Commissioner of Taxation v Energy Resources of Australia Ltd
[1996] HCATrans 129
IN THE HIGH COURT OF AUSTRALIA
Office of the Registry
Sydney No S107 of 1995
B e t w e e n -
COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Appellant
and
ENERGY RESOURCES OF AUSTRALIA LTD
Respondent
DAWSON J
TOOHEY J
GAUDRON J
McHUGH J
KIRBY J
TRANSCRIPT OF PROCEEDINGS
AT CANBERRA ON WEDNESDAY, 17 APRIL 1996, AT 10.21 AM
Copyright in the High Court of Australia
MR D.F. JACKSON, QC: If the Court pleases, I appear with my learned friend, MR J.W. DURACK, SC, for the appellant. (instructed by the Australian Government Solicitor)
MR P.G. HELY, QC: If the Court pleases, I appear with MR R.F. EDMONDS, SC and MR D.J. HAMMERSCHLAG, for the respondent. (instructed by Corrs Chambers Westgarth)
DAWSON J: Mr Jackson.
MR JACKSON: Your Honours, may I, before your Honours look at the outline of submission, say two things? The first is that your Honours will have two documents there, I think, one headed appellant’s outline of submissions, which puts the matter in very short form. The other is a document headed appellant’s submissions in which we have endeavoured to put our case rather more fully, and I will speak to those, your Honour, but could I just say that the first part of the appellant’s submissions also contains a summary of facts and issues which your Honours might find helpful to read at this point.
DAWSON J: Thank you, Mr Jackson.
KIRBY J: Is the decision of the Full Court now in the Federal Court Reports, as well as the Australian Law Reports?
MR JACKSON: Your Honour, I do not know offhand. I will find out for your Honour.
DAWSON J: Yes, Mr Jackson.
MR JACKSON: Your Honours, one further matter I might perhaps mention about the outline of submissions is my learned friends have mentioned to me just before your Honours came in that paragraph 3 of the outline where we put in effect what we say is their case is not the way in which they put it, but perhaps I can leave that to your Honours.
DAWSON J: The way you say they put it.
MR JACKSON: Yes, your Honour.
KIRBY J: 3 or 4(ii)?
MR JACKSON: In paragraph 3, your Honour, of the outline of submissions where we refer to the respondent’s case. Your Honours, as is apparent from the submissions, the case is concerned with the quantum of the deduction which the respondent was entitled to obtain in respect of the discount on promissory notes which it issued and repaid in United States dollars. Your Honours, the finance obtained was in relation to the establishment and operation of the respondent’s uranium mine, the Ranger Mine at Jabiru. May I take your Honours in that regard very briefly to the statement of facts which your Honours will see in Justice Hill’s reasons for judgment in volume 2 at page 556 in a passage which commences at about line 45 and goes through to the next page, again at about line 45 and your Honours will see that there were two sets of transactions. The ones giving rise to the present case are those referred to at page 557 commencing at line 15 and going through that paragraph.
Your Honours, I will come to the arrangement in a little more detail shortly, but the essence of them is set out there. Your Honours, as I submitted a moment ago, the amount claimed as a deduction was the amount of the discount in respect of the promissory notes and the discount, of course, was the difference between the amount which was received from selling the notes and the amount of their face value payable later when they matured.
Your Honours, may I just say something more about discount. Discount in the case of bills of exchange or promissory notes - perhaps I can say bills of exchange for brevity - is not really a freestanding concept. It is not quite like interest in the case of a loan where one can identify obligations to pay an amount or amounts in respect of principal and an amount or amounts in respect of interest. In the case of bills of exchange discount is the description given to a difference, that is, a difference between face value payable at a later time and the amount earlier received.
Your Honours, because the discount is of that character difference, its quantum cannot be identified without having regard to both elements which make it exist: that is, how much did you get; and how much do you have to pay? Could I come then to the first of the two bases which are in question now. When I say two bases, your Honours will see that the case is capable of being dealt with on one of two bases, the first basis being the question whether it is a deduction under section 51(1) or, if there had been an exchange gain, whether that was something that was assessable.
It is clear, in our submission, from the Court’s decision in Coles Myer Finance Ltd v Federal Commissioner of Taxation (1993) 176 CLR 640 that the amount of a discount when financing is by way of bills of exchange may be an allowable deduction pursuant to section 51(1). Your Honours will see that at page 664 in the last paragraph on the page in the paragraph that goes through to page 665. I shall not read it out to your Honours, but may I refer your Honours to that paragraph and in particular to the concluding sentence of it:
The difference between the amount payable on the bill and note and the amount received when the bill or note is discounted is a loss or outgoing made in the ordinary course -
et cetera.
DAWSON J: There is no dispute about all of this, is there, or that this is on revenue account?
MR JACKSON: Your Honour, in our submission, there was not any dispute. I was about to come to that very thing to indicate the passages. Before the court below, for some reason, despite the fact that we were content to accept that the transactions were relevantly on revenue account, Justice Beaumont felt the need to take a different view, although of course the matter had not been in issue and evidence had not been developed on the question before the primary judge.
DAWSON J: What is the position of the parties in dispute about it here?
MR JACKSON: Your Honour, the short answer is, “I don’t know at the moment”. I was going to indicate that the case was clearly one where it was not in dispute in the court below, and a deduction was claimed in respect of the amount of the discount. So, presumably, it is difficult to see how there could have been such a dispute about it.
Your Honour, I was going to say the parties had agreed that the discount was on revenue account. Could I take your Honour to Justice Hill at page 561, volume 2. You will see, commencing at line 15 to line 30, he states the position of the respondent; they had sought the deduction under section 51(1) of the cost of financing, and your Honour will see that set out there. In the next paragraph, going through to line 55 and the top of the next page, your Honours will see the Commissioner’s contention ‑ the two opposing contentions ‑ a question of how much. Your Honours will see also, at page 564, lines 15 to 30, the statement commencing at line 20:
there is no dispute between the parties that the discount in the present case is on revenue account ‑
and, Justice Beaumont, at page 506, lines 45 to 55.
Yours Honours, unless their Honours got that wrong, it seems pretty clear what the matter in dispute was. And the issue which thus arose, your Honours, was the amount of the discount. Was it to be simply the conversion of the United States dollar discount into Australian dollars as at the time of the maturity of the bills, at the time of payment out, or was it to be what we would submit is the true value of the discount in Australian dollars, namely the difference between the Australian dollar value of the proceeds at the time when they were received, on the one hand, and the Australian dollar value of the amount paid out on maturity?
And, your Honours, what we would submit is that the course which we submit is the appropriate one, that is the second course to which I referred, that that is the appropriate course to reflect the true amount of the deduction, we would submit, is supported by the approach taken in dicta in a number of decisions of the Court.
DAWSON J: Before you go to that, if you are right and that is the area of dispute, despite Justice Beaumont’s views, then that confines the dispute to sections 51 and 25.
MR JACKSON: Yes, your Honour.
DAWSON J: We do not get to the other application of capital gains ‑ ‑ ‑
MR JACKSON: Of Division 3B, yes, your Honour.
GAUDRON J: And it is only a question of mathematical calculation.
MR JACKSON: Well, it is a question of principle too, your Honour, because the question of principle, as we would understand it, is this. We say that you take into account the value of the money received at the time of discounting; you take into account the amount of the face value on maturity, and you take one from the other, the exchange rates differing, of course.
