Commissioner of Taxation v Firth

[2002] HCATrans 448

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S178 of 2002

B e t w e e n -

COMMISSIONER OF TAXATION

Applicant

and

STEPHEN PAUL FIRTH

Respondent

Application for special leave to appeal

GLEESON CJ
GUMMOW J
CALLINAN J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON TUESDAY, 5 NOVEMBER 2002, AT 10.03 AM

Copyright in the High Court of Australia

MR B.J. SHAW, QC:   If the Court pleases, I appear with my learned friend, MR M.K. MOSHINSKY, for the applicant Commissioner.  (instructed by the Australian Government Solicitor)

MR R.F. EDMONDS, SC:   May it please the Court, I appear with my learned friend, MS E.A. COLLINS, for the respondent.  (instructed by Firths)

GLEESON CJ:   Mr Shaw.

MR SHAW:   If the Court pleases, this matter raises a question about the effect of section 8(1), or section 51 as it used to be, about when and how an apportionment can be made of an outgoing which is incurred in gaining or producing assessable income, the apportionment being based, so the argument goes here, on the fact that to some extent the outgoing is of a capital nature.

In Ronpibon Case one of the items which was apportioned was directors’ fees.  Obviously the fees paid to directors are a singular amount paid for whatever it is the directors do and, in that case, what they had done was partly devote their attention to running the investment business of the company and partly to activities directed to resumption of the company’s business which had ceased because of the war – after the war.

Here, what has happened is that the taxpayer borrowed funds to invest in shares.  He sought to deduct the interest.  The loans were on terms which made the loan non‑recourse and below it was held that the interest which was charged and paid was as the taxpayer understood and, in fact, higher than it would have been if the loans had not been on non‑recourse terms.  The Commissioner sought to apportion the interest as partly incurred in order to secure the non‑recourse nature of the loans and as, accordingly, of a capital nature.  There was no dispute below that if apportionment was appropriate, the apportionment that had been made should stand.

In the judgment of the majority below at page 46, in paragraph 74, at line 30 and the following lines, it was accepted by the majority that the non‑recourse risk is ordinarily reflected in the rate of interest.  Then, on the next page, page 47, their Honours say, at paragraph 76:

In our view, the aggregate of the terms and conditions of each PEIL agreement, including the non‑recourse provisions, constituted the basis on which the lender advanced funds to the taxpayer . . . The relatively high interest rate doubtless reflected the lender’s assessment of the risk that it was incurring . . . There is, however, nothing in the agreement which suggests that any portion of the interest liability incurred by the taxpayer was attributable to a particular provision in the agreement.  Nor is there anything in the agreement to suggest that the taxpayer’s purpose in incurring the interest liability was otherwise than to raise and maintain the borrowing.

Then in the next paragraph, they say:

That the taxpayer entered into the PEIL agreements doubtless evidences an intent on his part to have the benefit of a non‑recourse loan rather than of some different type of loan facility and a willingness on his part to pay a higher rate of interest for a loan that included such a benefit.

And then they conclude, at the bottom of the page, that:

the primary Judge was correct in concluding that the advantage the taxpayer sought to obtain by the outgoings of interest was to raise and maintain the loans. 

Now, in our submission, on the basis of Ronpibon’s basis it is possible to dissect and apportion payments which are directed to a single advantage, that is the directors’ fees in Ronpibon’s Case – here the interest.  The fact that the agreement itself does not place a figure on the two different parts is, in our submission, irrelevant as it was in Ronpibon’s Case.  To say what the taxpayer sought to obtain was to raise and maintain the loans, in our submission, misstates the position because the interest secured, not just the maintaining of the loans but the right to not pay back the moneys in full in case the value of the shares which were purchased fell below the amount which had been lent.

GUMMOW J:   Did the joint judgment in the Full Court deal with the final point made by Justice Hill at paragraph 30?

MR SHAW:   No, it does not, your Honour.  On the very last sentence on the page, that is page 47, the reference to “the second issue” was dealt with by his Honour Mr Justice Hill as your Honour mentioned.  But the majority proceeded on the basis that because the terms of the agreement did not make any allocation of what the different parts of the interest were, apportionment was impossible and, in our submission, that is simply not so.

Justice Hill dealt with that issue and he dealt also with the question of whether the advantage secured by the non‑recourse term was of a capital nature.  His Honour said, at pages 28 and 29, that Ronpibon was not in point because, as he says at page 29, about line 6:

the Commissioner wishes to apportion at the earlier stage –

than in Ronpibon –

namely at the stage of identifying what the expenditure was for –

but, in our submission, that is simply not so.  Here it is clear the expenditure was on interest.  The question is what advantages did the interest achieve.  Then his Honour goes on to deal with the question whether or not the advantage obtained by the non‑recourse term was of a capital nature.  He said it was not because the loans were only for a year and the advantage was an ephemeral one.  In our submission, that is to not give full effect to the non‑recourse term because the non‑recourse term has the effect that in circumstances where it comes into effect, the whole amount of the loan never has to be repaid.  So that the repayment of what is a capital amount is reduced by however much it may be, and that is an enduring advantage, it is submitted.

CALLINAN J:   It is rather like insuring the loan, is it not, in a sense?  Insuring against default?

MR SHAW:   Your Honour, there may be fine distinctions to be drawn perhaps but it is not insuring against a loan.

CALLINAN J:   Insuring against default.

MR SHAW:   Here it does not affect any insurance at all.  What it does is directly secure the reduction in ‑ ‑ ‑

CALLINAN J:   No, but the additional interest has the effect of protecting the borrower against any obligation that might arise on default, to the extent that the asset is not sufficient to repay the full loan.

MR SHAW:   But what the term does is, in appropriate circumstances, reduce the amount of the obligation.

CALLINAN J:   Mr Shaw, do the majority comment upon paragraph 28 of Justice Hely’s decision?

MR SHAW:   Justice Hely’s decision?

CALLINAN J:   Yes, at page 10, paragraph 28, which seems to be a finding that the 5 per cent – it was 5 per cent here, was it not?  The additional 5 per cent?

MR SHAW:   I am sorry, your Honour.

CALLINAN J:   The additional amount paid was about 5 per cent by comparison with the benchmark, was it not?

MR SHAW:   I think that is right, your Honour, yes.

CALLINAN J:   And Justice Hely’s finding seems to be that 5 per cent is within the range, that it is not disproportionate or excessive so as to suggest that it is on capital rather than on outgoing account or income account.

MR SHAW:   Your Honour, the majority did not feel a need to consider at all the question of whether or not the advantage, if it could be apportioned, was a capital one.

CALLINAN J:   The decision may be maintainable on the basis that Justice Hely suggests in paragraph 28 that the excess simply is not enough to be – I use the term loosely, but remarkable in any way, the 5 per cent.

MR SHAW:   Your Honour, obviously the decision may be maintainable on the basis that the advantage is not of a capital nature because both Justice Hely and Justice Hill said that it was not of a capital nature.  But, in our submission, they simply did not address the point that what was secured by it was a permanent advantage because it permanently secured the position that, when it operated, the loan amount had to be repaid only to a certain extent but not to the rest.  If the Court pleases.

GLEESON CJ:   Thank you, Mr Shaw.  We do not need to hear you, Mr Edmonds.

The Court is of the view that there are insufficient prospects of success of an appeal to warrant a grant of special leave in this case, and the application is refused with costs.

AT 10.16 AM THE MATTER WAS CONCLUDED