Federal Commissioner of Taxation v Ashwick (Qld) No 127 Pty Ltd
[2011] FCAFC 49
•8 April 2011
FEDERAL COURT OF AUSTRALIA
Commissioner of Taxation v Ashwick (Qld) No 127 Pty Ltd [2011] FCAFC 49
Citation: Commissioner of Taxation v Ashwick (Qld) No 127 Pty Ltd [2011] FCAFC 49 Appeal from: Ashwick (Qld) No 127 Pty Ltd (ACN 010 577 456) v Commissioner of Taxation [2009] FCA 1388 Parties: COMMISSIONER OF TAXATION v ASHWICK (QLD) NO 127 PTY LTD (ACN 010 577 456) File numbers: VID 34 of 2010
VID 35 of 2010
VID 36 of 2010
VID 37 of 2010Parties: COMMISSIONER OF TAXATION v ELFIC PTY LTD (ACN 007 606 206) File numbers: VID 38 of 2010
VID 39 of 2010
VID 40 of 2010Parties: COMMISSIONER OF TAXATION v EFG SECURITIES PTY LTD (ACN 005 489 029) File number: VID 41 of 2010 Parties: COMMISSIONER OF TAXATION v EFG AUSTRALIA PTY LTD (ACN 006 357 035) File number: VID 42 of 2010 Parties: COMMISSIONER OF TAXATION v EFG TREASURY PTY LTD (ACN 050 431 699) File number: VID 43 of 2010 Parties: COMMISSIONER OF TAXATION v EFG INVESTMENTS PTY LTD (ACN 006 169 955) File number: VID 44 of 2010 Parties: COMMISSIONER OF TAXATION v FOSTER’S GROUP LTD (ACN 007 620 886) File number: VID 45 of 2010 Parties: COMMISSIONER OF TAXATION v AMAYANA PTY LTD (ACN 006 908 738) File number: VID 46 of 2010 Parties: COMMISSIONER OF TAXATION v NEXDAY PTY LTD (ACN 003 621 681) File number: VID 47 of 2010 Judges: BENNETT, EDMONDS AND MIDDLETON JJ Date of judgment: 8 April 2011 Catchwords: INCOME TAX – group of companies – finance group within larger group – intra-group loans – unpaid principal and interest written off as bad – whether unpaid principal written off as bad allowable deductions under ss 25‑35(1)(b) or 8-1 of the Income Tax Assessment Act 1997 (Cth) – whether loans made by lender in the ordinary course of a business of lending money – whether business of lending money had ceased in respect of loans made after a certain date – whether unpaid interest written off as bad allowable deductions under ss 25-35(1)(a) or 8-1 – whether unpaid interest written off as bad properly brought to account as assessable income in year in which it accrued – whether cash or accruals basis of accounting appropriate.
INCOME TAX – whether interest on intra-group loans allowable deductions under s 8-1 – whether incurred in carrying on business for the purpose of producing assessable income within s 8-1(1)(b) – to be determined objectively by reference to the relationship between what the expenditure is for and the taxpayer’s undertaking or business – subjective motive not relevant in a case such as this – whether an outgoing of a capital nature within s 8‑1(2)(a).
INCOME TAX – Part IVA of the Income Tax Assessment Act 1936 (Cth) – whether a ‘scheme’ – whether a tax benefit obtained in connection with a scheme – amount of tax benefit so obtained a function of the counterfactual – the counterfactual must be a prediction that is sufficiently reliable for it to be regarded as reasonable – whether purpose of obtaining a tax benefit can be attributed to a person or persons who entered into or carried out the scheme as the dominant purpose of that person or those persons – relevance of other possibilities which the taxpayer might have undertaken if the scheme had not been entered into in determining whether such a purpose should be attributed.
Held: Appeals dismissed.
Legislation: Income Tax Assessment Act 1997 (Cth) ss 25-35(1)(a), 25‑35(1)(b), 8-1
Income Tax Assessment Act 1936 (Cth) Pt IVA
Explanatory Memorandum to the Income Tax Law Amendment Bill (No. 2) 1981 (Cth)Cases cited: Abbott v Philbin [1961] AC 352 cited
Arthur Murray (NSW) Pty Limited v Federal Commissioner of Taxation (1965) 114 CLR 314 cited
Australian National Hotels Ltd v Federal Commissioner of Taxation (1988) 19 FCR 234 referred to
Ballarat Brewing Co Limited v Federal Commissioner of Taxation (1951) 82 CLR 364 cited
BHP Billiton Petroleum (Bass Strait) Pty Ltd v Commissioner of Taxation (2002) 126 FCR 119 cited
Brent v Federal Commissioner of Taxation (1971) 125 CLR 418 cited
British American Tobacco Services Limited v Federal Commissioner of Taxation (2010) 189 FCR 151 referred to
Coal Developments (German Creek) Pty Ltd v Commissioner of Taxation (2008) 166 FCR 140 cited
Coles Myer Finance Limited v Federal Commissioner of Taxation (1993) 176 CLR 640 cited
Commissioner of Inland Revenue v The National Bank of New Zealand (1976) 2 NZTC 61,150 applied
Commissioner of Taxation (WA) v Newman (1921) 29 CLR 484 cited
Commissioner of Taxation v Bivona Pty Ltd (1990) 21 FCR 562 referred to
Commissioner of Taxation v Citibank Ltd & Ors (1993) 44 FCR 434 cited
Commissioner of Taxation v Citylink Melbourne Limited (2006) 228 CLR 1 cited
Commissioner of Taxation v EA Marr & Sons (Sales) Ltd (1984) 2 FCR 326 referred to