On the other hand, as we would understand the other side’s contention, it is that you do not do in effect the earlier of those in time. What you do is to do the transaction in United States dollars, or whatever other currency it might be, and take the amount of the discount in United States dollars and convert that figure as at the date of maturity. So, your Honour, that really is the fundamental matter in issue on the section 51(1) question.
Now I was going to take your Honours, and I will do so only relatively briefly, to the dicta in a number of decisions of the Court ‑ ‑ ‑
DAWSON J: So that what you are contending is a one-stop calculation.
MR JACKSON: Your Honour, I think it is the other side who would be the one-stop shop. We would be ‑ ‑ ‑
DAWSON J: Two stages, yes.
MR JACKSON: Yes, we are the two stages. Your Honours, to put it very shortly we say discount has no meaning except as a calculation. Discount refers to the difference between two figures. To give it meaning you have to look to both figures and convert each.
May I take your Honours first to Coles Myer 176 CLR 640, to which I referred a moment ago. Now, your Honours, may I take your Honour to page 664. Commencing at about point 4 on the page your Honours will see the paragraph, “Some kinds of recurrent expenditure,” and so on. Now, if your Honours were to read that paragraph what your Honours will see is that there are two references to exchange rise and exchange losses and the paragraph really leads into what is the last sentence of that where their Honours go on to say:
And, in Avco, it was recognized that exchange losses incurred in the borrowing and repayment of funds to purchase stock in trade and the deferment of payment to suppliers of such stock were losses on revenue account.
May I just say something in relation to the concept of exchange loss or exchange gain? When courts, as in that passage and in other cases, refer to taking into account exchange loss or gain the term does not have content unless one is looking at a situation where two different dates or, atypically, perhaps, two different rates on the same day, but two different dates or two different rates are involved. If there were a discounting conducted entirely in Australian dollars, of course, there could be no question of an exchange loss. An exchange loss, in our submission, becomes relevant only if one is looking at exchange rates at different times, that is, on discounting and on maturity, and the view - whilst I do not suggest for a moment that the particular passage to which I have just referred in Coles Myer is dealing with the question of discounting bills of exchange, when it speaks of exchange losses in relation to “borrowing and repayment of funds”, what must be being contemplated is the fact that there will be differences in the exchange rates applicable at two different times.
McHUGH J: Mr Jackson, I have some instinctive unease about the approach in these currency cases. It is as if one is using the English income tax approach. One rather tends to look at the terms of transactions and whether there is a profit or loss on the transaction rather than whether it is income or a loss or outgoing. Have you got any comment about that at all?
MR JACKSON: Your Honour, what I would say about it is really this, that it is clear from Coles Myer, if I could speak about discounting bills of exchange, that that method of raising finance - and your Honour will see at the top of page 665 a reference to it - the discount is the cost of acquiring funds, in the same way, I suppose, as interest would be if it were a loan. So that the sum which is a deductible sum for Australian income tax purposes is, to put it shortly, the amount of the discount. What we are simply seeking to say is that in claiming a discount, which it is accepted is something that is entitled to be the subject of a deduction under section 51(1), there is not really any question of contras fundamentally, although one can arrive at the same number of dollars by doing it in a contra way. But really all one is trying to work out is how much is the amount of that deduction.
McHUGH J: Correct me if I am wrong, but one does not look at it in terms of saying, “Well, the proceeds from this issue are income. The repayment of the issue is an outgoing and therefore you deduct one from the other”. That is not the approach that is adopted, is it?
MR JACKSON: With respect, I am not really talking about the proceeds being income. What I am seeking to say is ‑ ‑ ‑
McHUGH J: I know you are not. In the cases one never looks at it in those terms.
MR JACKSON: No. Your Honour referred to the British position. The position is really quite different there in a sense and to some extent now regulated by statute. We have referred in our submissions - and I will take your Honours to the paragraph later - to a decision which really does seem to be based on the profit concept, a decision in the House of Lords. I will come to that a little later. But we are not submitting anything really about profit. The approach which we would ‑ ‑ ‑
McHUGH J: I was not suggesting that you were. I was just getting a feel for the matter generally and what is the proper approach to it?
MR JACKSON: Yes. Your honour, one has to start, really, from the proposition that Coles Myer says that if the method of raising finance that is used is one that is by the discounting of bills of exchange, then the cost of finance, being relevantly deductible, is the discount. Now, your Honour, I know I have said it twice already, I think, but the concept of discount is bereft of meaning otherwise than as the result of a comparison of two things, and that is so whether one is talking of Australian dollars or talking in a conversion from overseas currency to Australian dollars. It is simply the description of a mathematical result. But it does become a question where the transactions that give rise to the discount are ones carried out in foreign currency, why one does not see what the two aspects of it that give rise to the discount are in notionally converted dollars in order to see what the result is in Australian dollars.
McHUGH J: I know, but it is a strange concept in a way. You say, the discount is either a loss or outgoing, but on the other hand, when there is a profit made in the transaction, you say that is income.
MR JACKSON: Yes.
McHUGH J: The profit is income, and that smacks very much of the English approach, rather than the approach under the 1936 Act.
MR JACKSON: Well, your Honour, the two really are just the obverse sides ‑ ‑ ‑
McHUGH J: I know, but I ‑ ‑ ‑
DAWSON J: Can I just clarify in my own mind? You would say, of course, there could not ever be a profit on any one of these transactions, because there is always a discount.
MR JACKSON: Well, there is always a discount, your Honour, yes.
DAWSON J: In the sense in which you have put it, and you have corrected me and said it was not a one‑stop calculation; you are probably right, but what you do is simply assess the amount of the discounted US dollars and then convert that; that is your approach to the matter, is it not?
MR JACKSON: No, your Honour, that, I think, is the other side.
DAWSON J: You had better clarify it.
GAUDRON J: And you so say that there can be a profit on the transaction, do you not, at least in an accountancy sense?
MR JACKSON: In an accountancy sense, yes.
DAWSON J: But not in an income tax sense?
MR JACKSON: No, your Honour.
DAWSON J: No, well that is what I am putting to you. We are talking about income tax.
MR JACKSON: Well, your Honour, one can arrive at assessable income, but it really depends on the way in which you do the transaction. You end up with the same number of dollars and, your Honour, could I just say ‑ ‑ ‑
DAWSON J: Now, before you answer that, what you are suggesting is the correct approach is to take the amount received for the note when it is issued, and then to take the amount which one has to pay on maturity of the note, and the difference in US dollars.
MR JACKSON: No, your Honour. We would take the amount that you received in US dollars, convert that as at that time to Australian dollars. One then takes the amount one has to pay on maturity and convert that to Australian dollars. The exchange rates will be different of course. The result of that gives you the amount of the discount and the amount of the discount is the amount of the claim for the deduction.
DAWSON J: Yes. The other approach is simply to keep it all in US dollars until the end and convert that into Australian currency at that time.
MR JACKSON: Yes. Now, your Honour, what we say about that fundamentally I think is that if one is looking at a transaction of that kind what one is seeking to do is to identify the amount of the deductible amount, which is the amount of the discount. In looking at that and because one has to deal in Australian dollars in the end, one is looking to see what is the amount of the discount in Australian dollars. You only get that, we would submit, or the better approach to getting it perhaps I should say - the better approach to getting it is to say what is the difference between what one got and what one has to pay looking at the value in Australian dollars of each of those at the time when it happened.
