Commissioner of Taxation v Energy Resources of Australia Ltd

COMMISSIONER OF TAXATION v ENERGY RESOURCES OF AUSTRALIA LIMITED
No. NG276 of 1994
FED No. 924/94
Number of pages - 55
Income Tax
(1994) 29 ATR 563
(1994) 54 FCR 25

COURT

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
BEAUMONT(1), GUMMOW(2) AND HILL(3) JJ

CATCHWORDS

Income Tax - foreign exchange gains and losses - "Euronote" financing facility under which 90 day promissory notes issued in $US, discounted and satisfied out of the proceeds of new issue - deduction allowed to respondent for discount at $A value at the time of maturity of difference between $US issue amount and $US maturity amount - whether difference between $A value of issue proceeds at time of issue and $A value of obligation at time of maturity constituted assessable income as income in ordinary concepts - whether transactions involved the giving or paying of consideration other than cash for the purposes of s.21 of the Income Tax Assessment Act 1936 (Cth) - whether any gain to the respondent required to be recognised as derived by taxpayer on revenue or capital account - whether respondent made a realised currency exchange gain under an eligible contract within s.82Y

Coles Myer Finance Limited v Commissioner of Taxation (1993) 176 CLR 640; discussed.
Payne v Federal Commissioner of Taxation (1933-34) 51 CLR 197, (1936) AC 497; discussed.
Caltex Limited v Federal Commissioner of Taxation (1959-60) 106 CLR 205; discussed.
Pattison (Inspector of Taxes) v Marine Midland Ltd (1984) AC 362; discussed.
Capcount Trading v Evans (Inspector of Taxes) (1993) STC 11; discussed.
Commercial and General Acceptance Limited v Commissioner of Taxation (1977) 137 CLR 373; applied.
Elmslie v Federal Commissioner of Taxation (1993) 118 ALR 357; distinguished.
KD Morris and Sons Proprietary Limited (In Liquidation) v Bank of Queensland Limited (1979-80) 146 CLR 165; applied.
Jolley v Mainka (1933) 49 CLR 242; applied.
United City Merchants (Investments) Ltd v Glass Fibres and Equipments Ltd (1983) 1 AC 168; discussed.
"roll-over"
"under a contract"
"cash"
"currency"

Income Tax Assessment Act 1936 (Cth): ss.20(1), 21, Pt.III Div.3B, ss.82Y, 82Z, 82V(1) and (2)(a), 82W(1) and (2)

HEARING

SYDNEY, 12-13 September 1994
#DATE 30:11:1994

Counsel and Solicitors AH Slater QC with JW Durack
for Applicant: instructed by Australian Government

Solicitor

Counsel and Solicitors R Bainton QC with D Hammerschlag
for Respondent: instructed by Corrs Chambers Westgarth

ORDER

THE COURT ORDERS THAT:

(1) Appeal allowed in part.

(2) Order 2 of the orders of 22 April 1994 be varied by substituting "A$7,905,110" for "A$11,604,956".

(3) Appeal otherwise dismissed.

(4) Appellant to pay respondent's costs.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

INTRODUCTION
BEAUMONT J This is an appeal from orders of Davies J allowing an appeal from decisions of the Commissioner disallowing objections by the respondent taxpayer, Energy Resources of Australia Limited ("ERA"), to amended assessments of its taxable income for the years ended 30 June 1987 and 30 June 1988 (see the report of Energy Resources of Australia Ltd v Federal Commissioner of Taxation (Davies J) 94 ATC 4225).

The background to the appeal is that the Commissioner assessed ERA, which mines uranium at the Ranger mine in the Northern Territory, under Division 3B of Part III of the Income Tax Assessment Act 1936 ("the Act"), which Division deals with "foreign currency exchange gains and losses". The assessment was made on the basis that ERA had realised foreign currency exchange gains and losses under certain Euronote transactions. The notes had been issued by ERA pursuant to a Finance Facility Agreement entered into in January 1986, before the commencement of Division 3B. At first instance, as before us, the Commissioner relied on Division 3B but, in the alternative, contended that, in any event, ERA's gains were assessable under s.25(1) and its losses deductible under s.51(1) of the Act. Although these provisions are familiar and need not be recited, reference should next be made to the provisions of Division 3B.

THE PROVISIONS OF DIVISION 3B
3. The Division applies to gains and losses only to the extent to which they are of a capital nature (s.82U(1)).

(As has been noted, timing is important here. The Division applies, according to its tenor, in relation to gains made and losses incurred before or after the commencement of the Division (i.e. 5 June 1987) (s.82U(4)). However, the interpretation clause, s.82V, refers to the "commencing day" as 19 February 1986 being the time at which the introduction of the Division was foreshadowed (s.82V(1)). There is a transitional provision, s.82W, to which it will be necessary to return later.)
The Division does not apply to a loss except to the extent to which a deduction would have been allowed under s.51 if the loss had not been of a capital nature (s.82U(2)). Likewise, the Division does not apply to a gain under a contract except to the extent to which, if a loss that was not of a capital nature had been incurred under the contract, a deduction would have been allowed under s.51 (s.82U(3)). It appears that these provisions were intended to give effect to the announcement made in anticipation of the legislation that foreign exhange gains or losses of a capital nature realised on or after 19 February 1986, to the extent to which money borrowed was used for the purpose of producing assessable income or in carrying on a business for that purpose, would be assessable as income or allowable as deductions.
A currency exchange gain or loss is defined to mean, respectively, a gain or loss to the extent to which it is "attributable to currency exchange rate fluctuations" (s.82V(1)).
A currency exchange gain made, or loss incurred, in respect of currency purchased under a contract shall be taken to have been made, or incurred, under that contract (s.82V(2)(a)) and to have been made, or incurred, at the time when it was "realised" (s.82V(2)(b)).
The assessable income of a taxpayer of a year of income shall include any currency exchange gain made by the taxpayer in the year of income under an "eligible contract" (s.82Y). An "eligible contract" is defined as a contract entered into on or after the "commencing day", 19 February 1986 (s.82V(1)). Subject to notification, a currency exchange loss incurred in a year of income under an eligible contract is an allowable deduction in respect of the year of income (s.82Z(1)).
There is a transitional provision, s.82W(1), dealing with a contract of loan to a taxpayer entered into before the commencing day (as here) in these terms:

"82W(1) Where, on or after the commencing day (i.e. 19 February 1986) and under a contract entered into by a taxpayer before the commencing day, any of the following happens in relation to the taxpayer (otherwise than pursuant to a contractual obligation that was binding on the taxpayer before commencing day):

(a) the taxpayer receives loan money;

(b) a loan made to the taxpayer is wholly or partly rolled over;

(c) the period for which money has been lent to the taxpayer is extended,

this Division applies as if --

(d) where paragraph (a) applies -- the loan money had been received by the taxpayer under a contract entered into by the taxpayer at the time when loan money was received;

(e) where paragraph (b) applies -- the loan resulting from the roll-over had been made to the taxpayer under a contract entered into by the taxpayer at the time of the roll-over; and

(f) where paragraph (c) applies -- a new loan of the amount outstanding immediately before the commencement of the extension period had been made to the taxpayer under a contract entered into by the taxpayer at the commencement of the extension period."

THE SCHRODER WAGG AGREEMENT
10. In 1980, ERA and an associated company entered into a loan facility agreement with several American banks by which a loan facility, denominated in United States dollars in the maximum sum of $US250 million, was placed at the disposal of the ERA Group for the purpose of enabling ERA to meet the development costs of its mine.

THE 1986 EURONOTE FACILITY AGREEMENT ("the Facility Agreement")
11. The Facility Agreement, dated 22 January 1986 and entitled "USD210,000,000 Facilities Agreement," was made in conjunction with three other agreements - a Euronote Tender Panel Agreement; a Euronote Issue Agency Agreement; and a Euronote Paying Agency Agreement, all of even date. In the Facility Agreement, it was recited that ERA had requested the Commonwealth Bank of Australia ("CBA") as Manager and Credit Suisse First Boston Limited ("Credit Suisse") as the Euronote Tender Panel Agent, to invite a consortium of banks and financial institutions to provide ERA with facilities of up to US$210,000,000; and that, pursuant to the facilities granted under the Agreement, ERA wished to be able to issue Euronotes, to request Letters of Credit and Guarantees to be opened (to support certain existing borrowings and the issue by ERA of other securities, including securities issued in the U.S. commercial paper market) and to obtain certain "short term" and "interim" loans. The Facility Agreement, which was made between ERA and one of its subsidiaries on the one hand, and the CBA (as the Manager), Credit Suisse (as the Euronote Tender Panel Agent), sixteen Banks and six "Specified Facility Banks", on the other, relevantly provided as follows:

(1) Purpose

The purpose of the facility was stated to be to enable ERA to prepay certain borrowings and to provide it with accommodation for its general operations (cl.2.01).

(2) Form

The form of the facility (for an amount not to exceed USD210,000,000 or its equivalent in a currency other than USD) was that ERA could request -

(a) the Euronote Tender Panel Agent ("the Panel Agent") to invite the Euronote Tender Panel Members ("the Panel Members") to bid for Euronotes, as provided in cl.5.01, having an aggregate amount outstanding up to USD140,000,000, or, if some or all of the Euronotes were issued in currencies other than USD, the amount of USD up to USD140,000,000 equivalent to the face amount of such Euronotes converted into USD at the Manager's spot rate of exchange two business days before the issue of the note

(cl.2.02(a); cl.1.01).

(b) the Banks to purchase any unsold Euronotes, as provided in cl. 2.03(a) and cl. 5.01, up to USD 140,000,000 or its equivalent in other currencies

(cl.2.02(b)).

(c) Letters of Credit or guarantees, as provided in cl.5.02, to be opened, up to USD210,000,000 (cl.2.02(c));

(d) CBA to provide short term funding, ("Swingline/short term cash funding facility") as provided in cl.5.03, up to USD50,000,000 (cl.2.02(d));

(e) CBA to make Interim Loans, as provided in cl.5.04, up to USD140,000,000 (cl.2.02(e)).

