than an interest in land.
Clause 11 relevantly provided that:
(a) Subject to the terms of this document, Abacus (but not the other Joint Venturer, who may only do so with the prior written consent of Abacus) shall be entitled to grant a security interest over its Joint Venture Interest provided that it gives 10 Business Days’ notice of its intention to do so to the other Joint Venturer.
(b) Prior to entering into a security interest over its Joint Venture Interest, Abacus shall procure that the proposed beneficiary of the security interest (Financier) enters into a deed with each of the Joint Venturers whereby the Financier agrees that should it wish to exercise its security rights and sell Abacus’ Joint Venture Interest, it shall allow the other Joint Venturer an opportunity to buy the Joint Venture Interest which is to be the subject of such sale in accordance with the provisions of this clause 11 provided that the Financier will receive, upon completion of such sale, all amounts which it is entitled to recover by enforcing its security.
(c) If Abacus is in default under any security interest granted by it over its Joint Venture interest such that its Financier is entitled to appoint a receiver over its Joint Venture Interest or issue a notice under section 57(2)(b) of the Real Property Act 1900, the other Joint Venturer shall have a right to acquire the Joint Venture Interest of Abacus in accordance with this clause 11.
(d) Upon receipt by Abacus of a notice from its Financier of the default or a notice under section 57(2)(b) of the Real Property Act 1900 issued by or on behalf of its Financier or upon Abacus receiving notice of the appointment by its Financier of a receiver over its Joint Venture Interest, Abacus or its Financier shall notify the other Joint Venturer in writing of the receipt by Abacus of such notice.
(e) If following receipt of such notification from Abacus or its Financier, the other Joint Venturer wishes to purchase Abacus’ Joint Venture Interest, it shall by notice in writing to Abacus and its Financier, within 10 Business Days after service of Abacus’ notice, advise Abacus and its Financier of its intention to purchase Abacus’ Joint Venture Interest. If the amount payable by the other Joint Venturer on purchase of Abacus’ Joint Venture Interest is sufficient to satisfy the debt owing to the Financier, Abacus and its Financier shall accept the offer of the other Joint Venturer to acquire Abacus’ Joint Venture Interest and Abacus and its Financier shall be deemed to have accepted such offer on the following basis:
(i) the purchase price shall be the Market Value, all income and outgoings (including land tax on a single holding basis) shall be adjusted and the terms of sale in so far as the Property is concerned shall be in accordance with the current form of Contract for the Sale of Land published by the Law Society of New South Wales or the Real Estate Institute of New South Wales; and
(ii) completion of the purchase shall take place on a date being no later than 3 months after Abacus and its Financier have accepted the other Joint Venturer’s offer.
(f) If the other Joint Venturer does not, within die said period of 10 Business Days, offer to purchase Abacus’ Joint Venture Interest, the Financier shall be entitled to exercise its powers of sale or proceed with a receivership sale pursuant to a public auction, tender or other procedure where the other Joint Venturer is permitted to bid or tender, as the case may be, and Abacus must, if requested by the Financier or the purchaser of the Joint Venture Interest, enter into a joint venture agreement on the same terms as this document with that purchaser.
(g) Abacus hereby waives all claims it may have against its Financier or the other Joint Venturer arising from the sale of Abacus’ Joint Venture Interest, as contemplated by this clause 11.
(h) Each Joint Venturer will pay its Agreed Proportion of all rates and taxes (including land tax) and other amounts applicable to the Joint Venture Interest so that the Joint Venture Interest shall not be encumbered as a result of the non-payment of such amount.
Clause 16 is extracted above.
Neither clause provides support for the applicants’ construction. Clause 11, as a matter of construction, deals with the creation of a security interest only over Abacus’ joint venture interest. What constitutes Abacus’ joint venture interest is prescribed by cl 5 and, properly construed, that clause does not confer an equitable interest in the Lewisham Properties upon Abacus. Clause 11(e) then deals with the circumstance where, if a security interest is granted, the security interest is sought to be enforced by the security holder and Lewisham Estates exercised the right to acquire Abacus’ joint venture interest. Clause 11(e)(i) only makes commercial sense if Abacus had exercised the option provided for by cl 16 to purchase the Lewisham Properties from Lewisham Estates. It strains the language of cl 11(e), read in the context of the joint venture agreement as a whole, to construe that clause as importing an intention of the parties for the joint venture agreement to create a 50% equitable interest in the Lewisham Properties in favour of Abacus. Clause 11(h) likewise does not assist the applicants but is consistent with the agreement of the parties to share the outgoings of the joint venture.