Commissioner of Taxation v Hart (2004) 217 CLR 216 referred to
Commissioner of Taxation v Unilever Australia Securities Limited (1995) 56 FCR 152 referred to
Commissioner of Taxes (SA) v Executor Trustee and Agency Co of South Australia Ltd (1938) 63 CLR 108 referred to
Commonwealth of Taxation v Roberts and Smith (1992) 37 FCR 246 referred to
CPH Property Pty Ltd v Federal Commissioner of Taxation (1998) 88 FCR 21 referred
Donaldson v Commissioner of Taxation [1974] 1 NSWLR 627 cited
Epov v Federal Commissioner of Taxation (2007) 65 ATR 399 cited
Essenbourne Pty Ltd v Federal Commissioner of Taxation (2002) ATR 629 cited
Favaro v Federal Commissioner of Taxation (1996) 34 ATR 1 referred to
Federal Commissioner of Taxation v AXA Asia Pacific Holdings Ltd (2010) 189 FCR 204 cited
Federal Commissioner of Taxation v BHP Billiton Finance Ltd (2010) 182 FCR 526 referred to
Federal Commissioner of Taxation v Lenzo (2008) 167 FCR 255 cited
Federal Commissioner of Taxation v Midland Railway Co of Western Australia Ltd (1952) 85 CLR 306 cited
Federal Commissioner of Taxationv Mochkin (2003) 127 FCR 185 cited
Federal Commissioner of Taxation v National Commercial Banking Corporation of Australia Ltd (1983) 50 ALR 322 referred to
Federal Commissioner of Taxation v Orica Ltd (1998) 194 CLR 500 cited
Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359 cited
Federal Commissioner of Taxationv Spotless Services Limited (1996) 186 CLR 404 cited
Federal Commissioner of Taxationv Spotless Services Limited (1995) 62 FCR 244 cited
Federal Commissioner of Taxation v Tasman Group Services Pty Ltd (2009) 180 FCR 128 referred to
Federal Commissioner of Taxation v Trail Bros Steel & Plastics Pty Ltd (2010) 186 FCR 410 cited
Fletcher v Federal Commissioner of Taxation (1991) 173 CLR 1 distinguished
Futuris Corporation Limited v Federal Commissioner of Taxation 2010 ATC 20-206 cited
GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124 referred to
Hallstroms Pty Ltd v Federal Commissioner of Taxation (1946) 72 CLR 634 referred to
International Nickel Australia Ltd v Federal Commissioner of Taxation (1977) 137 CLR 347 cited
J & R O’Kane & Co v Commissioners of Inland Revenue (1922) 126 LT 707 cited
J Rowe & Son Pty Ltd v Federal Commissioner of Taxation (1971) 124 CLR 421 cited
Joshua Brothers Proprietary Limited v Federal Commissioner of Taxation (1923) 31 CLR 490 cited
Kidston Goldmines Limited v Commissioner of Taxation (1991) 30 FCR 77 referred to
Levin & Co Ltd v Commissioner of Inland Revenue [1963] NZLR 801 distinguished
Macquarie Finance Ltd v Commissioner of Taxation (2004) 210 ALR 508 referred to
Macquarie Finance Ltd v Commissioner of Taxation (2005) 146 FCR 77 referred to
Magna Alloys & Research Pty Ltd v Federal Commissioner of Taxation (1980) 33 ALR 213 applied
McCutcheon v Federal Commissioner of Taxation (2008) 168 FCR 149 cited
Modern Permanent Building & Investment Society (in liquidation) v Federal Commissioner of Taxation (1958) 98 CLR 187 cited
Nilsen Development Laboratories Pty Ltd v Federal Commissioner of Taxation (1981) 144 CLR 616 cited
Spassked Pty Ltd v Commissioner of Taxation (2004) 136 FCR 441 referred to
St George Bank Ltd v Federal Commissioner of Taxation (2009) 176 FCR 424 referred
St George Bank v Commissioner of Taxation (2008) 69 ATR 634 referred to
Steele v Deputy Commissioner of Taxation (1999) 197 CLR 459 referred to
Texas Company (Australasia) Ltd v Federal Commissioner of Taxation (1940) 63 CLR 382 referred to
Ure v Federal Commissioner of Taxation (1981) 50 FLR 219 distinguishedCommissioner of Taxation v AXA Pacific Holdings Ltd, No. M165 of 2010, 11 March 2011 (Special Leave Application, High Court of Australia)
Australian Government, Treasury Discussion Paper: Improving the operation of the anti-avoidance provisions in the income tax law (18 November 2010)
RW Parsons, Income Taxation in Australia – Principles of Income, Deductibility and Tax Accounting, Law Book Company Limited, 1985 [6.111]; [11.43] – [11.45]; [11.53]; [11.248].
Date of hearing: 16 and 17 August 2010 Place: Melbourne Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 208 Counsel for the Appellant: Ms H Symon SC with Mr M Flynn and Mr P Nicholas Solicitor for the Appellant: Australian Government Solicitor Counsel for the Respondents: Mr A Myers QC with Mr G Davies QC and
Mr F O'LoughlinSolicitor for the Respondents: Corrs Chambers Westgarth
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 34 of 2010
VID 35 of 2010
VID 36 of 2010
VID 37 of 2010
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: ASHWICK (QLD) NO 127 PTY LTD (ACN 010 577 456)
Respondent
JUDGES:
BENNETT, EDMONDS AND MIDDLETON JJ
DATE OF ORDER:
8 April 2011
WHERE MADE:
SYDNEY (HEARD IN MELBOURNe)
THE COURT ORDERS THAT:
1.The appeals be dismissed.