DAWSON J: And that is the dispute.
MR JACKSON: Yes. Your Honours, could I just mention in relation to what was put to me by your Honour Justice McHugh, International Nickel v The Commissioner of Taxation (1977) 137 CLR 347 was the case where it was held by the Court that a net exchange gain as a result of devaluation was part of assessable income, the particular transaction being one where the taxpayer was an importer of nickel products for sale in Australia, price payable in sterling, on the devaluation the amount payable is reduced in Australian dollars. Now, your Honours, I mentioned when dealing with ‑ ‑ ‑
McHUGH J: Could I just detain you once more before you can get on with your argument? Is there any benefit to be gained from analysing the matter in terms of treating it as a discount at one level and a purchase and sale of US dollars at the other?
MR JACKSON: I am sorry, I am not quite with your Honour.
McHUGH J: On one view there are two separate transactions. One is purchasing US dollars and one is selling US dollars in effect and there may be a profit or a gain or a difference anyway between those two transactions, but in a sense that is different from what the discount is - not in a sense, it is a difference. In this case the two things have tended to be rolled into one, have they not? It is just regarded as an overall transaction.
MR JACKSON: It is sort of overall, your Honour, if I could put it that way. Overall is a convenient but, with respect, not a precisely accurate description of what occurred. Your Honour, I will come in a little bit more detail to the documents in a moment, but what you have is a situation where the ability to issue the notes was one of a number of possible facilities that could be used by the respondent to provide it with up to $US210 million and then it could use any of these. It was a collapsing facility in the sense that the amount of it reduced from time to time, but to call it a facility is, itself, really to use a financier’s description for brevity rather than for anything else. Again, I will come to this, your Honour.
What one really had was a situation that if they chose to use the notes provision of it, then there was the ability to have underwritten by the banks who were the other parties to it an issue of notes that was not taken up by someone else and, as very frequently happens, the proceeds of discounting of new notes, together with other moneys, was sometimes used to pay the amount payable on maturity, but - your Honours, again, I will come to this - other moneys were available to be used and were used, and there was no obligation to use the money from a fresh discounting to pay the previous amount.
TOOHEY J: But it might be better where foreign currency is involved not to use the term “discounting”. It tends to divert attention from what the real issue is.
MR JACKSON: Yes, your Honour, that is true, in a sense. I suppose to use the term “discount”, it really leads one into the area because it is clear from Coles Myer - I do not want to labour it of course - that amounts of this genus are available as the subject of deductions, but what Coles Myer of course does not decide is how you work out the amount of the deduction in cases where you have the money which is the subject of the discount being in a foreign currency.
Your Honours will see at page 664 of Coles Myer the reference to Avco. Your Honours, may I go to that decision? It is Avco Financial Services Limited v the Commissioner of Taxation (1982) 150 CLR 511 and, your Honours , that case contains again recognition that it is the movement in exchange rates which is to be examined. If I could go first, your Honours, very briefly, to the headnote. Your Honours will see that the finance company had borrowed money in the US so it could make loans in Australia and to repay existing borrowings and on the repayment of the loans it made exchange gains and losses and it was held they were part of its assessable income or allowable deductions as the case might be. In that regard, your Honour, could I go to two passages, your Honours? The first is at page 514, Chief Justice Gibbs in the first new paragraph on that page and, your Honours, it is that paragraph to which I wish to refer.
Your Honours will see particularly that an obligation which is incurred and which is, for example, the subject of a deduction in one year, an obligation to pay, for example, a certain number of US dollars, will be brought to account as a number of Australian dollars for the purposes of the return. Of course that is necessarily done on the basis of a particular exchange rate. When the obligation comes to be discharged in the succeeding year, the result will be, except in the very unusual case, that the exchange rate is different. Now that will result in there having to be some alteration, one way or another, as his Honour says.
McHUGH J: But that passage throws up the conceptual difficulty I have about this whole matter. I have great difficulty in grasping the idea that a gain can be income.
MR JACKSON: Well, your Honour, it really is, in a sense - perhaps I can put it this way. If one looks at the nature of what is involved, what one sees is that one is necessarily talking about something that is relevantly an obligation in relation to which there has been a claim based on a certain amount. Now, your Honour, the nature of it is that there is a deduction which is on revenue account.
McHUGH J: I understand that, but if I buy 100 cows at $10 a head and I sell them at $15 a head, I make a gain of $500, but nobody says that the $500 is income. One says that the proceeds, the $1,500, is the income and the $1,000 I paid is the outgoing. That is the difficulty I have. It is just purely conceptual and it is probably ‑ ‑ ‑
MR JACKSON: Well, your Honour, I rather suspect I was arguing some of this yesterday in getting special leave in a matter yesterday, but what we would submit is - perhaps I can say two things. There are some cases, of course, where net amounts are really the amount of the income. Your Honour, Whitfords Beach I think is one where ‑ ‑ ‑
McHUGH J: Well it is easily understood with the old 26A and similar sections which specifically deal with profits and so on, but this smacks to me of the English taxation system, as opposed to the very individualistic system under the 1936 Act. It probably does not make any difference in the end, Mr Jackson.
MR JACKSON: Your Honour, could I say two things about that. The first is this. It is, in our submission, a relatively established doctrine ‑ ‑ ‑
McHUGH J: I understand that.
MR JACKSON: Your Honour, I would refer to the cases in the passage I have just been citing. In particular, International Nickel to which I referred earlier, is an instance of a case where the Court held the net gain to be income. The other thing is that the notion of items of this kind being income is certainly one that is supported by the United States decisions where the structure of their Act is relatively similar to our, as distinct from the English, and there has been a considerable body of judge-made authority to the effect that reimbursements on the one hand, and items which cancel out deductions in a previous year, themselves partake of the nature of income.
Your Honour, the point has really been reached in the United States where one has a situation where the relevant Act makes particular provision for circumstances where that consequence is not to flow. So, that, your Honour, in the principal jurisdiction where the structure of it is broadly the same as ours in the sense of income and outgoings along the 25/51 line, a view similar to that adopted here has been taken.
McHUGH J: Yes.
MR JACKSON: That is the first passage to which I wish to refer in that case. May I give your Honours a reference later to the leading United States case which is Hillsboro something and also, your Honours, to an article dealing with the topic. Your Honours, the second passage to which I wish to refer was that at page 529 and in the passage which commences at the bottom of page 529 and goes on to page 530, what your Honours will see is that their Honours said:
With respect to those who think otherwise, the proposition that -
Your Honours will see the passage going through that paragraph. Could I just say in relation to the last sentence of that paragraph, it is perhaps expressed a little economically, with respect. What the Court seems to be saying is that “a saving in the number of Australian dollars representing the amount of foreign currency”, et cetera.
McHUGH J: I notice in the American case referred to there there seemed to be some attempt to argue that there were two separate transactions, on 529.
