Ashwick (Qld) No 127 Pty Ltd (ACN 010 577 456) v Commissioner of Taxation

[2009] FCA 1388

FEDERAL COURT OF AUSTRALIA

Ashwick (Qld) No 127 Pty Ltd (ACN 010 577 456) v Commissioner of Taxation [2009] FCA 1388

TAXATION – deductible expenses – written-off bad debts – whether deductible under s 25-35, Income Tax Assessment Act 1936 (Cth) or s 8-1, Income Tax Assessment Act 1997 (Cth) – whether debts incurred in the “ordinary course of… business” – intra-group debt arrangements.

TAXATION – deductible expenses – whether interest expenses incurred “in carrying on a business” in circumstances of winding down of sections of corporate group.

TAXATION – deductible expenses – deductibility of losses transferred to corporate group members.

TAXATION – avoidance – Income Tax Assessment Act 1936 (Cth), Pt IVA – whether “scheme” for s 177A(1) – whether coherent course of conduct engaged in – existence and nature of benefit derived.

Income Tax Assessment Act 1936 (Cth)
Income Tax Assessment Act 1997 (Cth)

Australian National Hotels Ltd v Federal Commissioner of Taxation (1988) 19 FCR 234
BHP Billiton Petroleum (Bass Strait) Pty Ltd v Commissioner of Taxation (2002) 126 FCR 119
Coal Developments (German Creek) Pty Ltd v Federal Commissioner of Taxation (2008) 166 FCR 140
Commissioner of Taxation v Bivona Pty Ltd (1990) 21 FCR 562
Commissioner of Taxation (SA) v The Executor Trustee and Agency Company of SA Limited (1938) 63 CLR 108
Commissioner of Taxation v Unilever Australia Securities Limited (1995) 56 FCR 152
Cross (Inspector of Taxes) v London & Provincial Trust Ltd [1938] 1 KB 792
Edgelow v MacElwee [1918] 1 KB 205
Fairway Estates Pty Ltd v Federal Commissioner of Taxation (1970) 123 CLR 153
Federal Commissioner of Taxation v Consolidated Press Holdings Ltd (2001) 207 CLR 235
Federal Commissioner of Taxation v Firth (2003) 120 FCR 450
Federal Commissioner of Taxation v Hart (2004) 217 CLR 216
Federal Commissioner of Taxation v R & D Holdings Pty Ltd (2007) 160 FCR 248
Federal Commissioner of Taxation v Total Holdings (Aust) Pty Ltd (1979) 24 ALR 401
Fletcher v Federal Commissioner of Taxation (1991) 173 CLR 1
Franklin’s Selfserve Pty Ltd v Federal Commissioner of Taxation (1970) 125 CLR 52
Henderson v Federal Commissioner of Taxation (1969) 119 CLR 612
Hooker Rex Pty Limited v Commissioner of Taxation (1988) 79 ALR 181
Hungier v Grace (1972) 127 CLR 210
J Rowe & Son Pty Ltd v Federal Commissioner of Taxation (1970-71) 124 CLR 421
Kidston Goldmines Ltd v Commissioner of Taxation (1991) 30 FCR 77
Macquarie Finance Ltd v Commissioner of Taxation (2005) 146 FCR 77
North Australia Pastoral Co Ltd v Federal Commissioner of Taxation (1944) 71 CLR 623
Northern Engineering Pty Ltd v Federal Commissioner of Taxation (1979) 42 FLR 301
Odhams Press v Cook [1940] 3 All ER 15
Peabody v Federal Commissioner of Taxation (1994) 181 CLR 359
Permanent Trustee Co (Executors of F H Prior dec) v Federal Commissioner of Taxation (1940) 6 ATD 5
Richard Walter Pty Ltd v Commissioner of Taxation (1995) 95 ATC 4440
Spassked Pty Ltd v Federal Commissioner of Taxation (No 5) (2003) 197 ALR 553
Spassked Pty Ltd v Federal Commissioner of Taxation (2003) 136 FCR 441
Stage Club Ltd v Millers Hotel Pty Ltd (1981) 150 CLR 535
Steele v Deputy Commissioner of Taxation (1999) 197 CLR 459
St Lucia Usines & Estates Co Ltd v Colonial Treasurer of St Lucia [1924] AC 508
Ure v Commissioner of Taxation (1981) 50 FLR 219

ASHWICK (QLD) NO 127 PTY LTD (ACN 010 577 456) v THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

VID 861 of 2006

ASHWICK (QLD) NO 127 PTY LTD (ACN 010 577 456) v THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA;
VID 123 of 2007

ASHWICK (QLD) NO 127 PTY LTD (ACN 010 577 456) v THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA;
VID 124 of 2007

ASHWICK (QLD) NO 127 PTY LTD (ACN 010 577 456) V THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA;
VID 125 of 2007

NEXDAY PTY LTD (ACN 003 621 681) v THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA;
VID 126 of 2007

EFG INVESTMENTS PTY LTD (ACN 006 169 955) v THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA;
VID 127 of 2007

AMAYANA PTY LTD (ACN 006 908 737) v THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA;
VID 128 of 2007

FOSTER’S GROUP LTD (ACN 007 620 886) v THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA;
VID 129 of 2007

ELFIC PTY LTD (ACN 007 606 206) v THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA;
VID 130 of 2007

EFG TREASURY PTY LTD (ACN 050 431 699) v THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA;
VID 131 of 2007

EFG AUSTRALIA PTY LTD (ACN 006 357 035) v THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA;
VID 132 of 2007

ELFIC PTY LTD (ACN 007 606 206) v THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA;
VID 133 of 2007

ELFIC PTY LTD (ACN 007 606 206) v THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA;
VID 134 of 2007

EFG SECURITIES PTY LTD (ACN 005 489 029) v THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA.
VID 135 of 2007

RYAN J
26 NOVEMBER 2009
MELBOURNE

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY

GENERAL DIVISION

VID 861 of 2006

BETWEEN:	ASHWICK (QLD) NO 127 PTY LTD (ACN 010 577 456) Appellant
AND:	THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent

JUDGE:	RYAN J
DATE OF ORDER:	26 NOVEMBER 2009
WHERE MADE:	MELBOURNE

THE COURT ORDERS THAT:

1.The application be dismissed.

2.There be no order as to costs.

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 eSearch on the Court’s website.

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY

GENERAL DIVISION

VID 123 of 2007

BETWEEN:	ASHWICK (QLD) NO 127 PTY LTD (ACN 010 577 456) Applicant
AND:	THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent

JUDGE:	RYAN J
DATE OF ORDER:	26 NOVEMBER 2009
WHERE MADE:	MELBOURNE

THE COURT ORDERS THAT:

1.        The appeal against the objection decision be allowed.

2.The assessment of 18 December 2006 be set aside and the assessment be remitted to the Commissioner of Taxation for reassessment in accordance with the reasons of the Court published this day. 

3.The respondent pay the applicant’s costs, to be taxed in default of agreement.

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 eSearch on the Court’s website.

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY

GENERAL DIVISION

VID 124 of 2007

BETWEEN:	ASHWICK (QLD) NO 127 PTY LTD (ACN 010 577 456) Applicant
AND:	THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent

JUDGE:	RYAN J
DATE OF ORDER:	26 NOVEMBER 2009
WHERE MADE:	MELBOURNE

THE COURT ORDERS THAT:

1.        The appeal against the objection decision be allowed.

2.The assessment of 18 December 2006 be set aside and the assessment be remitted to the Commissioner of Taxation for reassessment in accordance with the reasons of the Court published this day. 

3.The respondent pay the applicant’s costs, to be taxed in default of agreement.

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 eSearch on the Court’s website.

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY

GENERAL DIVISION

VID 125 of 2007

BETWEEN:	ASHWICK (QLD) NO 127 PTY LTD (ACN 010 577 456) Applicant
AND:	THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent

JUDGE:	RYAN J
DATE OF ORDER:	26 NOVEMBER 2009
WHERE MADE:	MELBOURNE

THE COURT ORDERS THAT:

1.        The appeal against the objection decision be allowed.

2.The assessment of 18 December 2006 be set aside and the assessment be remitted to the Commissioner of Taxation for reassessment in accordance with the reasons of the Court published this day. 

3.The respondent pay the applicant’s costs, to be taxed in default of agreement.

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 eSearch on the Court’s website.

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY

GENERAL DIVISION

VID 126 of 2007

BETWEEN:	NEXDAY PTY LTD (ACN 003 621 681) Applicant
AND:	THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent

JUDGE:	RYAN J
DATE OF ORDER:	26 NOVEMBER 2009
WHERE MADE:	MELBOURNE

THE COURT ORDERS THAT:

1.        The appeal against the objection decision be allowed.

2.The assessment of 18 December 2006 be set aside and the assessment be remitted to the Commissioner of Taxation for reassessment in accordance with the reasons of the Court published this day. 

3.The respondent pay the applicant’s costs, to be taxed in default of agreement.

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 eSearch on the Court’s website.

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY

GENERAL DIVISION

VID 127 of 2007

BETWEEN:	EFG INVESTMENTS PTY LTD (ACN 006 169 955) Applicant
AND:	THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent

JUDGE:	RYAN J
DATE OF ORDER:	26 NOVEMBER 2009
WHERE MADE:	MELBOURNE

THE COURT ORDERS THAT:

1.        The appeal against the objection decision be allowed.

2.The assessment of 18 December 2006 be set aside and the assessment be remitted to the Commissioner of Taxation for reassessment in accordance with the reasons of the Court published this day. 

3.The respondent pay the applicant’s costs, to be taxed in default of agreement.

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 eSearch on the Court’s website.

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY

GENERAL DIVISION

VID 128 of 2007

BETWEEN:	AMAYANA PTY LTD (ACN 006 908 737) Applicant
AND:	THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent

JUDGE:	RYAN J
DATE OF ORDER:	26 NOVEMBER 2009
WHERE MADE:	MELBOURNE

THE COURT ORDERS THAT:

1.        The appeal against the objection decision be allowed.

2.The assessment of 18 December 2006 be set aside and the assessment be remitted to the Commissioner of Taxation for reassessment in accordance with the reasons of the Court published this day. 

3.The respondent pay the applicant’s costs, to be taxed in default of agreement.

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 eSearch on the Court’s website.

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY

GENERAL DIVISION

VID 129 of 2007

BETWEEN:	FOSTER’S GROUP LTD (ACN 007 620 886) Applicant
AND:	THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent

JUDGE:	RYAN J
DATE OF ORDER:	26 NOVEMBER 2009
WHERE MADE:	MELBOURNE

THE COURT ORDERS THAT:

1.        The appeal against the objection decision be allowed.

2.The assessment of 18 December 2006 be set aside and the assessment be remitted to the Commissioner of Taxation for reassessment in accordance with the reasons of the Court published this day. 

3.The respondent pay the applicant’s costs, to be taxed in default of agreement.

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 eSearch on the Court’s website.

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY

GENERAL DIVISION

VID 130 of 2007

BETWEEN:	ELFIC PTY LTD (ACN 007 606 206) Applicant
AND:	THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent

JUDGE:	RYAN J
DATE OF ORDER:	26 NOVEMBER 2009
WHERE MADE:	MELBOURNE

THE COURT ORDERS THAT:

1.        The appeal against the objection decision be allowed.

2.The assessment of 18 December 2006 be set aside and the assessment be remitted to the Commissioner of Taxation for reassessment in accordance with the reasons of the Court published this day. 

3.The respondent pay the applicant’s costs, to be taxed in default of agreement.