2.The appellant pay the respondent’s costs as agreed or taxed.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 38 of 2010
VID 39 of 2010
VID 40 of 2010
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: ELFIC PTY LTD (ACN 007 606 206)
Respondent
JUDGES:
BENNETT, EDMONDS AND MIDDLETON JJ
DATE OF ORDER:
8 april 2011
WHERE MADE:
sydney (heard in mELBOURNE)
THE COURT ORDERS THAT:
1.The appeals be dismissed.
2.The appellant pay the respondent’s costs as agreed or taxed.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 41 of 2010
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: EFG SECURITIES PTY LTD (ACN 005 489 029)
Respondent
JUDGES:
BENNETT, EDMONDS AND MIDDLETON JJ
DATE OF ORDER:
8 april 2011
WHERE MADE:
sydney (heard in mELBOURNE)
THE COURT ORDERS THAT:
1.The appeal be dismissed.
2.The appellant pay the respondent’s costs as agreed or taxed.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 32 of 2010
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: EFG AUSTRALIA PTY LTD (ACN 006 357 035)
Respondent
JUDGES:
BENNETT, EDMONDS AND MIDDLETON JJ
DATE OF ORDER:
8 april 2011
WHERE MADE:
sydney (heard in mELBOURNE)
THE COURT ORDERS THAT:
1.The appeal be dismissed.
2.The appellant pay the respondent’s costs as agreed or taxed.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 43 of 2010
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: EFG TREASURY PTY LTD (ACN 050 431 699)
Respondent
JUDGES:
BENNETT, EDMONDS AND MIDDLETON JJ
DATE OF ORDER:
8 april 2011
WHERE MADE:
sydney (heard in mELBOURNE)
THE COURT ORDERS THAT:
1.The appeal be dismissed.
2.The appellant pay the respondent’s costs as agreed or taxed.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 44 of 2010
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: EFG INVESTMENTS PTY LTD (ACN 006 169 955)
Respondent
JUDGES:
BENNETT, EDMONDS AND MIDDLETON JJ
DATE OF ORDER:
8 april 2011
WHERE MADE:
sydney (heard in mELBOURNE)
THE COURT ORDERS THAT:
1.The appeal be dismissed.
2.The appellant pay the respondent’s costs as agreed or taxed.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 45 of 2010
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: FOSTER’S GROUP LTD (ACN 007 620 886)
Respondent
JUDGES:
BENNETT, EDMONDS AND MIDDLETON JJ
DATE OF ORDER:
8 april 2011
WHERE MADE:
sydney (heard in mELBOURNE)
THE COURT ORDERS THAT:
1.The appeal be dismissed.
2.The appellant pay the respondent’s costs as agreed or taxed.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 46 of 2010
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: AMAYANA PTY LTD (ACN 006 908 738)
Respondent
JUDGES:
BENNETT, EDMONDS AND MIDDLETON JJ
DATE OF ORDER:
8 april 2011
WHERE MADE:
sydney (heard in mELBOURNE)
THE COURT ORDERS THAT:
1.The appeal be dismissed.
2.The appellant pay the respondent’s costs as agreed or taxed.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 47 of 2010
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: NEXDAY PTY LTD (ACN 003 621 681)
Respondent
JUDGES:
BENNETT, EDMONDS AND MIDDLETON JJ
DATE OF ORDER:
8 april 2011
WHERE MADE:
sydney (heard in mELBOURNE)
THE COURT ORDERS THAT:
1.The appeal be dismissed.
2.The appellant pay the respondent’s costs as agreed or taxed.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 34 of 2010
VID 35 of 2010
VID 36 of 2010
VID 37 of 2010
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: ASHWICK (QLD) NO 127 PTY LTD (ACN 010 577 456)
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 38 of 2010
VID 39 of 2010
VID 40 of 2010
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: ELFIC PTY LTD (ACN 007 606 206)
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 41 of 2010
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: EFG SECURITIES PTY LTD (ACN 005 489 029)
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 42 of 2010
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: EFG AUSTRALIA PTY LTD (ACN 006 357 035)
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 43 of 2010
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: EFG TREASURY PTY LTD (ACN 050 431 699)
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 44 of 2010
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: EFG INVESTMENTS PTY LTD (ACN 006 169 955)
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 45 of 2010
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: FOSTER'S GROUP LTD (ACN 007 620 886)
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 46 of 2010
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: AMAYANA PTY LTD (ACN 006 908 738)
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 47 of 2010
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: NEXDAY PTY LTD (ACN 003 621 681)
Respondent
JUDGES:
BENNETT, EDMONDS AND MIDDLETON JJ
DATE:
8 april 2011
PLACE:
mELBOURNE
REASONS FOR JUDGMENT
BENNETT J:
I agree that the appeals should be dismissed with costs for the reasons given by Edmonds J.
I certify that the preceding one (1) numbered paragraph is a true copy of the Reasons for Judgment herein of the Honourable Justice Bennett. Associate:
Dated: 8 April 2011
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 34 of 2010
VID 35 of 2010
VID 36 of 2010
VID 37 of 2010
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: ASHWICK (QLD) NO 127 PTY LTD (ACN 010 577 456)
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 38 of 2010
VID 39 of 2010
VID 40 of 2010
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: ELFIC PTY LTD (ACN 007 606 206)
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 41 of 2010
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: EFG SECURITIES PTY LTD (ACN 005 489 029)
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 42 of 2010
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: EFG AUSTRALIA PTY LTD (ACN 006 357 035)
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 43 of 2010
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: EFG TREASURY PTY LTD (ACN 050 431 699)
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 44 of 2010
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: EFG INVESTMENTS PTY LTD (ACN 006 169 955)
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 45 of 2010
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: FOSTER'S GROUP LTD (ACN 007 620 886)
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 46 of 2010
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: AMAYANA PTY LTD (ACN 006 908 738)
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 47 of 2010
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: NEXDAY PTY LTD (ACN 003 621 681)
Respondent
JUDGES:
BENNETT, EDMONDS AND MIDDLETON JJ
DATE:
8 APRIL 2011
PLACE:
MELBOURNE
REASONS FOR JUDGMENT
EDMONDS J:
INTRODUCTION
These are appeals from a judge of this Court allowing appeals against objection decisions disallowing objections against assessments of income tax issued by the appellant (‘the Commissioner’) to various companies in the Foster’s Group (‘group’). The assessments disallowed deductions claimed by borrowing companies in the group for interest incurred on loans made to them by lending companies in the group, as well as deductions claimed by lending companies in the group for the writing off of bad debts, some for both outstanding principal and unpaid interest and others for only unpaid interest, owed by borrowing companies in the group in respect of such loans. Some companies in the group were both lenders and borrowers.