Clause 16 should be construed on its terms, not, as submitted for the applicants, as “[dealing] with Abacus acquiring title to the Property without disturbing the beneficial interests”. It was contended that the acquisition option price, which was defined to mean “an amount equal to the amount required to pay and discharge in full any Senior Debt in respect of [the Lewisham Properties]…” (cl 1.1), was “clearly… not the price of Abacus acquiring the absolute interest in the Property – it is simply Abacus discharging the Senior Debt and taking title to the Property, which will remain subject to the joint venture agreement”. Further, it was argued, cl 6(h) required the acquisition option price paid by Abacus to be repaid to Abacus as a priority payment. Thus, it was submitted, Abacus was not ultimately “paying for the [bare] legal title” because the amount is returned to it. Viewed in that way, the argument went, the joint venture agreement provided for legal title to the Lewisham Properties to change between Lewisham Estates and Abacus, but for the parties’ beneficial interests to remain the same. It was argued that cl 5(b), in referring to the Lewisham Properties being held for the joint venture in the agreed proportions “by one of the Joint Venturers” (either Lewisham Estates or Abacus) rather than by the “Owner” (Lewisham Estates), was deliberately drawn to contemplate that either of the joint venturers may hold the legal title to the properties for the joint venture because under cl 16 Abacus was able to acquire legal title to the properties without disturbing the beneficial interests in the properties.
To the contrary, cl 16.3 makes it clear that it was an option to buy an undivided legal interest as registered proprietor in the fee simple of this property. That is because the word “Contract” is a capitalised word, which is defined in cl 1.1 as a contract for the sale of the Lewisham Properties in the form of sch 2 to the joint venture agreement. Schedule 2 in turn refers to the form of Annexure C to the Call Option Agreement. Annexure C to the Call Option Agreement is the standard form of contract for the sale of land in New South Wales. Clause 6(h) also does not advance the construction urged by the applicants as, for the reasons already given, the parties’ agreement concerning the distribution of proceeds is not indicative of an intention to create a 50% equitable interest in the property in favour of Abacus.
Finally, the applicants’ reliance on cl 13 also does not assist.
Clause 13(a) provided that:
The Joint Venturers agree that neither of them will (except after 6 months prior notice in writing to the other of them) make application to court for the appointment of trustees for sale or partition of the Property pursuant to the provisions of section 66G of the Conveyancing Act 1919 (NSW).
Section 66G(1) of the Conveyancing Act 1919 (NSW) (Conveyancing Act) provides:
Where any property (other than chattels) is held in co-ownership the court may, on the application of any one or more of the co-owners, appoint trustees of the property and vest the same in such trustees, subject to incumbrances affecting the entirety, but free from incumbrances affecting any undivided shares, to be held by them on the statutory trust for sale or on the statutory trust for partition.
Section 66F(1) of the Conveyancing Act provides:
Co-ownership means ownership whether at law or in equity in possession by two or more persons as joint tenants or as tenants in common; and co-owner has a corresponding meaning and includes an incumbrancer of the interest of a joint tenant or tenant in common.
Thus, for a person to make an application under s 66G of the Conveyancing Act in relation to property, there must be at least two “co-owners” of the property and, as defined in s 66F(1), a “co-owner” must have a beneficial interest in the property in the strict sense. The applicants placed reliance on Kelly v Kelly [2007] NSWSC 1076 where Austin J observed at [30] and [32]:
First, s 66G(1) relates to specific parcels of property in co-ownership, both in terms of its wording and its purpose. The opening words of the subsection identify some particular property held in co-ownership, and the section authorises the court to appoint trustees to that property for the purposes of sale or partition. The purpose of s 66G(1) is to allow the court to authorise the sale of particular property, by making orders which, typically, include orders relating to the process of sale and the destination of the purchase money. Orders of these kinds do not appear appropriate where the applicant for orders has only a right in respect of a potentially fluctuating group of assets, stemming from his or her entitlement to compel the due administration of those assets.
