Commissioner of Taxation v BHP Billiton Limited
[2010] HCATrans 321
[2010] HCATrans 321
IN THE HIGH COURT OF AUSTRALIA
Office of the Registry
Melbourne No M117 of 2010
No M118 of 2010
No M119 of 2010
No M120 of 2010
B e t w e e n -
THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Appellant
and
BHP BILLITON LIMITED
Respondent
Office of the Registry
Melbourne No M121 of 2010
No M123 of 2010
B e t w e e n -
THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Appellant
and
BHP BILLITON PETROLEUM (NORTH WEST SHELF) PTY LTD
Respondent
Office of the Registry
Melbourne No M122 of 2010
B e t w e e n -
THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Appellant
and
THE BROKEN HILL PROPRIETARY COMPANY PTY LTD
Respondent
Office of the Registry
Melbourne No M124 of 2010
No M125 of 2010
B e t w e e n -
THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Appellant
and
BHP BILLITON MINERALS PTY LTD
Respondent
FRENCH CJ
GUMMOW J
HEYDON J
CRENNAN J
BELL J
TRANSCRIPT OF PROCEEDINGS
AT CANBERRA ON WEDNESDAY, 8 DECEMBER 2010, AT 10.05 AM
(Continued from 7/12/10)
Copyright in the High Court of Australia
__________________
FRENCH CJ: Mr Bloom.
MR BLOOM: Thank you, your Honour. Yesterday, your Honours, I had commenced dealing with Mr Coburn’s modus operandi evidence. The existence of that alleged modus operandi was not put to Mr McGregor, a director of BHP Billiton and of Finance who was cross‑examined, nor was it put to Mr Hall, a director of Finance who was not required for cross‑examination. So even the existence of such a modus operandi, whatever it was, in the context of Billiton, Finance and DRI has not itself been made out. How then, we say, can it be put in evidence or as evidence that Finance and DRI did not deal with each other at arm’s length, which is the question, of course addressed by subparagraph (d)?
The arrangement which the court was originally asked to infer from Mr Coburn’s evidence in the context of the structure of the BHP Billiton group is that Finance would have complied with a request or direction from Billiton to accept a contractual limitation on its rights of recourse against DRI if that had become expedient. There is no suggestion it ever had and no suggestion a request of that kind was ever made, but the Commissioner now accepts, of course, as we have already pointed out, that there was no such arrangement, yet reliance on it is maintained as part of subparagraph (d) in order to support a general proposition that the corporate mind of Finance and DRI was subordinate to that of Billiton.
Finally, this allegation of possible subordination, your Honours, is not directed at examining whether DRI and Finance dealt at arm’s length in relation to the loan, which is what is required by subparagraph (d), but it rather looks to an alleged power held by Billiton. It was not pleaded, so it could not have been met by calling evidence, and again not put to any witness. As his main illustration of non-arm’s length dealings in relation to the debt, the Commissioner refers, of course, to the final rollover of the loan in November 1999 and, with respect, he asks the Court to look at this in isolation and completely out of context. That context, in our submission, is supplied by the primary judge, and if I might ask your Honours to go to volume 8 of the appeal book, firstly at page 3278 and paragraph 48:
On 21 July 1999, a letter was sent on BHPB letterhead from Joe Czyzewski, a director of Finance, to the directors of BHPDRI in the following terms:
[Finance] is aware that [BHPDRI] has commenced selling product and is working towards generating a viable cash flow in order to service its loans.
Now, when the Commissioner set this letter out in his submissions in‑chief he left that first paragraph out, but that first paragraph is somewhat critical, in our submission –
In the circumstances, [Finance] confirms that it does not intend for the period of twelve month’s (sic) from the date of this letter, or for such shorter period as we may specify at our election, intend to seek repayment of any loan it may have with [BHPDRI] but shall keep the company’s commercial performance under ongoing review.
Prior notice shall be given to you should it become necessary for [Finance] to take action in respect of any loan.
In March 2000, a further review of the HBI project was undertaken in response to the BHPB board’s concerns about current performance of the operations and the inability of the plant to meet commissioning targets. At the BHPB board meeting on 23 March 2000, a presentation was made about the future of the HBI plant. The board resolved: (1) that trials to assess the technical adequacy and commercial viability of the HBI facility should proceed until September 2000 when the board would again review the investment; and (2) to approve additional capital expenditure of $46 million. At the same time, a review of the carrying value of the asset was to be completed by the end of April 2000.
The board of Finance met on 30 March 2000. After noting the decisions of the BHPB board on 23 March 2000 and that BHPDRI was indebted to Finance in the amount of $2,113,944,530, the Finance board resolved to write to the BHPDRI directors to advise them that Finance would conduct a review of the loan by engaging Ernst & Young as independent experts to report on the valuation of the loan. Pending receipt of the Ernst & Young report, the directors of Finance agreed that a provision be made against the loan in Finance’s books by adopting the “worst case” scenario which indicated a negative carrying value of the loan. Further consideration of the question of interest on the loan was deferred pending receipt of the Ernst & Young report. Moreover, the directors of Finance agreed to review the provision of further loans to BHPDRI after discussions with BHPB management and to keep the BHPDRI loan under close review. On 3 April 2000, Finance informed BHPDRI of these matters.
Then if your Honours turn to 52 there is there sent out a letter sent to DRI on7 April and it says:
At its meeting on 23 and 24 March 2000 the Board of [BHPB] approved additional funding of [BHPDRI] until September 2000. [Finance] has discussed the provision of further loan funds to [BHPDRI] through the existing intercompany loan facility and advised that it is unable to fund the further approved expenditure.
The shareholder of [BHPDRI], [BHPM Holdings] has agreed to inject equity into [BHPDRI] with a total issue price of $150 million. This equity injection will be completed immediately. [BHPB] has agreed to subscribe for equity in [BHPM Holdings] as may be necessary to enable [BHPM Holdings] to meet the equity injection into [BHPDRI].
The project was to continue but Finance was saying, “We are providing no further funds”.
CRENNAN J: I know this goes back to a slightly different topic, but I think yesterday you were suggesting that there was an error in the Ernst & Young report and I wanted to ask you in the context of the Commissioner relying on the Ernst & Young report in the settings of (a) and (c), whether your remark that there was a mistake in the report was something elicited in evidence before the trial judge.