The loans in question ultimately funded the Finance group of the Foster’s Group. The Finance group comprised EFG Australia Pty Ltd (‘EFGA’) and its subsidiaries, including ELFIC Pty Ltd (‘ELFIC’) and EFG Securities Pty Ltd (‘EFGS’). A diagrammatic representation of the Finance group showing its relationship to the ultimate parent company, Foster’s Group Limited (‘FGL’), and other companies in the group, appears in Appendix 1 to these reasons.
The disallowed deductions for loan interest concern:
1.Interest incurred by ELFIC to EFGA in the 1995, 1996 and 1997 years of income;
2.interest incurred by EFGS to EFGA in the 1997 year of income;
3.interest incurred by EFGA to EFG Treasury Pty Ltd (‘EFGT’) and Amayana Pty Ltd (‘Amayana’) in the 1998 year of income;
4.interest incurred by EFGT to FGL in the 1998 year of income; and
5.interest incurred by Amayana to FBG Treasury Aust Pty Ltd (‘FBGTA’) in the 1998 year of income.
The disallowed deductions for bad debt write-offs reflected, at the time of the write-offs in 1998, two chains of loans through which EFGA was funded. The first chain began with a loan to EFGA from Amayana, which in turn borrowed from FBGTA. FBGTA conducted the group’s treasury activities and was the vehicle through which banks lent to the group. The second funding chain began with a loan to EFGA from EFGT, which in turn borrowed from FGL. The funding chains are represented diagrammatically in Appendix 2 to these reasons.
The disallowed deductions for bad debt write-offs concern:
(1)A debt written off as bad by EFGA, for both outstanding principal and unpaid interest, in respect of its loan to ELFIC;
(2)a debt written off as bad by EFGA, for both outstanding principal and unpaid interest, in respect of its loan to EFGS;
(3)a debt written off as bad by Amayana, for unpaid interest, in respect of its loan to EFGA;
(4)a debt written off as bad by EFGT, for unpaid interest, in respect of its loan to EFGA; and
(5)a debt written off as bad by FGL, for unpaid interest, in respect of its loan to EFGT.
As a consequence of disallowing deductions to members of the Finance group (EFGA, ELFIC and EFGS) and to FGL, Amayana and EFGT, the Commissioner has also disallowed loss transfers to group companies (Ashwick (Qld) No 127) Pty Ltd (‘Ashwick’), Nexday Pty Ltd (‘Nexday’) and EFG Investments Pty Ltd (‘EFGI’) on the ground that the transferor companies did not have the tax losses, constituted by the deductions for bad debts written off and interest incurred, available to transfer. Only a representative sample of the assessments of these loss transferee companies is before the Court. The parties have agreed to abide by the Court’s decision in relation to other loss transferee companies.
Throughout these reasons I have substantially, but not wholly, adopted the acronyms and abbreviations the primary judge used to refer to entities or expressions which recur with some frequency. To facilitate a reading of these reasons, I have reproduced below the table appearing at [4] of the Reasons, amended to take account of the small changes I have made.
Expression or Entity
Acronym or Abbreviation
Amayana Pty Ltd
Amayana
AML Finance Corporation Limited
AML Finance
Ashwick (Qld) No 127 Pty Ltd
Ashwick
Bank Bill Rate
BBR
EFG Australia Pty Ltd
EFGA
EFG Financial Limited
EFG Financial
EFG Investments Pty Ltd
EFGI
EFG Securities Pty Ltd
EFGS
EFG Treasury Pty Ltd
EFGT
Elders Lensworth Finance Limited Group
Lensworth
Elders Rural Finance Limited
Elders Rural Finance
ELFIC Pty Ltd (formerly Elders Finance and Investment Co Limited)
ELFIC
FBG Treasury Aust Pty Ltd
FBGTA
Finance group
Collectively the subsidiaries of FGL which from time to time made up the Finance group
Foster’s Group Ltd (formerly IXL Ltd)
FGL
Foster’s Group or group
Collectively FGL and its subsidiaries from time to time including those within the Finance group
Harlin Holdings Pty Limited
Harlin
Income Tax Assessment Act 1936 (Cth)
the 1936 Act
Income Tax Assessment Act 1997 (Cth)
the 1997 Act
Nexday Pty Ltd
Nexday
Reasons
The reasons for judgment of the learned primary judge
Reduction of Assets Management Committee
RAMCO
The appellant Commissioner of Taxation
the Commissioner
ISSUES ON THE APPEALS
In [8] of his written submissions, the Commissioner conveniently summarised the issues on the appeals and the respondents adopt that summary, which is set out below:
‘8. The issues [on the appeals] are:
(1)Whether EFGA was entitled to claim as deductions pursuant to s 25-35(1)(b) or s 8-1 of the Income Tax Assessment Act 1997 (“the 1997 Act”), the amount of $1,202,441,116 in respect of its loan to ELFIC and the amount of $100,009,232 in respect of its loan to EFGS written off by it as bad debts in the 1998 year. Resolution of this issue requires determination of the following questions:-
(i)whether, after January 1990, EFGA conducted a business of lending money;
(ii)alternatively, whether money lent by EFGA to ELFIC and EFGS after January 1990 was money it lent in the ordinary course of its business of lending money;
(2)Whether the respondents in Table 1 below were entitled to deduct bad debts written off in respect of loans to borrowers as shown in the table.