(3) Request Notices

Under the procedure for a request notice by ERA to effect a Utilization under a Facility, ERA was to specify the Facility it wished to utilize (cl. 4.01). In utilizing the Underwriting Facility, ERA was to specify -

(i) the proposed issue date (cl.4.02(b));

(ii) the desired currency denomination of the notes provided that a currency other than USD (and not AUD in any event) would be specified only in certain events (cl.4.02(d)(i)(aa)); (In fact, for present purposes USD was the only currency used.)

(iii) the amount, being not less than USD10,000,000 and not more than USD50,000,000 (cl.4.02(d)(i)(bb));

(iv) the desired term of each note, either one, two, three or six months (cl.4.02(d)(i)(cc)); and

(v) whether or not the notes were to bear interest

(cl.4.02(d)(i)(dd)).

(4) The Facilities

As was provided in cl.2., there were four Facilities in place. We are concerned with Euronotes issued pursuant to the first, the Euronote Underwriting Facility, which was expressed to be available upon these terms:

(i) Panel Agreements. It was the declared intention of ERA, the Manager, and the Panel Agent to enter into Euronote Tender Panel Agreements with financial institutions dealing in Euronotes (cl.5.01(a)).

(ii) Tender Procedure. Upon submission of tenders, the Panel Agent and ERA were to consult with a view to agreeing on the Euronote Issue Amount for each proposed Tranche

(cl.5.01(b)(iv)).

(iii) Acceptance of Tenders. ERA was to request the Panel Agent to accept all tenders at a rate less than or equal to the underwritten rate, in order of effective yield

(cl.5.01(c)(i)).

(iv) Purchase by Banks. If the aggregate face amount of Euronotes to be issued in respect of a particular proposed Tranche for which purchasers procured by the Panel Agent was less than the proposed Issue Amount, and certain other conditions were satisfied, including the giving of notice by ERA, the Banks were obliged to purchase the Euronotes at the prescribed subscription price (cl.5.02(e)(i)).

(v) Payment to ERA. The Panel Agent was to pay the aggregate Euronote purchase and subscription prices to the bank or other account specified by ERA (cl.5.01(g)).

(5) Accommodation Limit Reductions and Cancellations On the reduction dates specified in Schedule 2, the Total Commitment was to be reduced each year to a prescribed amount

(cl.10.01). For instance, by 30 June 1987, the prescribed amount was 92% of the Total Commitment. By 30 June 1993, it was 18%. By 30 June 1994, at the expiration of the term of the Facility, it was to be zero (Sch.2). (In the events which happened, ERA's obligations under the Facility were fully discharged by 9 October 1990.) Further, ERA could, on notice, declare (within limits) that a part of the Total Commitment be deemed unavailable

(cl.10.02). ERA could, on notice, cancel the whole, or a part (within limits) of the Total Commitment (cl.10.03).

(6) Payments

ERA was to make all payments, if in USD, on the due date in same day funds, unless otherwise specified (cl. 12.01(a)). (In fact, relevantly, none other was specified.) If made in any other currency, the payment was to be made on the due date in lawful money of that country and in immediately available funds which were freely transferable and convertible into USD (cl. 12.01(b)).

(7) Governing law

The agreement was governed by the laws of the Australian Capital Territory (cl.22.11).

(8) The form of the Euronotes A form of Euronote Tender Panel Agreement was annexed to the agreement. It provided for the issue of notes in the form of Schedule One either in USD or such other currency as each Bank may approve. The form in Schedule One (subject to a statement that amendments will be required if the note is denominated in a currency other than USD) is, relevantly, as follows: "For value received, ERA promises to pay to the bearer on the Maturity Date the Principal Amount upon surrender of the Note to the Principal or other Paying Agent of ERA. (In a specimen note in evidence, the Principal Agent was described as Kredietbank S.A. at an address in Luxembourg. Alternatively, surrender could be made to Kredietbank N.V., as a Paying Agent, at a London address.) Payment is to be made by transfer to an account with a bank outside the USA. The obligations of ERA are subject to the laws of England."

(There is a provision for interest, if applicable, but this was not made applicable in the case of the subject notes.)

THE DRAW-DOWNS AND THE ISSUE OF THE EURONOTES UNDER THE FACILITY AGREEMENT
12. All of the notes issued in the years of income under the Facility were in USD, in Schedule One form, and for a term of three months. As has been said, none carried interest. However, they were taken up by the tendering Banks at a discount on their face value. When each note matured, the face value was paid to the noteholder, principally from the proceeds of a new issue, the balance being provided from ERA's other US dollar funds (most of its contracts for the sale of its minerals being written in US dollars); on occasions, ERA purchased or borrowed US dollars for this purpose (per Davies J at 4,227).

Funds were drawn down under the Facility Agreement in the following sequence.

(1) On 13 February 1986 notice to draw down US$125 million was given by ERA pursuant to cl. 4.01 of the Facility Agreement. On 18 February 1986 that amount was made available to ERA and was used to repay the amount owing under the Schroder Wagg agreement.

(2) On 18 February 1986 ERA gave notice of draw down pursuant to cl. 4.01 of the sum of US$50 million and those funds were made available on 25 February 1986.

(3) On 13 March 1986 ERA gave notice of draw down pursuant to cl. 4.01 of the sum of US$40 million and those funds were made available on 20 March 1986.

(4) On 10 April 1986 ERA gave notice of draw down pursuant to cl. 4.01 of the sum of US$35 million and those funds were made available on 18 March 1986.

(5) On 17 February 1989 ERA gave notice of draw down pursuant to cl. 4.01 of the sum of US$20 million and those funds were made available on 2 March 1989.

THE CLAIM FOR DEDUCTION IN RESPECT OF THE DISCOUNTS ON THE NOTES
14. In its income tax returns for the 1987 and 1988 years of income, ERA claimed deductions, calculated in Australian dollars, in respect of the "discounts" on the Euronotes, namely, the difference between the face values of the notes and the tender prices which actually were received. In his amended assessments, the Commissioner accepted that such deductions were allowable under s.51(1).

THE COMMISSIONER'S ASSESSMENT THAT CURRENCY GAINS WERE ASSESSABLE INCOME AND THAT CURRENCY LOSSES WERE DEDUCTIBLE
15. The issue raised for determination at first instance arose out of the circumstance that the exchange rates between Australian currency and US currency differed between the dates of issue, and the dates of the payment, of each Euronote. With respect to most of the notes issued, the Commissioner calculated a currency gain; but, with some issues, the Commissioner calculated a currency loss. Amended assessments were made accordingly, relying on Division 3B of Part III of the Act, although, as has been said, in these proceedings the Commissioner also sought to rely upon s.25(1) and s.51(1) of the Act. So far as Division 3B was concerned, the Commissioner took the view that each Euronote was an "eligible contract" and that, on its maturity, ERA made a currency exchange gain or loss under that contract for the purposes of s.82Y and s.82Z.

In the assessments, and in these proceedings, the Commissioner relied upon the provisions of s.20 of the Act which, relevantly, reads:

"(1) For all the purposes of this Act, income wherever derived and any expenses wherever incurred shall be expressed in terms of Australian currency.

(2) Where an amount of income of a taxpayer is derived during the whole or part of a year of income from the carrying on of a business in a foreign country -

(a) that amount of income shall be expressed in Australian currency at a rate equal to the average of the exchange rates applicable from time to time during the whole or that part of that year; and ...

(3) Where an amount of foreign income of a taxpayer is derived during a year of income (not being income to which subsection(2) or (4) applies), that amount of foreign income, and any amount of foreign tax paid in respect of that foreign income, shall be expressed in Australian currency at the exchange rate applicable -

(a) where the whole amount of that income is remitted to Australia in that year - on the day on which it is remitted;

(b) where part of the amount of that income is remitted to Australia in that year - on the day on which it is remitted; and

(c) in any other case - at the end of that year."

(In respect of the 1987 year, only the terms of the present sub-section (1) appeared in s.20.)

Before us, the Commissioner also sought to rely upon the provisions of s.21 of the Act. It is there provided that where, upon any transaction, any consideration is paid or given otherwise than in cash, the money value of that consideration shall, for the purposes of the Act, be deemed to have been paid or given.

THE REASONING AT FIRST INSTANCE
18. Davies J expressed his conclusion that the exchange gains should be excluded from ERA's taxable income as follows (at 4,233):

"In my opinion, ERA's transactions did not involve a currency exchange, either direct or indirect, nor was conversion to Australian currency in the manner undertaken by the Commissioner required by the Act. The exchange gains and losses as calculated by the Commissioner did not exist and ERA did not realise or incur them. The relevant calculation to be made was that of the value in Australian currency of the tender prices received and of the payments made under the notes. The difference between these amounts, being the cost in Australian currency terms of obtaining the US dollar finance, was deductible under s. 51(1) of the Act. Division 3B is not concerned with such a matter but only with gains and losses of a capital nature.

"Mr Durack (for the Commissioner) sought to bring the assessed gains and losses to account under s. 25(1) and 51(1) of the Act. This contention must be rejected ... . Moreover, very little evidence went to this aspect of the matter. Mr Durack relied principally upon the regularity of the transactions. However, such evidence as there is supports the view that the Euronote transactions were of a capital nature, and did not concern working or circulating capital. The Euronote facility replaced the Schroder Wagg finance facility, the funds from which had been used in the development of the Ranger Mine and which therefore had a capital favour. It would be inconsistent with the Commissioner's assessments to treat the transactions as being of a revenue nature because of their regularity. The Commissioner has separately calculated the discounts as a cost of capital borrowings."

The steps by which his Honour reached these conclusions may be summarised as follows:

(a) Division 3B

(i) For present purposes, a note or bill transaction, as here, should be distinguished from a loan.

(ii) When moneys are borrowed, "the moneys lent do not cease to exist, but are represented by the obligation to repay" (at 4,229), the payment of interest being a separate obligation. On a loan, if appropriate, an exchange gain may be calculated in Australian dollar terms, by comparing the Australian currency value of the moneys when lent and their value when repaid. Further, a deduction for the interest would be calculated in Australian currency.