MR BLOOM: Yes, there was evidence of a Mr Cameron to which I will shortly come, your Honour.
CRENNAN J: Thank you.
MR BLOOM: So, going back to this context, the loan had fallen due in November but before that a letter had been sent in the form of a moratorium effectively saying “We are monitoring your progress. We are looking to see whether or not by the commencement of selling product, you are able to do something that might allow you to trade out.” That was the beginning of the context and that was before the rollover and what else, one might ask rhetorically, was Finance to do. Was it to say in the context of these letters, this correspondence and the ultimate refusal to provide any more funds, “Well, in November before we have made that decision, we are going to immediately call for repayment of the loan. Before we have got the Ernst & Young report, we will call for repayment of the loan”. Its only alternative was to roll the loan over at that point.
Now, we say, with respect, that that context is consistent with the behaviour that one might expect of parties dealing at arm’s length, involving as it does a moratorium, an independent investigation of the value of the loan, and decisions based upon receipt of the independent advice, all of which her Honour described as “reasonable and diligent”. Can I ask your Honours to go to ‑ ‑ ‑
GUMMOW J: Just before you do that, can you just tell me which of these group members were listed at all relevant times?
MR BLOOM: Billiton Limited, your Honour.
GUMMOW J: That is the one that is listed?
MR BLOOM: Yes, the ultimate parent company.
GUMMOW J: Yes.
MR BLOOM: And, of course, it was a public company group.
GUMMOW J: Yes.
MR BLOOM: And that is another relevant matter.
GUMMOW J: Yes.
MR BLOOM: Yes. Paragraph 55, her Honour deals with:
After providing their preliminary views in April 2000, Ernst & Young tendered their report on the valuation of the BHPDRI loan receivable to the directors of Finance on 3 May 2000. Ernst & Young concluded that the value of the HBI plant did not exceed $346 million.
May I interpolate there “on a going concern basis” -
and had a nil value if the plant was closed. The report was considered by the directors of Finance at a meeting of the board held on the day the report was issued, 3 May 2000. The directors resolved –
in effect, to write off part of the debt down to $346 million, that being the highest amount that Ernst &Young suggested on a going concern basis, the plant was worth. The view was taken and it is obviously a view for those running the company that the balance was not reasonably recoverable and, therefore, as your Honour held, and as the Full Court confirmed, something that they were entitled to write off as a bad debt.
That is dealt with in paragraph 56, the writing off. If I could then ask your Honours to go, please, to 114 which is at page 3302, her Honour says - and this is in one of her summary paragraphs:
The HBI project posed a series of difficult decisions throughout the life of the investment (for example, these difficulties were the subject of the review conducted by Mr McGregor in 1997 . . . The evidence establishes that throughout the life of the project decisions were made on the basis of obtaining the best possible return in circumstances that were not ideal . . . To provide a simplistic example, where an investor makes a $10 million investment, and that investment goes bad, the investor is often faced with limited options. Cut their losses by abandoning the project and recouping little, if any, return on the investment or, depending upon the circumstances, invest further funds in the hope of generating a greater return on the total funds expended. The course of action adopted will depend upon many factors including but not limited to availability of investment capital, project risk and the period of repayment. It is a calculation undertaken by investors and lenders on a daily basis. This is what occurred here - a series of reasonable and diligent decisions with respect to the HBI project and BHPDRI. The circumstances existing at the date of each review and the analysis of the facts and circumstances relating to each of the decisions is recorded –
and amongst the paragraphs she refers to is paragraph 50. Amongst the paragraphs she refers to is paragraph 50. Can I also just ask your Honours to turn over the page, while you are there, to paragraph 118 relevant to this paragraph (d) submission that our learned friends put. Her Honour’s conclusion:
In these circumstances, it cannot be said that “each” loan to BHPDRI and BHPTM was an isolated transaction of a very special character undertaken by Finance at the behest of BHPB.
Now, each of those three things was put and in this paragraph is being rejected, including “at the behest of BHPB”. Your Honours, there are some specific matters – non-arm’s length dealings they are said to be – relied upon by the Commissioner in paragraphs 44 to 47 of his written submissions in‑chief. Paragraph 44 deals with Finance’s practice as a member of the Billiton Group and in paragraph 44 the Commissioner contends that:
Implicitly, [Finance] lent by reference to the benefit of the project to the Group as a whole, rather than DRI’s capacity to service the loan –
That was, of course, something put and rejected below, but one has to understand that one of the things that was always taken into account in an investment for the Group was the benefits that would also flow to other members of the Group. In this particular case, iron ore mining is productive of fines or tailings. Those fines have nowhere to go, but they sit by the side of the mine and take up a lot of room. Here was a methodology invented that it was thought would turn fines into saleable iron ore. It was the invention of the light globe. As far as everyone was concerned, this would take the fines away from the mine site, allowing more mining to take place, hence the benefit to the miners, more fines to be produced, more fines to be stockpiled, the fines to be turned into briquettes, the briquettes sold to make money. So there were synergistic benefits, of course, right through the Group, but the synergistic ‑ ‑ ‑
CRENNAN J: Fines often arise in the context of environmental complaints.
MR BLOOM: As well, and it also enabled BHP Billiton, as a group, to fulfil secondary obligations to the State. It was really a win/win situation and it was thought that this would be the answer to a lot of problems, but not just for ‑ ‑ ‑
HEYDON J: Two billion dollars lost.
MR BLOOM: Yes, your Honour, and a substantial amount lost in the TM matter in the same year.
GUMMOW J: Where do we see these obligations of the State you have just mentioned?
MR BLOOM: The secondary obligations?
GUMMOW J: Yes.
MR BLOOM: I will get those out for your Honour.
GUMMOW J: Okay.
MR BLOOM: I think her Honour makes a reference to them – but the point is, in a group, there are always going to be synergistic benefits. That is not to suggest that Finance carried on business for the benefit of the other members of the Group to the exclusion of itself. That was the point on which the case turned below so far as concerned the bad debts. Her Honour made these findings at 103 to 104 at page 3297:
And the fact that Finance might have been or in fact was acting in the BHPB Group’s interest is not unusual. In NEAT Domestic Trading Pty Ltd v AWB Ltd (2003) 216 CLR 277, 296, McHugh, Hayne and Callinan JJ described the relationship between a parent (AWB Limited (“AWB”)) and its wholly owned subsidiary (AWB (International) Limited (“AWBI”)) in the following terms -
It is there set out, but your Honours see at about two‑thirds down the quote:
As a wholly owned subsidiary of AWB those duties would, no doubt, have required the board of AWBI to pursue the interests of its parent (and thus, its parent’s shareholders) to the extent that those interests were compatible with other obligations of AWBI. In fact the interests of the two companies coincided.