MR JACKSON: Yes, your Honour. What is apparent from the passage to which I referred is that in cases of the kind to which the Court is there referring it seems clear enough that the movement in the exchange rates is to be taken into account one way or the other. Your Honours will also see that in the next paragraph their Honours exemplify what they have said by reference to the conversions involved when moneys are brought to and sent out of Australia. It is the first new paragraph on page 531. But, your Honours, actual conversion to Australian or any other currency is not, in our submission, a necessary requirement, and that is something that we would submit is demonstrated by the reasons for judgment of members of the Court in Caltex. May I come to that now, your Honours. That is Caltex Limited v Federal Commissioner of Taxation (1961) 106 CLR 205.
One does need to note the facts of this to a degree. They are summarised in the headnote. May I just take your Honours to these aspects of it. There was a debt for trading stock to a US supplier by an Australian incorporated company, marked variations in the exchange rate. They were reflected by monthly adjustments to the supplier’s account. Remittances were from time to time made by using Australian currency to purchase dollars. The debt was discharged in 1936 in the manner set out at about point 7 on page 205:
A new supplier had lent the appellant the full amount of these payments and had paid this amount in dollars into the appellant’s bank account.....the Australian equivalent of the US dollars then paid was substantially higher than either the cost -
and so on. It was claimed that there was an exchange loss deductible as an outgoing. The Court by majority held there had been no loss or outgoing, but the reason for doing it was that in substance the transaction which had occurred was one where there had not been a discharge of the indebtedness but something equivalent to an assignment of the indebtedness to someone else. I will take your Honours to the particular passage in a moment.
McHUGH J: ....., was it not?
MR JACKSON: It was not said to be that; it was something akin to it, your Honour. Could I go to Chief Justice Dixon at page 218. Your Honours will see that his Honour does not very much deal with the exact point to which I was referring, but the relevant part of his reasons may be seen at page 218 commencing about point 5, the reference to Armco, and going through to page 219, about point 8. The particular passage of significance is at page 219, where your Honours will see at about point 5 he says:
But if for any reason the amount is capable of changing, as is the case when the indebtedness is in a foreign currency and the rate of exchange may alter, a further question arises.
Your Honours will see that continues to the end of that paragraph and then goes on to identify in the penultimate paragraph on page 219 the problem in the present case.
Your Honours, more importantly for present purposes Justice Fullagar at page 228 deals specifically with the question of the need for there to be an actual transfer of funds between Australia and the United States and your Honours will see that in the second new paragraph on the page where he says:
I should perhaps add that I do not regard the mere fact that there was in 1936 no actual transfer of funds between Australia and New York as necessarily decisive against the taxpayer. I would think it quite possible that an Australian trader might make a real exchange loss as a consequence of receipts and payments of dollars in New York without any actual exchange operation.
He elaborates upon that, your Honours, throughout that paragraph.
KIRBY J: One gets an impression that this was written in a context where there was much less in the nature of transactions wholly within the currency of other countries.
MR JACKSON: In terms of frequency, yes, your Honour, and, of course, until I think the early 1980s for much of the period the Australian dollar was artificially pegged.
KIRBY J: This transaction here was wholly in United States currency. One would think that our approach should take into account the fact that that is now so much more common than it was in the past, depending, of course, on the terms of the statute and the application of the statute to them, but we have to operate the statute in the real commercial world that is somewhat different now than it was in 1960.
MR JACKSON: Your Honour, it is considerably different for a number of reasons. One is the matter to which I adverted before and that is the fact that the Australian currency was in effect - I say artificially and I mean by that fixed by government decision at the exchange rate that could be applicable and your Honours will recall that there would be from time to time demands by one interest group or another that the relevant rate should go up or should go down. It always seemed to go down when I was about to go overseas. So that there was that feature which meant that the market was not itself playing the part which it does today. The second feature, of course, is that for one reason or another there has been much greater participation by Australian companies and so on in international activity and international borrowing. The third feature, your Honours ‑ ‑ ‑
KIRBY J: That is in turn simply a reflection of the global nature of financing and of much commerce today.
MR JACKSON: Yes, your Honour, but two other features I am going to mention are really reflections of the same broad concept. One is that overseas institutions have been much more active in seeking dealings with Australian people, including, of course, the relaxation in the number of foreign banks that are allowed to practice or carry on business actively in Australia. Your Honours will have seen the fact that there is more interest overseas in activity in Australia in some aspects and not always good for people, for example, the foreign exchange loans there were that gave rise to many difficulties in the last decade. But the last matter I suppose, and I do not mean to give a compendious list of aspects of it, is, of course, the much easier means of communication, both physically and electronically.
TOOHEY J: If there has been no transfer of funds and whatever transactions are involved take place, let us say, in the United States by reference to money held by the taxpayer in question, on what footing does the difference between the exchange rate become relevant for the purposes of assessing either income or outgoings?
MR JACKSON: What the taxpayer receives is, on the discounting of the bills, money in the United States which it ‑ your Honours, it is not a notional thing, at all.
TOOHEY J: No.
MR JACKSON: It receives funds in the United States. Now, it can use those funds in any way in which it likes. It can use the funds, as the facility agreement refers to, as part of its operating capital, for operating its mine here, and things of that kind. It can convert the money immediately into any other currency that it chooses. It can keep the money in United States dollars, and invest it in some way in the United States, and it can use the money to pay off some of the obligation on the immediately preceding bills of exchange, or notes that mature. So that, your Honour, that is the first thing. One is not dealing with a notional sum of money. One is dealing with a sum of money that it gets in the hand, as it were.
TOOHEY J: It is because it is not notional that I asked the question. If it was notional it might be easier to see why the exchange rate is relevant. But, if we are talking about actual money held in an actual account in the United States, it does not leave that account, but is used in the form of American dollars for the purpose of various transactions by the taxpayer. I just then say, in that light, on what footing is it said that the exchange rate is relevant to the determination of income or loss?
MR JACKSON: It would not become relevant, I suppose, if there were no claim, one way or the other, that there was assessable income or a deduction. If what is said is that there has been a deductible expense incurred, by reason of the transaction, one then has to say, “What is the transaction?”, and “How much is the amount of the deduction?” Now, your Honour, in the end one must get to a sum in Australian dollars, and if one is getting to a sum in Australian dollars, it becomes a question then of how you work it out, and one has to look to see the true nature, or the true amount of the sum in Australian dollars, and we would submit one does that by saying, “It is a comparison of what you got and a comparison with what you had to pay”. What did you get? You got the equivalent in Australian dollars of X and you had to pay the equivalent in Australian dollars of Y.
TOOHEY J: Why do you say that? Why does one ask the question in that way?
MR JACKSON: Your Honour, one asks it because the taxpayer is seeking to say we incurred a loss. We claim that in Australia, we incurred an expense and we claim that in Australian dollars, and it becomes a question of how you work it out.
TOOHEY J: That seems to me to beg the question, Mr Jackson.
MR JACKSON: Well, your Honour, the answer to the question involves ultimately choosing which of two views is the appropriate one. I accept that, your Honour, and it may be that in some cases one could say, well, you look at it this way rather than the way we are suggesting. But what I am seeking to say, your Honour, is that that is not the proper way of doing it in cases where what you are seeking to value really has no meaning unless you look at the two ends of it. And in looking at the two ends of it, your Honour, in just the same way - perhaps I am putting this badly. What I am seeking to say is this. If you look at the amount of the deduction, what you are looking at - I know I have said this before - is a comparison between two things.