(iv) In a note transaction, "(t)here is no underlying concept of a sum paid which has not ceased to exist. The sum paid on maturity is not a repayment of the sum received on the issue of the note plus interest. It is simply the sum which, by the issue of the note, the issuer agreed to pay" (at 4,230).

(iv) The concepts "currency exchange," "currency exchange gain" and "currency exchange loss," which are used in Division 3B, "involve the notion of a conversion from one currency to another" (at 4,231), ordinarily when there is a difference between the money of account and that of payment. In referring to the concept of the realisation of a gain or a loss, s.82V(2)(b) describes "a real gain or loss and not merely an artificial or figured gain or loss" (at 4,231).

(v) Section 20 does not require that every transaction in a foreign currency be converted into Australian dollars. That provision will apply only where a transaction should be converted into Australian dollars for the purposes of the Act. But here, there was no relevant occasion, in fact, for any conversion; nor did any provision of the Act require that any currency be converted. There was no occasion to calculate in Australian currency the face value of the notes as at the dates of their issue. The date of maturity was the relevant date on which to calculate the value in Australian currency of the payment then made. But because, as at that date, there was no material variation in the exchange rate, there could be no exchange gain or loss.

(vi) In any event, it appears that there would be no "realisation" of any gain or loss for the purposes of s.82W until the final discharge of the facility arrangement.

(b) Sections 25(1) and 51(1)

(i) In the case of a loan, any exchange gain resulting from the borrowing and lending of money ordinarily will follow the nature of the transaction, so that, e.g. in a borrowing for capital purposes, an exchange gain or loss will not fall within s.25(1) or s.51(1); on the other hand, in a loan to provide "funds to be used in the ordinary and regular processes by which the money-making activities of the business are carried on, any exchange gain or loss will be assessable or deductible under ss.25(1) and 51(1) ... ." (at 4,230). In either case, an interest payment, being a separate obligation, will be brought to account, in Australian currency terms, under s.51(1).

(ii) The parties were agreed that in the case of a note issue, the discount or cost, being the difference between the price paid for the note and its face value, was deductible under s.51(1) and should be brought to account in Australian currency. His Honour said that he did not disagree with this, provided the exchange gains and losses fell within the test for working or circulating capital. "The expression in Australian currency of the cost of obtaining finance by note transactions necessarily involves a calculation which takes account of movements in exchange rates" (at 4,230). But when this calculation has been completed, there should be no further calculation of exchange gain or loss to be brought to account.

THE GROUNDS OF APPEAL
20. The Commissioner relies, in essence, on the following grounds in his Amended Notice of Appeal:

(1) As to Division 3B
21. The Commissioner contends that, pursuant to Div. 3B, the net exchange gains of $1,136,219 and $11,474,142 were assessable income of ERA in the 1987 and 1988 years of income. The contract evidenced by each note was an "eligible contract" within Div. 3B; and Div. 3B did not require a conversion or a need to convert from one currency to another. For the purposes of Div. 3B, an exchange gain or loss is "realised" upon the discharge of the obligation under each note. Where the AUD equivalent at maturity date of the USD issue proceeds was less than the AUD equivalent of the USD issue proceeds at the date of issue of the note, ERA made a currency exchange gain under an eligible contract which is assessable income under s.82Y.

Alternatively, where the AUD equivalent at maturity date of the USD face value of a note was less than the AUD equivalent of the USD face value at the date of issue, ERA made a currency exchange gain under an eligible contract which is assessable income under s.82Y, except to the extent that the gain relates to the discount element of the face value.
Likewise, where the AUD equivalent at maturity date of the USD issue proceeds exceeds the AUD equivalent of the USD issue proceeds at issue date, ERA incurred a currency exchange loss under an eligible contract, deductible under S.82Z(1).
Alternatively, the Commissioner contends that where the AUD equivalent at maturity date of the USD face value of a note exceeded the AUD equivalent of the USD face value at issue date, ERA made a currency exchange loss under an eligible contract, deductible under s.82Z(1), except to the extent that the loss relates to the discount element of the face value.

(2) As to s.25(1) and s.51(1)
25. Alternatively, the Commissioner contends, ERA realised relevant gains on revenue account which are assessable income under s.25(1); and, likewise, the relevant exchange losses were incurred on revenue account and were deductible under s.51(1).

(3) As to the orders made
26. In respect of the 1988 year, Davies J ordered that the sum of $11,684,956 be excluded from ERA's taxable income. The Commissioner contends, and ERA now agrees, that even if none of the Commissioner's other grounds of appeal is made out, the amount to be excluded from the assessable income for the 1988 tax year should be $7,905,110 only.

(It should be noted at once that the parties are agreed that, whatever the outcome of the appeal in other respects, the orders made by Davies J should be varied in certain respects to be mentioned later.)

CONCLUSIONS ON THE APPEAL
28. Since the Facility Agreement under which the Euronotes were issued, and the notes themselves, were international currency contracts, it is necessary to consider the relevant principles of Australian private international law, first, as to the interpretation of the contracts and, secondly, with respect to the determination of the money of account under the contracts.

(a) Interpretation of the contracts under the conflicts rules
29. The initial matter to be considered is the identification of the relevant governing law of the material transactions. As has been seen, the Facility Agreement and associated arrangements involved overseas parties and the receipt and payment of funds in United States dollars. The Facility Agreement was expressed to be governed by the laws of the Australian Capital Territory, although its performance overseas was contemplated. The form of note in Schedule One required payment in United States dollars to an agent in either Luxembourg or London with payment to be made by transfer to an account with a bank outside the U.S.; and the obligations of ERA under the note were expressed to be governed by the laws of England.

The general rule of interpretation is that the intention of the parties must be ascertained according to the rules of construction of the proper law of the contract (see Halsbury's Laws of Australia, Vol. 4 (P.E. Nygh) at 85-1260). At the same time, if the language of the document uses foreign legal terms, the meaning of those terms will be ascertained according to the system from which they were taken, whatever may be the proper law (see P.E. Nygh, Conflicts of Laws in Australia, 5th ed. at 286).

(b) Determination of the money of account
31. The proper law of the contract (in the present case, the laws of the A.C.T.) determines the money of account of an international currency contract. Under A.C.T. (Australian) law, there is a presumption that the money of payment (here U.S. currency) is also the money of account (see Halsbury's Laws of Australia, Vol. 4 (P.E. Nygh) at 85-1290).

In C.A. Parsons and Co. Ltd. v The Electricity Trust of South Australia (1976) 16 SASR 93, a case concerning a contract for certain works, Bray CJ said (at 100-1):

"Now there is a presumption that, other things being equal, the money of payment is also the money of account. ... Of course this is only a presumption. If there is no ambiguity there is no need to call on it, and even if there is an ambiguity there may be other circumstances sufficient to counterbalance it, as where there are alternative places of payment and it is unlikely that the parties intended that different values should be received in accordance with the place of payment chosen ...."

An appeal to the High Court (see Electricity Trust of South Australia v C.A. Parsons and Co. Ltd. (1977) 18 ALR 225) was dismissed. Barwick CJ said (at 233):

"The case is one therefore, in my opinion, where a firm lump sum price expressed in Australian currency was agreed to be paid in Australia in Australian dollars. No question of any diversity of currency of obligation and currency of payment arises in the case. There was at no stage, and certainly not in the order of December 13 and its incorporated documents, any agreement to make any payment at any time in other than Australian dollars or to make any payment calculated otherwise than in Australian dollars. The only sterling figure in columns 1, 2 and 3 of Schedule XIV had become of no more than historical interest once converted to Australian dollars and 'firmed'."

Mason and Aickin JJ said (at 236):

"Furthermore, the provision in the sub-clause dealing with the manner in which the amount of the allowance is to be calculated, that is by ascertaining the difference between 'rates and classifications at the date of tender and those applying when the various costs are incurred' is singularly inapposite to fluctuations in the exchange rate. An alteration in the exchange rate does not result in the incurring of cost by the respondent; the amount which it is to be paid at Adelaide in Australian currency under the contract remains unaffected, though the value of this amount in terms of English currency would be affected. In no sense is this a cost incurred within the meaning of the sub-clause."

(c) Determination of the money of payment
35. The proper law determines what is the money of payment and in the absence of a contrary or inconsistent indication, the currency of the place of payment will be the money of payment. If, for instance, payment were to be made in Australia, the debtor may elect to pay in the currency of the money of Australia or in Australian currency to its equivalent value (see Halsbury's Laws of Australia (P.E. Nygh) at 85-1305).

(d) The application of the conflicts rules in the present circumstances
36. The relevant relationship between ERA, its associated companies and the institutions providing the facility was, in my view, governed by the terms of the Facility Agreement, the other related agreements of even date, and the terms of the notes issued thereunder. Whilst the law attached particular incidents to the issue of the notes, it is also true that the legal relationship between the parties (including, for instance, ERA's obligations to reduce the accommodation) was established by the Facility Agreement (see Prints for Pleasure Ltd. v Oswald-Sealy (Overseas) Ltd (1968) 88 WN (1) 375; K.D. Morris and Sons Pty Ltd v Bank of Queensland (1986) 146 CLR 165 at 173-4). Further, in my opinion, those terms should, relevantly, receive their ordinary meaning so that for our purposes, no special meaning should be attributed to the words used in any of these agreements by virtue of any special foreign element.

It follows that United States currency was, in my view, both the money of account and the money of payment. Further, in my opinion, under the Facility Agreement and the notes, ERA was bound, and entitled, to make the payments due by the transfer of United States currency to a bank account outside the United States, viz. in Europe.

(e) The relevant revenue consequences of the transactions
38. It will be necessary to consider in stages the income tax consequences of the entry into and performance of the transactions. In particular, it will be necessary, despite the agreement of the parties on the issue, to revisit, to some extent, the question of the deductibility of the "cost" of the notes, since the Commissioner's submissions on the application of s.25(1) and s.51(1) for present purposes proceed on the footing that if that "cost" is on revenue account, all other aspects of the note transactions must also be on revenue account.