In 104:
That was the position here – Finance was incorporated on 29 August 1975 as a wholly owned subsidiary of BHPB “for the purpose of borrowing funds to re‑lend to Group companies” with one of its objects “to carry on the business of financier in all its branches both within and outside Australia” . . . The fact that the directors of the corporate boards overlapped and that Finance relied upon the staff and processes of the BHPB Group (for which it paid a fee) does not detract from the inevitable finding that Finance was not a sham, was not a mere conduit, was in a business and that business was lending money in the sense described by the High Court –
in those cases then mentioned. Her Honour’s finding in that regard - your Honour Justice Gummow asked me – is in paragraph 26 at 3269 and Mr McGregor’s evidence is paragraph 44 of his affidavit in volume 1 at 262.
FRENCH CJ: Where do those obligations come from?
MR BLOOM: They were under existing State agreements, as I understand it, your Honour. In paragraph 44 they:
were set out [in] the State Agreements for the Mount Newman, Goldsworthy and McCamey’s Monster –
Your Honour no doubt has some familiarity with those terms.
GUMMOW J: Paragraph 44?
MR BLOOM: Paragraph 44 of his affidavit.
GUMMOW J: What page?
MR BLOOM: Page 262:
It was also expected that the HBI plant would secure additional intangible benefits for the BHPB group. Chief amongst these was the expectation that the construction and operation of the plant would satisfy obligations imposed upon BHPM by the Western Australia state government to undertake secondary processing of iron ore in that state. Those obligations were set out [in] the various State Agreements ‑ ‑ ‑
GUMMOW J: Yes, in my understanding it has long been a concern of the West Australian Government to achieve a situation where there is more than mining. There is processing as well.
MR BLOOM: Yes, and employment. Your Honours, if I might then ask you to turn to paragraph 24 in the learned trial judge’s judgment, which is at page 3268 and there over on 3269 your Honours see the interest income, accounting profit after tax and taxable income of Finance for the years 1986 to 2002, 2000 being the only year in which there is both an accounting loss and a tax loss. I think her Honour described these two projects as hiccups, and fairly large ones.
FRENCH CJ: Fairly large ones, yes.
MR BLOOM: I think she actually wrote “hiccough”. She might have had the latter word in mind. Then in paragraph 107, which is at page 3299, her Honour says:
Consistent with the principles in airway Estates Pty Ltd v Federal Commissioner of Taxation (1970) 123 CLR 153 and Franklin’s Selfserve Pty Ltd v Federal Commissioner of Taxation (1970) 125 CLR 52, each loan was not an instance of lending for an extraneous purpose. Finance made the loans to both BHPDRI and BHPTM to advance its own purpose of profit‑making by lending. It was not Finance’s business to make decisions about debt and equity. Finance’s business was to borrow and lend money following the making of such decisions by others. But for the lending by Finance, Finance would not have derived the substantial interest income and profits from 1986 to 2002 –
Then there is that “hiccough” –
The fact that out of 17 years of continued and successful borrowing and lending money, two projects “failed” in one year (the 2000 year the subject of these proceedings) does not and cannot convert these loans to loans for an extraneous purpose or being other than in the ordinary course of that business.
Your Honours, Finance had originally, and again in 1997 after the first review, expected that its loan would be repaid in full. The original HBI submission recorded a nominal internal rate of return of over 20 per cent at a payback period of five years and that is dealt with in paragraph 28 of her Honour’s judgment at page 3270. Then at 113, which is at page 3301 - and I go to this only because of submissions made by our learned friends, but:
The memorandum prepared on 16 June 1995 by the Chief Executive Officer of BHPM (Mr JK Ellis) that sought initial approval for capital expenditure by BHPB on the HBI plant demonstrated that HBI sales were modest in relation to anticipated returns on the project as a whole (for example, $43 million net operating profit after tax in 2004). However, not only is the value non‑negative, repayment of the BHPDRI loan from Finance is supported by a number of facts. First, at each point the decision to invest (or invest further) was taken on the basis of the return on the project as a whole given the facts which existed at the time of each review . . . Further, the Commissioner’s contention that anticipated cash flows would be insufficient to make repayments was calculated using discounted cash flows rather than actual dollars. In the context of a repayment of a loan, such an approach does not provide a complete answer to the question of whether an entity can repay a loan in real dollars in years to come. Moreover, selection of BHPDRI as the project entity, consistent with Section 21.19 of the BHPB Accounting Police Manual . . . was considered together with the appropriate debt funding levels for such a project . . . Those two issues (the entity and the debt funding levels) were interrelated and considered on the basis that BHPDRI would ultimately make a profit and, until it did, the anticipated “substantial pool of tax losses generated in [BHPDRI” would provide BHPB with the ability to offset income and tax payments in other parts of the BHPB group . . . Finally, it was the uncontested evidence of Finance that had the HBI project achieved the anticipated returns, there would have been a funds flow in the form of additional equity by way of redeemable preference shares or, as stated by Mr McGregor, it was “…usual that the BHPB group entities which contributed to overall profit were rewarded or compensated for such contribution, for example by way of an internal cash flow adjustment”.
Now, in 1997, when Mr McGregor performed his review, the decision was made to go ahead in the best interests of both Finance and BHPB. Again in his submissions the Commissioner leaves out the words “Finance and” but, in fact, the evidence refers to the interests of Finance and BHP Billiton. Her Honour deals with this at paragraph 42 at 3274:
At that time, the choice was to abandon the project altogether or persist with completion as economically and expeditiously as possible. In the best interests of Finance and the BHPB Group, Mr McGregor concluded that “a forward view of the project reveal[ed] that there [was] no case to be made for either abandoning the project or slowing it down [and that] the only sensible course of action [was] to complete the project as expeditiously and cheaply as possible”.