…
The plaintiff has an interest in relation to the assets of the estate as a whole, and an expectation that, upon due administration, he will receive the half-interest in one or two or all three properties to which he is entitled under the will and the court's orders… In my opinion the general and inchoate interest described in Schultz's case and Horton v Jones, even if it is a proprietary interest in all of the assets of the unadministered estate, is not sufficient to attract the jurisdiction under s 66G.
Thus, it was argued, for cl 13 of the joint venture agreement to be capable of having any operation, Lewisham Estates and Abacus must each have a beneficial interest (in the strict sense) in the Lewisham Properties, otherwise there would not be at least two co-owners of the Lewisham Properties and so s 66G would be inapplicable. It was submitted that the Court should avoid giving an interpretation to the joint venture agreement that rendered one of its provisions otiose when another interpretation that is open on the text of the agreement would give that provision work to do, citing in support XL Insurance Co SE v BNY Trust Company of Australia Limited [2019] NSWCA 215 at [72]–[73] per Gleeson JA (Bell P agreeing); HP Mercantile Pty Ltd v Hartnett [2016] NSWCA 342 at [154] per Leeming JA. Additionally, it was submitted that the fact that the parties included cl 13 indicated that, objectively considered, the parties intended the joint venture agreement would give each of them a beneficial interest in the Lewisham Properties, and effect should be given to that objective intention.
The difficulty with the argument is that cl 13 on its face appears to be inconsistent with the contractual requirement for the Lewisham Properties to be held for the purposes of the joint venture and cl 5(b), which expressly provided that there was no co‑ownership of the Lewisham Properties as tenants in common. Further, s 66F of the Conveyancing Act requires that the co‑ownership be “in possession”, denoting an immediate right to possession or enjoyment of the particular property. Given the terms of the joint venture agreement, an immediate right to possession by Abacus of one half of the Lewisham Properties would have been inconsistent with the continued devotion of the Lewisham Properties to the purposes of the joint venture. Accordingly, I do not consider that cl 13 supports the construction urged by the applicants.
There are four other matters that tell against the applicants’ case.
The first is that it is unnecessary to impute a trust relationship with Abacus in order to give the joint venture agreement a commercially sensible construction. In that regard, if it was intended by the parties to create a trust, it is significant that the joint venture agreement did not expressly so provide. A court should exercise caution when deciding whether there is an intention to create a trust in the context of sophisticated commercial relationships: Walker v Corboy (1990) 19 NSWLR 382 at 390 per Clarke JA.
Secondly, at the time the joint venture agreement was executed, Lewisham Estates did not hold an undivided interest in the Lewisham Properties but held its interest in the Lewisham Properties subject to the terms of the Lewisham Estates Trust. Nothing either in the terms of the joint venture agreement nor in any other document in evidence indicates how the creation of that equitable estate was to be reconciled with the rights and interests of the unitholders of the Lewisham Estates Trust. That tells against the inference of a trust.
Thirdly, the grant of the option to Abacus to purchase the Lewisham Properties in cl 16 of the joint venture agreement is inconsistent with an intention that Abacus has a 50% equitable interest in the Lewisham Properties. The purpose of cl 16 is not evident if Abacus had such an equitable estate.
Finally, contrary to the applicants’ submission, the fact that cl 4.1 of the joint venture agreement provided that nothing in the joint venture agreement constituted one joint venturer as a partner of the other joint venturer “other than for the purpose of the Income Tax Assessment Act 1997 (Cth) because the joint venturers may receive income jointly” does not direct any different construction of the joint venture agreement. As noted, a joint venture can take many forms and does not necessarily include, let alone require, each joint venturer to hold a proprietary interest in the joint venture assets.
Accordingly, I find that Abacus did not have a 50% equitable interest in the Lewisham Properties.