(i) Was the "cost" of the notes deductible?
39. It is clear enough that, in general terms (that is, for purposes other than tax), the difference between the amount of the note and the proceeds received was a cost to ERA of raising funds in this way. For instance, in K.D. Morris, above, a bank and its customer agreed upon a "Commercial Bill (Acceptance) Facility" under which, from time to time, the customer drew bills which were accepted by the bank and payable to a merchant bank which bought them at a discount for sale in the market. Stephen and Wilson JJ said (at 170-1) that because, on maturity, the difference between the proceeds and the face value of the retired bills was made good by the customer, the result for the customer, as in the present case, was that it effectively retained the use of the funds, less only the amounts successively lost with each discounting. Those amounts, together with the bank's charges for the facility and for each roll over, "represented the cost to the (customer) of procuring the funds ... which it ... need(ed)."

However, even if it be accepted that ERA incurred a "cost" in this sense, the question remains whether, for the purposes of s.25(1) and s.51(1), this was a capital cost or a revenue cost. Although it is now established that in the case of a finance company this "cost" will ordinarily be deductible, the position with respect to manufacturing and trading companies, for example, is different.
In Avco Financial Services Ltd. v Federal Commissioner of Taxation (1982) 150 CLR 510, a finance company borrowed money in the United States to enable it to make loans to its customers in Australia and to repay its existing borrowings. The exchange gains and losses made on repayment of the loans were held to be assessable income and allowable deductions respectively. Mason, Aickin and Wilson JJ said (at 527):

"There is ... an important and material difference between borrowing by a finance company in the ordinary course of its business and borrowing by a manufacturing or trading company. In general the finance company's borrowings provide money which it turns over at a profit. Borrowing otherwise than for on-lending or for the repayment of funds borrowed for on-lending, that is, borrowing undertaken for capital rather than revenue purposes, as in CAGA is an exception to the general rule. On the other hand, borrowing by a manufacturing or trading company is often undertaken to strengthen the capital or profit-earning structure of the company. A finance company usually borrows in order to increase its working capital which is then turned over at a profit; the manufacturing or trading company frequently borrows to strengthen its permanent capital."

More recently, in Coles Myer Finance Limited v Commissioner of Taxation of the Commonwealth of Australia (1993) 176 CLR 640, a finance company, in order to raise finance for lending purposes, drew and sold, inter alia, notes at a discount. The High Court held that the discount amounts were losses and outgoings incurred for the purpose of securing working or circulating capital and were deductible under s.51(1).
In Coles Myer, pursuant to leave granted during the course of argument on the appeal, the Commissioner submitted a memorandum to the following effect (at 651-2): (a) The gross amounts received and paid were of a capital nature although received and paid for revenue purposes, that is, for the purposes of and in the course of the income-earning business of money-lending. (b) The cost to the finance company of obtaining the gross receipt (i.e. the discount) was deductible, just as the interest earned by it through the use of the proceeds in the business was assessable income. (c) Discount, being the cost of finance, is deductible like interest, as a recurrent expenditure made to secure working capital. It is the discount, the net difference, that is deductible. The gross amounts are neither assessable nor deductible and the reasoning of the High Court in Avco is, upon analysis, is not to the contrary. The amount received from discounting a note is not income. Income connotes a return from capital, assets or labour employed. The money raised was the capital employed to earn income. Although the money stock of a finance company is similar to the trading stock of a trading company, there is this difference, that money is not bought and sold like trading stock; rather, it is borrowed and lent and interest earned by a financier is compensation for the loss of the use of the money, not profit on the sale of the money. (d) Taking the conceptual separation, in a loan context, between principal and interest being respectively the capital and revenue components of the transaction, in the case of a note the proceeds from discounting equate to the principal component and the discount is equivalent to the interest or revenue component.
In their essentials, the High Court accepted these submissions.
Mason CJ, Brennan, Dawson, Toohey and Gaudron JJ (at 664) explained the ratio in Avco as follows:

"The judgments in this Court in Avco ... contain statements which either state ... or might be taken, when read in isolation, to suggest ... that the borrowing of money and the repayment of loans by a finance company in the ordinary course of its business may amount to transactions on revenue account. However, the joint judgment of Mason, Aickin and Wilson JJ ..., when properly understood, like that of Gibbs CJ ..., proceeds on the proposition that, although such transactions by a finance company are properly to be regarded as transactions on capital account, the relevant gains and losses are nevertheless to be regarded as revenue gains and losses. That is because the gains and losses were incurred in the course of and as an incident of making repayments of the borrowed money with which the taxpayer carried on its business as a finance company. The losses or outgoings were incurred in the day-to-day conduct of the business and for the purpose of carrying it on as a going concern. Though the borrowed moneys were capital, it was working or circulating capital from which the taxpayer derived its profits by turning the borrowed money to account at higher rates of interest than those paid to the taxpayer's lenders. The borrowing, as much as the lending, was an integral part of the day-to-day conduct of the taxpayer's profit-earning business."

Their Honours went on to say (at 664):

"'Some kinds of recurrent expenditure made to secure capital or working capital are clearly deductible', as Dixon J noted in Texas Co. .... His Honour instanced interest on moneys borrowed, rent on premises and hire of plant as examples .... So, in Texas, the increase in expenditure occasioned by an exchange rise, due to a delay in payment for petroleum products by the taxpayer, an oil company, when the delay was designed to create a fund for working capital by arrangement with the taxpayer's parent company, did not result in the exchange loss constituting a loss of a capital nature. The increased outlay was, in the words of Latham CJ ...: 'a necessary outgoing made in the normal course of the continuance and maintenance of the business as an enterprise conducted for the purpose of profit.' 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 ...."

Their Honours concluded (at 664-5) that Coles Myer, like Avco, was an illustration of a loss or outgoing incurred for the purpose of securing working or circulating capital which is clearly deductible. The taxpayer issued the bills and notes for the purpose of its business as a finance company, using the moneys raised by discounting the bills and notes for the purpose of providing finance, from which it earned its income. In essence, it derived its income from the profits which it makes from the provision of finance under various classes of transactions, those profits exceeding the cost to the taxpayer of the moneys which it raises from the issue of bills and notes. The taxpayer's business was therefore similar to that of a finance company which borrowed moneys for lending, the rates of interest which it pays being significantly lower than those payable to it by those who have the moneys on loan. In effect, the discount offered by the taxpayer was the "cost of acquiring" the funds which it turned over in its business, "the amount of the discount serving the same purpose as the amount of interest on borrowed moneys"; the amount of the discount was the cost of those moneys. The difference between the amount payable on the bill and note and the amount received when the bill or note was discounted was, their Honours held, a loss or outgoing made "in the ordinary course" of conducting the business for the purpose of profit-making.
Deane J was of the same opinion, saying (at 668) that the taxpayer's receipts and payments in respect of the notes and bills "occurred in the ordinary course of its very substantial business as the financier" of the Coles Myer group of companies. The purpose of its dealings with the notes and bills "was to raise circulating capital for use in that business". As with the borrowing and repayment of circulating capital, the gross receipts upon sale and the gross payments upon maturity were receipts and outgoings of capital. The surpluses of the outgoings over receipts, i.e. the discounts on sale of the bills and notes, were, however, "detachable" from the gross receipts and outgoings and constituted losses or outgoings of a revenue nature. Those surpluses were the kind of "recurrent expenditure" incurred in the obtaining of the circulating capital used in a business for the earning or gaining of assessable income which is "clearly deductible" pursuant to s.51(1).
Deane J also explained the ratio in Avco in a similar way, saying (at 668-9):

"Careful analysis of the judgment(s) ... discloses that ... their Honours were careful to confine their conclusion about deductibility and assessibility to net losses or gains by reason of the exchange fluctuations. Thus, Mason, Aickin and Wilson JJ made clear ... their reliance upon quoted statements from Texas Co. ... which supported the conclusion that the net exchange losses in Avco ... were, like interest on 'money borrowed', the kind of 'recurrent expenditure' made to secure working capital which is 'detachable' and deductible pursuant to s.51(1). Their Honours went on ... to identify 'the true principle' as being: 'in the case of a finance company which borrowed money overseas in the ordinary course of its business and not for some special purpose, the added cost of repayment in foreign currency caused by the devaluation or depreciation of the Australian dollar is an additional cost of the borrowing and, like other costs of the borrowing, is an allowable deduction under s.51(1). Conversely, a saving in the amount of foreign currency needed to repay an overseas loan due to a revaluation or an appreciation in the value of the Australian dollar is to be considered as income arising directly out of the finance company's ordinary business.' (Emphasis added.)

The real importance of Avco ... for present purposes is that it provides strong support for the conclusion that the taxpayer's net losses or outgoings, resulting from the discount on the face value allowed upon sale, are the kind of recurrent expenditure which is deductible pursuant to s.51(1) of the Act as a loss or outgoing incurred in gaining or producing assessable income."

ERA is not a financier nor a dealer in foreign currency notes, but of course the deductibility of the cost of a note cannot be confined to taxpayers of these classes, as the reasoning in Crawford v Federal Commissioner of Taxation 93 ATC 5234, for instance, demonstrates. There, a deduction was claimed in respect of losses and outgoings in connection with a bill discount facility used by the taxpayer to lend to a trustee at a rate equal to the losses. It was held by the Full Federal Court that it was open to the Administrative Appeals Tribunal to find that a deduction be allowed on the ground that the taxpayer's purpose in incurring charges in respect of the bank bill facility was to gain or produce assessable income by way of interest. Hill J (with the agreement of Gummow and von Doussa JJ) so concluded upon an analysis of the evidence before the AAT. Hill J said (at 5,240):

"...interest incurred on funds borrowed to gain assessable income will generally be an allowable deduction .... The fact that no assessable income is ultimately derived will not necessarily preclude a taxpayer from obtaining a deduction: .... What is significant, where no income is derived, is the connection between the loss or outgoing claimed and the activities which are directed at the gaining or producing of assessable income. The outgoing for interest must be incidental and relevant to the end of gaining or producing assessable income: .... In this and subsequent discussion where I refer to 'interest', I intend to include losses and outgoings on a bill acceptance facility as holding the same commercial substance as interest for present purposes."