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 eSearch on the Court’s website.

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY

GENERAL DIVISION

VID 131 of 2007

BETWEEN:	EFG TREASURY PTY LTD (ACN 050 431 699 Applicant
AND:	THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent

JUDGE:	RYAN J
DATE OF ORDER:	26 NOVEMBER 2009
WHERE MADE:	MELBOURNE

THE COURT ORDERS THAT:

1.        The appeal against the objection decision be allowed.

2.The assessment of 18 December 2006 be set aside and the assessment be remitted to the Commissioner of Taxation for reassessment in accordance with the reasons of the Court published this day. 

3.The respondent pay the applicant’s costs, to be taxed in default of agreement.

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 eSearch on the Court’s website.

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY

GENERAL DIVISION

VID 132 of 2007

BETWEEN:	EFG AUSTRALIA PTY LTD (ACN 006 357 035) Applicant
AND:	THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent

JUDGE:	RYAN J
DATE OF ORDER:	26 NOVEMBER 2009
WHERE MADE:	MELBOURNE

THE COURT ORDERS THAT:

1.        The appeal against the objection decision be allowed.

2.The assessment of 18 December 2006 be set aside and the assessment be remitted to the Commissioner of Taxation for reassessment in accordance with the reasons of the Court published this day. 

3.The respondent pay the applicant’s costs, to be taxed in default of agreement.

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 eSearch on the Court’s website.

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY

GENERAL DIVISION

VID 133 of 2007

BETWEEN:	ELFIC PTY LTD (ACN 007 606 206) Applicant
AND:	THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent

JUDGE:	RYAN J
DATE OF ORDER:	26 NOVEMBER 2009
WHERE MADE:	MELBOURNE

THE COURT ORDERS THAT:

1.        The appeal against the objection decision be allowed.

2.The assessment of 18 December 2006 be set aside and the assessment be remitted to the Commissioner of Taxation for reassessment in accordance with the reasons of the Court published this day. 

3.The respondent pay the applicant’s costs, to be taxed in default of agreement.

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 eSearch on the Court’s website.

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY

GENERAL DIVISION

VID 134 of 2007

BETWEEN:	ELFIC PTY LTD (ACN 007 606 206) Applicant
AND:	THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent

JUDGE:	RYAN J
DATE OF ORDER:	26 NOVEMBER 2009
WHERE MADE:	MELBOURNE

THE COURT ORDERS THAT:

1.        The appeal against the objection decision be allowed.

2.The assessment of 18 December 2006 be set aside and the assessment be remitted to the Commissioner of Taxation for reassessment in accordance with the reasons of the Court published this day. 

3.The respondent pay the applicant’s costs, to be taxed in default of agreement.

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 eSearch on the Court’s website.

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY

GENERAL DIVISION

VID 135 of 2007

BETWEEN:	EFG SECURITIES PTY LTD (ACN 005 489 029) Applicant
AND:	THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent

JUDGE:	RYAN J
DATE OF ORDER:	26 NOVEMBER 2009
WHERE MADE:	MELBOURNE

THE COURT ORDERS THAT:

1.        The appeal against the objection decision be allowed.

2.The assessment of 18 December 2006 be set aside and the assessment be remitted to the Commissioner of Taxation for reassessment in accordance with the reasons of the Court published this day. 

3.The respondent pay the applicant’s costs, to be taxed in default of agreement.

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 eSearch on the Court’s website.

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY

GENERAL DIVISION

VID 861 of 2006

BETWEEN:	ASHWICK (QLD) NO 127 PTY LTD (ACN 010 577 456) Appellant
AND:	THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent
And		VID 123 of 2007
BETWEEN:	ASHWICK (QLD) NO 127 PTY LTD (ACN 010 577 456) Applicant
AND:	THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent
And		VID 124 of 2007
BETWEEN:	ASHWICK (QLD) NO 127 PTY LTD (ACN 010 577 456) Applicant
AND:	THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent
And		VID 125 of 2007
BETWEEN:	ASHWICK (QLD) NO 127 PTY LTD (ACN 010 577 456) Applicant
AND:	THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent
And		VID 126 of 2007
BETWEEN:	NEXDAY PTY LTD (ACN 003 621 681) Applicant
AND:	THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent
And		VID 127 of 2007
BETWEEN:	EFG INVESTMENTS PTY LTD (ACN 006 169 955) Applicant
AND:	THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent
And		VID 128 of 2007
BETWEEN:	AMAYANA PTY LTD (ACN 006 908 737) Applicant
AND:	THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent
And		VID 129 of 2007
BETWEEN:	FOSTER’S GROUP LTD (ACN 007 620 886) Applicant
AND:	THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent
And		VID 130 of 2007
BETWEEN:	ELFIC PTY LTD (ACN 007 606 206) Applicant
AND:	THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent
And		VID 131 of 2007
BETWEEN:	EFG TREASURY PTY LTD (ACN 050 431 699 Applicant
AND:	THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent
And		VID 132 of 2007
BETWEEN:	EFG AUSTRALIA PTY LTD (ACN 006 357 035) Applicant
AND:	THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent
And		VID 133 of 2007
BETWEEN:	ELFIC PTY LTD (ACN 007 606 206) Applicant
AND:	THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent
And		VID 134 of 2007
BETWEEN:	ELFIC PTY LTD (ACN 007 606 206) Applicant
AND:	THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent
And		VID 135 of 2007
BETWEEN:	EFG SECURITIES PTY LTD (ACN 005 489 029) Applicant
AND:	THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent
JUDGE:	RYAN J
DATE:	26 NOVEMBER 2009
PLACE:	MELBOURNE

TABLE OF CONTENTS

THE CORPORATE STRUCTURE AND HISTORY OF THE FOSTER’S GROUP
ACRONYMS AND ABBREVIATIONS
THE FACTUAL BACKGROUND

THE COMMISSIONER’S ASSESSMENTS, THE APPLICANTS’ OBJECTIONS AND THE PRESENT PROCEEDINGS

(i)     ELFIC
(ii)       EFGS
(iii)      EFGA
(iv)      FGL
(v)       Amayana
(vi)      Ashwick
(vii)     Nexday
(viii)        EFGT
(vix)     EFG Investments

THE COMMON ISSUES
THE DEDUCTIBILITY OF BAD DEBTS WRITTEN-OFF

(i)     The statutory provisions
(ii)       EFGA’s bad debt deductions

(a)       The ELFIC/EFGA Bad Debt Deduction

(b)       The EFGS/EFGA Bad Debt Deduction

(c)       The Commissioner’s contentions in respect of the bad debts written off by EFGA

(d)      EFGA’s contentions as to its bad debt deductions

(e)       Consideration of EFGA’s bad debt deductions

(iii)      EFGT’s Bad Debt Deductions

Consideration of EFGT’s bad debt deductions

(iv)      FGL’s Bad Debt Deductions

Consideration of FGL’s Bad Debt Deduction

(v)       Amayana’s Bad Debt Deductions

Consideration of Amayana’s Bad Debt Deductions

THE DEDUCTIBILITY OF INTEREST EXPENSES INCURRED BY BORROWER COMPANIES WITHIN THE FOSTER’S GROUP

The applicants’ contentions on deductibility of interest claimed by ELFIC
Consideration of deductibility of interest claimed by ELFIC
Aspects of EFGA’s activities relevant to its claim for a deduction in respect of interest
The applicants’ contentions on deductibility of interest claimed by EFGA
Consideration of deductibility of interest claimed by EFGA
Aspects of Amayana’s activities relevant to its claim for a deduction in respect of interest.
The applicants’ contentions on the deductibility of interest claimed by Amayana
Commissioner’s contention as to the deductibility of interest claimed by Amayana
Consideration of deductibility of interest claimed by Amayana
Aspects of the activities of EFGS relevant to its claim for a deduction of interest
Applicants’ contentions as to the deductibility of interest claimed by EFGS
The Commissioner’s contentions on the deductibility of interest claimed by EFGS
Consideration of the deductibility of interest claimed by EFGS
Aspects of EFGT’s activities relevant to its claim for a deduction in respect of interest
Applicants’ contentions on the deductibility of interest claimed by EFGT
The Commissioner’s contentions on the deductibility of interest claimed by EFGT
Consideration of deductibility of interest claimed by EFGT
Was the interest expenditure on capital account?

DEDUCTIBILITY OF LOSSES TRANSFERRED TO ASHWICK, NEXDAY AND EFG INVESTMENTS

(i)     Ashwick

Consideration of Ashwick’s claimed deduction for a tax loss transferred from Amayana

(ii)       Nexday

Consideration of Nexday’s claimed deduction for a tax loss transferred from Amayana

(iii)      EFG Investments

Consideration of EFG Investment’s claimed deduction for a tax loss transferred from EFGS

PART IVA

The existence of a “scheme”
Tax Benefit

Purpose

(i)     Manner in which the scheme was entered into or carried out – s 177D(b)(i)
(ii)       The form and substance of the scheme – s 177D(b)(ii)

(iii)        Time of entry into alleged scheme and period during which it was carried out – s 177D(b)(iii)

(iv)         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)

(v)          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)

(vi)         Any change in the financial position of a person with a connection with the relevant taxpayer – s 177D(b)(vi)

(vii)        Any other consequences for the relevant taxpayer or for any person referred to in (vi) of the scheme being entered into or carried out – s 177D(b)(viii)

(viii)       Nature of any connection between the relevant taxpayer and any person referred to in (vi) – s 177D(b)(viii)

Conclusion as to Part IVA

GENERAL CONCLUSION

(i)     Proceeding numbered VID 861 of 2006;  Ashwick (Qld) No 127 Pty Ltd

(ii)         Proceedings numbered VID 123 of 2007, VID 124 of 2007 and VID 125 of 2007;  Ashwick (Qld) No 127 Pty Ltd

(iii)      Proceeding numbered VID 126 of 2007;  Nexday Pty Ltd
(iv)      Proceeding numbered VID 127 of 2007;  EFG Investments Pty Ltd
(v)       Proceeding numbered VID 128 of 2007,  Amayana Pty Ltd
(vi)      Proceeding numbered VID 129 of 2007;  Foster’s Group Ltd

(vii)        Proceedings numbered VID 130 of 2007, VID 133 of 2007 and VID 134 of 2007; Elfic Pty Ltd

(viii)        Proceeding numbered VID 131 of 2007;  EFG Treasury Pty Ltd
(vix)     Proceeding numbered VID 132 of 2007;  EFG Australia Pty Ltd
(x)       Proceeding numbered VID 135 of 2007;  EFG Securities Pty Ltd

REASONS FOR JUDGMENT

THE CORPORATE STRUCTURE AND HISTORY OF THE FOSTER’S GROUP

1. In 1982 Elder Smith Goldsbrough Mort Limited took over Henry Jones IXL Limited and changed its name to Elders IXL Limited.  In 1983 the enlarged company took over Carlton & United Breweries Limited and conducted under a new name, Foster’s Group Limited (“FGL”) a diverse range of business including;

   (a)brewing, hotels, producing and marketing wines and spirits, all of which were conducted by subsidiary companies known as the Carlton Group;

   (b)livestock selling, rural financing, wool broking, insurance agencies, merchandising, a real estate agency and rural information services conducted by another group of subsidiaries known as the Pastoral Group;

   (c)agricultural, resource, industrial and consumer products export trading businesses conducted by subsidiaries known collectively as the International Group; and

   (d)financial services business conducted by subsidiaries collected in the Finance Group (also called the Elder’s Finance Group) (“the Finance Group”).