When one is looking at the amount that is obtained, one looks to see if there has been any exchange gain or loss, we would submit, because the transaction is in a foreign currency so one has to look to see what emerges from that and the cases suggest, we would say, that in doing that what you look to see is what the value was in Australian currency at the earlier time, and what is the value at the later time.
DAWSON J: That is not the exercise, is it? The exercise is to say what the cost was of acquiring money for the purpose of running one’s business and since the transaction in acquiring the money was entirely in American dollars, then the cost initially will be in American dollars, and that is what you convert back into Australian currency.
TOOHEY J: Well, if indeed, you convert it at all, which is what is troubling me.
DAWSON J: Well the only reason you have to convert it is because you are allowed to deduct the cost of acquiring that money, and so in each year you have to see what the cost was of the funds.
TOOHEY J: I understand that in the sense that one went out and bought money for the particular transaction. Let us say you have a fairly healthy bank account in the United States on which you draw for various purposes, so that in one sense you have not acquired - it is difficult to say that $1 million dollars was acquired today or tomorrow, because the funds have always been kept at a level of $5 or $10 million dollars. I am still troubled to know on what basis it is then relevant to say, or to ask, what the exchange rate was at any particular date.
MR JACKSON: Could I say this. If what your Honour is putting to me were right, then ‑ ‑ ‑
TOOHEY J: I am not saying it is right - perhaps it is a reflection of my own lack of understanding.
MR JACKSON: Your Honour, I was not meaning to be offensive in saying that. What I am seeking, simply, to say is this: if what your Honour is putting to me was the appropriate approach, then what was done in Caltex would really have been unnecessary because there is no net difference in United State dollars. Only if the conversion were made did the issue arise.
TOOHEY J: The statement by Justice Fullagar - the one that you took us to at page 228 - I would think it quite possible that an Australian trader might make a real exchange loss as a consequence of receipts and payments of dollars in New York, without any actual exchange operation. It is that notion which prompted those questions.
DAWSON J: Is the answer to be found in the fact that there is a cost of finance, of money and, in this case, it is an ongoing cost which goes from year to year. But you have to, for income tax purposes, confine it within discrete periods in order to assess what your deduction will be. And in a sense it is an artificial exercise, as Justice Toohey points out, but it is made necessary by the confines of the Incomes Tax Assessment Act.
MR JACKSON: Well, your Honour, it really comes about ultimately because of two features. One is that there has to be an annual return, that is the first thing.
DAWSON J: Yes.
MR JACKSON: And, your Honour, that is why one sees in, if I could put it this way, the ordinary case, you see provision made where there is an accrual accounting for businesses in the ordinary way. Then if something for which the estimate was made in one year turns out to be incorrect and it is a greater or lesser sum, that is adjusted in the next year one way or the other. Now, something of that kind has to come about because of the need for there to be an annual return. The second thing, of course, is that the return has to be in Australian dollars, and if you are talking about an Australian company operating in Australia and selling its product to the world but engaged in borrowings overseas, that is what one really is talking about.
DAWSON J: Precisely, and you could, of course, with this facility leave your calculations if it were not for income tax to the expiry of the facility and say what your net loss or gain was.
MR JACKSON: In some facilities one could, your Honour.
DAWSON J: What, this one does not come to an end?
MR JACKSON: No, your Honour, but what I was seeking to say was that this is one where it is a reducing facility and where there are separate transactions in respect of each of the notes. Your Honour, if one had a simple case where there was the one facility provider, as it were, and the same amount to be turned over for 10 years, then we would still submit that the position was that you had, leaving aside altogether Division 3B, a situation where every year you had to deal with each of the transactions that had occurred.
DAWSON J: In that year, yes.
MR JACKSON: Yes. Your Honours, could I also say that, just referring to what your Honour Justice Toohey was putting to me, the whole point of the observation made by Justice Fullagar, followed by the example which he gives - I am sorry, your Honour, I am putting that badly. The example which he gives on page 228 and going down to the bottom of the page and the top of the next page is one which illustrates, in a sense, the need to engage in a consideration of this kind because it demonstrates how the true amount in Australian dollars of transactions of this broad kind needs to be reflected and can be reflected oddly if one does not do the conversions.
Your Honours, may I go from that to the third set of reasons in the case, and that is of Justice Kitto at page 229. Your Honours will see commencing at about point 3 on the page that his Honour summarises in the first paragraph what was decided by Texas Co. (Australasia) Ltd. v Federal Commissioner of Taxation, and you will see the two propositions to which he refers and, particularly, No 2. Now, your Honours, having said that, his Honour then goes on to say in the next paragraph that he has:
used the word “forego” to cover both the case where the trader expends Australian pounds in purchasing the requisite number of dollars, and the case where he uses for the payment dollars which he has acquired otherwise than in exchange for pounds, for example by -
and he lists a number of ways in which that might occur. That goes through that paragraph.
At page 230 your Honours will see in the first new paragraph on the page that his Honour goes on to say:
If, on that day, the appellant had discharged the indebtedness out of its own resources, either buying dollars with pounds or utilizing dollars of its own, the difference between the equivalent of the dollar indebtedness expressed in pounds at the then rate of exchange and the number of pounds previously allowed as deductions in respect of the indebtedness would have been an allowable deduction, being covered by the second of the propositions -
on the preceding page, and his Honour goes on through that sentence. Could I just mention in passing that on the next page, page 231, in the long paragraph on that page his Honour deals with the particular circumstances why the case was not one attracting the operation of those principles and, I shall not read it out, but, effectively, one comes down to about point 8 on the page where he says:
The object of the affair was one which might equally have been achieved by the new supplier’s taking an assignment -
and so on. That is dealt with also on page 232 commencing about the sixth line on that page and through that paragraph. The two other members of the Court, Justices Taylor and Menzies, although they dissented on the question of whether, in the particular case, there had, in fact, been a payment of the amounts. We are of a similar view to the Justices to whom I have referred already, on the issue of the need to take into account exchange gains and losses. Justice Taylor, your Honours, page 237, commencing at about point 4 in a passage which goes through to about point 2 on page 238 deals with this issue and it seems apparent enough that what his Honour is saying is that one has to take into account the amount of the exchange loss or gain, whether the money is actually paid or not in Australian currency, and your Honours will see, particularly, the bottom of page 237. His Honour then, at page 238, in a passage which commences at about point 4 and which goes to the bottom of the page, deals also with the circumstance. He gives an example of the way in which the transactions should work.
Your Honours will see particularly at page 238, the last 10 lines or so, he says:
the defect in the respondent’s argument is that it selects as its basis an expression - “exchange loss” - which is no more than a commercial term conveniently used to denote some of the effects which fluctuating rates of exchange may produce in trading transactions and then, after giving a too literal meaning to the expression, it denies that any such loss can occur except in the case of a trader who has exchanged a sum in one currency for its equivalent in another.
He said the problem was rather wider than that. Your Honours will see at page 239, about point 5 on the page, his Honour says:
The use of a trader’s own dollar funds to discharge a dollar indebtedness overseas means, of course, that the trader is no longer in a position to convert the dollars used to Australian currency. And, expressed in terms of that currency, he incurs an additional cost which is just as real and significant as if it had been necessary for him to expend Australian currency to secure dollar funds for the purpose of making the payment in question.