On the other hand, in Associated Minerals Consolidated Limited v Commissioner of Taxation (1994) 124 ALR 254, a claim to deduct interest paid by a mining company in respect of a loan in United States dollars was held by the Full Federal Court to have been properly disallowed as an outgoing of a capital nature. The taxpayer had invested in mining operations in America. By 1984 the strengthening US dollar had produced an exchange rate gain for that investment which represented an unrealised capital profit which was credited to a currency exchange reserve. The taxpayer obtained a matching loan in US dollars to "lock in" the current balance. The taxpayer disposed of the amount in Australian dollars, which represented the US dollars borrowed, by lending it to its holding company interest free.
Reliance was placed by the taxpayer in Associated Minerals on the joint majority judgment of Bowen CJ and Burchett J in Australian National Hotels Limited v Federal Commissioner of Taxation (1988) 19 FCR 234. In that case, an Australian company borrowed a substantial sum in Saudi Arabian currency to pay for building work in respect of premises in which it carried on its business. It took out insurance against the risk of an adverse movement in the foreign exchange rate. The joint majority judgment, as was later pointed out in Robe River Mining Co Pty Ltd v Federal Commissioner of Taxation (1989) 21 FCR 1 held that the premiums "amounted to a recurrent expenditure to obtain and retain the use of the capital", which should be treated as "analogous to interest". The taxpayer argued that the matching loan was itself a form of insurance against exchange losses, which might have been incurred had the United States dollar lost value, and that the interest payable in respect of that loan was therefore analogous to the premiums paid in Australian National Hotels.
In Associated Minerals, Northrop, Spender and Burchett JJ said (at 256-7):

"But there is an insuperable difficulty in the way of this argument. The learned judge heard oral testimony in support of the appellant's contention as to the purpose and function of the loan. Yet it is plain he preferred to rely on the indications contained in contemporaneous records. Those records did not give a major place to any perceived need of a hedge against a possible fall in the value of the United States dollar. Instead, they emphasised the desirability of crystallising the unrealised capital profit which was available to be taken by the creation of the matching loan. It is true that to do this inevitably involved the creation of a hedge in respect of the whole investment, at least temporarily. But the hedge was incidental to the crystallisation of the profit."

Their Honours went on to say (at 257):

"In the course of his submissions in reply, counsel for the appellant sought to change tack, in order to argue that the loan moneys were really used for the purposes of the appellant's business when they were provided to RGC. The contention he then sought to put forward was that all members of the group shared in a group treasury, so that, although the moneys here in question were lent to RGC free of interest, the appellant in reality got a commercial return through the availability of other moneys to it or its subsidiaries, as and when required. But the maintenance of this argument would have required an amendment of the notice of appeal."

In Willingale (Inspector of Taxes) v International Commercial Bank Ltd. (1978) AC 834, the practice of the taxpayer, a financier, was to purchase or discount bills. On occasions, it sold them prior to maturity and, since some were payable in foreign currency, the profit would depend, in part, on exchange rates at the time of repayment or sale. It was held that there was no liability for tax on the "accrued discount", being a time-based proportion of the profit made on each bill held until maturity. Lord Salmon and Lord Fraser held that there is an essential difference between interest and discount, that is, interest is earned and accrued from day to day, while discount is not and does not. Lord Salmon said (at 842):

"Although there may be some superficial similarity between

(a) lending pounds 10,000 for 5 years at a rate of interest of X per cent, per annum on the terms that none of the interest amounting in all to pounds 5,000 shall be payable until the principal becomes repayable and (b) buying a foreign bill of exchange with a face value equivalent to pounds 15,000 for a price equivalent to pounds 10,000, the two transactions are, in my view, essentially different from each other in character. The lender is entitled to be paid pounds 15,000 at the end of five years; no more and no less. The purchaser of the bill is entitled to sell the bill when he likes, or keep it until maturity. The amount he receives for it, translated into sterling, will depend upon the currency rate of exchange at the material time."

I agree. See also Chow Yoong Hong v Choon FAH Robber Manufactory (1962) AC 209; K.D. Morris, above, at 194-8; Brick and Pipe Industries v Occidental Life Nominees Pty. Ltd. (1990) 3 ACSR 649 at 703.
In the present case, as has been seen, in its returns for the 1987 and 1988 years, as Davies J noted (at 4,227), ERA claimed deductions, calculated in Australian dollars, of the discounts on the Euronotes; and, in amended assessments, the Commissioner accepted this in accordance with the reasoning in Coles Myer, but also upon the footing that, by virtue of s.20 of the Act, the discounts in this currency necessarily were expressed in Australian currency. Davies J said (at 4,230):

"The parties are agreed that, in the present case, the discounts were deductible under s.51(1) of the Act and that they should be brought to account in Australian currency. I would not disagree with that approach, though I would observe, by way of caution, that in Willingale and Coles Myer the exchange gains and losses fell within the rubric of the working or circulating capital test to which I have already referred."

On the other hand, as has been earlier noted, his Honour (at 4,233) rejected the application of either s.25(1) or s.51(1), saying that -

"...very little evidence went to this aspect of the matter. (The Commission) relied principally upon the regularity of the transaction. However, such evidence as there is supports the view that the Euronote transactions were of a capital nature, and did not concern working or circulating capital. The Euronote facility replaced the Schroder Wagg finance facility, the funds from which had been used in the development of the Ranger Mine and which therefore had a capital flavour. It would be inconsistent with the Commissioner's assessments to treat the transactions as being of a revenue nature because of their regularity. The Commissioner has separately calculated the discounts as a cost of capital borrowings."

(The agreement of the parties on this aspect of the matter was maintained before us. Neither party sought to argue that the discount was not deductible so that the consequences of this agreement were not explored in argument before us.)

However, after referring to Willingale and Coles Myer, Davies J went on to say (at 4,230):

"If a discount is an allowable deduction under s.51(1) of the Act, then the quantum of it must be calculated in Australian dollar terms. One means of doing so is to assess the value of the amount paid on maturity, converted at the exchange rate at the time of payment, and to deduct the amount received on the issue of the note, converted at the exchange rate at that time. See Willingale at 842.

That was not how the discounts were expressed in Australian currency by the Commissioner in the subject assessments. I assume that the Commissioner adopted an average rate such as that of which s.20(2) speaks. Perhaps the Commissioner was influenced by the principle enunciated in Coles Myer that the discounts should be brought to account on an accounting straight-line basis over the terms of the notes. But the Commissioner was not obliged to take account of exchange rate variations in that way. The particular that was calculated was the cost in Australian currency of obtaining the US dollar funds.

The expression in Australian currency of the cost of obtaining finance by note transactions necessarily involves a calculation which takes account of movements in exchange rates. When this calculation has been completed, there should be no further calculation of exchange gain or loss to be brought to account."

In Federal Commissioner of Taxation v Hunter Douglas Ltd. (1983) 78 FLR 182, it was held by a majority of a Full Federal Court (Fisher and Lockhart JJ, Franki J dissenting) that whether foreign exchange gains or losses made in repaying loans are capital or revenue items must be determined with reference to the purpose of the borrowing which supports them, and that the particular use to which the borrowed money is actually put is merely evidentiary of the purpose of the borrowing and not conclusive of it.
Fisher J said (at 191):

"It is clear that the trial judge concluded that the exchange losses were on revenue account because of the use which the taxpayer made from time to time of drawings of the borrowed funds. He saw them as being applied directly in the payment of the day-to-day business expenses of the taxpayer and therefore held that the exchange loss which occurred when the particular drawing was repaid was deductible. He did not regard the drawings as a means of financing the business of the taxpayer but rather that they were utilised in enabling the profits of the taxpayer to be earned. He thus saw them as having the same characteristics as drawings by a finance company as in the Avco case ....

I however regard the purpose of the borrowings as being of more assistance in establishing the character of the loan transactions and the exchange losses incurred on repayments thereunder and in determining whether they are on capital or revenue account. The use which a borrower in fact makes from time to time of borrowed funds and the purposes for which it applies them is not necessarily conclusive of the purpose or character of the borrowing. This character will depend upon the purpose for which the borrowing is made, for example, to strengthen the capital structure of the company and also the use which the company makes generally of borrowed funds in its profit-earning activities. The crucial question will frequently be whether the company uses the borrowed funds to finance its profit-earning activities or as an integral part of such activities.:

His Honour was of the opinion that two matters supported the finding that the borrowings were on capital account and that the exchange losses were not detachable and thus on revenue account. The purpose of the borrowings was to finance the expansion of the taxpayer's business and to provide the additional working capital which this expansion required. Thus the borrowing transactions themselves were not on a revenue account. Furthermore the funds borrowed were not used in or as an integral part of the profit-making activities of the taxpayer, that is, as part of the process by which it operated to obtain its regular returns, but in the financing of such activities. In particular they were undertaken "with a view to expanding such activities". These borrowings may in fact have been used to pay the day-to-day expenses, or in reimbursing a bank account from which such expenses were paid. However this does not determine conclusively the part that borrowed funds played in the profit-making activities of the taxpayer or "the true character" of the loan transactions.
Fisher J went on to say (at 194-5):

"The fact that a finance company may in respect of its borrowings be in a different position from a manufacturing or trading company is made very clear by the high Court in C.A.G.A.'s case and Avco's case. In C.A.G.A.'s case because the principal purpose of the borrowings was to strengthen the taxpayer's business structure and was not part of the process by which it operated to obtain regular returns the High Court held that the borrowings were on capital and the exchange gain was assessable. By way of contract in Avco's case the borrowings in question were held to have been undertaken in the ordinary course of the taxpayer's income-earning business and the resultant exchange losses or gains were deductible or assessable. In that case the High Court went to lengths to indicate the special position of a finance company borrowing as part of its day-to-day operations for the purpose of re-lending."