Your Honours see at the end of the paragraph at about line 40:
By year six, the projected cash flows were positive. A payback period of six to seven years was expected.
FRENCH CJ: This is all designed to put the November 1999 rollover into what you call in context.
MR BLOOM: Yes, your Honour. And to do with the submissions made by our learned friends that this was a losing thing from the word “go”. They were submissions put and rejected by her Honour below, with respect. My learned friend says he does not put such a submission. I was referring to what is in the written submissions, not to what my learned friend has said on his feet.
Your Honours, paragraph 46 of the submissions in‑chief deals with the alleged modus operandi. I will not come back to that. Paragraph 47 speaks about specific non‑arm’s length dealings, but they are not between debtor and creditor as required by subparagraph (d). One of those, for instance, is the unilateral act of DRI in writing down the debt in its accounts to current carrying value, but the evidence showed that the Group adopted this practice so as to reconcile accounts prepared under Australian generally accepted accounting principles with US generally accepted accounting principles and adopted this practice from 1998. The evidence about that is, and I will not take you to it, in paragraph 45 of her Honour’s reasons at 3276.
The next matter referred to by the Commissioner in paragraph 47 is a letter of comfort given by Billiton to DRI. The Commissioner complains, in effect, that Finance was not a party but all that means is that that cannot then be a dealing under (d) between debtor and creditor. The final and only specific dealing identified, which is actually between debtor and creditor in relation to the debt is the letter of 21 July 1999, to which I took your Honours, and this is correspondence between Finance and DRI, but as the portion of the letter at the very beginning of it shows, this was the granting of the moratorium and is hardly, with respect, in context a non‑arm’s length dealing between debtor and creditor.
GUMMOW J: This phrase “at arm’s length”, it crops up in other contexts, does it?
MR BLOOM: Yes, your Honour, usually in various parts of the Income Tax Assessment Acts.
GUMMOW J: Just lift your gaze from the Income Tax Assessment Act.
MR BLOOM: I am sorry, your Honour, yes, I will.
GUMMOW J: Elsewhere in the legal universe, this expression “at arm’s length” crops up, does it not?
MR BLOOM: It does, and ‑ ‑ ‑
GUMMOW J: In insolvency law?
MR BLOOM: And in various other pieces of legislation. The cases which deal with the expression “dealing at arm’s length” are always at pains to point out that there is a difference between being at arm’s length, and dealing at arm’s length, something your Honour Justice Crennan raised with me yesterday. We say that, well, of course we cannot say that these parties are at arm’s length because they are obviously connected as sister companies, but what we can say is that in relation to these particular alleged dealings they were not dealing otherwise than at arm’s length with each other. There are cases on the topic. Our learned friends have on their list a case called Orrong which sets out a number of the cases in the various contexts dealing with the expression. I will not take your Honours to it. They say that case is ‑ ‑ ‑
GUMMOW J: This is Justice Habersberger’s case.
MR BLOOM: Yes. They say that there is authority for the proposition that an inference should be drawn ‑ ‑ ‑
GUMMOW J: 207 FLR 245.
MR BLOOM: Thank you, your Honour – that an inference should be drawn that parties who are not at arm’s length are not dealing at arm’s length. With respect, that inference has never reached appellate court level. It has been drawn a couple of times by judges at first instance. Nevertheless, the question must always be one as a matter of fact, we say, of whether the parties are dealing with each other otherwise than at arm’s length. What is relied upon to make these non‑arm’s length dealings is again this alleged practice of Billiton to require subordination of the minds of the subsidiaries.....and there is no evidence of that whatsoever.
FRENCH CJ: It has to be a characterisation of the dealing, you would say, rather than something simply based upon the relationship of the parties.
MR BLOOM: Yes, your Honour, and that is done, with respect, taking into account not only the dealing itself, but the context in which it takes place.
CRENNAN J: I notice in the Ralph Report at page 251 ‑ ‑ ‑
MR BLOOM: Thank you, your Honour, I will just get that. Is that tab 18, your Honour?
CRENNAN J: Tab 24.
MR BLOOM: Tab 24?
CRENNAN J: Yes. Sorry, it is 18, I beg your pardon.
MR BLOOM: Thank you, your Honour. Yes, your Honour.
CRENNAN J: Tab 18 at page 251, there is a second bullet point at the middle of the page which makes a reference to “debt forgiveness transactions between related parties not transacting at arm’s length” and it gives us an example to subsidiaries of a wholly owned company group, and goes on. It sort of identifies a concern, if you like, in relation to capital losses created by forgiveness of a debt.
GUMMOW J: Artificially.
CRENNAN J: Artificially, between wholly owned subsidiaries in a group.
MR BLOOM: This is a 245 issue, we think, your Honour. Your Honour, we will dig it out, but we think this is a reference to 245. In any case, it is prefaced ‑ ‑ ‑
CRENNAN J: Yes, it may well be because, of course, that is the debt forgiveness regime, is it not?
MR BLOOM: Yes. It is prefaced, though, by the companies not transacting at arm’s length, which is a paraphrase, if one likes, not dealing at arm’s length.
CRENNAN J: Yes, but it was just the example caught my eye.
MR BLOOM: Yes.
CRENNAN J: As though nothing more were needed in relation to assessing whether or not a debtor and creditor are dealing at arm’s length. That may be wrong, of course, but it is just ‑ ‑ ‑
MR BLOOM: Leave aside what is drawn from that, that prospect is not realised here because the debt forgiveness is by Division 245 entirely dealt with.
CRENNAN J: Yes.
MR BLOOM: Entirely dealt with.
CRENNAN J: As you said yesterday, 243 is a ‑ ‑ ‑
MR BLOOM: Division 243 is a very specific provision.
CRENNAN J: Very specific exception to the general debt forgiveness regime in 245. In fact, I suppose on one view you cannot really assess what 243 means without taking into account 245.
MR BLOOM: And its existence.
CRENNAN J: And its existence, exactly.
MR BLOOM: Yes.
GUMMOW J: In a way, 243 is some caution or break on 245.
