Commissioner of Taxation v BHP Billiton Ltd

The Commissioner of Taxation appealed to the Full Court of the Federal Court of Australia against decisions of the primary judge, Gordon J, which allowed appeals by BHP Billiton Ltd (BHPB) and its subsidiaries, BHP Billiton Direct Reduced Iron Pty Ltd (BHPDRI) and BHP Billiton Finance Limited (Finance). The central dispute concerned whether a loan from Finance to BHPDRI constituted "limited recourse debt" under Division 243 of the *Income Tax Assessment Act 1997* (Cth), which the Commissioner sought to apply to reduce capital allowance deductions claimed by BHPDRI and BHPB.

The legal issues before the Full Court were whether the loan from Finance to BHPDRI was a "limited recourse debt" as defined in section 243-20(2) of the Act, and whether BHPDRI and Finance were dealing at arm's length. Specifically, the Court had to determine the meaning of "capable of being limited" within the definition of limited recourse debt, considering the creditor's rights against the debtor in the event of default.

The Full Court, affirming the primary judge's findings, dismissed the Commissioner's appeal. The Court reasoned that the legislative policy of Division 243 was to reverse capital allowance deductions where expenditure was funded by debt, but the debtor was not fully at risk and the debt was not fully repaid. However, the primary judge had found that the loan from Finance to BHPDRI was not limited recourse debt, as Finance's rights upon default were not limited to the financed property or security. The Court rejected the Commissioner's argument that an "economic equivalence" test should be applied, finding that the statutory language did not support such an interpretation. The Full Court agreed with the primary judge that Finance was a genuine lending entity operating for profit and that the decisions regarding the project were reasonable business decisions.

Consequently, the Full Court dismissed the Commissioner's appeals, upholding the primary judge's orders that allowed the appeals from the Commissioner's disallowance of objections.