Fisher J added (at 195-6) that the position is different where the company is not a finance company but a trading or manufacturing company which incurs exchange losses or gains otherwise than through the purchase of trading stock. Here the losses or gains will, in the ordinary course, be on capital account. For them to be on revenue account it is necessary for the taxpayer to establish that the additional expenditure to meet exchange losses was expenditure incurred in the process of producing its income, and, in the words of Mason, Aickin and Wilson JJ in Avco, "as an integral part of that process". It is not sufficient to rely upon the finding that in fact the borrowed moneys were used to satisfy day-to-day outgoings. The borrowings in such a case "are prima facie an addition to the capital employed in the business."
Lockhart J expressed a similar view (at 197-200), concluding (at 201):

"The principal purpose of the borrowing in this case was to strengthen the business structure or organisation of the taxpayer to enable it to provide a stronger base or entity with which to carry on its business and earn profit. The nature of the borrowings determines the nature of the foreign exchange losses for fiscal purposes. As the former were capital items so were the latter."

See also the discussion by R.W. Parsons, Income Taxation in Australia at 6.329, 6.330 and 12.193 and 12.208-9.
In the present case, as we have seen, Davies J found (at 4,233) that the Euronote transactions were "of a capital nature and did not concern working or circulating capital". As his Honour then said, the Euronote facility replaced the Schroder Wagg finance facility, funds from which had been used in the development of the Ranger mine. Davies J concluded that the Euronote facility "had a capital flavour". With respect, I agree (cf. Commissioner of Taxation v Raymor (NSW) Pty Ltd (1990) 24 FCR 90 at 99-100; and on the question whether the development costs of a mine are on capital or revenue account, see the cases cited in Federal Commissioner of Taxation v Ampol Exploration Ltd. (1986) 69 ALR 289 at 313-4). If it were necessary or appropriate for me to express a view on the question, it would seem to follow that, in the absence of some special consideration, the "cost" of the notes was not deductible. But since the parties have elected, no doubt for good reason, to agree to accept its deductibility, it is not open to the Court to pursue that particular matter further.

(ii) Could s.25(1) or s.51(1) apply in the present case?
68. Although it is not possible for the Court to re-open the settled issue of the deductibility of the notes, the private agreement of the parties on that particular question cannot dictate or even influence the outcome of the issues that now arise for determination (cf. Commissioner of Taxation v Australia and New Zealand Savings Bank Limited, High Court, 16 November 1994, unreported, at 5-6). I already have expressed my concurrence with the conclusion of Davies J that the present transactions were of a capital, rather than a revenue, character. Moreover, I would regard the decision and reasoning in this area in Hunter Douglas as indistinguishable for present purposes (see also Robe River Mining Co. Pty. Ltd. v Commissioner of Taxation (1989) 21 FCR 1 at 15). It follows, in my view, that neither s.25(1) nor s.51(1) could have any application in the present case. I would dismiss the appeal to this extent.

(iii) Did Division 3B have any operation here?
69. I have come to the conclusion that this Division could not apply to the present circumstances.

In my opinion, it was not open to the Commissioner to reconstruct, as it were, the events which actually happened by making a notional conversion into Australian currency of amounts received and paid in U.S. currency in the note transactions when that notional conversion was neither required nor contemplated by the parties in their agreement and where there was no evidence that the taxpayer adverted to an exchange or loss as an object or outcome of entry into the facility arrangement.
As has been noted, what is deemed by s.82Y to be included in the assessable income of a taxpayer is "any currency exchange gain made by the taxpayer in the year of income under an eligible contract".
It is true that the meaning of this provision has not previously been considered. But, on its face, putting aside for the moment present complications in terms of timing (as we know, the Facility Agreement preceded the commencing day, 19 February 1986), it is not at all apparent how s.82Y could have any operation in the instant case, even if it be accepted that the Euronote facility was clearly an international transaction. The circumstance that an agreement has international aspects, in terms of the places where its parties carry on business and in terms of where the funds are raised and where payments are made is one thing. Yet it is another thing to say that the arrangement required, or even contemplated, a conversion of currency for any purpose.
It is significant that the funds raised by the 1986 arrangement were used, as contemplated, to discharge a previous facility, itself denominated in U.S. dollars. Moreover, the Euronote facility was, in all respects and at all times, denominated in U.S. dollars. It appears that none of the parties contemplated that any other currency would be used. Nor, in fact, was any other currency used. There was never any occasion to convert from one currency to another, so that the facility could not be described as an exchange contract in the sense of a contract to exchange one currency for another. Nor is it a hedging contract, looked at both as a matter of substance and of form.
It may be accepted that Division 3B should not be limited to hedging contracts or to contracts which either require or contemplate a conversion of currency. That is to say, there could conceivably be circumstances where a taxpayer so planned its affairs that the object or consequence of its entry into a contract of another kind was the realisation of an exchange gain or a loss by reason of its entry into the contract. But in the present case, there is no evidence that ERA had this in mind, as an object or a consequence, in entering into the Euronote facility. Although, as Davies J observed (at 4,233), "very little evidence" went to such matters, it appears to be clear on the evidentiary material available that the question of an exchange gain or loss was not adverted to by ERA at the time of its entry into the Facility Agreement. The evidence shows no more than an intention on the part of ERA to procure funds in the form of US dollars for the purpose of discharging an earlier facility, also available in US dollars, the purpose of the latter facility being to provide for the costs of development of the Ranger mine.
For completeness, I should add that, in my view, neither s.20 nor s.21 can have any relevance to the present question, which is whether a currency exchange gain or loss was made under a contract. That is, this is not a matter going to the way in which profits may be computed where it may be appropriate that s.20 or s.21 apply (see Pattison (Inspector of Taxes) v Marine Midland Ltd. (1984) 1 AC 362 at 367, 372-3; Capcount Trading v Evans (Inspector of Taxes) (1992) STC 11).
Nor, since no "loan" is involved, could the transitional provisions of s.82W(1), which deal with the "roll-over", or extension, of loans made under a contract entered into before the commencing day, apply here in my opinion. As has been seen, we are concerned here with the issue of notes at a discount, a transaction both in form and in substance different from a loan.
It follows that I would dismiss the appeal in this respect also.

ORDERS PROPOSED
78. As has been noted, the parties have agreed that, even if the appeal were otherwise to be dismissed, the orders made by Davies J should be varied in one respect. With regard to the 1988 year, his Honour made an order directing that the sum of $11,684,956 should be excluded from ERA's taxable assessable income. The parties are agreed that the figure $7,905,110 should be substituted for the figure $11,684,956.

Accordingly, I propose the following orders:

1. Vary the orders made by Davies J by substituting $7,905,110 for $11,684,956 in the direction given in respect of the assessment for the year ended 30 June 1988.

2. Otherwise the appeal is dismissed with costs.

JUDGE2

GUMMOW J A Judge of the Court (Davies J) held that the appellant ("the Commissioner") had wrongly included certain amounts in his assessments of the taxable income of the respondent ("the taxpayer" or "ERA") for the years ended 30 June 1987 and 30 June 1988.

I agree with Hill J, and for the reasons he gives, that ss. 20 and 21 of the Income Tax Assessment Act 1936 ("the Act") do not assist the Commissioner in this case.
I agree also with what his Honour says as to the inapplicability of s. 25. However, I would say nothing as to any possible application of Part IIIA of the Act. That was not in issue before us.
It also should be noted that the appeal proceeded on the footing that there was no issue in this case concerning the allowance by the Commissioner of the deduction under s. 51 (1) of the Act claimed by the taxpayer as the cost to it of the financing and representing the sum in Australian dollars of the difference between the face value, in United States dollars, of the bills and the discounted amount received in United States dollars. The argument was conducted on the footing that the difference did not represent an outgoing on capital account.
Section 20 of the Act requires expression of income and expenditure "in terms of" Australian currency. Division 3B of Part III of the Act (ss. 82U-82ZB) is headed "Foreign Currency Exchange Gains and Losses". The legislation with which this appeal is concerned thus assumes and operates upon some basic concepts. One of these is the term "currency".
The term "currency" includes "coinage" but also includes much else: Watson v Lee (1979) 144 CLR 374 at 398. This is illustrated by the terms of sub-s. 8 (1) of the Currency Act 1965, that the dollar is "the monetary unit, or unit of currency, of Australia", and of s. 9 which requires transactions to be "made, executed, entered into or done" according to "the currency of Australia" or that of some other country. In this sense currency is a universal means of exchange, designated by a particular unit of account; Jolley v Mainka (1933) 49 CLR 242 at 259-261, 266-269.
The distinction between money of account and money of payment is relevant to several aspects of this appeal. The money of account is that currency in which, as a matter of substance, an obligation is measured whilst the money of payment is the currency in which tender is to be made as proper performance of an obligation to effect payment. The money of account and of payment may or may not be the one currency.
The money of account is the means of measuring the obligation to pay, the money of payment is the means of discharge of the obligation. The contrast is between the substance of the obligation and the mode of performance: Woodhouse AC Israel Cocoa Ltd S.A. v Nigerian Produce Marketing Co. Ltd (1971) 2 QB 23 at 54. I agree with Beaumont J that, in respect of the obligations with which this appeal is concerned, the money of account and the money of payment was United States currency, subject to the qualification that payments in respect of the promissory notes were to be made to an account outside the United States of America.
The distinction between money of account and of payment lay at the root of the decision of the House of Lords in Adelaide Electric Supply Company, Limited v Prudential Assurance Company, Limited (1934) AC 122.
As Hill J explains in his reasons for judgment, the litigation culminating in Payne v Deputy Federal Commissioner of Taxation (1936) AC 497 appears to have led to the introduction of what is now sub-s. 20 (1) of the Act. This required, for all the purposes of the Act, the expression in terms of Australian currency of income wherever derived and of expenses wherever incurred.
In Payne, the appellant had included in his return for the purposes of the Income Tax Assessment Act 1922 ("the 1992 Act") pounds 5,671 stg., being the number of pounds which had been paid into his bank account in London and which never had been transmitted to Australia. The taxpayer unsuccessfully challenged the ruling that, by reason of the difference in the rate of exchange between the United Kingdom and Australia at the time of the payment of the moneys into his account, if pounds 5,671 stg. had been transmitted to Australia the sum of pounds 6,768 would have been realised and it was this latter sum which was to be brought to account under the 1922 Act. The taxpayer submitted that, having regard to the Adelaide Electric case, the money of account was British currency and Australian currency was merely the currency of payment, in discharge of the tax liability which was assessed by reference to the currency in which the payment had been received by the taxpayer. Their Lordships held (at 508-509) that as a matter of construction of the 1922 Act the income of the taxpayer was to be stated by the taxpayer and dealt with by the Commissioner solely in terms of Australian currency.
This appeal principally turns upon the construction of Division 3B of Part III of the Act.
Division 3B was inserted in the Act by s. 9 of the Taxation Laws Amendment Act 1987. This statute came into operation on the day it received the Royal Assent, 5 June 1987, although it applies to certain contracts entered into on or after the prior "commencing day" of 19 February 1986 (sub-s. 82V (1)). In certain circumstances where there is a "roll-over" (an undefined term) of a loan made to the taxpayer under a pre-commencing day contract, Division 3B applies as if the loan resulting from the roll-over had been made to the taxpayer under a contract made at that later date (sub-s. 82W (1)). The present case does not concern any loan of money to the taxpayer. As Beaumont J explains in his reasons for judgment, the issue of notes at a discount differs in form and substance from a loan.
As I have indicated, Division 3B comprises ss. 82U-82ZB and is headed "Foreign Currency Exchange Gains and Losses". Reference is made throughout the Division to "currency exchange" gains and losses, rather than to "foreign currency exchange" gains and losses. What is not made clear is whether the currency exchange in question involves the exchange of Australian currency for a foreign currency, or whether it extends also to the exchange of one foreign currency for another foreign currency. In the end, nothing for the purposes of the present appeal appears to turn upon the latter question. The taxpayer says that the relevant dealings were all in the one foreign currency, whilst the Commissioner looks to exchange between that currency and Australian currency.
Some assistance, by way of analogy, in dealing with the issues of construction which arise in the present case, is provided by the following passage in the speech of Lord Radcliffe in Tomkinson v First Pennsylvania Banking and Trust Co. (1961) AC 1007 at 1059. (The immediate issue concerned entry of judgments in foreign currency, the law as to which changed with Miliangos v George Frank (Textiles) Ltd (1976) AC 443, but nothing turns on this for present purposes.) After pointing out that in this area English law lacks a well-settled nomenclature for its terms, his Lordship continued:

