Commissioner of Taxation v Energy Resources of Australia Limited

The Commissioner of Taxation appealed to the High Court of Australia against a decision of the Full Federal Court concerning the deductibility of discounts on promissory notes issued by Energy Resources of Australia Limited (ERA). The dispute centred on whether the cost of these discounts constituted a capital or revenue expense for the purposes of s 51 of the *Income Tax Assessment Act 1936* (Cth), and how to calculate the deductible amount, particularly when the notes were issued and discharged in foreign currency.

The High Court was required to determine two primary legal issues. Firstly, whether the discount on promissory notes issued by ERA was an allowable deduction under s 51 of the Act, and if so, whether it was a capital or revenue expense. Secondly, the Court had to consider the correct method for calculating the cost of these discounts when they were denominated in a foreign currency, specifically addressing the timing of currency conversion for the purpose of calculating any deductible loss arising from exchange rate fluctuations. The Court also considered the relevance of Division 3B of Part III of the Act.

The High Court held that the discount on the promissory notes represented a cost of borrowing money, which was revenue in nature and therefore deductible under s 51. The Court reasoned that the discount was an expense incurred in gaining or producing assessable income, and it was not of a capital nature. Regarding the foreign currency aspect, the Court determined that the cost of the discount should be calculated by converting the Australian dollar equivalent of the discount at the time the promissory notes were discharged, not at the time of issue. This approach recognised that the actual cost of the borrowing, and thus the deductible loss, was crystallised upon repayment. The Court found that the provisions of Division 3B of Part III of the Act were not applicable to the circumstances of this case.

The appeal by the Commissioner was dismissed.