2. As at 30 June 1984 the structure of the Finance Group could have been represented in a simplified diagrammatic form by the following flow chart:

3. Each of the entities in the Finance Group had its own charter which laid down certain limits subject to which it was required to trade.  Those limits were directed to matters like gearing ratios, liquidity ratios, funding and borrowing limits, credit risk and trading and dealing limits.  Each of those charters had been formulated by the Board of the relevant Finance Group subsidiary and approved by the Board of the parent company, FGL.  The charters were reviewed and amended from time to time. 

   ACRONYMS AND ABBREVIATIONS

4. Throughout these reasons acronyms and abbreviations are generally used to refer to entities or expressions which recur with some frequency.  In the case of corporate entities the full name of the company is set out immediately before the relevant acronym or abbreviation where it first occurs.

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	EFG Investments
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	FBGT
Foster’s Group Ltd (formerly IXL Ltd)	FGL
Harlin Holdings Pty Limited	Harlin
Income Tax  Assessment Act 1936 (Cth)	the 1936 Act
Income Tax Assessment Act 1997 (Cth)	the 1997 Act
Nexday Pty Ltd	Nexday
Reduction of Assets Management Committee	RAMCO
The Finance Group	Collectively the subsidiaries of FGL which from time to time made up the Finance Group
The Foster’s Group	Collectively FGL and its subsidiaries from time to time including those gathered in the Finance Group
The respondent Commissioner of Taxation	the Commissioner

THE FACTUAL BACKGROUND

1. On 3 December 1984, EFGA Pty Ltd (“EFGA”) was incorporated as a new holding company for the subsidiaries which comprised the Finance Group of FGL’s subsidiaries.  It was perceived that EFGA would have a higher credit rating than its subsidiaries separately enjoyed and would be able to borrow funds for the members of the Finance Group from external lenders more advantageously than those members individually could achieve.  There was also some expectation that the holding company for the Finance Group might obtain a banking licence.

2. Before the incorporation of EFGA, ELFIC Pty Ltd (formerly Elders Finance and Investment Co Limited) (“ELFIC”) had carried on the business of a merchant banker and its activities included the receiving of surplus funds on deposit from other members of the Finance Group and the making of advances by way of loans at a margin as required to members of the Finance Group.  However, the greater proportion of ELFIC’s income by way of interest was derived by loans to third parties.  By 30 June 1994, ELFIC’s gross assets had grown to $690 million. 

3. After its incorporation and until about 2002, EFGA stood alone and separate from other entities in the Foster’s Group as a corporation with its own statutory accounts.  Also after its incorporation, EFGA succeeded to ELFIC’s share of a US$500 million global note facility which had been raised as to US$300 million by FGL and as to US$200 million by ELFIC on behalf of the Finance Group.  Upon its entry into that facility, EFGA, in February 1985, achieved a credit rating by Australian Ratings of A+.  On 15 July 1985, a new charter was formulated for EFGA applicable to the whole of the Finance Group, each individual component of which was also given its own separate approved charter and cross-guarantees to a trustee were established between EFGA, ELFIC, Elders Rural Finance and Elders Lensworth Finance Limited Group (“Lensworth”) which later became Lensworth Glenmore Park Limited and was a central company of the Lensworth Group which carried on the property finance business of the Elders Finance Group. 

4. EFGA also succeeded to ELFIC’s role as a licensed participant in the money market and a foreign exchange dealer.  It took until 1 July 1986 for the legal and systems requirements for that transfer to be implemented. By 30 June 1987, EFGA’s creditors and borrowings had grown to about $1.4 billion and by 30 June 1988 to about $2.3 billion. 

5. Between 1985 and 1986, EFGA took over the conduct of treasury activities for the Finance Group.  That involved it in making loans of about $700 million to ELFIC and $40 million to EFG Securities Pty Ltd (“EFGS”) at benchmark rates like the Bank Bill Rate (“BBR”) plus a margin.  ELFIC in turn on-lent the funds to retail customers subject to credit limits set by the Board of EFGA and an obligation to submit monthly management reports to that Board.  The fixing of interest rates charged to members of the Finance Group occurred at least annually and was intended to impose a discipline on EFGA executives to improve its performance as measured by a “profit” on the notional cost of capital employed.  Finance Group subsidiaries were required to account for “losses” on defaulting loans to retail customers, which were set-off against “profits” derived from performing loans and other activities.

6. Mr Gerald John van Wyngen, who was the Director from 1986 to 1990 of EFG Treasury Pty Ltd (“EFGT”) deposed to its activities during his directorship when he oversaw its five divisions;

   (a)Trading, which undertook foreign exchange trading and funding, and dealt in foreign exchange options;

   (b)Risk Management, which acted as a futures broker for EFGT and third party customers;

   (c)Funding, which raised funds to finance the activities of entities in the Finance Group as well as external parties, and traded in bank bills, forward rate agreements and other derivatives;

   (d)Capital Markets, which traded in bonds, convertible notes and interest rate swaps and managed commodity risks for mining houses; and

   (e)       Capital Markets Technologies, the Synthetic Options joint venture in San Francisco.

   EFGT had originally operated as a subsidiary of ELFIC but in July 1986 it passed into the direct control  of EFGA.

7. Mr van Wyngen described EFGT as a “profit centre” with a budget requiring a return on capital employed after all expenses, including head office cost allocations.  He gave evidence that in early 1986, the budget for EFGT required it to make a profit contribution of nearly $3 million (before tax) to ELFIC, with around $10 million in revenue, $6 million in direct operating expenses and $1 million in allocated central expenses.  As at 31 May 1986, EFGT was approximately $300,000 behind budget in terms of its net contribution.

8. For the year ended 30 June 1988, EFGT made a direct management return (measured as revenue less transaction costs, standby costs, provisions and direct operating expenses) of $12.7 million. The return of EFGT’s funding business, before overheads, was $8.5 million, compared with a budget of $2.4 million.  For the year ended 30 June 1989, EFGT made a direct management return of $7.5 million, to which the funding business contributed $3.3 million.  Following a report by PA Consulting Group dated 13 April 1989, the division of EFGT that conducted futures broking and trading was sold as it was no longer considered profitable. 

9. According to Mr van Wyngen, EFGT raised funds from several external sources, including prime corporations (being companies with a rating of "A-" or higher) and banks in the money and term deposit markets, discounting bills of exchange, retail deposits from the pastoral and trustee businesses and overseas bank lines.  The funding obtained was on a mix of terms (tenor), ranging from 11.00 am and 24 hour call, through to term deposits of 12 months or more.  The rate of interest on these funds depended on the tenor and the then applicable interest yield curve across the range of maturity terms.

10. Each year, as part of the annual budgeting process, the Finance Group entities carrying on external lending activities forecast the funds required for each month over the following financial year.  When funding was required, EFGT would process a pre-numbered deal ticket and provide the funds to the other entities, including ELFIC and EFGS, for lending to their customers.  In April 1988, EFGT's Australian region balance sheet totalled $2.5 billion, which made it the biggest balance sheet for an Australian non-bank financial institution.

11. EFGT’s strategy for maximising profit was to pursue opportunities to raise funds at the lowest possible cost, anticipate interest rate changes, lend at higher yields and manage foreign exchange and interest rate risk.  Further considerations included the need to maintain sufficient liquidity to comply with banking covenants and to be in a position to provide the funds required by the borrowing entities within the Finance Group at relatively short notice, as well as managing prudently to protect against unexpected turmoil in financial markets.

12. According to Mr van Wyngen, a major technique by which profits were maximised was “gapping” or “mismatching”.  This involved anticipating movements in interest rates across a spread of maturity terms and exploiting differences between the rate at which money was borrowed by EFGT and on lent to external counterparties and other entities within the Finance Group, as well as Elders Resources Finance.  This was managed across the portfolio by use of physical means like varying the tenor of liabilities and assets (such as bank and non-bank bills of exchange) and synthetic products, such as bank bill futures, forward rate agreements and interest rate swaps.

13. From around 1988, capital adequacy guidelines for banks were introduced by the Reserve Bank of Australia, which required their assets to be risk weighted and gearing limited to 12.5 times capital. This made funding cheaper for banks (which had a lower risk weighting), and more difficult to obtain and more expensive for non-bank financial institutions such as EFGA (which was not under the control of the Reserve Bank of Australia and had a higher risk weighting).  From around 1988, Mr van Wyngen advised that EFGA should obtain a banking licence to avail itself of these benefits.

14. Lending transactions occurred between EFGT and external counterparties for the purpose of managing EFGT's liquidity.  The counterparties were banks, prime merchant banks, finance companies and prime or near prime companies for which credit limits had been approved by credit personnel based in the Finance Group's Melbourne office. The loans were nearly always lent on "11 am" or "24 hour" call and were unsecured. The terms able to be agreed by EFGT were governed by an operating charter, which set out the lines of authority, operating limits, and approved product mixes.

15. Funding was provided to other entities in the Finance Group, such as ELFIC and EFGS, by way of loans at interest.  From 1986 to 1990, the interest charged was normally calculated by applying a particular margin to the 90 day BBR on a monthly basis. In early 1986, the margin above BBR had been set at 0.7%. The margin was changed to 0.6%, with effect from October 1986. In addition, a charge was agreed to be paid by the borrowing entities for the facilities which were required to be held by the Finance Group to have sufficient liquidity to meet the funding requirements of the borrowing entities. Finally, a “penalty” rate was payable if the borrowing entity required materially less or more funding from EFGT than forecast in the budgets. Interest accruing on loans from EFGA (through EFGT) to other entities in the Finance Group was ordinarily calculated on a daily basis, and capitalised monthly.

16. Where funding was provided by EFGT to a borrowing entity for a specific loan by the borrowing entity to a customer, there was a risk of a differential between the timing of interest receipts and payments. Although interest was capitalised monthly on balances owed by the borrowing entities to EFGT, it was not paid until the borrowing entities received funds from their clients.  However, EFGT was at liberty to exploit the interest rate risk in how it sought its own funding, for example by “gapping”. 

17. The term of loans to other entities in the Finance Group was 24 hour call except for matched funded loans or where specifically agreed otherwise. In substance, this meant that the money was rolled over from day to day, with the borrowing entity being responsible for repaying the loans irrespective of how it employed the funds. The loans to other entities in the Finance Group were unsecured.

18. Mr van Wyngen gave evidence that the amount and type of security required from customers was determined and administered by the borrowing entities as part of their normal external lending businesses. In all cases, the credit risk was borne by borrowing entities. If an amount was not paid by a customer, the borrowing entity remained liable to EFGT for principal and accrued interest on the loan provided by EFGT.

19. In late December 1989, Dresdner Bank agreed to purchase the business of  EFGT (except for its funding operations). Mr van Wyngen transferred with the rest of the EFGT operations to Dresdner Australia, and was subsequently appointed Managing Director when the sale was completed in early 1990.

20. Between July 1985 and June 1986 the activities of companies in the Finance Group expanded considerably, enabling EFGA to report a profit for that financial year of approximately $34.2 million.  By May 1987 the management of the Finance Group had been restructured along regional lines with a separate Regional Managing Director and Regional Board for each of Australia, New Zealand, Asia, the United Kingdom / Europe and the United States of America.  Each region had its own treasury.  By 30 June 1987, the total assets of the Finance Group had grown to approximately $4.1 billion and the net operating profit to about $64 million. 