Justice Menzies at page 249 dealt also specifically with the question whether it was necessary to pay the money. Your Honours will see the last paragraph on the page. The observations made by his Honour there in that paragraph, which goes through to about point 4 on the next page, are to the effect, once again, that it is not necessary to actually buy the foreign currency.
Your Honours, in the particular case, as I said a moment ago, the deduction was not allowed because it was held that the loss had not matured because what had occurred was just the substitution of another creditor. I have taken your Honours to what was said by Justice Fullagar about that. Your Honours will see that also in ‑ ‑ ‑
KIRBY J: I just pause to note that in that passage that you quoted from Justice Menzies, his Honour said that the taxpayer had of necessity to keep its accounts in Australian pounds.
MR JACKSON: Yes.
KIRBY J: What you are really suggesting here is that, though the transaction was in United States dollars and continued throughout in United States dollars and it was always conceived of in United States dollars, it had at the beginning to be notionally converted into Australian dollars, though it never was so converted. It just seems to me that in the modern context of international financial flows that if you require that, then there needs to be a clear statutory basis for it.
MR JACKSON: There is, your Honour. One sees that section 20(1) of the Income Tax Assessment Act says that:
For all the purposes of this Act, income wherever derived and any expenses wherever incurred shall be expressed in terms of Australian currency.
KIRBY J: Yes, but the question is whether it is income at that point.
MR JACKSON: Your Honour, one thing it does say is that for the purposes of the Act expenses, wherever incurred, are to be expressed in Australian currency.
McHUGH J: “Expenses” is a strange word to use in section 20, having regard to the term “losses or outgoings” in 51.
MR JACKSON: Your Honour, it is no doubt a shorthand expression.
McHUGH J: Very shorthand.
MR JACKSON: Your Honour, in the area, if I can put it that way, the term “expense item” is commonly used as a synonym for something that is a section 51(1) deduction.
KIRBY J: I am sorry, I took you off your course. You were going back to Justice Fullagar.
MR JACKSON: What I was saying, your Honour, was this, that the deduction was not allowed in the particular case because it was held the loss had not matured because there was just the substitution of another creditor. I had referred to the passage of Justice Fullagar. What I was going to do was take your Honours to another passage which puts it shortly to Justice Kitto at page 230 at about point 2 and your Honours will see it there set out. Could I just also say perhaps in relation to what your Honour Justice Kirby said to me a moment ago, no doubt there are transactions all around the world but what one has here is an Australian taxpayer carrying on business in Australia, obtaining its funds at one point by a particular method open to it of overseas borrowings, to put it loosely and inaccurately, but it is an Australian taxpayer carrying on business in Australia in a way that has been a traditional way for large businesses to do it.
KIRBY J: I understand the way you put it. You say that if you are looking at the true loss for the purpose of deduction, you have to have a countervailing account of what came in?
MR JACKSON: Yes.
KIRBY J: Really that is the sort of clash that we have got to resolve in this case and I understand the force of that argument.
MR JACKSON: Your Honour, what I was going to say was that moving on from Caltex, in this case, of course ‑ ‑ ‑
DAWSON J: But what do you get out of Caltex, Mr Jackson?
MR JACKSON: Your Honour, what I get out of it are two things really. It is necessary to take into account exchange losses or exchange gains where there are transactions in foreign currency. That is the first thing. The second thing, your Honours ‑ ‑ ‑
DAWSON J: That merely begs the question, does it not?
MR JACKSON: Your Honour, there are quite a few decisions to that effect, in our submission. Your Honours will see them referred to in the passages I have given already. The second thing though is that in determining the amount of the gain or loss, it does not have to be a case where there is actual conversion of Australian dollars into United States dollars or some other currency. There does not have to be a transmission of the money, an actual conversion in that sense, and the views of the Court in that case seem to make it clear that that is so.
KIRBY J: Was that the view both of the majority and the minority in Caltex? Did anybody say anything contrary to that?
MR JACKSON: Your Honour, no ‑ ‑ ‑
KIRBY J: Because it is the second proposition which is the important one, it seems me, in building your argument.
MR JACKSON: Yes. Your Honour, the answer is, no. Chief Justice Dixon I do not think speaks about it particularly. The difference in view between majority and minority is on a different point.
KIRBY J: I realise that, but so far as the minority dealt with the matter; they made observations which are consistent with what Justice Fullagar said.
MR JACKSON: Yes. Your Honour, there does not seem to be any express difference of view on that question. Indeed, what seems to have been done is that the court is rejecting an argument put forward to the contrary.
Your Honours, could I move on to the next aspect with which we wish to deal, and it is this: to say that this is not a case that can be disposed of in the same way as Caltex was disposed of ultimately, because this is a case where the liabilities had matured, and they had been paid, and, your Honours, of course the liabilities ‑ the matured liability, whatever it might be ‑ is the subject of a claim for deduction, and a claim not in dispute in that regard. But, it is plain also that this is a case where there were completely new creditors, and that that is so, your Honours, appears from two things; the first, if I can put it shortly, is ‑ and your Honours will see set out at our submissions in paragraph 11 ‑ ‑ ‑
DAWSON J: That is the big submissions?
MR JACKSON: The big submissions, your Honour, and where we say, your Honours, in the last sentence, although the evidence is not mentioned, in the reasons below it was plain that the subscribers to the notes issued to assist in discharging maturing liability, included many subscribers who were not holders of the maturing notes. Could I indicate where your Honours will find support for the proposition, and in volume 2, at page 386 your Honours will see, going from 386 through to 483, a document which indicates who all the tenderers were for the bills, and if your Honours take, for example, page 386, the notes having an issue date of 25 February 1986, your Honours will see for example that the Algemene Bank and Banque Indosuez are the first two listed. They do not appear in the next issue, issue No 2, and then your Honours will see, for example, JH Shroder Wagg, as being the second‑last one on page 387, and your Honours ‑ sometimes people reappear when the particular notes mature; sometimes they do not.
Your Honours will see, for example, if your Honours look at page 387, that on 20 March 1986 the notes were issued; the maturity date was 20 June 1986 and when your Honours come to 20 June 1986, which is page 390, there is a different list; some the same, some not; Bank of Tokyo, for example, not there the first time, but there the second.
KIRBY J: What is the point is this? This is just the international money market.
MR JACKSON: No, your Honour, what I am trying to say is this, that there is in reality a settlement of the first series of transactions. You do not have the same people simply replacing themselves by taking the new bills. What I am seeking to say, your Honour, is that one cannot really say that this is a case where you have just got the equivalent of an assignment. What you have got is particular sets of notes being paid out, new people coming in as the persons to whom the notes ‑ ‑ ‑
McHUGH J: This is to distinguish this case from Caltex.
MR JACKSON: Yes. Your Honours, also, as we say in paragraph 20 of the same submissions, there was no obligation to use the proceeds of fresh notes to discharge the liability on existing notes. It was not simply taking the money from the discounting of one with an obligation to use it to pay the amount of the maturity. It could be used. It did not have to be. Your Honours, could I go then to ‑ ‑ ‑
DAWSON J: Just before you do, Mr Jackson. The object of the exercise is what, to ascertain the amount of the cost of the money, that is, the amount of the loss or outgoing?
MR JACKSON: Yes, your Honour.
DAWSON J: With these notes, there was no loss or outgoing incurred until the maturity date, was there?