Table 1: Bad debt deductions
Taxpayer Income Year Amount of deduction Provision under which deduction claimed EFGT
043/20101998 $525,260,163 (unpaid interest on loans to EFGA) 25-35(1)(a) or 8-1 FGL
045/20101998 $401,058,393 (unpaid interest on loans to EFGT) 25-35(1)(a) or 8-1 Amayana
047/20101999 $133,165,341 (unpaid interest on loans to EFGA) 25-35(1)(a) or 8-1 EFGA
Notice of contention in 042/20101998 Unpaid interest on loans to ELFIC and EFGS 25-35(1)(a) or 8-1 (if not allowable under s 25-35(1)(b))
(3)Whether the respondents in Table 2 below were entitled to deduct interest expense on borrowings from lenders as shown in the table.
Table 2: Interest expense deductions
Taxpayer Income Year Amount of deduction Borrowings from EFGT
043/20101998 $47,514,675
(s 8-1)
FGL Amayana
046/20101998 $16,875,354
(s 8-1)FBGTA EFGA
042/20101998 $57,645,096
(s 8-1)EFGT EFGA
042/20101998 $25,036,634
(s 8-1)Amayana ELFIC
040/20101995 $95,293,880
(s 51(1))EFGA ELFIC
039/20101996 $106,399,661
(s 51(1))EFGA ELFIC
038/20101997 $93,156,592
(s 51(1))EFGA EFGS
041/20101997 $6,804,054
(s 51(1))EFGA
(4)Whether the Commissioner was entitled to make the determinations set out in Table 3 below pursuant to s 177F of the 1936 Act. That issue arises only if:
(i)Amayana, EFGT, EFGA, ELFIC and EFGS were entitled to deductions, pursuant to either s 8-1 of the 1997 Act or s 51(1) of the 1936 Act, for interest they incurred on loans from FBGTA, FGL, EFGT, Amayana or EFGA, as the case may be;
(ii)EFGT, Amayana and FGL were entitled to deductions, pursuant to s 25-35(1)(a) or s 8-1 of the 1997 Act, for unpaid interest they wrote off in respect of loans made to EFGA and or EFGT, as the case may be;
(iii)EFGA either carried on the business of lending money or alternatively did not carry on the business of lending money but was entitled to deductions pursuant to s 25-35(1)(a) or s 8-1, for unpaid interest it wrote off in respect of loans it made to ELFIC and EFGS;
(iv)Ashwick, Nexday and EFGI were, consequently, entitled to deductions for losses transferred to them by EFGA, EFGT, FGL, ELFIC, EFGS or Amayana as the case may be.
Table 3: Section 177F determinations
Taxpayer Income year Tax benefit disallowed ($) Interest deductions Amayana 1998 16,875,354 EFGT 1998 47,514,675 EFGA 1998 82,681,730 ELFIC 1995 95,293,880 1996 106,399,661 1997 93,156,592 EFGS 1996 7,504,175 1997 6,804,054 Bad debt deductions FGL 1998 401,058,393 Amayana 1999 134,165,341 EFGT 1998 525,260,163 EFGA 1998 976,023,874 Transferred losses Ashwick 1997 30,213 1998 23,628 2001 145 Nexday 2000 139,290 EFGI 1996 739,340
(5)Whether Ashwick was entitled to be paid its costs of VID861/2006. As the [primary] judge noted at [[274] of his] Reasons, … that proceeding was overtaken by VID125 of 2007. His Honour initially dismissed VID861 /2006 and made no order as to the costs of that proceeding. That order was subsequently varied by consent to provide that the Commissioner pay Ashwick’s costs of VID861/2006 The Commissioner’s consent was given without prejudice to any appeal rights he may have in respect of the costs order. The Commissioner says that if he is successful in one or more of the other appeals, the costs order should be set aside, and Ashwick should be ordered to pay the Commissioner’s costs of the proceeding up to and including 16 February 2007;
(6)Whether any of the respondents is liable to additional tax pursuant to s 226 or s 226L of the 1936 Act as set out in Table 4 below. If the Commissioner was entitled to make the determinations he did pursuant to s 177F of the 1936 Act, the respondents are liable to additional tax pursuant to s 226(2) of the 1936 Act. Alternatively, it is submitted that in the event that it is held that a respondent was not entitled to a deduction or transferred loss claimed in an income year, s 226L applies to impose additional tax on that respondent because:
(i)there was a “tax shortfall” within the meaning of s 222A(1) for that year;
(ii)that shortfall was caused by the respondent in a taxation statement treating an income tax law as applying in relation to a scheme in a particular way;
(iii)the relevant scheme was a “tax avoidance scheme” within the meaning of s 224(1) of the 1936 Act.
Under each provision, the additional tax is to be imposed at the rate of 25% on the tax shortfall, on the basis that the respondent had a reasonably arguable position that Part IVA did not apply.