21. The share market crash of October 1987 thwarted a proposal to split the Foster’s Group into four separate publicly-listed companies, one of which would have been the Elders Finance Group.  Several companies in which the Finance Group had shareholdings were affected by the share market crash.  However, there was little concern about the solvency of the Finance Group itself as its capital and reserves were regarded as sufficient to absorb those losses.  In spite of the stock market crash and the abandonment of the proposed demerger of FGL, EFGA continued to grow steadily.  In the year ended 30 June 1988, the Finance Group was the largest merchant banker in Australia, reporting a record profit of $63.4 million and assets of $5 billion and, as at 30 June 1989, EFGA had 141 subsidiaries principally in Australia and New Zealand with some located elsewhere in the world.  In the three years ending 30 June 1989, EFGA’s consolidated accounts recorded significant net operating profits for the Finance Group.  In the same period ELFIC and EFGS earned substantial net income but incurred significant interest expenses almost exclusively on intra-group loans which were used as circulating capital in their businesses.  In the year ended 30 June 1988, ELFIC suffered an operating loss of $15 million and a loss on extraordinary items of $24 million including a write-down in investments in subsidiaries (one of which was EFGS) of $19 million.  In the same year EFGS suffered an operating loss of $12 million.  However, not all the companies in the Finance Group sustained losses in that period.  The Lensworth Group, with activities in the property sector, recorded increased operating profits in 1988 as a result of which the assets of the Lensworth Group increased by something of the order of 30%.  By the year ended 30 June 1989, ELFIC’s operating loss had grown to $86 million and that of EFGS to $8 million.  EFGA, however, still recorded a consolidated profit for the Finance Group in the same year of $81 million, largely derived from the continuing profitability of the Lensworth Group.  In June 1989, EFGA provided additional share capital of $80 million to ELFIC which, in turn, provided additional share capital of $20 million to EFGS.  By that means both subsidiaries reported positive net assets as required to preserve their money market dealers’ licences.

1. In late 1988, Australian Ratings downgraded EFGA’s credit rating from “A+” to “BBB+” and in January 1989 indicated its intention to downgrade EFGA’s credit rating further in response to concerns about the quality of its assets and the impact of new capital adequacy guidelines.  Those guidelines required each bank to maintain a certain level of capital, depending on the risk weighting accorded to its assets.  EFGA had a higher risk weighting because it was treated as a corporate borrower rather than a bank.  As a result, lenders charged higher rates of interest to EFGA, which, in turn, had to charge its customers higher interest rates than those charged by banks.

2. Australian Ratings ultimately did not further downgrade EFGA’s rating.  Nevertheless, the Finance Group went ahead with plans to become a specialist merchant bank, entailing a cap on assets as at 30 June 1989 and a reduction in total assets of $1 billion by 30 June 1990.  In the 1989 financial year, EFGA posted a consolidated profit before tax of $90 million.  However, EFGS and ELFIC both suffered net operating losses and required capital injections from EFGA to enable the companies to report positive net asset positions and retain the licences required to operate their businesses.  After the middle of 1989, FGL, at the request of EFGA, and prompted by external lenders’ having declined to renew EFGA’s debt financing, provided EFGA with a standby facility of $400 million at an interest rate of 2% above the BBR and on condition that EFGA reduced the facility to $250 million by October 1989.  Although that reduction was apparently achieved, a further tightening of the liquidity of the Finance Group necessitated an increase, in December 1989, to $500 million in the standby facility provided by FGL to EFGA. 

3. In August 1989, Harlin Holdings Pty Limited (“Harlin”) launched a bid for FGL and subsequently attained a 55.82% shareholding.  The takeover bid boosted the Finance Group’s ability to access the funds required for the orderly sale of assets.  However, the Finance Group’s liquidity and funding position continued to decline in the face of increased customer defaults, a depressed economy and ongoing funding commitments.  In August 1989, a $400 million standby loan facility was granted by FGL to EFGA, under which interest was charged at a margin of 2% above the then applicable BBR.

4. In November 1989, Australian Ratings downgraded FGL’s credit rating to “BB/B.1” and EFGA’s credit rating to “BB-/B.1”.  As a result, EFGA’s loans no longer fitted the investment criteria of its major lenders and banks began to withdraw funding.  After the downgrade, the Board of EFGA agreed to accelerate the strategic sell-down of the Finance Group’s assets in order to continue its operations.  A steering committee was formed to downsize the Australian and New Zealand businesses and coordinate reductions and sell-offs in other regions.  Between January and March 1990, the steering committee oversaw the sale of the Finance Group’s assets.  During this period, the Finance Group subsidiaries cut back their lending activities and concentrated on funding existing committed liabilities.  However, EFGA continued, where required, to make loans at a margin to the Finance Group subsidiaries.

5. In March 1990, FGL announced its plan to focus solely on its brewing business and divest itself of all of its other businesses, including those conducted by the Finance Group.  As a result, many lenders to the Finance Group, caught off-guard by the announcement, sought to switch existing external lines of credit to FGL.  At that stage, external funding of the Finance Group was over $3 billion.  In order for EFGA to realise the Finance Group’s assets and maximise shareholder returns, it became necessary to repay facilities as they matured and, to the extent that asset sales could not fund this, to draw on alternative funding from FGL.  Between February and April 1990, funding to EFGA by FGL doubled to approximately $301 million.

6. On 22 March 1990, the Board of EFGA established the Reduction of Asset Management Committee (“RAMCO”) to facilitate the expeditious realisation of assets, disposal of businesses and repayment of debt.  RAMCO had equivalent authority to the EFGA Board and continued to meet till July 2004.  In May 1990, the directors of the companies in the Finance Group called on FGL to provide them with letters of comfort so that they could sign the statutory accounts referable to companies in the Finance Group.

7. By 30 June 1990, the Finance Group’s assets had fallen to $2.7 billion following the sale of the Australian treasury operation, the Australian trustee business and stockbroking businesses in Australia, New Zealand and the United Kingdom.  At this stage, the realisation of the Finance Group’s assets was expected to be completed by 30 June 1990.  The debt owed by EFGA to the Foster’s Group was now $435 million, comprising the sum of direct liabilities of $417 million and bank borrowings transferred from EFGA to the Foster’s Group of $18 million.  This was forecast to increase to $820 million by 31 July 1990 and, thereafter, gradually reduce and be fully repaid by 30 June 1992.  The increase in debt to the Foster’s Group was largely the result of external bank funding being withdrawn or not being renewed and facilities being transferred to, or replaced by, new funding from the Foster’s Group.  As well, FGL provided a guarantee of performance of the obligations of Finance Group companies to certain creditors to preserve lines of credit from those creditors.  That was done rather than increasing the share capital of the Finance Group companies because of the risk that such equity funds might have become available to third party litigation creditors of companies in the Finance Group.  Until this time, EFGA had been charging the Finance Group companies at its cost of borrowing plus a margin of 0.6%.  From 1 September 1990, EFGA continued to charge interest but provided further moneys at cost of funds with no margin.

8. 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 (“FBGT”).  Both the loan from FBGT to Amayana and that from Amayana to EFGA were at the standard intra-company interest rates charged by FBGT.

9. The refinancing of the Finance Group’s commitments during the latter half of 1990 became a major drain on FGL’s funds. However, had ELFIC, Lensworth or Elders Rural Finance defaulted under the US$ Denominated Note Global Facility noted at [7] above, cross-default clauses could have been triggered imperilling the financial viability of the whole Foster’s Group.

10. Money raised from the sale of assets to external purchasers and the transfer of assets to other members of the Foster’s Group, as well as from the repayment of customer loans, was used at this time to repay bank loans, to continue funding to external customers where appropriate and, to the extent available, to repay funding provided by the Foster’s Group.  However, the necessity of acquiring assets from debtors in settlement of their debts hindered the Finance Group’s realisation program because such property assets had to be managed and took time to realise.  By July 1990, the Board of EFGA had formed the view that, because of the depressed Australian property market, the Lensworth Group’s property book could not be sold at that time except on “fire sale” terms and prices.  Other assets of the Finance Group were sold off, more than half of them by June 1990, and those sales enabled the balance of debts owed to EFGA by members of the Finance Group, other than ELFIC, EFGS and Lensworth, to be reduced to nil by 1992. 

11. EFGA continued to lend to Finance Group subsidiaries to fund their existing liabilities to external customers where termination of the facilities could not be negotiated, and continued lending to customers if the further amount would not only be repaid but also assist the recovery of the entire amount outstanding.  Up until around July 1992, RAMCO’s terms of reference did not impose limits on the amounts that could be advanced to existing customers, although they were typically loans of under $1 million.  In July 1992, RAMCO’s terms of reference were amended and authority limits were introduced formalising the process for approving additional loans to existing customers.  These additional loans to existing customers were funded by loans from EFGA to the relevant Finance Group subsidiaries (including ELFIC and EFGS).  Generally, the sources of the funds for these additional loans were either the proceeds of asset realisations, or funds drawn by EFGA from the Foster’s Group.  

12. During 1991, the Finance Group suspended customer accounts for non-performing loans, ceasing to record interest as income where there were doubts about the relevant customers’ ability to continue paying interest.  This impinged on EFGA’s profit and loss statement as funding costs continued to be recognised.  However, the customers were still expected to repay the principal amount and the suspended interest.

13. In March 1991, EFGA reported a deficiency of shareholders’ funds.  This was due to the allocation of significant provisions to closing down costs and doubtful debts.  Furthermore, the interest payable to the Foster’s Group on funds advanced to the Finance Group exceeded the interest received from customers whose loan accounts had been suspended.

14. 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.

15. In early 1991, concerns were also raised about the unsecured nature of loans provided by the Foster’s Group to the Finance Group, which would rank equally with the debts of any litigation creditors.  As the level of debt rose, obtaining security for the debts owing by EFGA to the Foster’s Group was made a priority.  By this stage, the amount due to the Foster’s Group had increased to nearly $1.4 billion, vastly exceeding the original forecast of $820 million.  This was attributed to a slowdown in asset sales as a result of the economic downturn, and a miscalculation of the volume and speed at which the banks would withdraw their funding support of the Finance Group.

16. Pursuant to the refinancing arrangements, EFGT became, in May 1991, the funding conduit to EFGA.  The Foster’s Group took security over EFGT’s assets in respect of the debt owed by EFGT to the Foster’s Group.  In turn, EFGA and certain Finance Group subsidiaries guaranteed EFGT’s obligations to the Foster’s Group and granted charges over their assets to support those guarantees. The Foster’s Group thereby became a secured lender with an entitlement to realise the assets of EFGT and the Finance Group subsidiaries should EFGT default in its repayment obligations, enabling the Foster’s Group to continue to fund the Finance Group without exposing the additional loan funds to the claims of third party litigants.  From October 1991, loans were made by the Foster’s Group to the Finance Group through EFGT under a Security Note arrangement.  EFGA and some of its subsidiaries, including ELFIC and EFGS guaranteed repayments by EFGT under these arrangements and gave charges over their assets to secure their obligations under the guarantees.  The effect of these arrangements was to cause loans by FGL to EFGA and AML Finance Corporation Limited (“AML Finance”) and by AML Finance to EFGA to be repaid and replaced with loans by FGL to EFGT secured over the bulk of the assets of EFGA and its subsidiaries in the Finance Group and by EFGT to EFGA.

17. By 30 June 1991, it had become apparent that EFGA, ELFIC and EFGS each had, or was likely to have, a deficiency of net assets of $194 million, $808 million and $40 million respectively.  On 12 August 1991, the FGL Board gave “in-principle” approval to the provision of a letter of comfort to the Finance Group subsidiaries.  The directors of EFGA, ELFIC and EFGS subsequently formed the view that those companies would be able to pay their debts as and when they fell due, and signed off on their accounts.