MR BLOOM: Yes. It is a super provision, if one likes. It is not intended, obviously, to do the same thing. It is intended to deal with the specific situation that it addresses. Your Honours, before leaving (d) can I just have this last submission. Even if one finds a non‑arm’s length dealing, one must still see that it is relevant to the issue that the reasonable conclusion is about. So, how is that particular non‑arm’s length dealing said to assist in the question of whether it is reasonable to conclude that the capacity existed at the time of the loan and if the dealing is not relevant to that, then it is not a dealing, with respect, that (d) is talking about. There is a specific provision, your Honour, in Division 245-90 dealing with companies under common ownership. That is in Schedule 2C to the 1936 Act. So while 243 is in the 1997 Act, 245 is in Schedule 2C of the 1936 Act, just to make matters easier and ‑ ‑ ‑
FRENCH CJ: All part of the process of simplification.
MR BLOOM: Yes. To make sure the publishers can sell all volumes, your Honour. Your Honours, I want to come now specifically to the Commissioner’s submissions in reply, but before that can I just say something very quickly about the Broadcasting Act cases upon which our learned friends rely, Canwest News and those cases. Obviously, they are concerned with a different expression and in a different context. The expression is “in a position to control” and where judges like Justice Beaumont in Canwest, Justice Lockhart in News, have talked about practicality it is in the context of control not of “in a position to”, so if one says ‑ ‑ ‑
GUMMOW J: You have to begin with some understanding of the scope and purpose of the regulatory regime which was being construed.
MR BLOOM: Of course. But even then the words that are said about control are not really relevant to capacity because they are not said about “in a position to” which is the beginning of that phrase. Your Honours, in his submissions in reply the Commissioner makes the point that the assets available for recourse at the termination of the debt overwhelmingly comprised assets forming part of the HBI complex. Secondly, again, Finance and DRI being subsidiaries of Billiton, could reasonably be expected to have acted in accordance with the requirements of their ultimate shareholding although, of course, distaining any arrangement or understanding to that effect.
Now, when he says that the assets of DRI were overwhelmingly comprised of assets forming part of the HBI complex, he also asserts that in an economic sense, in his submissions‑in‑chief, Finance’s rights were already limited to DRI’s substantial assets so why not, he says, accede to a request never made to formalise them. As he puts it, there was no disincentive. It is very different to saying there was an incentive. He says there was no disincentive if such a request had been made but why, one asks rhetorically, would one if one has access to all of the assets and one knows that the assets extend beyond the DRI plant, and one knows that there are other assets there possibly of value and the DRI plant is not, why would one agree to limit one’s right to the invaluable asset, substantial or not. It just, with respect, makes no sense. Your Honours, the assets included the general purpose leases on which the plant had been constructed. Mr Cameron’s evidence about that is in appeal book 5 beginning at page 2081. He says:
I am employed as a Senior Legal Counsel for the BHP Billiton –
In paragraph 5 over onto page 2082 he exhibits the DRI agreement and the “Beneficiation Agreements”. Then at about line 20 in paragraph 6 he refers to a letter sent from Mr Carpenter on behalf of the Government for Western Australia - he was then the Minister for State Development and Energy:
The letter records the agreement of the State of Western Australia that the determination of the DRI Agreement be effective following completion of the decommissioning process rather than immediately. The letter also records the common position of the State and BHPB that the HBI plant was on land leased under general purpose leases issued pursuant to the Mining Act 1978 (WA) and not pursuant to the terms of the two state agreements. The leases were thus not affected by the determination of the DRI Agreement or any future determination of the Beneficiation Agreement.
He produces and exhibits and list “of the general purpose leases”. The DRI agreement, should your Honours need to go to it, begins at 2088, the Beneficiation agreement at 2136 and the letter from Mr Carpenter is at 2181. Your Honours, our learned friends rely upon NEAT Domestic. I have taken your Honours to the extract from that in her Honour’s judgment at 103, and they say that that provides support for the proposition that the subsidiaries can be expected to act in accordance with the will of the parent. But, your Honours, that case’s expression of “directors’ duties” does not support the Commissioner’s general behaviour proposition.
That case affirms the duties of the directors of Finance in accordance with what was said by Sir Anthony Mason in Walker v Wimborne (1976) 137 CLR 1, especially at 6 and 7, a case well known to your Honours, to act in the best interests of the company while pursuing the interests of their parent, but only to the extent that those interests are compatible with other obligations. Now, that expression of the duty of directors is no foundation for the proposition that Finance could be expected, without more, to have acted in accordance with BHP Billiton’s wishes and to have ignored the interests of its vast external creditors. As at 30 June 2000, it owed to third parties approximately $37 billion, and that appears from page 1267 of appeal book 3.
Your Honours, one talks about $2 billion as a large amount of money, as your Honour Justice Heydon pointed out, but in the context of a company of this size, it is a “two” in relation, for instance, to outstanding debts of 37. Furthermore, your Honours, this is a public company group, not a private company group, so the suggestion that it is not constantly under the microscope, unlike some private company groups might be, is really, with respect, completely wrong and must be taken into account. Your Honours, there is a statement made in our learned friend’s submissions in reply that there was no suggestion – this is paragraph 17:
no suggestion that Finance had ever entered into or agreed to the alteration of its contractual relationship with DRI other than at the instigation of BHPB.
With respect, that is quite a misleading statement. There was in fact no evidence whatsoever that Billiton had ever instigated any alteration of Finance’s contractual relationship with DRI, ever. So to suggest the negative of that is not, with respect, to suggest that therefore there are examples of Finance acting at the instigation of Billiton. Your Honours, paragraph 104 of the Full Federal Court’s judgment and the judgment of Justice Edmonds is at page 3434. It was suggested, I think, that this paragraph was wrong insofar as it dealt with subsection (2) and that for some reason we did not seek to support it. We do support it and we do not think, with respect, that it is wrong. His Honour says:
The legislative policy so identified, conditions the proper construction of ss 243‑20(1) and (2). They are to be construed so that their application is confined to situations where, at the time of borrowing, the debtor is not fully at risk in relation to the expenditure
because of contractual limitations on the lender’s rights of recourse on a relevant event of default –
that is subsection (1) –
or, where, at the time of borrowing, the debtor or someone else has the capacity to subsequently bring about that state of affairs.
That is subsection (2). There is nothing, with respect, incorrect in what his Honour says. Your Honours, the case now put by our learned friends was never the subject of evidence. The case was conducted, as I have said, on the pleadings and the pleadings were amended a number of times by the Commissioner, but not in any respect relevant to 243. The appellant, in effect, now selectively picks parts of the substantial evidence before the trial judge in a lengthy case and asks this Court for the first time to draw inferences of fact and to decide as an issue of fact whether the reasonable conclusion should be formed.