Table 4: Penalties imposed
Taxpayer Income Year Penalty FGL
045/20101998 $2,781,834.12 EFGT
043/20101998 $4,260,348.62 Amayana
046/20101998 $1,518,781.86 EFGA
042/20101998 $5,892,219.44 EFGI
044/20101996 $70,201.80 Ashwick
036/20101997 $2,719.17 Ashwick
035/20101998 $2,126.52 Nexday
047/20102000 $12,536.10 ELFIC
040/20101995 $1,932,285.21 ELFIC
039/20101996 $722,719.17 ELFIC
038/20101997 $1,027,582.11 EFGS
041/20101997 $371,579.76
THE PRIMARY JUDGE
The primary judge at [1] to [3] and [5] to [63] of his Reasons made a number of findings of fact by way of background, none of which would seem to be in dispute between the parties. In their written submissions on the appeals, the respondents did raise one matter which they say is an error on the part of the primary judge (at [10] of his Reasons), but they conceded that the alleged error is of no material consequence.
In the course of examining each of the four main issues, namely –
(1)The deductibility of bad debts written off;
(2)the deductibility of interest expenses incurred by borrowing companies within the group;
(3)the deductibility of losses transferred to loss transferee companies in the group; and
(4)the application of Pt IVA of the Income Tax Assessment Act 1936 (Cth) (‘the 1936 Act’) to the scheme identified by the Commissioner,
the primary judge made, in relation to specific taxpayers, findings of fact in addition to those made at [5] to [63] of his Reasons.
As noted in [2] above, the primary judge concluded that all the deductions claimed by the relevant taxpayers were allowable deductions, and rejected the Commissioner’s case that, if the deductions were otherwise allowable, the provisions of Pt IVA applied to cancel those deductions.
THE STATUTORY PROVISIONS
The first statutory provision which bears on the deductibility of the bad debts written off is s 25-35(1) of the Income Tax Assessment Act 1997 (Cth) (‘the 1997 Act’). It provides:
‘(1)You can deduct a debt (or part of a debt) that you write off as bad in the income year if:
(a) it was included in your assessable income for the income year or for an earlier income year; or
(b)it is in respect of money that you lent in the ordinary course of your *business of lending money.’
The other, more generally applicable, provision of the 1997 Act under which the bad debts written off and interest expenses are claimed to be deductible is s 8-1. That sub-section provides:
‘(1)You can deduct from your assessable income any loss or outgoing to the extent that:
(a) it is incurred in gaining or producing your assessable income; or
(b) it is necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income.
Note:Division 35 prevents losses from non-commercial business activities that may contribute to a tax loss being offset against other assessable income.
(2)However, you cannot deduct a loss or outgoing under this section to the extent that:
(a)it is a loss or outgoing of capital, or of a capital nature; or
(b) it is a loss or outgoing of a private or domestic nature; or
(c)it is incurred in relation to gaining or producing your *exempt income or your *non-assessable non-exempt income; or
(d) a provision of this Act prevents you from deducting it.
For a summary list of provisions about deductions, see section 12-5.
(3)A loss or outgoing that you can deduct under this section is called a general deduction.’
The provisions of Pt IVA of the 1936 Act relevantly provide:
‘[177C]
(1)Subject to this section, a reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to:
(a)an amount not being included in the assessable income of the taxpayer of a year of income where that amount would have been included, or might reasonably be expected to have been included, in the assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out; or
(b)a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out; or
…
and for the purposes of this Part, the amount of the tax benefit shall be taken to be:
…
(d)in a case to which paragraph (b) applies—the amount of the whole of the deduction or of the part of the deduction, as the case may be, referred to in that paragraph;
…
(2)A reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as not including a reference to:
…
(b)a deduction being allowable to the taxpayer in relation to a year of income the whole or a part of which would not have been, or might reasonably be expected not to have been, allowable to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out where:
(i)the allowance of the deduction to the taxpayer is attributable to the making of a declaration, agreement, election, selection or choice, the giving of a notice or the exercise of an option by any person, being a declaration, agreement, election, selection, choice, notice or option expressly provided for by this Act or the Income Tax Assessment Act 1997, except one under Subdivision 960-D of the Income Tax Assessment Act 1997; and
(ii)the scheme was not entered into or carried out by any person for the purpose of creating any circumstance or state of affairs the existence of which is necessary to enable the declaration, agreement, election, selection, choice, notice or option to be made, given or exercised, as the case may be; or
…
[177D]
This Part applies to any scheme that has been or is entered into after 27 May 1981, and to any scheme that has been or is carried out or commenced to be carried out after that date (other than a scheme that was entered into on or before that date), whether the scheme has been or is entered into or carried out in Australia or outside Australia or partly in Australia and partly outside Australia, where:(a)a taxpayer (in this section referred to as the relevant taxpayer) has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme; and
(b) having regard to:
(i)the manner in which the scheme was entered into or carried out;
(ii)the form and substance of the scheme;
(iii)the time at which the scheme was entered into and the length of the period during which the scheme was carried out;
(iv)the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;
(v)any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme;
(vi)any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;
(vii)any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out; and
(viii)the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi);
it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme or of enabling the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers).’
DEDUCTIONS FOR BAD DEBTS
EFGA
In the 1998 year of income EFGA wrote off as bad, debts owing by ELFIC and EFGS to EFGA in respect of loans made by EFGA to ELFIC and EFGS. The debt owing by ELFIC at the time it was written off totalled $1,202,441,116 and the debt owing by EFGS at the time it was written off totalled $100,009,231. Both debts were constituted by amounts of outstanding principal and unpaid interest.
EFGA claimed deductions for the debts written off as bad in reliance on s 25-35(1)(b) of the 1997 Act; in the alternative, under s 8-1 of that Act. The learned primary judge concluded that EFGA was entitled to the deductions claimed under s 25-35(1)(b). It was unnecessary for the primary judge to consider the alternative claim for relief under s 8-1.
There was no issue that the debts were bad at the time they were written off; nor that they were written off in the relevant year of income.