Revenue borrowings issue
When the Lewisham Properties were sold in the 2013 income year, Abacus was paid $48,009,738.87 out of the proceeds of sale. Of that amount, $18,861,669.52 was applied to the repayment of the principal owing from the drawdowns by Lewisham Estates on the Abacus Facility Agreement and $5,772,315.78 was applied to pay capitalised interest on those drawdowns. Two million dollars was paid on account of the cancellation amount payable pursuant to cl 4 of the Call Option Agreement, which had the effect of cancelling the call option in respect of the Lewisham Properties. The balance of $21,375,753.57 was applied by Abacus in discharge of debts owed by other members of the Demian Group under the Facility Agreement. Consequently, the amounts paid to Abacus out of the proceeds of sale exceeded the repayment of the drawdowns and capitalised interest of Lewisham Estates by $23,375,753.57 (the excess amount). In issue was whether a portion of the excess amount is deductible from the net income of the Lewisham Estates Trust for the 2013 income year as “revenue borrowings”. The applicants contended that an “applicable” proportion of the excess amount has a revenue character on the basis that:
(a)it was not in dispute that Lewisham Estates was in the business of property development or that the Lewisham Properties were its trading stock;
(b)those properties were purchased by Lewisham Estates between 2003 and 2005 and financed through borrowings from Capital Finance, Perpetual Trustee and National Australia Bank;
(c)because those borrowings were used by Lewisham Estates to fund the purchase of its trading stock, viz, the Lewisham Properties, those borrowings formed an “integral part” of Lewisham Estates’ business and part of the process by which Lewisham acquired its trading stock and thus were of a revenue character;
(d)in 2010, Lewisham Estates repaid the Capital Finance and National Australia Bank loans using two drawdowns on its facility with Abacus: on or around 30 July 2010, it drew down $8,703,431.38 (plus an amount for Abacus’ fees, costs and expenses), which it used to repay the Capital Finance loan; and on 3 August 2010, it drew down $1,350,350 which it used to repay the National Australia Bank loan;
(e)the amounts borrowed from Abacus, at least to the extent of the drawdowns to repay the National Australia Bank and Capital Finance, had the same character as the original borrowings and were on revenue account; and
(f)the excess amount paid to Abacus has a revenue character to the extent to which the drawdowns from the Abacus facility were used to discharge Lewisham Estates’ borrowings from Capital Finance and the National Australia Bank because to that extent, the excess amount is attributable to the discharge of those revenue borrowings.
The applicants accepted that not all of the access amount was revenue in nature. However, it was contended that 53.3% of the excess amount should be treated as revenue in nature on the basis that percentage amount is the same proportion that the revenue drawdown of Lewisham Estates from the Abacus facility ($10,053,791.38) to repay the National Australia Bank and Capital Finance bore to the total principal drawdowns ($18,861,669.52). 53.3% of the excess amount translates to a deduction claim of $12,459,923 if Abacus did not hold a 50% equitable interest in the Lewisham Properties, or $6,229,961.50 if Abacus held a 50% equitable interest and Lewisham Estates only had a 50% interest in the Lewisham Properties.
The applicants relied on The Texas Co (Australasia) Ltd v Federal Commissioner of Taxation [1940] HCA 9; 63 CLR 382 (Texas); Avco Financial Services Ltd v Commissioner of Taxation (Cth) [1981] HCA 6; 150 CLR 510 (Avco); Federal Commissioner of Taxation v Hunter Douglas Ltd (1983) 14 ATR 629 (Hunter Douglas); Thiess Toyota Pty Ltd v Commissioner of Taxation [1978] 1 NSWLR 723 (Thiess Toyota); and Federal Commissioner of Taxation v Cadbury-Fry Pascall (Aust) Ltd (in vol liq) (1979) 10 ATR 55 (Cadbury-Fry Pascall) in support of their submissions.
In Texas the taxpayer, an oil company, purchased its petroleum products from its parent or related companies in the United States. As its share capital was insufficient to meet its requirements for working capital, the taxpayer was allowed to delay payments in respect of the purchases in order to provide it with funds large enough for its needs. Before payment was made, the rate of exchange moved against Australia and increased the outlay in Australian pounds for the products. It was held that the increased outlay was deductible as part of the cost of the purchase of trading stock and hence on revenue account. In the words of Starke J at 450, the additional amounts were “outgoings incurred in connection with the trading operations of the taxpayer: the purchase of the stock in which it traded”. See also Latham CJ at 427 and Dixon J at 468–9.