In our respectful submission and having regard to all four matters identified in subsection (2), including (b), this Court would not, if it undertakes that task, reasonably conclude the rights of Finance against DRI in the event of default were at the time of the loan relevantly capable of being limited in the way mentioned by subsection (1). If your Honours please, those are our submissions.
FRENCH CJ: Thank you, Mr Bloom. Yes, Mr Solicitor.
MR GAGELER: I would not like your Honours to be left with the impression by anything said by me in‑chief or by my learned friend at the opening and then at the closing of his submissions that the Commissioner’s case as now pressed before your Honours lies outside the compass of the case that was run at trial. Your Honours have been provided with a small bundle of papers headed “Submissions at Trial”. I do not want to detain your Honours very long with this, but we have given your Honours the context so it could not be suggested that we have been unduly selective.
This was a case where, in accordance with standard directions in a tax list in Melbourne the parties submitted extensive submissions in writing in advance of the trial and a little mystery that has been cleared up by the research overnight is that the origin of this notion of economic equivalence that so distracted the trial judge was to be found in BHPB’s written submissions filed at trial. We have numbered these pages in the bottom right‑hand corner.
At page 2 in BHPB’s written submissions filed in advance of the trial and in advance of the submissions of the Commissioner your Honours see the first sentence at paragraph 186 which introduces that notion picked up again and developed at page 16 in the closing oral submissions on this point, put by my learned friend, Mr De Wijn, page 16 about line 40 where the Commissioner’s argument is characterised by our learned friends in that way. That is of minor significance. So far as the way in which the Commissioner put the case, it was put broadly. There were many strands, but one strand is the strand that is being pursued here. If Your Honours look at page 6, bottom right‑hand corner, paragraph 301, it is said:
In the present case, on a literal interpretation the requirements of s 24302‑(2) are readily satisfied. All it requires is that, having regard to the nominated considerations, it is reasonable to conclude that the creditor’s rights as against the debtor in the event of default are “capable” of being limited in the manner set out in s 243‑20(1). All that is required is that the parties have the capacity to enter into an agreement to this effect, or some other party, like BHPB, can procure such a limitation of Finance’s rights as creditor.
In relation to the various factors. Then your Honours will see from page 7 and following, each of paragraphs (a) through to (d) is analysed. The arm’s length dealing point, paragraph (d) being taken up from page 9 with some extensive and fairly helpful collections of authorities on that point, perhaps in answer to one of your Honour Justice Gummow’s questions for my learned friend, but then paragraph 117, in particular, takes up a series of fairly broad propositions as to why the parties were not in relation ‑ ‑ ‑
GUMMOW J: Paragraph?
MR GAGELER: Paragraph 117, page 12.
GUMMOW J: In 317?
MR GAGELER: Paragraph 317, page 12 then takes up a series of propositions in relation to the circumstances of these loans. Then if your Honours go to page 32 ‑ ‑ ‑
GUMMOW J: Could you just stop for a minute, Mr Solicitor. Going back to page 16, do you dispute the characterisation by counsel at line 42 that section 243 is an anti‑avoidance provision?
MR GAGELER: Yes, we do very much dispute that. There are anti‑avoidance provisions, but this is not one of them.
GUMMOW J: Well, if it is not an anti‑avoidance provision ‑ ‑ ‑
MR GAGELER: No. I will come to that in a moment. It is not just ‑ ‑ ‑
GUMMOW J: Well, just a minute.
MR GAGELER: Sorry, your Honour.
GUMMOW J: If it is not an anti‑avoidance provision, looking at paragraph 317 on page 12 where we were, how is 243 to be accommodated to a very wide and long‑established practice of corporate group activity?
MR GAGELER: In circumstances ‑ ‑ ‑
GUMMOW J: It has been part of commercial reality for an awfully long time.
MR GAGELER: Of course it has, but the commercial reality is this, that if a group chooses to set up a special purpose vehicle where the assets of the company are effectively limited to the assets of a particular project and the group chooses to finance the project undertaken by that special purpose vehicle by an internal loan from one group member to another where all can be expected to act in the interests of the group as a whole, the factors set out in (a) through to (d), paragraphs (a) and (c) and paragraph (d), make it reasonable to conclude, absent some other arrangement or particular circumstances, that if it suits the interests of the group as a whole, those financing arrangements can be varied in the manner set out.
Now, your Honours might say that is not much of a threshold. No, it is not, but it is ameliorated by subsection (6). If that is not a reasonable result in the circumstances, if it cannot be said in the circumstances that the debtor has not been truly fully at risk, the language of the explanation contained in the guide to the Division, then the Division would be misapplied, but otherwise the sort of circumstance that one finds here is precisely the circumstance to which subsection (2) speaks, in our submission.
GUMMOW J: Keighery’s Case is behind us, I suppose, but notions of ordinary commercial dealing cannot be put completely out of understanding, can they, when one comes to construing a provision which you say is not an anti‑avoidance provision like 243?
MR GAGELER: No. Notions of ordinary commercial dealing must be taken into account.
GUMMOW J: Ordinary, but in the context that this was an unusual form of business on a very large scale with interlocking governmental requirements and so on and so forth.
MR GAGELER: Yes. Much of the judgment at first instance that your Honours have been taken to by my learned friend ‑ ‑ ‑
GUMMOW J: I think the trial judge was entirely alert to all of these matters, if I may say so.
MR GAGELER: She was, but much of her judgment that your Honours have been taken to concerned the question of whether Finance could be said to be in the business of lending money and the peculiar nature of an in‑house finance company was highly relevant to the argument that the Commissioner sought to run on that point. That is not the issue before your Honours.
CRENNAN J: One problem, I think, is if the purpose of section 243 is expressed in general terms in the way you have rather done it, it leads to the conclusion that the section was aimed at and will always catch a project within a group where there is a specified purpose company as a subsidiary and a lender as a subsidiary ‑ ‑ ‑
MR GAGELER: With a lender as a subsidiary, yes.
CRENNAN J: ‑ ‑ ‑ Which fails.
MR GAGELER: Well, not necessarily, no.
CRENNAN J: Given section 245, it is just hard to see that being the purpose of 243.