The primary judge found that EFGA carried on a business of lending money at all times from 1985 to 1998 ([118] – [126] of his Reasons) and that the debts written off were in respect of money lent in the ordinary course of that business. Accordingly, the principal and interest components (in respect of the latter, see Federal Commissioner of Taxation v National Commercial Banking Corporation of Australia Ltd (1983) 50 ALR 322 at 325 – 326) of the debts written off as bad by EFGA were deductible under s 25-35(1)(b).
On the hearing of the appeals, the Commissioner accepted that the primary judge correctly found that EFGA was carrying on a business of lending money before 1990 but contended that at some time shortly after FGL decided in March 1990 to wind down the Finance group, EFGA ceased to carry on a business of lending money.
That would not matter if the debts written off as bad were in respect of loans made before 1990. Section 25-35(1)(b) only requires that the taxpayer be carrying on the business of lending money at the time the loan is made and that it be made in the ordinary course of that business. It does not require the taxpayer to be carrying on the business of lending money in the year in which the debt is written off as bad. However, EFGA made loans to ELFIC and EFGS after March 1990 and some or all of the outstanding principal and unpaid interest in respect of such loans was included in the debts written off in 1998.
To fully understand the import of the Commissioner’s contention, it is instructive to start with the finding the primary judge made at [30] of his Reasons namely, that in March 1990, FGL announced its plan to focus solely on its brewing business and divest itself of all of its other businesses, including those conducted by the Finance group. After March 1990, the activities of EFGA were conducted with the ultimate purpose of realising its assets and winding up its business. The Commissioner had some difficulty in identifying when he contended EFGA’s business of lending money ceased. He pointed to the findings of the primary judge at [101] of his Reasons:
‘After June 1990, EFGA radically changed the nature of its business. It ceased to borrow funds from external lenders and looked, instead, to lenders within the Foster’s Group. It conducted its activities through RAMCO for the benefit of the Foster’s Group as a whole, rather than of EFGA’s own business. Consistently with that change, it ceased lending to make a profit. That was done by eliminating, from 1 September 1990, the inter-entity interest rate margin, including that charged to ELFIC and EFGS’
to support a submission that EFGA’s business of lending money ceased around the June – September 1990 period. The submission did not go so far as saying that, at about that time, EFGA ceased business altogether. However, in response to the question from the bench: ‘What business was henceforth carried on?’, came the answer:
‘What we say is that from 30 June 1990 its activities were confined to serving the purposes of its parent company in maximising the realisation of the assets that were held by the finance group.’
I deal with this contention at [40] below.
Despite the findings of the primary judge at [101] of his Reasons, his Honour concluded at [123] of his Reasons that –
‘[T]he activities of EFGA during the wind-up period were … in the ordinary course of its business of lending money. It is true that during that period EFGA ceased to charge the previous inter-entity rate of interest on loans to Finance Group borrowers but that was merely in recognition of the precarious financial states of those subsidiaries and the need for EFGA to make its own contribution to a quick and effective realisation of group assets. There was, I consider, an actual and continuing intention by those managing EFGA to carry on during the wind-up period its business of lending money although the carrying on of the same business was directed to a different end or purpose. In that sense the intention of those controlling EFGA during the wind-up period coincided with that regarded by Barwick CJ in Fairway Estates Pty Ltd v Federal Commissioner of Taxation (1970), supra, at 163, as satisfying the relevant test.’
After 1990 EFGA continued to manage its existing loan assets, it made further advances, it borrowed further moneys, it received payments and repayments in respect of its loan assets and it made payments and repayments in respect of its liabilities. It charged interest on its loans and it incurred interest on its borrowings. The payments received by EFGA; its operating profits; its operating revenue, interest income and interest expense; the balances on loans owing to EFGA; the balances arising on its borrowings, the interest charges it incurred on its borrowings and its reported assets are tabularised at Appendix 3 to these reasons, Tables 1 to 7 respectively.
The Commissioner’s contention that the primary judge erred is based upon four findings of the primary judge. They are:
(1)From 1 September 1990 EFGA ceased to charge a margin over its cost of funds to ELFIC and EFGS (Reasons [101] and 123]);
(2)the employment of funds advanced to ELFIC and to EFGS was not profitable for EFGA as it had been before 1990 (Reasons [101] and [124]);
(3)EFGA carried on its activities after 1990 at the direction of others including, ultimately, FGL (Reasons [124]);
(4)the internal provision of loan funds to ELFIC and EFGS from 1989 was not a part of a coherent course of conduct but occurred as individual responses from time to time to external exigencies created by circumstances of the external financial climate (Reasons [228]).
Based on these findings, the Commissioner contended that EFGA no longer satisfied the requirements for a business of lending money after 1990; it ceased to lend for the purpose of making a profit and it ceased to lend in a systematic, business-like manner. According to the Commissioner, the primary judge ought to have found that EFGA was not entitled to deduct the debts written off in the 1998 income year pursuant to s 25-35(1)(b).
In relation to the first of the findings referred to by the Commissioner, the primary judge found that the reduction in the rate of interest was not referrable to the adoption of any intention that the business of lending money should thereupon cease but reflected the recognition of the precarious financial states of ELFIC and EFGS and the need for EFGA to make its own contribution to an effective realisation of group assets (Reasons [123]). The primary judge further found that the intention of those managing EFGA was that EFGA should continue to borrow and to lend at interest and that payments or repayments in respect of the borrowings, loans and interest should continue to be made and received (Reasons [123]). As indicated above, after 1990 EFGA, in accordance with that intention, continued to make borrowings and continued to make loans at interest and continued to receive payments and repayments in respect of those loans and interest (Reasons [123]). In every year from 1986 to 1998, except 1987, EFGA’s reported income in the form of interest exceeded its expenses by way of interest on borrowed funds (Reasons [183]); see also Appendix 3, Table 3).