18. By September 1991, the recession was hindering the asset realisation program and increasing the incidence of defaults by customers unable to meet their repayment obligations to the Finance Group companies.  Price Waterhouse, as auditors of EFGA, concluded that general provisions should be increased by between $35 million to $50 million above the existing provisions of $62 million.  FGL had made a loss of $43 million in the year ended 30 June 1991 and had no accumulated distributable reserves.  As payment of a dividend without the consent of lenders could have been a breach of banking covenants, the FGL Board resolved not to pay a dividend for the 1991 financial year.

19. After the security structure noted at [41] above had been implemented in October 1991, it was decided to pursue an orderly realisation of the Finance Group’s assets rather than aggressively selling down those assets. Between 1991 and 1998, the performance of the remaining assets of the Finance Group continued to be monitored by RAMCO and, as thought appropriate, Finance Group companies were directed to foreclose on securities held over properties of defaulting external borrowers. Additional finance was provided by EFGA to some external customers to enable them to maintain assets which could not yet be sold at acceptable prices. Although the asset realisation program had, by mid 1992, bought about an improvement in the net liability position of the Finance Group, it was perceived by then that the program would have to be extended to mid 1997 before it could be completed.

20. After Australia, the United Kingdom and the United States had gone into recession in 1991, the Board of EFGA determined that the Lensworth Group’s property business should be realised over a period of time with the other residual assets of the Finance Group.  Accordingly, the RAMCO and Lensworth Group assets were brought under one management organisation and the time frame for the orderly realisation strategy was extended to between five and seven years.

21. Before 1992, the advances from the Foster’s Group to the Finance Group had outstripped the repayments.  However, after July 1992, the Finance Group’s principal repayments and interest payments to the Foster’s Group outpaced the additional advances.  The cash was being generated from realising loans, selling assets where the Finance Group had security and selling other assets and businesses of the Finance Group.  By December 1991, the undrawn funding commitments of the Finance Group had dropped from $900 million to $185 million.

22. In June and August 1992, in response to concerns about EFGA’s solvency, all staff were transferred from EFGA to EFGT.  The human resources reshuffle coincided with Harlin’s going into receivership on 6 July 1992 and the acquisition of its shares in the Foster’s Group by BHP Limited.

23. In September 1992, the Board of FGL approved an increase in provisioning of $360 million to cover additional specific provisions, additional general provisions and work out costs, and $300 million for future funding costs.  At about the same time, FGL provided another letter of comfort to enable the Finance Group directors to sign off on their respective company accounts.  Over time, a portion of the provisions was in fact reversed, thereby realising profits for the Finance Group.  On 15 September 1992, FGL made a rights issue to raise new capital which was successful in raising $1 billion.  That enabled a large portion of FGL’s debt to be repaid and effectively brought FGL’s liquidity problems to an end. 

24. Throughout 1993 and 1994, the continuation of the asset realisation program resulted in a net cash outflow from the Finance Group to the Foster’s Group.  New strategies were developed to maximise the realisable value of assets over which the Finance Group had security before the Finance Group decided, in 1995, to retain the land holdings which had been acquired in order to enhance their value through rezoning and development.  Nevertheless, EFGA continued to make losses, except for the 1995 year, generally due to provisions for the decline in value of investments and loans and bad debt write-offs.  ELFIC and EFGS continued to record losses because their intra-company debts exceeded income from their business activities.

25. Despite this progress, it remained necessary to obtain comfort that the Foster’s Group would continue to provide financial support to the Finance Group companies that were net asset deficient so that the directors of those companies could sign off on the statutory accounts.  

26. It was at around this time that EFG Financial Limited (“EFG Financial”), a subsidiary of ELFIC Holdings BV and a Finance Group company incorporated in Cyprus, was in the process of being sold. As at 31 March 1996, EFG Financial’s trial balance recorded debts owing to it by EFGA in the amounts of US$66,306,653.04 and US$35,620,265.31. In preparation for the sale of ELFIC Holdings BV and its subsidiaries, the debts owed by EFGA to EFG Financial were assigned from EFG Financial to Amayana for $1. Under the security structure described at [41] above, FGL continued, until 30 June 1998, to charge interest on its loans to EFGT. In turn, EFGT continued to charge interest on its loans to EFGA. The existing loans from Amayana to EFGA remained unpaid and were unsecured. The loans by FGL to EFGT were at interest and the interest so charged was returned as assessable income by FGL. From time to time, EFGT made payments and repayments reducing the balance of its debts from about $1,143 million to about $842 million by 30 June 1998. Subsequent payments by EFGT between 1999 and 2001 amounted to $61,830,522. EFGT, in turn, charged interest on intra-group loans from it to, in particular, EFGA. That interest was included in EFGT’s assessable income. Substantial payments and repayments on account of those debts were made by EFGA to EFGT between October 1991 and 30 June 1998.

27. Loans were also made at interest from FBGT to Amayana which on-lent the borrowed funds, also at interest, to EFGA.  The interest was included in Amayana’s assessable income.  Although payments and repayments were made from time to time on behalf of EFGA to Amayana, EFGA’s total indebtedness to Amayana rose from about $251 million in 1991 to about $325 million in 1998.

28. EFGA made available to subsidiaries in the Finance Group, particularly ELFIC and EFGS, the funds which it had borrowed from EFGT and Amayana.  EFGA charged interest to the borrowers and returned such interest as assessable income.

29. In early 1998, Mr Neufeld, who was Senior General Manager within the Finance Group from 1995 to 2001, conducted a “recoverability review” to assess the prospects of recovering debts owed respectively by ELFIC and EFGS to EFGA, by EFGA to EFGT and by EFGT to FGL.  He assessed ELFIC’s “best case” recovery at $92 million being $54 million from external customers and $38 million from related party customers.  In the same way, Mr Neufeld assessed the “best case” recovery of EFGS at $6 million, all from one external customer, and that of EFGA at $197.2 million from all assets, not merely from loans to ELFIC and EFGS.  EFGT’s “best case” recovery was similarly assessed at $208 million, all from related party customers.  In the light of those assessments, Mr Neufeld thought that, of the amount of $1.29 billion owed by ELFIC to EFGA, $1.2 billion should be written off as a bad debt.  Similarly, he recommended that $99 million of the $106 million owed by EFGS to EFGA should be written off and $657 million of $850 million owed by EFGA to EFGT should be written off.  Mr Neufeld considered that $268 million of the debt of $843 million owed by EFGT to FGL was recoverable.  He also recommended that the interest on the outstanding balance in each instance be reduced to nil.  In substance, those recommendations as to write-offs were adopted.  As well, in the 1999 financial year, Amayana wrote off as bad the entirety of the debt owed to it by EFGA apart from the assigned debts acquired by Amayana from EFG Financial;  see [51] above.  The write-off was said to be justified by the fact that any proceeds from the realisation of debts due to EFGA and its subsidiaries were to be applied in repayment of secured loans to EFGA from EFGT which, in turn, was obliged to use the repayments to it in reduction of its liabilities to FGL.

1. From September 1997, and during 1998, an allocation of repayments made by EFGS and ELFIC to EFGA, by EFGA to EFGT and by EFGT to FGL was undertaken on the basis that repayments specifically appropriated to a particular debt or loan should be applied in reduction or elimination of that debt or loan.  Remaining payments attributed to interest were allocated to reduction of interest liabilities on a first-in first-out basis and any surplus was applied in reduction of unpaid principal and interest also on a first-in first-out basis.  If any balance remained, that was also allocated to repayment again on a first-in first-out basis, of outstanding principal and unpaid interest.  After that process had been completed, the balance (if any) assessed by Mr Neufeld as part of the “recoverable amount” was notionally applied, also on a first-in first-out basis, to reduction of the outstanding liabilities for principal and unpaid interest. 

2. The interest charged by EFGA to ELFIC and EFGS, by EFGT and Amayana to EFGA, by FGL to EFGT and by FBGT to Amayana was treated as an expense in the profit and loss statements of each of the debtor companies.  ELFIC and EFGS claimed deductions for the same interest from their assessable incomes and those deductions were included in the losses said to have been incurred by those companies which were transferred to other companies in the Foster’s Group. 

3. Similarly, EFGA claimed deductions for unpaid principal and interest due from ELFIC and EFGS which had been written off as bad debts.  The unpaid interest component of those debts had previously been returned by EFGA as assessable income.  EFGA also claimed deductions from its assessable income of liabilities for interest which it had incurred to Amayana.  The combined deductions claimed by EFGA resulted in tax losses which were transferred to other companies in the Foster’s Group.

4. EFGT and Amayana, in turn, claimed deductions for the interest charged on loans to them from FGL and FBGT.  Having respectively included in their assessable incomes from 1992 to 1998 interest on loans made to EFGA, they claimed deductions in respect of the interest due from that company which had later been written off as bad.  There was no claim for a deduction by either EFGT or Amayana of amounts of principal due from EFGA which had been written off as bad.  However, the deductions claimed by EFGT and Amayana contributed to tax losses which were subsequently transferred to other companies within the Foster’s Group. 

5. Correspondingly, FGL had included in its assessable income from 1992 interest on loans which it had advanced to EFGT.  It claimed a deduction in 1998 in respect of interest on those loans which had been written off as bad which contributed to another tax loss which was also transferred to another company within the Foster’s Group.

6. The accounts for EFGT for the year ended 30 June 1996 recorded a loss of $1.1 billion resulting from a large provision for doubtful debts in relation to the receivables due from EFGA to reflect the likely level of recovery.  In August 1996, the Board of EFGT agreed to make a provision for $1.12 billion and the Board of FGL provided further confirmation of its ongoing support.

7. To address the fact that all operating Finance Group entities had become net asset deficient by 31 October 1996, Lensworth Group Limited was established.  On 26 March 1997, Lensworth Group acquired from EFGT the shares in the parent companies of the various land holding entities and late in that year the profits derived by Lensworth Group ceased to be reported as abnormal items and were disclosed as ordinary income of the Foster’s Group on the basis that the property development activities by then constituted an ongoing business.

8. The Foster’s Group continued to charge interest on the existing debts owed by the Finance Group even though the interest was extremely unlikely to be recovered.  That course of action was justified on the basis that the realisation process was drawing to a close and the litigation risks appeared to have reduced with the settlement of several matters.

9. As at 30 June 1998, ELFIC owed EFGA debts totalling $1,294,441,115.  On 19 June 1998, the $1,202,441,115 that ELFIC could not pay or repay EFGA was written off as bad, and the interest rate on the debts reduced to nil per cent per annum by the Board of EFGA with effect from 30 June 1998.

   THE COMMISSIONER’S ASSESSMENTS, THE APPLICANTS’ OBJECTIONS AND THE PRESENT PROCEEDINGS

   (i)        ELFIC

10. On 18 December 2007, the Commissioner issued an assessment to ELFIC in respect of each of the tax years ended 30 June 1995, 1996 and 1997 determining that the respective amounts of $95,293,880, $106,399,661 and $93,156,592, each “being a tax benefit that is referrable to ELFIC … (the taxpayer) … shall not be allowable to the taxpayer in relation to that year of income.”  An objection by ELFIC to each of those assessments was disallowed on 9 February 2007 when the Commissioner also declined to remit the penalty tax imposed on ELFIC under Division 10 of Part VII of the 1936 Act.  The reasons for disallowing ELFIC’s objections were expressed as follows:

    INTEREST DEDUCTION CLAIM

    During the year of income ended 30 June 1995 (“the relevant year”), ELFIC Pty Ltd (“the Taxpayer”) was a member of a large corporate group (“the Group”.