MR GAGELER: Let me deal with the difference between those. The answer is, no, it would not always catch such a situation because paragraph (b) cuts both ways. My learned friend seems to think that an arrangement can only be a factor that will make it more likely than not or reasonable to conclude that the rights of the parties would become limited. That is not the way we put it. An arrangement can cut both ways. There may be particular arrangements to which group members are parties, including covenants with external lenders, that would make it unreasonable to conclude in the particular case that such a project would fall within the terms of paragraph (2). That is not the present case. It is not suggested that there are any external group liabilities, covenants or contractual relationships that enter into the present case.
So far as your Honour asked me about the relationship between Division 245 and Division 243, can I say this. There is an overlap between them but they have a different focus. It cannot be said, in our submission – our learned friend did not quite go so far as to say this, but he got close to it – it cannot be said that the presence of Division 245 is a reason for taking a narrow view of the scope of Division 243. They are separate, they are overlapping and to the extent that there is an overlap, it is addressed in Division 243 itself. Section 243‑75 says that where there is an overlap you apply Division 243 first.
Now, the focus of Division 245 is on the forgiveness of a commercial debt. It applies whenever you have a debt that is used to finance some income producing activity and it applies upon the waiver of that debt. When it applies there is a hierarchy of measures that may but need not involve a reduction of capital allowance deductions for the future. That is just one of a whole range of possibilities envisaged by Division 245.
Division 243 has a different focus. It is concerned with the termination of a debt which is not limited to the forgiveness of a debt. The termination of a debt includes simply the write‑off of a debt, and it is concerned with the termination of a debt that has been used to fund property or a particular activity for which a capital allowance deduction has been claimed in circumstances where the debtor has not been fully at risk from the inception of the loan, but has had the benefit of those capital allowance deductions. The purpose, as explained in the guide and as can be inferred from the structure, is to claw back what has occurred in the past, but only claw back proportionately to the extent that a debt is unpaid.
Your Honours, they are separate provisions conceived in the ferment of the late 1990s, but it would be quite wrong to say that because Division 243 came just slightly after Division 245, that it was there to catch something very specific and very narrow and that Division 245 was meant to be the generic provision. That is not the way it operates.
Your Honours, the only other thing that I wanted to draw out of the submissions at trial is when you get to pages 32 and 33 in the oral submissions of Mr Flynn, who presented this part of the argument for the Commissioner at about page 32, line 25, he is moving to paragraph (d), he is relying on the evidence of Mr Coburn. Her Honour asks at page 33 just before line 20:
So you say I have regard to general practice?
Answer, “Yes”, and second sentence of the paragraph that follows:
And we’d say that your Honour should conclude either that Finance and DRI were not dealing with each other at arm’s length, or that they would have subjected themselves to the will of BHPB in relation to any dealings in relation to the debt.
So there you are.
BELL J: Can I just inquire while you are on the topic of how the matter was conducted before the primary judge. You made the point with respect to (2)(b) that it can cut both ways so that one is really looking at an intensely fact specific inquiry on any occasion. Were these matters canvassed with the witnesses?
MR GAGELER: No, no, which may come to a question the Chief Justice asked me yesterday, the issues having been flagged in that way, and before that I should point out there were documents in the nature of pleadings that were filed that were so general as to allow virtually anything to be argued, but you can see relevantly to section 243‑20 the Commissioner’s document at page 213 of volume 1 comfortably encompasses the case as it emerged before your Honours. Our learned friends’ complaint before this Court in their written submissions was that amongst the arrangements mentioned at page 213 were not the arrangements or the circumstances referred to at the end of our written submissions in‑chief as arrangements. We accepted that and withdrew that part of the submission, but there was never any broader challenge by our learned friends to the Commissioner’s ability to agitate in this Court the arguments that we seek now to focus upon.
The question of onus of proof, your Honours, relates to the question of whose responsibility was it to put matters to witnesses. Our submission, consistently with what I said to your Honour the Chief Justice yesterday, is that the effect of section 14ZZO(b) of the Taxation Administration Act is, just as in a Part IVA case, dealing with section 177D(b), it was up to the taxpayer to establish the objective facts under paragraphs (a) through to (d) from which it would not be reasonable to conclude in terms of subsection (2), that is, simply to apply to this provision the same approach as has been taken, in our submission correctly, in the Full Court of the Federal Court to section 177D. The reference most usefully is Eastern Nitrogen Limited v Commissioner of Taxation 108 FCR 27 at paragraph 86 in the judgment of Justice Carr.
GUMMOW J: Does Dalco bear on this, because that is a decision of this Court?
MR GAGELER: Does it bear upon this?
GUMMOW J: Yes, this notion of onus.
MR GAGELER: Yes. Your Honours, I am told that Dalco is consistent. Dalco, I think, does not address section 14ZZO in terms. This judgment of Justice Carr does.
GUMMOW J: Well, section 14ZZO has an ancestry, does it not? It popped up in the Tax Administration Act. It used to be in the Tax Act.
MR GAGELER: It has been there forever, in one version or another. I am sorry, your Honour. Dalco, of course, discusses the general operation of section 14ZZO in that sense. It is entirely consistent, this being a particular application of that provision as expounded in Dalco. Can I just say two further things about construction and then move very quickly to the facts. Our learned friend’s case on construction was not clear to us on the written submissions and it has not become particularly clearer in the course of oral submissions.
It appears that our learned friend sees subsection (2) as limited to a case where a legal right existing at the time of a debt is in some way qualified by an arrangement existing at the time of a debt. Apart from how an arrangement will meaningfully qualify a legal right, there is, in our submission, a deeper problem. It requires paragraph (b) to apply in every case and it makes paragraphs (a), (c) and (d) no more than adjectival to paragraph (b). That, in our respectful submission, ignores the structure of the section and ignores the word “any” at the beginning of paragraph (b) and ignores the fact that an arrangement can cut both ways.
The second point that I wanted to make was that I had put in‑chief that “capable” is best read as meaning “susceptible”. Your Honour Justice Crennan said to me the word “able” would be as good a word to use. I accepted that. “Able” is actually the language of the explanatory memorandum in expounding the meaning of the word “capable”. I do not want to take your Honours to it. It is paragraph 2.73 of the explanatory memorandum.