The issue in Avco was whether exchange gains and losses made by a finance company in the repayment of moneys borrowed by it in the ordinary course of its business for lending to its customers were on revenue or capital account. The exchange gains and losses were held to be on revenue account. Gibbs CJ reasoned at 518:
Where a taxpayer carries on the business of borrowing and lending money, the moneys used for that purpose are analogous to trading stock – the taxpayer in effect deals in the money. Exchange gains and losses, regularly and frequently made and incurred, in the course of making repayments of borrowed money which is used by a taxpayer in making loans in the course of its finance business are outgoings made in the day to day conduct of the business and for the purpose of carrying on the business as a going concern... the additional moneys paid as a result of the unfavourable exchange variations – the exchange losses – were part of the price by which the appellant obtained the money which it used to make a profit – part of the process by which the appellant obtained regular returns.
The majority (Mason, Aickin and Wilson JJ) at 527 similarly reasoned that:
The essence of the business of a finance company… is the borrowing and lending of money, the rates of interest payable on money lent being significantly higher than the rates payable on the money borrowed, for it is from the difference in the rates that the company generates its profit, after making provision for bad debts…
Exchange gains and losses are an ordinary incident of overseas borrowings by a finance company. If an overseas loan, the proceeds of which are to be used in the Australian business of the finance company, is to be repaid in the foreign currency, the company has, in the first instance, to exchange the foreign currencies for Australian dollars, and later to buy the foreign currency with Australian dollars. Exchange gains and losses are therefore an incident of borrowing.
The majority continued at 530:
The true principle is that in the case of a finance company which borrows money overseas in the ordinary course of its business and not for some special purpose, the added cost of repayment in foreign currency caused by the devaluation or depreciation of the Australian dollar is an additional cost of the borrowing and, like other costs of the borrowing, is an allowable deduction under s. 51(1).
In that regard, no distinction was drawn between the borrowing of moneys for the purpose of on-lending and the borrowing of moneys for the purpose of repaying loans previously borrowed for on-lending. As the majority explained at 532 “[i]n each instance the transactions are continuously and regularly entered into in the ordinary course of the finance company’s business; they are an integral part of that business”.
In the course of reasoning, the majority also stated that there is an important distinction between the borrowing and repayment of loans of a finance company in the ordinary course of its business and the borrowing and repayment of loans by a manufacturing or trading company. The majority said at 527:
In general the finance company’s borrowings provide money which it turns over at a profit. Borrowing otherwise than for on-lending or for the payment of funds borrowed for on-lending, that is, borrowing undertaken for capital rather than revenue purposes, as in [Commercial & General Acceptance Ltd v Commissioner of Taxation (Cth) [1977] HCA 47; 137 CLR 373 (CAGA)] is an exception to the general rule. On the other hand, borrowing by a manufacturing or trading company is often undertaken to strengthen the capital or profit-earning structure of the company. A finance company usually borrows in order to increase its working capital which is then turned over at a profit; the manufacturing or trading company frequently borrows to strengthen its permanent capital.
CAGA is authority that where a borrowing is undertaken to strengthen the capital or profit earning structure of the taxpayer, the repayment of the borrowing is an expenditure on capital account.
Thiess Toyota and Cadbury-Fry Pascall were both cases in which a trader acquired trading stock in foreign currency. In Thiess Toyota the trader arranged for the financier to pay directly for the trading stock to be later reimbursed by the taxpayer. Movements in the exchange rate resulted in the trader making foreign currency gains and the gains were held to be on revenue account. Meares J distinguished CAGA from the case where a manufacturer or trader buys or sells stock in trade for a price payable in foreign currency which appreciates or depreciates before payment is made and held that the appellant’s finance arrangements were “all part of a transaction relating directly to, and having the purpose of, the purchase of trading stock”: Thiess Toyota at 728. Thiess Toyota was cited with approval by Gibbs CJ in Avco at 517–8. In Cadbury-Fry Pascall, the Australian taxpayer’s English parent company purchased trading stock for the Australian taxpayer in foreign currency, with the Australian taxpayer repaying the parent company later. Movements in exchange rates saw the Australian taxpayer make a gain on the repayment to its English parent company and that gain was found to form part of its assessable income. Jenkinson J found that the credit facility was principally for the payment of liabilities in respect of the purchase of raw materials and the payments in reduction of the loan account were in substance part of the regular outlay of the taxpayer for the raw materials acquired by it for manufacture and it followed that the exchange gain was on revenue account: Cadbury-Fry Pascall at 61.