MR JACKSON: Your Honour, the ‑ ‑ ‑
DAWSON J: Because that was at the time at which the company had to pay out the face value of the notes. Until then what had happened was that it merely received money at the discounted rate.
MR JACKSON: Your Honour, if that were so, Coles Meyer of course would really, in a sense, have been decided the other way.
DAWSON J: You can spread that amount over the year perhaps, if you like, but that is not the point. The point at which the actual loss occurred was at the date of maturity, was it not?
MR JACKSON: May I say two things about that. Your Honour, that is right in terms of the quantification of the obligation. In terms of the existence of the obligation, it is not, with respect, correct and the fact that the obligation is one ‑ ‑ ‑
DAWSON J: This is the difference between loans and bills, or notes, but you do not have anything other than an obligation to pay an amount at a particular date.
MR JACKSON: Your Honour, that is right, but at the same time if one looks, for example, at Coles Meyer, that issue seems to have been agitated in that case.
DAWSON J: I may be wrong but as I read Coles Meyer, it says that you spread the cost over the year, on a straight line method, but that is another thing. The question is what is the loss, what is the amount of the loss.
MR JACKSON: I accept that, your Honour.
DAWSON J: And that occurs, and is quantifiable really, only at a particular time, namely when you have to pay out.
MR JACKSON: Your Honour, accepting all that, it is quantifiable then, but it is a question of how it is quantified and the way in which, in our submission, it is quantified is by seeing what, ultimately, in Australian dollars, has been the value of that cost.
DAWSON J: But the cost is only identifiable in terms of US dollars at that point of time, because you have only traded in US dollars - if “trading” is the right word. You have only been dealing in US dollars up to that point.
MR JACKSON: No, your Honour, it has always been identifiable in US dollars.
DAWSON J: You can always, at any time, convert US dollars, but that is not the nature of the transaction. The transaction is a transaction in US dollars so that in the first instance any loss is in US dollars, and because the loss occurs at an identifiable point of time, that is the time - I am putting this as a proposition - that is the time at which you do the conversion if you want to say what the loss is in Australian dollars. That is the case against you.
MR JACKSON: May I seek to say in relation to that that, first of all, speaking in terms of - if I could just go back to the question of liability. I mentioned Coles Myer 176 CLR, and at the bottom of page 659 in that, , five members of the Court said:
By making the promissory note, the maker engages that he will pay it according to its tenor. The obligation to pay at a future time created by such a note is clearly a present liability -
And that is why it is something that ‑ ‑ ‑
DAWSON J: That is because of the nature of the loan because it is a continuing liability, a continuing indebtedness, but a bill or a note is different.
MR JACKSON: Well, that is the bill, your Honour.
DAWSON J: And a note is different.
MR JACKSON: Well, your Honour, these were notes.
DAWSON J: Yes.
MR JACKSON: I do not want to hold your Honour up on that point.
DAWSON J: But there is a difference, is there not? In a sense it is a continuing obligation. In a sense it is not. It is an obligation to pay at a certain date in the future a certain sum of money. Well, that is not a continuing obligation in one sense, is it?
MR JACKSON: It remains, your Honour, as the day becomes closer.
DAWSON J: It remains as a future obligation but not as a present one. Perhaps that is a distinction. It is a continuing future obligation but not a continuing present obligation if anything turns on it, but the fact is that the cost is incurred at the date of payment, not like interest where it is accruing all the time. That is the difference - the date of discharge, the date of maturity. I am sorry,.....be equivocal, the date of maturity.
MR JACKSON: Leaving aside the question whether the obligation is present or not.
DAWSON J: I do not think that is a fruitful argument.
MR JACKSON: I would not really disagree with your Honour and one cannot see what the amount of the discount is.
DAWSON J: One can, because it is in US dollars at that time. The whole transaction is in US dollars, and one looks at the US dollars which one had to outlay, and the US dollars which one received previously, and there is a sum in US dollars, and at that point of time you can assess what the loss was.
MR JACKSON: Undoubtedly, your Honour, you have to do it that way. You have to do it in a way that arrives at, in Australian dollars, what is the amount of the cost. But, in looking at the amount of the cost what one cannot leave out of account is that what one got at the time when the bill or note was discounted was money and the money which was obtained then was money which, at that point, had a value in Australian dollars.
DAWSON J: It is irrelevant that it was money at that point of time because we are not thinking in income tax purposes then. It was dollars.
which are capital in character. Where one would be concerned with those things such as in the context of the capital gains tax provisions of the legislation, there is in section 160K(5), which is at the back of the copy statutes that I made available to the Court a little earlier, a specific provision that says in effect that:
Where an amount of money, or the value of any property, that is to be taken into account for the purposes of this Part as, or as part of:
(a) the cost base to a taxpayer in respect of an asset; or
(b) the consideration in respect of the disposal of an asset;
would, but for this subsection, be an amount in the currency of a foreign country, the amount to be so taken into account is the equivalent amount in Australian currency at the time when the costs were incurred or the time of disposal of the asset, as the case may be.
This section is of interest for present purposes only for two reasons. First, it proceeds upon the assumption that currency of a foreign country may nonetheless be money which is interesting for section 21 purposes. Second, it is an illustration of the proposition that when the legislation requires a notional conversion, it makes specific provision intended to achieve that result.
Paragraph 27 - this is a little repetitive and I apologise for that, but I simply wanted to make the point that when Mr Jackson submits that:
It is sufficient, in the absence of special circumstances, that an obligation be discharged.
In order to give rise to an exchange rate gain, that is a submission put in the context of Caltex and we respectfully submit it must be understood as meaning that is so where the obligation has antecedently been taken into account on the revenue account, otherwise it is not so. Paragraph 33(4) is, we respectfully submit, an exaggeration or distortion of the position. Our whole case is that there never was a foreign exchange gain, nor was there a foreign exchange loss. Those are the submissions that we wanted to put, if the Court pleases.
DAWSON J: Yes, thank you, Mr Hely. Mr Jackson.
MR JACKSON: Your Honours, may I say something first of all about our learned friend’s argument concerning Caltex. We would seek really to say two things, I think. The first is that to read Caltex in the way in which our learned friend’s argument does, as being ‑ Caltex and the other cases to which reference has been made ‑ cases dealing only with circumstances where an amount has been put in revenue account as a kind of estimate or as the statement of the position as at a particular day and they deal only with cases where that changes, does not, in our submission, really give sufficient weight to the approach taken by the Court in those cases, and that that is so ‑ perhaps I should say just in relation to that, it is clear that the Court was dealing with the matter as a matter of principle, not just as a matter of principle in relation to the manner of disposition of debts and using the occasion of particular purchases as merely an illustration of the way in which the issue would arise.
But that that is so, your Honours, is supported, we would submit, by what was said, for example, in Avco 150 CLR 518, where Chief Justice Gibbs at the bottom of the page said about Caltex this:
In the Federal Court, Brennan J ‑
who was a member of the majority in the Federal Court from which the appeal came ‑
raised the question whether a loss could be said to be incurred in those cases in which the Australian dollar loss had been merely calculated, and there had not been an actual outlay of Australian dollars.