So far as application is concerned, paragraphs (a) and (c) were addressed by my friend yesterday afternoon. He returned briefly to them today. The point he made was that DRI had other assets. The point he did not make was what those other assets were worth and, according to the balance sheet, they were worth next to nothing. He did assert from the Bar table that the Ernst &Young report was mistaken in attributing no value to some of those assets. We have not found any evidence that the Ernst & Young report was mistaken and if that report were mistaken, the annual report would also have to be mistaken.
In relation to “arm’s length”, our learned friend puts up a straw man when he characterises our case as being to the effect that Finance was somehow merely a conduit, getting close to a sham, or that the corporate mind of Finance and DRI was subordinate in the sense of capable of being wholly suborned to the will of BHPB. We do not need to go that far. The corporate mind of Finance, properly exercised, was legitimately able to have Finance give up rights against DRI if the giving up of those rights was in the interests of the Group as a whole.
You have to remember that in the circumstances of the present case Finance did in the events that occurred give up rights against DRI. Not only did it write off the debt of $1.8 million on 3 May 2000, but despite the fact that DRI limped on for some years afterwards, it waived the debt in a letter it wrote to DRI on 10 May 2000. So the concept of one company giving up rights against another within this corporate group is by no means foreign to what occurred.
Finally your Honours were taken to paragraph 114 of her Honour’s judgment, which was read to your Honours as if it was written from the perspective of Finance alone. That is wrong. What her Honour is doing is summarising the course of events which showed a series of high level investment decisions being made by BHPB and then the implementation of those high level decisions by other members of the Group. If you go back to page 3299 and put all of this in context, paragraph 107, the middle of the paragraph, a sentence read to your Honours:
It was not Finance’s business to make decisions about debt and equity. Finance’s business was to borrow and lend money following the making of such decisions by others.
BHPB. You go to paragraph 113, page 3301, bottom of the page, line 50:
Moreover, selection of BHPDRI as the project entity, consistent with Section 21.19 of the BHPB Accounting Policy Manual was considered together with the appropriate debt funding levels for such a project. Those two issues (the entity and the debt funding levels) were interrelated –
and so on. Even the reliance that our learned friend placed on Mr McGregor’s analysis back at paragraph 42, page 3274, somehow demonstrating arm’s length dealing, makes our point. Paragraph 42 second sentence:
In the best interests of Finance and the BHPB Group, Mr McGregor concluded –
It was Mr McGregor’s recommendation that then gets taken up by the BHP board at paragraph 43. To suggest that the making of this $2 billion unsecured loan by a book entry in the circumstances that occurred was a dealing at arm’s length is to make a suggestion that really should not be accepted by your Honours. Those are our submissions, if the Court pleases.
GUMMOW J: Wait a minute do not go away.
MR GAGELER: I am not running away.
GUMMOW J: I want to start at the beginning. Are the relevant notices of assessment in the same form? I am looking at page 40 in volume 1. Obviously not in the same amount, but that is the same form, is it not, used for each notice? This is the one to BHP Billiton.
MR GAGELER: I am going to have to be assisted with an answer to that question, your Honour.
GUMMOW J: Because it is to that that section 177 of the 1936 Act, anyway, would have attached indebtedness and enforcement provisions, subject to the ‑ ‑ ‑
MR GAGELER: Appeal provisions.
GUMMOW J: ‑ ‑ ‑ appeal structure bearing the onus.
MR GAGELER: Yes.
GUMMOW J: What is the source of the so‑called pleadings? It is the direction and practice in the Federal Court, is it?
MR GAGELER: Yes. It would be a practice note which – there is a Rule of the Court.
GUMMOW J: The Rule was made against a background of a decision in this Court that the Commissioner could be required to provide particulars, was it?
MR GAGELER: Yes.
GUMMOW J: That was the source of it, was it not?
MR GAGELER: Yes.
FRENCH CJ: There was the change in the last couple of years, I think, was there not, with the creation of a sort of taxation co‑ordinated list of some kind that submissions were required and statements?
MR GAGELER: You are probably asking the one person at the Bar table who cannot answer that specifically, your Honour.
FRENCH CJ: Yes. There used to be Commissioner’s statements put in and responses but then, I think, it became a bit more elaborate.
MR GAGELER: What you see here is that there were the appeal statements and then there was these extensive submissions in advance of the trial.
FRENCH CJ: Yes.
GUMMOW J: What I am asking is, when a system of pleadings is set up in that way, it may not be sufficient simply to repeat the mantra of 177 and 190, namely, the assessment speaks and there is an onus to displace it. The pleading system spins at a whole series of factual disputes in which parties lock issue.
MR GAGELER: Yes, and what I have sought to show – I have accepted that.
GUMMOW J: Particularly where there is a very complex provision which it turns out founds this assessment, although it does not appear on its face.
MR GAGELER: What I have sought to show from the material that I have provided is that the factual issue was in play. Amongst a thousand of other factual issues, the factual issue as it emerged in this Court was in play and on that factual issue I do repeat the mantra that our learned friends had the burden of proof or the onus of proof. I have not given your Honour an answer to whether those assessments were all in the same form.
GUMMOW J: The objection decision covered the lot, did it? The Commissioner’s objection ‑ ‑ ‑
MR GAGELER: Your Honour, I would rather check it and perhaps provide a note.
GUMMOW J: All right.
FRENCH CJ: That is at tab 4.7, I think, in volume 1, at least as BHP Billiton is concerned.
MR GAGELER: They are in the same form with one change. There is one at page 40. There is another at page 105. There is another at page 145 which has the addition of shortfall interest charge. There is a further one at page ‑ ‑ ‑
GUMMOW J: That should be the fourth and last?
MR GAGELER: At page 185 there is a similar one with a shortfall interest charge. The relevant rule, at page 202 you can see the introduction to the appeal statement said that it is pursuant to rule 52B of the Federal Court Rules.
GUMMOW J: Page 202?
MR GAGELER: Yes, 202 in volume 1. If it matters, there was other correspondence before the Federal Court not in the appeal books advising of the basis of the adjustments under Division 243. So not in the assessments but fully explained in other documents. If the Court pleases, those are our submissions.
FRENCH CJ: Thank you, Mr Solicitor. The Court will reserve its decision. The Court adjourns until midday.
AT 11.23 AM THE MATTER WAS ADJOURNED
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