Hunter Douglas was a case where the taxpayer borrowed money in foreign currency to use in the course of its business, including to pay wages, payroll tax and for stock in trade. Exchange rate movements resulted in the taxpayer making exchange losses. It was held by majority (Fisher and Lockhart JJ, Franki J dissenting) that the exchange losses were not deductible by reason that the borrowings and exchange losses were not an integral part of the ordinary operation of the taxpayer’s business of development, manufacture and marketing of window covering, home improvement, casual living, architectural and building products. After reference to Avco, Fisher J reasoned at 641–2:
The position is different where the company is not a finance company but a trading or manufacturing company which incurs exchange losses or gains otherwise than through the purchase of trading stock. Here the losses or gains will in the ordinary course be on capital account. For them to be on revenue account it is necessary for the taxpayer to establish that the additional expenditure to meet exchange losses was expenditure incurred in the process of producing its income, and in the words of Mason, Aickin and Wilson JJ in Avco set out above, as an integral part of that process. It is not sufficient, with all respect to the learned trial judge, to rely upon the finding that in fact the borrowed monies were used to satisfy day to day outgoings. The borrowings in such a case are prima facie an addition to the capital employed in the business.
…
… the borrowing of the moneys and the repayment thereof in this matter was expenditure in relation to the financing of the taxpayer's business by augmenting its working capital. It was money borrowed to pay liabilities incurred in carrying on and expanding the business, as part and parcel of the taxpayer's financial as opposed to its trading activities. The borrowings and their exchange losses were not an integral part of the ordinary operation of the taxpayer's business. They were borrowings arranged for special purposes…
Lockhart J similarly concluded at 645 that the borrowings were not “an integral part of the ordinary operations of the taxpayer’s business so as to represent a matter of revenue rather than capital”, citing Avco at 524–5 per Mason, Aickin and Wilson JJ.
Lockhart J at 643 referred to Avco and observed that, in general, loans and repayments of loans were on capital account. Lockhart J then referred to two exceptions to this “prima facie presumption”, namely borrowings by finance companies to lend to their customers, and borrowings by trading companies to finance the purchase of trading stock. Lockhart J explained at 643:
Borrowings by finance companies in the ordinary course of their business or borrowings by trading companies to purchase trading stock are examples of expenditure incurred in the earning of a taxpayer’s income and not for the purpose of enhancing the business or organisation of the taxpayer as an income earning entity. It is well established that such borrowings are revenue items.
…
Where a trading company buys goods which it turns over as trading stock gains or losses incurred are of a revenue nature. If moneys payable by a taxpayer are allowable deductions, in general any increase or decrease in those amounts caused by fluctuations in the exchange rate are likewise allowable deductions or assessable income as the case may be. If a trading company borrows money overseas in circumstances where the borrowing is a necessary part of and has the purpose of purchasing trading stock gains or losses will be revenue items.
and at 645:
Borrowing money to carry on business must prima facie be treated as augmenting the capital employed in the business. Borrowings by finance companies to then lend to their customers, and borrowings by trading companies to finance the purchase of trading stock, are exceptions to this general rule. Such borrowings are an integral part of the ordinary conduct of the company's business and are thus revenue, not capital, items. Moneys borrowed by a finance company are turned over by making loans to its customers.