A taxpayer who owed money for trading stock in foreign currency and, as a result of a change in the relative value of the Australian currency was required to discharge that indebtedness by payment of a greater value of Australian currency than was represented by the amount at which the trading stock was taken into its books, incurred an outgoing on revenue account which was deductible under s.51(1): cf Moreau v Federal Commissioner of Taxation (1926) 39 CLR 65; Texas Co. (supra); Armco (supra); Caltex (supra); International Nickel Australia Limited v Commissioner of Taxation (1976-77) 137 CLR 347; and Avco (supra). However, even where the initial liability arose from the purchase of trading stock if the account owing was capitalised the resulting loss or gain, as the case may be, might be on capital account.
Further, in the case of finance companies in particular, the purpose of the borrowing was required to be analysed. Thus in Commercial and General an exchange gain arising from a borrowing made to strengthen a finance company's capital base was not income because the gain was on capital account. Conversely where the gain or loss arose from a borrowing for a purpose other than trading stock or equivalent circulating capital in the case of a finance company, exchange gains or losses would ordinarily be on capital account even if the moneys borrowed were used to fund the ordinary day to day outgoings of the taxpayer: see Hunter Douglas (supra). The question whether the borrowing was on capital or revenue account was ultimately to be determined by the application of the principles laid down by Dixon J in Sun Newspapers Limited v Federal Commissioner of Taxation (1938) 61 CLR 337.
Not surprisingly in an environment where exchange gains or losses had become a recurrent incident of overseas borrowing transactions and where such transactions had become quite frequent, there was much agitation for a deduction to be allowed for foreign currency losses without the distinction being drawn as to whether such losses were on revenue or capital account. The agitation was, no doubt, fuelled by the continuing depreciation of the Australian dollar against foreign currency. It was in that environment that the Government announced the proposed amendment to the Act, inserting Div.3B. Although not relevant to the present discussion, the legislation also referred to gains and losses from forward cover or other currency hedging contracts.
As the Explanatory Memorandum to the Taxation Laws Amendment Bill (No.5) 1986 (which became the previously mentioned Act in 1987), circulated by the authority of the then Treasurer, made clear, exchange gains were not to be assessable nor losses deductible until the gains or losses were realised. In that connection the Memorandum said:

"In broad terms, in the case of a borrowing or loan, this will be when the borrowing or loan (or an instalment) is repaid and, in the case of a contract for the sale or purchase of an asset, when the taxpayer receives or makes the payment for the asset (or an instalment of the payment)."

The central provisions in Div.3B are ss.82Y and 82Z, which operate respectively to include any "currency exchange gain" made by the taxpayer in the year of income under an eligible contract in assessable income (s.82Y) or grant to the taxpayer a deduction in respect of any currency exchange loss incurred by that taxpayer in the year of income under an eligible contract (s.82Z), but subject in the case of losses to certain conditions not presently relevant.
The key concepts are that there be a currency exchange gain or currency exchange loss, as the case may be, and that the gain or loss be made under an "eligible contract". The expressions "currency exchange gain" and "currency exchange loss" are defined in s.82V(1) as follows:

"'currency exchange gain' means a gain to the extent to which it is attributable to currency exchange rate fluctuations;

'currency exchange loss' means a loss to the extent to which it is attributable to currency exchange rate fluctuations."

These definitions are affected by the provision of s.82V(2)(b) which restrict the relevant gains or losses to those which are realised. Thus in the present case the Division will have operation only where ERA can be said to have made a realised gain or loss attributable to currency exchange rate fluctuations. Further, that realised gain or loss must be made under an eligible contract.
An eligible contract is defined in s.82V(1) as meaning any contract entered into by the taxpayer on or after the commencing date, other than a hedging contract, or certain kinds of hedging contracts. It is not necessary to explore the operation of the Division in relation to hedging contracts. Thus, relevantly, any contract will be an eligible contract provided it has been entered into after the relevant commencing date, defined as 19 February 1986.
It will be noted that the facilities agreement itself was entered into on 22 January 1986 and so would not be an eligible contract. However each time ERA offered notes for tender and, in the result, issued and sold at a discount its promissory notes, the arrangements so made constituted a contract and was in the result, when made after 19 February 1986, an eligible contract.
The only section specifically assisting in defining whether a gain or loss is made under a contract is s.82V(2)(a), which provides:

"A currency exchange gain made, or a currency exchange loss incurred, in respect of currency purchased under a contract shall be taken to have been made or incurred under that contract; ...".

There are certain transitional provisions contained in s.82W(1) and (2), to which reference should be made in so far as they may cast light upon the meaning of the expression "under a contract". It is only necessary here to refer to s.82W(1) which provides as follows:

"Where, on or after the commencing day and under a contract entered into by a taxpayer before the commencing day, any of the following happens in relation to the taxpayer (otherwise than pursuant to a contractual obligation that was binding on the taxpayer before the commencing day):

(a) the taxpayer receives loan money;

(b) a loan made to the taxpayer is wholly or partly rolled over;

(c) the period for which money has been lent to the taxpayer is extended, this Division applies as if -

(d) where paragraph (a) applies - the loan money had been received by the taxpayer under a contract entered into by the taxpayer at the time when the loan money was received;

(e) where paragraph (b) applies - the loan resulting from the roll-over had been made to the taxpayer under a contract entered into by the taxpayer at the time of the roll-over; and

(f) where paragraph (c) applies - a new loan of the amount outstanding immediately before the commencement of the extension period had been made to the taxpayer under a contract entered into by the taxpayer at the commencement of the extension period."