    The Taxpayer has claimed, in the relevant year, a deduction amount totalling $95,293,880 on account of amounts of unpaid interest on debts allegedly owing by the Taxpayer to another entity within the Group. The Taxpayer argues that the amount of $95,293,880 is deductible in the relevant year under subsection 8-1(1) of the Income Tax Assessment Act 1997 (''the ITAA 1997”).

    The Commissioner contends that the interest amount claimed in the relevant year as a deduction is not deductible under subsection 8-1(1) of the ITAA 1997, or the equivalent provision of the Income Tax Assessment Act 1936 (“ITAA 1936”), for the following reasons:

    (a)      the unpaid interest was not a loss or outgoing -

    i)        incurred in gaining or producing assessable income; or

    ii)necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

    (b)      the interest was capital, or capital in nature.

    PART IVA AND ITS APPLICATION.

    Further or alternatively, if the purported interest deduction of $95,293,880 was deductible for the year ended 30 June 1995, under subsection 8-1(1) of the ITAA 1997 or the equivalent provision of the ITAA 1936, which the Commissioner does not concede, the Commissioner contends that the provisions of Part IVA of the ITAA 1936 apply to disallow that deduction. In consequence, the Commissioner has made a valid determination under paragraph 177F(1)(b) of the ITAA 1936. The determination was issued to the taxpayer on 12 December 2006.

    The appeals to this Court against the disallowance of the three objections in respect of ELFIC are proceedings respectively numbered VID 130, 133 and 134 of 2007.

    (ii)       EFGS

11. The assessment for this taxpayer was issued on 18 December 2006 in respect of the tax year ended 30 June 1997.  It was determined that EFGS was not entitled to a deduction in that year of $6,804,054 being interest on loans from EFGA.  An objection to that assessment was disallowed on 9 February 2007 for the same reasons, mutatis mutandis, as those given in relation to ELFIC which are reproduced at [64] above. The appeal to this Court against the objection by EFGS to that assessment is the proceeding numbered VID 135 of 2007.

    (iii)      EFGA

12. The Commissioner’s assessment in respect of EFGA was also issued on 18 December 2006 and related to the tax year ended 30 June 1998.  It was determined that EFGA was not entitled to a deduction for that year in respect of bad debts written off on account of debts totalling $1,202,441,116 owed to EFGA by ELFIC and a further $100,009,231 owed to EFGA by EFGS.  That claim to a deduction was described in the Commissioner’s notice dated 9 February 2007 of disallowance of an objection to the assessment as the “bad debts claim”.  In his reasons for the decision to disallow the objection in respect of the bad debts claim the Commissioner recited:

    BAD DEBTS CLAIM

    In respect of the debts allegedly bad and written off in the relevant year, the Commissioner contends that the Taxpayer is not entitled to a deduction under subsection 25-35(1) or subsection 8-1(1) of the ITAA 1997.

13. The same reasons gave this explanation of the application to the bad debts claim of Part IVA of the 1936 Act:

    BAD DEBTS CLAIM

    Further or alternatively, if the alleged amount of $1,302,450,347 claimed as bad debts was deductible for the year ended 30 June 1998, under subsection 25-35(1) or subsection 8-1(1) of the ITAA 1997, which the Commissioner does not concede, the Commissioner contends that the provisions of Part IVA of the ITAA 1936 apply to disallow that deduction. In consequence, the Commissioner has made a valid determination under paragraph 177F(1)(b) of the ITAA 1936. The determination was issued to the taxpayer on 12 December 2006.

14. In the same assessment the Commissioner determined that EFGA was not entitled to a deduction in the 1998 tax year for interest totalling $82,681,730 owing by EFGA to other entities within the Foster’s Group.  That claim was described in the notice of disallowance of EFGA’s objection as the “interest deduction claim”.  The following reasons were given for the decision to disallow the objection in respect of that claim:

    INTEREST DEDUCTION CLAIM

    The Commissioner contends that the interest amount claimed in the relevant year as a deduction is not deductible under subsection 8-1(l) of the ITAA 1997 for the following reasons:

    (a        the unpaid interest was not a loss or outgoing

    i)        incurred in gaining or producing assessable income; or

    ii)necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

    (b)      the interest was capital, or capital in nature.

    … … …

    PART IVA AND ITS APPLICATION.

    INTEREST DEDUCTION

    Further or alternatively, if the purported interest deduction of $82,681,730 was deductible for the year ended 30 June 1998, under subsection 8-1(1) of the ITAA 1997, which the Commissioner does not concede, the Commissioner contends that the provisions of Part IVA of the Income Tax Assessment Act 1936 (“the ITAA 1936”) apply to disallow that deduction. In consequence, the Commissioner has made a valid determination under paragraph 177F(1)(b) of the ITAA 1936. The determination was issued to the taxpayer on 12 December 2006.

    EFGA’s appeal against the disallowance of its objection has been brought as proceeding number VID 132 of 2007 in this Court.

    (iv)      FGL

15. The Commissioner’s assessment in respect of FGL issued on 18 December 2006 and disallowed a claimed deduction for bad debts written off.  The objection to that assessment was disallowed on 9 February 2007 and the Commissioner’s statement of reasons for that decision recited;

    BAD DEBTS CLAIM

    During the year of income ended 30 June 1998 (“the relevant year”), Foster's Group Limited (“the Taxpayer”) was a member a large corporate group (“the Group”).

    The Taxpayer has claimed that, during the relevant year, it was entitled to a deduction amount of $401,058,393 under paragraph 25-35(1)(a) or subsection 8-1(1) of the Income Tax Assessment Act 1997 (“the ITAA 1997”) in respect of debts allegedly owed to it and written off.

    In respect of the debts allegedly bad and written off in the relevant year, the Commissioner contends that the Taxpayer is not entitled to a deduction under paragraph 25-35(1)(a) or subsection 8-1(1) of the ITAA 1997.

    PART IVA AND ITS APPLICATION.

    Further or alternatively, if the alleged amount of $401,058,393 claimed as bad debts was deductible for the year ended 30 June 1998 under paragraph 25-35(1)(a) or subsection 8-1(1) of the ITAA 1997, which the Commissioner does not concede, the Commissioner contends that the provisions of Part IVA of the Income Tax Assessment Act 1936 (“the ITAA 1936”) apply to disallow that deduction.. In consequence, the Commissioner has made a valid determination under paragraph 177F(1)(b) of the ITAA 1936. The determination was issued to the taxpayer on 12 December 2006.

    FGL’s appeal to this Court against the disallowance of its objection to the assessment is the proceeding numbered VID 129 of 2007.

    (v)       Amayana

16. The Commissioner’s assessment in respect of this taxpayer for the 1998 tax year was issued on 18 December 2008 and disallowed a claimed deduction of $16,875,354 in respect of interest on loans from FBGT to Amayana.  An objection to that assessment was disallowed on 9 February 2007.  The Commissioner’s reasons as recited in the notice of disallowance were:

    The Commissioner contends that the interest amount claimed in the relevant year as a deduction is not deductible under subsection 8-1(1) of the ITAA 1997 for the following reasons:

    (a)      the unpaid interest was not a loss or outgoing -

    i)        incurred in gaining or producing assessable income; or

    ii)necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

    (b)      the interest was capital, or capital in nature.

    PART IVA AND ITS APPLICATION.

    Further or alternatively, if the purported interest deduction of $16,875,354 was deductible for the year ended 30 June 1998 under subsection 8-1(1) of the ITAA 1997, which the Commissioner does not concede, the Commissioner contends that the provisions of Part IVA of the Income Tax Assessment Act 1936 ("the ITAA 1936") apply to disallow that deduction. In consequence, the Commissioner has made a valid determination under paragraph 177F(1)(b) of the ITAA 1936. The determination was issued to the taxpayer on 12 December 2006.

    Amayana’s appeal from the disallowance of its objection has been constituted by the proceedings in this Court numbered VID 128 of 2007.

    (vi)      Ashwick

17. The Commissioner disallowed the deduction of $30,213 claimed by Ashwick (Qld) No 127 Pty Ltd (“Ashwick”) in the 1997 year as a result of the transfer of a tax loss from ELFIC to Ashwick, another wholly owned subsidiary of FGL.  An objection to that determination or assessment was disallowed on 9 February 2007.  The Commissioner’s reasons as recited in the notice of disallowance were:

    Certain entities within the Group (“the Entities”) had allegedly incurred tax losses during the relevant year or prior to the relevant year. One of the Entities (“the loss company”) had claimed that, pursuant to a Loss Grouping Agreement, it had transferred to the Taxpayer a tax loss of $30,213 during the relevant year.

    The Commissioner disputes that tax losses were incurred by the loss company. Accordingly, the Commissioner considers that, as no tax losses were available for transfer to the Taxpayer during the relevant year, the Taxpayer's claim for a deduction under sections 170-20 and 36-17 of the Income Tax Assessment Act 1997 (“the ITAA 1997”) or the equivalent provisions under the Income Tax Assessment Act 1936 (“ITAA 1936”) must fail.

    PART IVA AND ITS APPLICATION.

    Further or alternatively, if the purported tax loss transfer of $30,213 from the loss company to the Taxpayer was effective for the year ended 30 June 1997 and the taxpayer would have been entitled to a deduction pursuant to sections 170-20 and 36-17 of the ITAA 1997, which the Commissioner does not concede, the Commissioner contends that the provisions of Part IVA apply to disallow that deduction. In consequence, the Commissioner has made a valid determination under paragraph 177F(1)(b) of the ITAA 1936. The determination was issued to the Taxpayer on 12 December 2006.

    The appeal against the disallowance of Ashwick’s objection in respect of that tax loss transfer is constituted by the proceedings in this Court numbered VID 123 of 2007.

18. The Commissioner, by an assessment issued on 18 December 2006, similarly disallowed the deduction claimed by Ashwick in the 1998 year as a result of the transfer of a tax loss from FGL to Ashwick.  An objection to that assessment was disallowed on 9 February 2007.  The Commissioner’s reasons, as recited in the notice of disallowance, were, mutatis mutandis, the same as those reproduced at [71] above. Ashwick’s appeal against that disallowance is constituted by the proceedings in this Court numbered VID 124 of 2007.

19. By a notice of amended assessment issued on 21 December 2006, the Commissioner disallowed the deduction of $145 claimed by Ashwick for the year ended 30 June 2001 as a result of the transfer to Ashwick from EFGA and EFGT of tax losses of $70 and $75 respectively.  An objection to that amended assessment was disallowed on 9 February 2007. The Commissioner’s reasons, as recited in the notice of disallowance were, mutatis mutandis, the same as those reproduced at [71] above. Ashwick’s appeal against that disallowance is constituted by the proceedings in this Court numbered VID 125 of 2007.

20. The Commissioner had earlier disallowed the deductions of $70 and $75 for the tax year ended 30 June 2001 which are referred to at [73] above. On 27 October 2005 Ashwick objected to that disallowance and, by notice dated 31 May 2006, was advised by the Commissioner that “As 60 days have now passed since the Commissioner was given the notice [of objection], the Commissioner is taken to have disallowed the objection.” Ashwick’s appeal against that deemed disallowance is constituted by the proceedings in this Court numbered VID 861 of 2006.

    (vii)     Nexday

21. By an assessment issued on 18 December 2006, the Commissioner disallowed the deduction of $139,200 claimed by another wholly owned subsidiary of FGL, Nexday Pty Ltd (“Nexday”) in the tax year ended 30 June 2000 in respect of A tax loss transferred to Nexday by Amayana.  Nexday’s objection to that assessment was disallowed on 9 February 2007.    The Commissioner’s reasons as stated in the notice of disallowance included this statement:

    The Commissioner disputes that tax losses were incurred by the loss company.  Accordingly, the Commissioner considers that, as no tax losses were available for transfer to the Taxpayer during the relevant year, the Taxpayer's claim for a deduction under sections 170-20 and 36-17 of the Income Tax Assessment Act 1997 (“the ITAA 1997”) must fail.