At 645, Lockhart J contrasted the facts in Thiess Toyota and Cadbury-Fry Pascall, holding that the borrowings were not part of the process by which the taxpayer operated to purchase trading stock. His Honour concluded that the nature of the borrowings determined the nature of the exchange losses for fiscal purposes. As the principal purpose of the borrowing was to finance an expansion of the taxpayer company’s business activities and to provide additional funds to increase its working capital for the purpose of avoiding a cash flow or liquidity problem during the period of expansion, the borrowings were on capital account and thus so too were the exchange losses.
Most recently, the High Court in Commissioner of Taxation v Sharpcan Pty Ltd [2019] HCA 36; 93 ALJR 1147 (Sharpcan) set out the test for determining whether an outgoing is incurred on revenue account or capital account as follows at 1154–5 [18]:
Authority is clear that the test of whether an outgoing is incurred on revenue account or capital account primarily depends on what the outgoing is calculated to effect from a practical and business point of view.Identification of the advantage sought to be obtained ordinarily involves consideration of the manner in which it is to be used and whether the means of acquisition is a once-and-for-all outgoing for the acquisition of something of enduring advantage or a periodical outlay to cover the use and enjoyment of something for periods commensurate with those payments.Once identified, the advantage is to be characterised by reference to the distinction between the acquisition of the means of production and the use of them; between establishing or extending a business organisation and carrying on the business; between the implements employed in work and the regular performance of the work in which they are employed; and between an enterprise itself and the sustained effort of those engaged in it. Thus, an indicator that an outgoing is incurred on capital account is that what it secures is necessary for the structure of the business.
(footnotes omitted)
Applying the test to the facts in the present case, whether the excess amount is deductible in the first instance thus depends on the character of the original borrowings to acquire the Lewisham Properties and whether those borrowings were “an integral part of the ordinary operations of the taxpayer’s business”. That is, whether those borrowings were part of the process by which Lewisham Estates operated to purchase trading stock, or whether they were undertaken to augment Lewisham Estates’ working capital.
Clause 27.1 of the 2007 Deed of Amendment provided:
The Trustee holds the income of a financial year which is available for distribution upon trust to pay, apply or set aside the income, or any part of the income, to or for the benefit of the beneficiaries, other than a default beneficiary who is not otherwise a beneficiary, or any one or more of them exclusive of the other or others who are living or which are in existence at the time the distribution of the income is made in such shares or proportions and from such category of income as the Trustee may in its discretion determine.
Clause 27.2 of the 2007 Deed of Amendment provided:
(a)The Trustee may before the end of a financial year resolve to accumulate the whole or a part of the income of that financial year whereupon the accumulation will subject to clause 27.2(c), form part of capital.
(b)A resolution to accumulate may be in respect of the whole or a part of one or more categories of income.
(c)The Trustee may pay tax in respect of an accumulation out of the accumulation or out of capital.
Clause 27.4 of the 2007 Deed of Amendment provided:
If the Trustee fails to effectively distribute the whole of the income of a financial year as provided in clause 27.1 or to effectively resolve to accumulate the income as provided in clause 27.2, the Trustee must set aside the income which has not been distributed or so accumulated on trust absolutely:
(a) for the default beneficiaries named or described in clause 27.5(d)(i); and
(b)if there are no such persons, for the default beneficiaries described in clause 27.5(d)(ii), and the provisions of clause 27.3 will apply to any distribution under this clause 27.4.
I accept the Commissioner’s submissions that the circular trust entitlements did not operate on a static amount of trust income. The consequence of the circular present entitlement would have been that an amount arose in the net income of the Demian Trust additional to the existing net income of the Demian Trust and s 99A(4A) would have made the trustee of the Demian Trust liable to be assessed on that additional amount of the net income because it was not included in the assessable income of a beneficiary under s 97. The additional amount of the net income of the Demian Trust would not reflect any amount which the trustee had failed effectively to distribute or accumulate under cls 27.1 or 27.2 of the 2007 Deed of Amendment. The additional amount of that net income would arise after the operation of those clauses, that is, once s 97 had applied to the default beneficiaries as beneficiaries. Neither the introduction of the trustee beneficiary non-disclosure tax nor the amendments to that legislation applying from the 2019 income year onwards direct any different outcome.