In a case such as the present where a funding arrangement is constituted by a facility agreement, which does not bind the person for whom funds are provided to utilise that facility but binds the financiers to make funds available where required, there may be said to be two contracts under which the ultimate note discount arrangement or loan is made: the facilities agreement and the ultimate agreement entered into, as in the present case, for the discounting of the note. Which contract is regarded as being the relevant contract under which the note discounting transactions were made is a question which depends upon the proper meaning of the phrase "under a contract" in the circumstances of the case.
The phrase "under a contract" was considered by Wilcox J in Elmslie v Federal Commissioner of Taxation (1993) 118 ALR 357, a case decided in the context of capital gains tax, albeit on facts clearly distinguishable from the present facts. The issue in Elmslie was whether certain shares allotted to the applicant after 20 September 1985, the date upon which Pt.IIIA of the Act imposing essentially tax on capital gains commenced to apply, were assets acquired "under a contract" made before that date. There had been on the facts of that case heads of agreement dealing with the allotment of shares and an allotment made thereafter as contemplated in the heads of agreement. Wilcox J held that the relevant contract under which the allotment was made was the immediately empowering contract rather than a more remote source of authority, with the result that the relevant contract was held to be the contract of allotment itself and not the prior heads of agreement. His Honour described as the critical question whether the statutory formula "under a contract" encompassed a contract that envisaged or provided for the acquisition of the asset, or even required a party or parties to undertake the transaction that constituted the acquisition of the asset, but was not the means by which the asset was actually acquired. His Honour was of the view that that question should be answered in the context before him in the negative.
The expression "under a contract" must, of necessity, be construed by reference to the context in which it appears. That context in Div.3B includes the provisions of s.82W(1). That sub-section contemplates that where a taxpayer receives a loan which the taxpayer is not bound to take in a case where there is a previous contract entered into by the taxpayer before the commencement date pursuant to which the loan is to be made, the loan would, but for the terms of the sub-section, be made under the original contract rather than the source of the ultimate obligation, namely, the loan. It likewise contemplates that a loan roll-over resulting in a new loan agreement and a new loan would not, but for the sub-section, result in the loan being made under the roll-over contract, but rather that the roll-over, if contemplated by an earlier contract not binding the taxpayer to take out the loan, would be made under the earlier contract.
There is no definition in the Division of the expression "roll-over", but the expression has a well understood commercial meaning. In the case of a loan it contemplates the renewal of the loan at the time of maturity, generally at a rate of interest based on the then ruling rate at the time of renewal (cf the Macquarie Dictionary definition of "rollover provision") and in the case of bills or promissory notes, the issue of new bills or notes at the time of maturity of earlier notes, resulting in the discharge of the liability on the earlier bills or notes, the new bills or notes being discounted generally at some prevailing rate (cf K.D. Morris and Sons Proprietary Limited (In Liquidation) v Bank of Queensland Limited (1979-80) 146 CLR 165.
Section 82W(1) would seem to be limited to cases involving loans of money and thus not to extend to bill or note discharge arrangements. It is well accepted that a bill discount arrangement would not in law be a loan (cf K.D. Morris and Sons (at 194ff per Aickin J); Willingale (Inspector of Taxes) v International Commercial Bank Ltd (1978) AC 834. The section thus has no direct application.
Two conclusions may, however, be drawn from s.82W(1). The first is that s.82W(1) recognises for the purposes of the Division the view taken by the statutory majority in Caltex that where funds are made available by way of a loan (or for that matter a discounting transaction) on terms that those funds may only be used to pay out an existing indebtedness, no gain or loss is realised. Second, s.82W(1) contemplates that a loan (and a fortiori, the same would follow with a discount transaction) made pursuant to a facility agreement will have been made under that facility agreement rather than under the fresh contractual arrangement made thereafter.
In part s.82W(1) is also consistent with the views of Stephen and Wilson JJ in K.D. Morris and Sons. That was a case of a bill discount facility between a bank and a building company providing for the issue and discounting of accommodation bills of exchange for a period of five years. The bills were limited in terms from 180 to 190 days to maturity. The result of the transaction for the building company was that it effectively retained the use of the funds under the facility, less the amounts successively lost with each discounting (see at 170). The question at issue was whether amounts paid by the bank on the bills immediately after the winding up of the building company had priority to other unsecured debts, pursuant to s.292(1)(a) of the Companies Act 1961-1975 (Qld). That question, in turn, depended upon whether it was correct to treat the company's liability to the bank, as if it first arose when the last series of bills was accepted by the bank or whether it arose at the time the first bill was discounted under the facility. Stephen and Wilson JJ (who, with Murphy J, formed the majority of the Court) said (at 173-4):

"This was no case of the occasional acceptance of bills by the Bank in a number of transactions each one unconnected with the others. It was, rather, a case of acceptances by the Bank pursuant to a contractual obligation originally undertaken by it in 1973. It was essential to the whole concept of the Bank's commercial bill acceptance facility that there should be this continuity of obligation; without it the facility was denied its prime character, that of a means of providing to the Company over a period of years access to funds.

The Bank's contractual obligation arose out of the concluded negotiations between it and the Company in the second half of 1973, which culminated in the acceptance on 30th August 1973 of the Bank's offer contained in its several letters written on various dates earlier in that month. That offer, once accepted, obliged the Bank to accept the Company's initial bills up to a maximum of $1 million and to go on accepting new replacement bills as existing bills matured and were retired ...

Once it availed itself of the facility the Company also became subject to a continuing obligation. That obligation was to put the Bank in funds in respect of the Bank's payment of bills on their maturity. ...

So long as the Company continued, as it in fact did, to use the roll over mechanism to discharge its periodic obligation to the Bank it was continually subject to this liability."

The same can be said of the present facilities agreement, albeit that it differed in two respects from that in K.D. Morris and Sons: the first in that it was a note rather than bill facility; the second that the facility did not contemplate the same parties would continue to roll-over the notes at the end of each cycle, but rather that individual members of the consortium varying from time to time would so do. Neither of these differences, in my view, is however material.
Once ERA availed itself of the facility it became subject to a continuing obligation in respect of the face value of the notes reduced in accordance with the facilities agreement or payments which ERA at its option might make discharging the facility obligation. Likewise, although individual members of the consortium did not have a specific obligation to purchase ERA's notes, there was an obligation that notes would be purchased from within the consortium providing access to the funds (subject to scheduled reductions) over the 8 year term of the facility.
Two conclusions seem to me to follow. The first is that in the context of the agreement it is incorrect to see each roll-over as a discharge of indebtedness upon a new indebtedness arising from the issue and discounting of fresh notes for the same reasons as the statutory majority in Caltex took the view that no exchange loss arose. Second, and more fundamental for the present case, it seems to me that the relevant contract under which the notes were issued was the facilities agreement rather than the individual contracts arising out of the acceptance of tenders for purchase of notes and the issue and sale of those notes at a discount.
The second of these conclusions suffices to determine that part of the appeal which concerns Div.3B. If ERA did make a realised currency exchange gain or loss, such a gain was a loss or gain made under the facilities agreement and accordingly not made or incurred under an eligible contract (s.82V(1)) and not therefore assessable income (s.82Y) or an allowable deduction (s.82Z) for the purposes of Div.3B.
If, contrary to my view, the relevant contract to be considered is the contract arising out the acceptance of tenders for the discount of notes, then I would be of the view that Div.3B was capable of operation to a limited extent but not in the manner submitted for by the Commissioner. In taking this view I have the misfortune to differ from the learned trial judge who was of the view that no exchange gains or losses arose under Div.3B, even if the relevant contract was not the facilities agreement.
Where a taxpayer borrows in overseas currency, uses the borrowed funds in its business and ultimately repays the borrowing in the same overseas currency, an exchange gain or loss arises where there has been a movement in the exchange rate between Australian dollars and United States dollars, between the date of borrowing and the date of repayment. By way of an example, if a taxpayer borrows United States dollars and there is a devaluation of the Australian dollar against the United States dollar, the number of Australian dollars that would be required to fund the repayment of the indebtedness will be greater than the Australian dollar value of the amount received. Such a case involves, for the purposes of Div.3B, the making of a currency exchange loss under the contract of loan and it matters not that that loss was not derived from an actual exchange transaction involving the conversion of currency. While Div.3B is not happily worded, there will have been a loss attributable to currency exchange rate fluctuations realised once the loan is discharged. It is precisely such a case to which Division 3B was, at least principally, directed. There is no difference in substance between a loan and a note discounting transaction for this purpose.
Some assistance may be derived on the question whether a gain or loss is realised under the facilities agreement when a borrowing and repayment of foreign currency occurs without the necessity to actually convert currency from the American jurisprudence. Care must, however, be taken in the application of United States decisions where the issue is not merely whether the gain or loss is ordinary income but includes also whether there is a gain or loss for capital gains tax purposes.
The starting point of the United States cases is the decision of the Supreme Court of the United States in Frank K Bowers, Collector v Kerbaugh-Empire Company 1 USTC 1431 (1926), where it was held that the repayment of a borrowing in the currency of that borrowing gave rise to no gain where that currency had devalued against the United States dollar. The decision is however complicated because the borrowed money had been advanced to a subsidiary which had lost it and the ratio of the case seem rather to be that overall the taxpayer had made a loss which had been diminished by the exchange gain rather than that the taxpayer had made no gain.

Bowers, the subsequent decision in Foundation Co. v Commissioner 14 TC 1333 (1950) and BF Goodrich Co. v Commissioner 1 TC 1098 (1943), seem to have been thought to stand for the proposition that the payment of a loan in foreign currency did not give rise to a taxable gain or loss if there was no necessity of converting the foreign currency into United States dollars. A proposition similar to that advanced before us. This view of the law was, however, rejected by the United States Court of Claims in KVP Sutherland Paper Company v United States 344 F.2d 377 (1965) which held that the plaintiff's receipt of Canadian currency in repayment of a loan made by it in the same currency to its subsidiary from funds borrowed in Canadian dollars gave rise to a taxable gain in the United States at the time the repayment took place. However, in that case the Canadian currency had been converted into United States dollars.
The current position in the United States would now, however, seem to be that a taxable gain or loss will be held to arise upon the repayment of an overseas currency borrowing in that currency, irrespective of the fact that no actual exchange transaction is involved, see National-Standard Co. v Commissioner 80 TC 551 (1983) and cases and articles referred to therein and Gillin v United States 423 F.2d 309 (1970). The latter case, however, may be thought to introduce some uncertainty into the discussion (at 311) where the Court seems to have left open the question whether a repayment of a Canadian borrowing from Canadian funds of the taxpayer necessarily gave rise to a taxable gain or loss.
Returning to the present case, where the face value of a loan or discount arrangement remains outstanding during the term of the facility, no gain or loss is realised because the taxpayer has a continuing liability. Once, however, the facility comes to an end or the loan, bill or note is discharged, not from the proceeds of a roll-over but from other sources, there will be a realisation to the extent of the repayment of the loan or the discharge of the bill or note other than from roll-over sources.
On the facts of the present case the facility agreement required the progressive retirement of bills over the term of the facility. ERA also had an option to retire the facility, in whole or in part, faster than the scheduled requirement. It is impossible from the facts contained in the appeal book to determine the extent to which the bills were in fact discharged, but discharged in part they clearly have been in the years of income.
In these circumstances it is clear to me that an exchange gain or loss has arisen, which, if under an eligible contract would be deductible or assessable under Div.3B, but the quantum of that gain or loss can not simply be discerned. For that reason, but for the view I take that the relevant contract was the facilities agreement, I would have remitted the assessments to the Commissioner for reassessment.
Accordingly I am of the view that, in principle, the appeal should be dismissed with costs. The parties are, however, in agreement that one of the orders made by his Honour related to matters in years of income outside those the subject of the appeal and to the extent necessary to correct that matter, I would allow the appeal.

[1994] FCA 924

30 NOVEMBER 1994