    In the same notice the Commissioner contended, further or in the alternative, that Part IVA of the 1936 Act applied to disallow the claimed deduction.  Nexday’s appeal to this Court against the disallowance of its objection is constituted by proceedings numbered VID 126 of 2007.

    (viii)     EFGT

22. On 18 December 2006 the Commissioner issued an assessment disallowing EFGT’s claim for a total deduction in the year ended 30 June 1998 of $572,774,838 in respect of a liability for interest and for bad debts owing to EFGT from EFGA which had been written off.  EFGT objected to the assessment in relation to both aspects of the claimed deduction and on 9 February 2007 the Commissioner disallowed the objection.  The reasons as stated in the notice of disallowance included this statement related to the interest deduction claim:

    The Commissioner contends that the interest amount claimed in the relevant year as a deduction is not deductible under subsection 8-1(1) of the ITAA 1997 for the following reasons:

    (a)the unpaid interest was not a loss or outgoing)

    i)incurred in gaining or producing assessable income;  or

    ii)necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

    (b)      the interest was capital, or capital in nature.

    In relation to the bad debts claim the Commissioner’s reasons recited:

    In respect of the debts allegedly bad and written off in the relevant year, the Commissioner contends that the Taxpayer is not entitled to a deduction under paragraph 25-35(1)(a) or subsection 8-1(1) of the ITAA 1997.

    As well, the Commissioner invoked Part IVA of the 1936 Act in support of his further or alternative contention that it applied to disallow each of EFGT’s interest deduction and the bad debts claim.  EFGT’s appeal to this Court against the disallowance of its objection is constituted by proceedings numbered VID 131 of 2007.

    (vix)     EFG Investments

1. Paragraph (d) of the same subsection provides further that for the purposes of Part IVA 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. The tax benefits relied on by the Commissioner as flowing to various applicants were the deductions claimed for bad debts written-off, the deductions for interest expenses claimed to have been incurred and the deductions respectively claimed by Ashwick, Nexday and EFG Investments for transferred tax losses.

3. Making the prediction on the hypothesis enjoined by the High Court in Federal Commissioner of Taxation v Peabody (1993) 181 CLR 359, I am not persuaded that, if the scheme postulated by the Commissioner had not been entered into, the deductions referred to in the last preceding paragraph would not have been allowable or might reasonably be expected not to have been allowable. I have already indicated, at [228] above, a basis on which interest could reasonably have been charged to borrowers in the Foster’s Group even in the absence of the presumptive scheme. On that basis, the facility of lenders within the Group to write off as bad debts amounts of unpaid interest would still have existed and have provided the foundation for deductions being allowed to those lenders in the year or years in which the write-offs occurred.

4. There is also considerable force in the contention advanced on behalf of the applicants that, on the hypothesis required by s 177C(1) that the presumptive scheme had not been entered into, the interest income on which the deductibility of the bad debts written-off and the interest incurred on intra-group loans was predicated would not have been derived.  On that hypothesis, the tax benefit imputed to the scheme propounded by the Commissioner would not have been achieved.

5. I also agree with the contention advanced on behalf of the applicants that the deductions claimed to have been available as a result of the transfers of tax losses to Ashwick, Nexday and EFG Investments, occurred as a result of the making of agreements expressly provided for by the Act.  For the reasons already explained, I am satisfied that the presumptive scheme was not entered into for the purpose of enabling those agreements to be made.  The agreements for the transfer of tax losses therefore fall within the exception created by s 177C(2)(b) of the 1936 Act which provides;

   (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;

   Purpose

6. In case I am wrong in concluding that the scheme alleged by the Commissioner was not entered into or carried out to obtain a “tax benefit” in the requisite sense, I turn now to consider the dominant purpose said to have actuated the entry into and carrying out of the alleged scheme.

7. The Commissioner, in the course of his submissions, examined each of the eight objective matters enumerated in s 177D(b) of the 1936 Act as requiring to be considered in order to identify the purpose of a scheme.  Section 177D provides that Part IVA;

   … 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).

8. 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.  Thus, in Federal Commissioner of Taxation v Hart (2004) 217 CLR 216, Gummow and Hayne JJ observed, at 243-4 [66];

   In the present matters, the respondents would obtain a tax benefit if, in the terms of s 177C(1)(b), had the scheme not been entered into or carried out, the deductions "might reasonably be expected not to have been allowable". When that is read with s 177D(b) it becomes apparent that the inquiry directed by Pt IVA requires comparison between the scheme in question and an alternative postulate. To draw a conclusion about purpose from the eight matters identified in s 177D(b) will require consideration of what other possibilities existed. To say, as Hill J did, that "the manner in which the scheme was formulated and thus entered into or carried out is certainly explicable only by the taxation consequences" assumes that there were other ways in which the borrowing of moneys for two purposes (one private and the other income producing) might have been effected. And it further assumes that those other ways of borrowing would have had less advantageous taxation consequences.

9. The Commissioner’s submission then examined each of the eight matters enumerated in s 177D(b) with a view to identifying the light cast by it on the objective purpose of those responsible for entering into, and administering, the scheme.

   (i)        Manner in which the scheme was entered into or carried out – s 177D(b)(i)

10. Under this heading, the Commissioner instanced the refinancing of EFGA and, through it, the Finance Group, by loans made at interest and later, from 1992, by the making of loans from FGL at interest to EFGT which were then on-lent, also at interest, to EFGA which used the funds to repay the principal and interest on outstanding loans made to it by AML Finance and FGL.  As well, EFGT, from the year ended 30 June 1992, made additional new loans at interest to EFGA using funds borrowed from FGL, also at interest.  The actions of FGL in entering into that chain of transactions were said to be informed by FGL’s knowledge that EFGA, ELFIC and EFGS lacked the ability to pay interest on their respective borrowings which, in turn, affected Amayana’s ability to pay interest on its borrowings from FBGTA.  Similarly, EFGA had no capacity to make regular and timely payments of interest on its borrowings from EFGT and Amayana. 

11. The capitalisation and compounding from month to month of interest allowed it greatly to exceed the assets of the Finance Group, EFGT and Amayana.  It was further said by the Commissioner that, as a result of EFGA having, in October 1991, given security over its assets to EFGT but having given no security to Amayana, Amayana’s loan to EFGA became irrecoverable but was not written-off until July 1998.  As well, the Commissioner claimed, the inclusion of EFGT and Amayana in the funding structure, “multiplied the bad debt deductions.” 

12. Members of the Finance Group, EFGT and Amayana were, in real terms, insolvent from November 1989 and were only enabled to continue to trade as a result of resolutions, letters of comfort and guarantees to external creditors given by FGL.  The Commissioner also pointed to the change after 30 June 1994 in the allocation of repayments by internal creditors which were applied on a FIFO basis, first to repayment of older outstanding advances of capital. 

13. Another feature of the treatment of debts internal to the Foster’s Group to which the Commissioner pointed was the fact that companies within the Group which received transferred losses did not make subvention payments to the transferor companies.  Such payments would have reduced the bad debts due from the loss companies and consequently have minimised the “losses” incurred by the creditor companies when they wrote-off as bad the debts owed by the debtor companies.

14. The matters identified by the Commissioner were said to go to the manner in which the scheme was entered into or carried out and to accentuate the predominance of a purpose of obtaining the tax benefits.  The creditor companies did not gain the usual advantage of charging interest, namely a return on their loans.  The economic advantage accrued solely in the form of tax benefits to the FGL as a whole. 

15. I doubt whether any of the matters instanced by the Commissioner under this head goes to the “manner” in which the scheme to which he pointed was entered into or carried out.  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) 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.

16. In any event, the 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. The fact that intra-group loans to Finance Group subsidiaries were made at interest is at least as readily explicable by a concern to measure or monitor the performance of the borrowing companies. A similar observation can be made about the compounding or capitalising of the interest after timely payments had ceased to be made with any regularity. A corresponding explanation is available in respect of some loans based on the security structure which, as described at [41] above, had been erected in mid-1991 to provide a measure of protection for the Foster’s Group assets from external creditors.

17. The delay in writing off bad debts owed by borrowers to lenders within the Foster’s Group was, I consider, at least equally explicable by a belief held by the relevant finance officers before 1997 that the debts were not wholly irrecoverable.  Support for that belief was available from the fact that repayments were made from time to time after 1992 by even the most heavily indebted subsidiaries as assets were realised.

18. I do not regard the allocation after 1994 of repayments by the borrowing subsidiaries on a “first in first out basis” as part of the manner of carrying out the alleged scheme which indicates the proscribed dominant purpose.  Where separately identifiable debts or components of a debt were owed by a particular subsidiary, it was obviously necessary to make an election as to which debt or component was to be reduced or eliminated by a given part payment.  The allocation of some of such part payments to reduction or elimination of the oldest advances of principal was logically justifiable otherwise than by reference to a tax benefit in the form of an ability at some time in the future to transfer within the Foster’s Group tax losses which could not have been quantified at the time of each part payment.  Similar considerations apply to the absence of subvention payments to the transferor loss companies which were parties to the tax loss agreements.  The absence of such payments is explicable by the fact that the agreements were entirely “in house” so that any subvention would have had a purely neutral effect on the consolidated finances of the Foster’s Group.  The relatively small amounts of some of the tax losses involved also militates against the existence of a dominant purpose to obtain a tax benefit in the form of deductions for transferred losses claimable by the transferee companies.

    (ii)       The form and substance of the scheme – s 177D(b)(ii)

19. The Commissioner distinguished between the form of the scheme which contemplated the charging and payment of interest between companies in the Finance Group and the substance of the scheme which was that interest would never be paid, or paid in full but would be capitalised to increase the indebtedness of borrower companies which the creditor companies eventually wrote-off without suffering any economic loss.  These differences between form and substance of the scheme were said to point to a purpose of avoiding tax. 

20. I doubt whether there was a relevant difference between the form and substance of the scheme identified by the Commissioner.  There is no suggestion that any of the intra-group loans or the accounting entries which evidenced the transactions were shams.  It is true that in some significant instances interest on the loans was never paid in full but the substance as well as the form of the loan transactions did not contemplate a failure by some of the borrowers to pay interest in full.

    (iii)      Time of entry into alleged scheme and period during which it was carried out – s 177D(b)(iii)

21. The Commissioner pointed to the fact that, by 1990, it was apparent that ELFIC and EFGS could not repay principal and interest under existing loans which inability had a repercussive effect on EFGA as the internal treasury.  Despite EFGA’s making dramatically increasing provision between 1991 and 1997 for doubtful debts from intra-group borrowers, it did not write-off the debts as bad until June 1998, preferring, instead, to charge and capitalise interest on the outstanding loans.

22. The Commissioner also focused specifically on 19 June 1998 as the date on which EFGA, EFGT and FGL wrote off as bad debts the loan amounts respectively due to each of those companies.  It was said that, by making the write-off take effect at 30 June 1998, “the creditor companies maximised the deductions that would be available, since interest continued to accrue up to 30 June 1998, even after the boards had resolved to write-off the loans.”  On the other hand, it was pointed out that Amayana’s write-off in July 1998 had been “reasonably contemporaneous” with the actions of EFGA, EFGT and FGL but allowed Amayana to schedule the tax effect of the write-off for the year of income ended 30 June 1999. 

23. In the light of the timing of the events outlined above and the period over which interest had been allowed to accrue, the Commissioner argued that it could readily be inferred that the scheme had been entered into primarily to obtain tax benefits. 