And your Honours will see the way in which it is then said ‑ his Honour then refers to Caltex:
where a taxpayer did not discharge its indebtedness in the United States, but merely substituted one creditor for another.....no loss was incurred ‑
Now, your Honours, there is no suggestion in that passage, if I could refer to it first, of there being some reading down of the notion, as limited to particular classes of case, as distinct from simple discharge of indebtedness.
But if one goes to the decision in the Full Court of the Federal Court, which is Federal Commissioner of Taxation v Avco Financial Services Ltd (1980) ATC 4,603 ‑ I do not know that your Honours have that ‑ I think the answer is no. Your Honours will see two things from that. In the judgment of Justice Brennan, which commences at 4,604, he discusses at page 4,606 and 4,607 the position in relation to the payments and Caltex and so on.
Your Honours will see two things. The first is at page 4,606. In the left column he refers specifically to the fact that in some cases there was not actually a payment out in Australian dollars, that the transaction was one as here where the whole transaction was conducted relevantly in United States dollars and he says particularly:
sometimes the moneys lent were retained in the USA to repay an amount due under an earlier borrowing.
Then, your Honours, at page 4,608 he refers in the right column towards the bottom of the page:
Had the losses been on revenue account, it would have been necessary to consider whether they could be said to have been “incurred” in those cases where the Australian dollar loss had been merely calculated, and there had not been an actual outlay of Australian dollars to repay a US Creditor (see Caltex, supra).
Now, your Honours, if one looks at that judgment and other judgments, no one really has quite seen before a point of distinction that is sought to be drawn in the present case between loans and transactions of the kind presently in question and the way in which our learned friends would seek to distinguish it.
McHUGH J: But must it not necessarily flow from the fact that there is no income for the purpose of section 25?
MR JACKSON: I am sorry, your Honour.
McHUGH J: In this case one does not begin to look at section 20 or anything else until the transaction is completed. There can be a loss or an outgoing as a result of the discount but the receipt of the moneys themselves are not income.
MR JACKSON: Your Honour, section 20 speaks also of expenses whenever incurred.
McHUGH J: I know it does, but it rather indicates it is looking at the matter in terms of revenue account.
MR JACKSON: Your Honour, if I can just say this - perhaps we are talking about different things.
McHUGH J: We may be.
MR JACKSON: Could I just say this, that section 20 is really speaking of both sides of the coin. It says the income has to be in Australian currency, expenses whenever incurred have to be in Australian currency. Your Honour, whether it be the case or not be the case that the funds obtained by way of the transactions in question are funds that are to be used in effect on capital account, the cost of funds is the expense that is the deductible expense. Now, that expense has to be expressed in terms of Australian currency and, your Honour, that is why one goes back to what I was submitting earlier, that to work out what that expense is, to express it ‑ ‑ ‑
McHUGH J: It is very simple. The respondent simply says, “It was $US616,638 and at maturity date it was X amount of dollars in Australia.”
MR JACKSON: Your Honour, that suffers a bit, with respect. If one looks first to the general and, secondly, to the particular. Looking to the general it is not as if one is simply saying what is the amount of a liability. There is the actual receipt of the money. The next thing, your Honour, is that if one goes to the ‑ ‑ ‑
McHUGH J: But the receipt is in the United States.
MR JACKSON: Indeed, your Honour.
McHUGH J: That is all in American dollars. The only thing that has happened in American dollars is that the respondent is 616,000 worse off in US dollars, and that is what you have got to - it has then made a loss and that is when section 20 strikes.
MR JACKSON: Your Honour, could I come then to the particular to seek to deal with what your Honour is putting to me, and that takes one to page 558, because you will see between lines 20 and 41, what happened to the money that was obtained on the discounting. What you will see there is:
At the expiration of the terms of the notes the successful tenderers for the next series of notes paid a discounted amount to the holders of the first series of notes to enable ERA to meet its obligation to pay the face value -
et cetera. Now, your Honour, undoubtedly the payment of the money is a payment in US dollars but it is a payment of US dollars at an amount which for Australian tax purposes has been calculated because it is paying off the face value of the matured bill at that time.
McHUGH J: It is paying capital. It is repaying capital. That is the problem that you have, is it not?
MR JACKSON: No, no.
McHUGH J: That is what distinguishes this case from Caltex and the revenue account cases.
MR JACKSON: Your Honour, I am sorry, I really had not quite finished what I was trying to say in relation to that.
McHUGH J: It should be me who says he is sorry.
MR JACKSON: Your Honour, what I am trying to say is that it is not as if the money has not been for purposes, whether it be purposes of general accounting or income tax purposes. It is not as if that money has not achieved a defined value at that point. Your Honour will recall that what is being done with it is to pay off the amount of the maturing bill as at that day. Now, that maturing bill for Australian tax purposes has a value. Now, whether you adopt their approach or our approach, it has a value in Australian dollars by reference to the exchange rate at that point. So, it is not as if the money that has come from the bills is money that sits there. It is used to pay off a certain sum and it has a value which one can convert to Australian dollars at that day.
McHUGH J: I know, but it is all in US dollars and it is all on capital account but the taxpayer incurs an expense, namely, the discount, and it is that discount that section 20 then uplifts and converts into Australian dollars.
MR JACKSON: What your Honour puts to me is right. However, it is a question of what the discount is.
McHUGH J: And it is a discount in US dollars. There is nothing else in the Act. Section 20 does not strike until you have got an expense. There is no gross income here. The proceeds of the notes are not gross income. It is all on capital account and so there is nothing. If, for example, there had been no discount, in so far as its income tax ramifications are concerned, this Act would have nothing to say. It is only because the taxpayer incurs an expense that any problem arises.
MR JACKSON: Your Honour, the taxpayer does incur an expense. One accepts that. I mean that is really the starting point of it, but it is what is the expense. Now, if you are speaking about the expense being expressed in terms of Australian dollars, what was, in Australian dollars, the expense. The nature of the expense is that it is a subtraction, but a subtraction between what two things.
DAWSON J: But the point is the expense was in US dollars, you see, at a particular point of time.
MR JACKSON: Not really, your Honour, with respect.
DAWSON J: But we are going back over old ground. We had this argument this morning.
MR JACKSON: I know, your Honour. All I am seeking to do is to answer what is being put to me. Your Honour, might I just say one other thing. Avco, for example, demonstrates that an exchange gain or loss can be on revenue account, notwithstanding that the receipt of loan funds under capital repayment are themselves on capital account of course.
McHUGH J: Yes, and that is this case.
MR JACKSON: The fact that there is a difference between capital and revenue, and that in working out the amount of the revenue one has to look to see a payment made that has a capital aspect, does not mean that you cannot take it into account. It is a question of calculation. Your Honours, could I mention in relation to our learned friend’s reference to Pattison v Marine Midland, that that has been dealt with in paragraph 19 of our submission and I do not want to add anything further to that.
Your Honours, turning to Division 3B, our learned friend treated as one of the requirements that there be “a purchase of currency”. That phrase is really one used only in section 82V(2)(a) which is one of the provisions dealing with the way in which the division operates. Your Honours, it is not the outer extent of the operation of the provision. It is a provision probably referable mostly to hedging contracts, one might think, but it does not mean that there has to be a purchase of currency for the division to apply. Your Honour, those are our submissions.
DAWSON J: Thank you, Mr Jackson. The Court will consider this matter.
AT 4.01 PM THE MATTER WAS ADJOURNED
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