THIRD SET OF ISSUES: PENALTIES
The applicants’ challenges to the penalties imposed were brought by way of merits review in the AAT in proceedings heard concurrently with the FCA proceedings. The issue of penalties is the subject of the decision in the corresponding AAT decision.
ORDERS
The parties are directed to provide a draft form of order giving effect to this judgment in respect of each of the related FCA proceedings within 14 days.
I certify that the preceding one hundred and seventy (170) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Davies. Associate:
Dated: 15 October 2020
APPENDIX A
file no parties NSD803/2018 ADVANCED HOLDINGS PTY LIMITED AS TRUSTEE FOR THE DEMIAN TRUST
Applicant
COMMISSIONER OF TAXATION
Respondent
NSD848/2018 MERCHANT PROJECT MARKETING PTY LTD
Applicant
COMMISSIONER OF TAXATION
Respondent
NSD849/2018 CHARLES APARTMENTS PTY LIMITED
Applicant
COMMISSIONER OF TAXATION
Respondent
NSD850/2018 RAMSEY GARDENS PTY LIMITED
Applicant
COMMISSIONER OF TAXATION
Respondent
NSD851/2018 TRAMDELL PTY LTD
Applicant
COMMISSIONER OF TAXATION
Respondent
NSD985/2018 CHARBEL DEMIAN
Applicant
COMMISSIONER OF TAXATION
Respondent
NSD986/2018 HODA DEMIAN
Applicant
COMMISSIONER OF TAXATION
Respondent
NSD987/2018 STEPHANIE DEMIAN
Applicant
COMMISSIONER OF TAXATION
Respondent
NSD988/2018 JESSICA DEMIAN
Applicant
COMMISSIONER OF TAXATION
Respondent
NSD989/2018 CHRISTOPHER DEMIAN
Applicant
COMMISSIONER OF TAXATION
Respondent
NSD1009/2018 ADVANCED HOLDINGS PTY LIMITED AS TRUSTEE FOR THE DEMIAN TRUST ON BEHALF OF EVE VALESKA VONO
Applicant
COMMISSIONER OF TAXATION
Respondent
NSD1010/2018 ADVANCED HOLDINGS PTY LIMITED AS TRUSTEE FOR THE DEMIAN TRUST ON BEHALF OF BROOKE DEMIAN
Applicant
COMMISSIONER OF TAXATION
Respondent
NSD599/2019 ADVANCED HOLDINGS PTY LTD
Applicant
COMMISSIONER OF TAXATION
Respondent
NSD1172/2019 BANKSTOWN DEVELOPMENT PTY LTD
Applicant
DEPUTY COMMISSIONER OF TAXATION
Respondent
NSD1173/2019 ADVANCED HOLDINGS PTY LIMITED AS TRUSTEE FOR THE DEMIAN TRUST
Applicant
DEPUTY COMMISSIONER OF TAXATION
Respondent
2018/2354 STVJ
Applicant
COMMISSIONER OF TAXATION
Respondent
2018/2355 STVJ
Applicant
COMMISSIONER OF TAXATION
Respondent
2018/2741 QLCN
Applicant
COMMISSIONER OF TAXATION
Respondent
2018/2743 WCVB
Applicant
COMMISSIONER OF TAXATION
Respondent
2018/2744 CVMQ
Applicant
COMMISSIONER OF TAXATION
Respondent
2018/2745 JMFF
Applicant
COMMISSIONER OF TAXATION
Respondent
2018/3153 XJSQ
Applicant
COMMISSIONER OF TAXATION
Respondent
2018/3154 XJSQ
Applicant
COMMISSIONER OF TAXATION
Respondent
2018/3155 LZHN
Applicant
COMMISSIONER OF TAXATION
Respondent
2018/3163 MJZH
Applicant
COMMISSIONER OF TAXATION
Respondent
2018/3165 SYFW
Applicant
COMMISSIONER OF TAXATION
Respondent
2019/2479 MGSL
Applicant
COMMISSIONER OF TAXATION
Respondent
2019/2480 MGSL
Applicant
COMMISSIONER OF TAXATION
Respondent
2019/4246 STVJ
Applicant
COMMISSIONER OF TAXATION
Respondent
4
9
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