24. Usually, in this context, the time of entry into a scheme is said to be significant because it coincides with, or is closely proximate to, the end of a tax year in which the presumptive tax benefit is sought to be obtained.  In the present case, the scheme alleged by the Commissioner was said to have entered into after November 1989 so that 19 June 1998 cannot assume the significance which the Commissioner has attached to it.  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.

25. 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.

    (iv)      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)

26. In this respect, the Commissioner pointed to the fact that the decision to fund the Finance Group by interest-bearing debt allowed deductions to be claimed in respect of interest by the lending companies and the writing-off as bad debts of unpaid interest.  Had interest not been charged, and had repayments not been allocated on a first-in first-out basis, write-offs of $64,814,698 in the year ended 30 June 1998 would not have been available.

27. As indicated at [237] above, the 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.

    (v)       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)

28. The circumstances detailed under this head by the Commissioner essentially replicated aspects of the alleged scheme which have already been discussed.  In particular, it was contended that, although the unpaid interest had been returned as income by creditor companies, the off-setting of those amounts by claims for deductions of interest on borrowed funds and the writing-off of bad debts “in effect resulted in a duplication of claims for tax deductions within the corporate group for the 1997-1998 period.” 

1. It was said that the failure to charge interest on intra-company loans meant that there was no net impact, apart from a beneficial tax impact, on the accounting positions of creditor companies within the Foster’s Group.  As well, the charging of interest on intra-group loans “washed out on consolidation” and was therefore of no concern to FGL.  Correspondingly, the accrued interest expense had no effect on the ability of companies in the Foster’s Group to discharge their obligations to external creditors or on the cash position of the Finance Group companies.  The effect would have been the same had the scheme not been entered into. 

2. The capitalisation and compounding of unpaid interest meant that it exceeded the interest on external borrowings to fund the Finance Group and “augmented the beneficial tax effects” of the tax deductibility of interest expenses and the dividend cash flow to FGL shareholders.

3. 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.  Many of those changes resulted from external forces which were regarded, for reasons unrelated to any tax benefit, as compelling internal adjustments of assets and liabilities and a re-arrangement of security over some assets.  Some of those adjustments, although they involved a substitution of internal lenders for outside financiers, did not significantly change the financial position of the relevant borrower.  Corresponding changes also resulted in some lending companies within the Foster’s Group deriving assessable income in the form of interest on loans which had not been derived before the changes occurred.  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.

   (vi)      Any change in the financial position of a person with a connection with the relevant taxpayer – s 177D(b)(vi)

4. It was said that entry into the scheme enabled the companies in the Foster’s Group to claim deductions greatly exceeding “the real economic loss” suffered by the Group as a whole.  That “real economic loss” was quantified by the Commissioner at $1,202,000,000 being the losses in the statutory accounts of the FGL for the 1990, 1991 and 1992 tax years less losses recovered between the years ended 30 June 1993 and 30 June 1996. 

5. Attention was also drawn to the transfer of tax losses to profitable companies within the FGL reducing the amount of tax which those companies would otherwise have paid.  Those tax losses could not have been generated without the financial support and comfort provided by FGL to enable insolvent borrowers within the Group to continue to incur losses.  Consequences for companies other than the relevant taxpayers were reflected in tax savings generated by the scheme. 

6. 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. 

7. 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).

   (vii)     Any other consequences for the relevant taxpayer or for any person referred to in (vi) of the scheme being entered into or carried out – s 177D(b)(viii)

8. The Commissioner accepted that there were no other consequences for the applicants or for any person referred to in (vi).

   (viii)     Nature of any connection between the relevant taxpayer and any person referred to in (vi) – s 177D(b)(viii)

9. The Commissioner reiterated that the companies referred to under (vi) had all been wholly-owned subsidiaries of FGL and subject to its direction in the implementation of intra-group funding arrangements.  Under that direction, the lending companies had continued to make advances to the borrowers at interest in circumstances in which no independent lender would have done so. 

10. 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 Part IVA

11. For the reasons which I have endeavoured to explain, I have concluded that Part IVA of the 1936 Act is not available to support the disallowance of the deductions which earlier in these reasons I have held to be otherwise available to one or other of the applicants.  In summary, I have reached that conclusion because, on balance, I have not been persuaded that the steps described by the Commissioner as having been taken by the Foster’s Group between 1989 and 1998 constituted a “scheme” within the meaning of Part IVA.

12. In the second place, that “tax benefits” in the requisite sense would have been derived had the presumptive “scheme” not been disallowed under Part IVA.  Thirdly, if contrary to my view there were such tax benefits, I have found that the presumptive scheme was not entered into for the dominant purpose, objectively ascertained, of obtaining those benefits.

    GENERAL CONCLUSION

13. In the light of the conclusions which I have reached on each of the four main issues identified at [78] above, it si appropriate to indicate in a summary way the disposition of each of the proceedings before the Court which I consider those conclusions require.

    (i)        Proceeding numbered VID 861 of 2006;  Ashwick (Qld) No 127 Pty Ltd

14. This proceeding is an appeal against a deemed disallowance of an objection to a decision by the Commissioner not to allow a deduction in respect of the same transferred tax losses of $70 and $75 which are the subject of proceedings numbered VID 125 of 2007.  The earlier proceedings has thus been overtaken and it is unnecessary to make any substantive order in it.  These proceedings numbered VID 861 of 2006 will accordingly be dismissed with no order as to costs.

    (ii)       Proceedings numbered VID 123 of 2007, VID 124 of 2007 and VID 125 of 2007;  Ashwick (Qld) No 127 Pty Ltd

15. These proceedings respectively concerned the disallowance of a transferred tax loss for each of the 1997, 1998 and 2001 tax years.  In light of the conclusion indicated at [216] of these reasons there should be an order in each proceeding that the appeal against the objection decision be allowed, the assessment of 18 December 2006 be set aside and the assessment be remitted to the Commissioner for reassessment in accordance with the reasons of the Court published this day.  The Commissioner must pay Ashwick’s costs of each proceeding.

    (iii)      Proceeding numbered VID 126 of 2007;  Nexday Pty Ltd

16. This proceeding was confined to the disallowance of a claimed tax loss which had been transferred from Amayana to Nexday.  Apart from his invocation of Part IVA, the Commissioner relied on a contention that because of deductions claimed by Amayana and properly disallowed there was no transferable tax loss.  As indicated at [218]-[219] of these reasons the Commissioner’s contention has not been upheld.  Accordingly, there should be an order in this proceeding that the appeal against the objection decision be allowed, the assessment of 18 December 2006 be set aside and the assessment be remitted to the Commissioner for reassessment in accordance with the reasons of the Court published this day.  The Commissioner must pay Nexday’s costs of the proceeding.

    (iv)      Proceeding numbered VID 127 of 2007;  EFG Investments Pty Ltd

17. Apart from his invocation of Part IVA, the Commissioner’s disallowance of the deduction claimed by EFG Investments was based solely on the contention that the interest component of the tax loss transferred to EFG Investments by EFGS was not allowable as a deduction to EFGS. As indicated at [222] of these reasons, for the reasons explained at [194] above, the claim by EFGS to deduct interest has been upheld. There should therefore be an order in this proceeding that the appeal against the objection decision be allowed, the assessment of 18 December 2006 be set aside and the assessment be remitted to the Commissioner for reassessment in accordance with the reasons of the Court published this day. The Commissioner must pay EFG Investments’ costs of the proceeding.

    (v)       Proceeding numbered VID 128 of 2007,  Amayana Pty Ltd

18. This proceeding involves a claim by Amayana for a deduction in the 1998 tax year in respect of interest on loans from FBGT. For the reasons indicated at [189]-[190] above the claim for that deduction should have been allowed. There should therefore an order in this proceeding that the objection appeal be allowed, the assessment of 18 December 2006 be set aside and the assessment be remitted to the Commissioner for reassessment in accordance with these reasons. The Commissioner must pay Amayana’s costs of the proceedings.

    (vi)      Proceeding numbered VID 129 of 2007;  Foster’s Group Ltd

19. The claim in this proceeding was confined to one for the deductibility of bad debts written off. As explained at [154]-[155] above that claim has succeeded but only in respect of the interest component of the relevant bad debt. There will therefore be an order in this proceeding that the objection appeal be allowed, the assessment of 18 December 2006 be set aside and the assessment be remitted to the Commissioner for reassessment in accordance with these reasons. The Commissioner must pay FGL’s costs of the proceedings.

    (vii)     Proceedings numbered VID 130 of 2007, VID 133 of 2007 and VID 134 of 2007;
    Elfic Pty Ltd

20. Each of these proceedings concerned a claim by ELFIC to deduct an expense in the form of interest on intra-group borrowings for each of the 1996, 1996 and 1997 tax years. As explained at [176]-[178] above, ELFIC’s claim has been upheld for each of the relevant years. There must therefore be an order in each proceeding that the objection appeal be allowed, the assessment of 18 December 2006 be set aside and the assessment be remitted to the Commissioner for reassessment in accordance with these reasons. The Commissioner must pay ELFIC’s costs of each proceeding.

    (viii)     Proceeding numbered VID 131 of 2007;  EFG Treasury Pty Ltd

21. These proceedings arose from the disallowance of an objection to an assessment which disallowed EFT’s claim for a deduction in respect of interest and for a debt owed by EFGA to EFT which was written off as bad. For the reasons indicated at [198] above, the claim for interest should have been allowed. In addition, as explained at [145]-[147] of these reasons EFGT’s claim for the bad debt deduction has also succeeded. There should, accordingly, be an order in this proceeding that the objection appeal be allowed, the assessment of 18 December 2006 be set aside and the assessment be remitted to the Commissioner for reassessment in accordance with these reasons. The Commissioner must pay EFGT’s costs of the proceeding.

    (vix)     Proceeding numbered VID 132 of 2007;  EFG Australia Pty Ltd

22. This proceeding concerned both a claim for a deduction in respect of bad debts written off in the year ended 30 June 1998 and a claim in the same year for interest owing to other entities in the Foster’s Group. The bad debts deduction has bee upheld in respect of both principal and interest as explained at [118]-[125] above. EFGA’s claim for a deduction in respect of the liability for interest has also succeeded as indicated at [185] above. There should therefore be an order in this proceeding that the objection appeal be allowed, the assessment of 18 December 2006 be set aside and the assessment be remitted to the Commissioner for reassessment in accordance with these reasons. The Commissioner must pay EFGA’s costs of the proceeding.

    (x)       Proceeding numbered VID 135 of 2007;  EFG Securities Pty Ltd

23. This proceeding concerns a claim for a deduction in the 1997 tax year for interest payable by EFGS to EFGA.  As appears from [194] of these reasons the deduction claimed by EFGS should have been allowed.  There should therefore be an order in this proceeding that the objection appeal be allowed, the assessment of 18 December 2006 be set aside and the assessment be remitted to the Commissioner for reassessment in accordance with these reasons.  The Commissioner must pay EFG Securities’ costs of the proceeding.

I certify that the preceding two hundred and eighty-three (283) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Ryan.

Associate:

Dated:            26 November 2009

Counsel for the Applicants:	Mr A Myers QC with Mr G Davies QC, Mr F O’Loughlin and Mr L Armstrong
Solicitor for the Applicants:	Corrs Chambers Westgarth
Counsel for the Respondent:	Ms J Davies SC with Mr D Fagan SC, Mr M Flynn and Mr P Nicholas
Solicitor for the Respondent:	Australian Government Solicitor
Date of Hearing:	3 September 2007 and 2, 3, 4, 10, 11, 12 and 13 June 2008
Date of Judgment:	26 November 2009