As to the second finding relied upon by the Commissioner, namely, that the employment of funds advanced to ELFIC and EFGS was not profitable for EFGA as it had been before 1990, as the primary judge concluded at [124] of his Reasons, this does not lead to the conclusion that EFGA ceased to carry on its business of lending money after 1990; nor, contrary to the Commissioner’s submissions, did it entail that the loans to ELFIC and EFGS after 1990 were no longer advanced in the ordinary course of that business. Importantly, the downturn in the profitability of EFGA’s business was due to a number of adverse external economic factors and was not due to any intention that the nature of EFGA’s business should alter, or the taking of any steps which brought the business of lending money to an end.
The Commissioner refers to the finding that EFGA carried out its activities after 1990 at the direction of others, including, ultimately, FGL. However, the direction was that EFGA should continue to carry on the same business of lending money, albeit with the ultimate purpose of realising its assets and winding up the business (Reasons [124]). During the wind-up period, as the primary judge found, the direction was that EFGA was to continue carrying on its business of lending money, which it did (Reasons [124]).
Finally the Commissioner refers to the finding that the internal provision of loan funds to ELFIC and EFGS from 1989 was not part of a coherent course of conduct but occurred as individual responses from time to time to external exigencies created by circumstances of the external financial climate. On the other hand, the fact that further funding arrangements were entered into after January 1990 as individual responses to external exigencies which arose from time to time by reason of external factors (Reasons [263]), is strongly supportive of the conclusion that the business of lending money which EFGA had conducted up to December 1989 did not cease in 1990 but continued thereafter.
The Commissioner sought to draw factual distinctions between EFGA and the ‘internal lender in Federal Commissioner of Taxation v BHP Billiton Finance Ltd (2010) 182 FCR 526’. I agree with the respondent’s response that the facts relied on are of no material consequence to these proceedings and do not support the conclusion that EFGA ceased to carry on its business of lending money in 1990 or that thereafter its loans were not made in the ordinary course of that business. As the Full Court in BHP Billiton Finance observed at [1], [2] and [33], what is or is not in the ordinary course of a taxpayer’s business of lending money must be determined by reference to the context in which the business is carried on, not by reference to the way in which a major bank might carry on its business. In the present case, the primary judge correctly considered the nature of EFGA’s business activities after 1990 in the context of the economic and other external difficulties which adversely impacted upon the business it had conducted since 1985.
It has long been recognised that when a company decides to discontinue its business by winding back the scale of the activities which constitute that business to the point that they are no longer carried on, the activities carried on during the winding back period are as much acts done in the course of carrying on that business as they were before the decision was made. So much was recognised by Lord Atkinson in J & R O’Kane & Co v Commissioners of Inland Revenue (1922) 126 LT 707 at 710:
‘A trader who wishes to retire from business may wind up his business in several ways; he may sell his concern as a going concern, or he may auction off his stock. But there is another way quite as effectual, and that is by continuing to carry on his business in the ordinary way, but not replenishing his stock which he has accumulated as it is sold. Then he will leave himself with no stock, and therefore he can retire from business. But the fact that he realises stock in the process of carrying on the trade as he has hitherto done will effectuate both purposes.’
Even where a company has gone into liquidation and the liquidator realises its stock in the manner that it has hitherto done, and even where the liquidator does not carry on other activities, such as manufacturing, that the company has hitherto carried on, the acts of the liquidator will be regarded as the continuation of the company’s business, albeit that it is only carried on for the purpose of winding up: Joshua Brothers Proprietary Limited v Federal Commissioner of Taxation (1923) 31 CLR 490.
Such a way of discontinuing a company’s business is to be contrasted with a sale of the assets of the business as a going concern: Commissioner of Taxation (WA) v Newman (1921) 29 CLR 484, or the sale of all those assets in order to put an immediate end to the business: Modern Permanent Building & Investment Society (in liquidation) v Federal Commissioner of Taxation (1958) 98 CLR 187 at 192 per Williams J.
The case which throws most light on whether the primary judge, in the present case, erred in his conclusion that, notwithstanding the findings of fact upon which the Commissioner relies, EFGA continued to carry on its business of lending money after 1990 and that loans made by it to ELFIC and EFGS after that year were made in the ordinary course of that business, is the decision of a Full Court of this Court in Commissioner of Taxation v Unilever Australia Securities Limited (1995) 56 FCR 152. The taxpayer (UAS) was until 1983 the group finance company for the Unilever group in Australia. In that capacity it had incurred liabilities under borrowings secured by a debenture trust deed which matured in 1987 and 1989. In 1986, the limitations imposed by the debenture trust deed were found burdensome and UAS entered into an ‘in-substance defeasance arrangement’ whereby in consideration of a payment to a state government financial institution (LGFA), LGFA indemnified UAS against liability for the larger sum payable on the maturity of the debentures. Effectively, it removed the debenture liabilities from UAS’ balance sheet. The Commissioner assessed UAS on the basis that it derived a gain at the time the contract was made with LGTA. UAS’ objection was upheld at first instance. By majority (Lockhart and Hill JJ), Beaumont J dissenting, the Full Court allowed the Commissioner’s appeal holding that the agreement with LGFA gave rise to a profit on revenue account although the profit did not arise at the time of the defeasance agreement but was realised when the debentures matured and LGFA paid out the principal sum thereby discharging the obligations of UAS.
Relevantly, for present purposes, was UAS’ argument that any profit it made arising out of the defeasance arrangement and the performance of that arrangement by LGFA was on capital account because it arose in the course of UAS going out of business pursuant to an expressed intention to do so. The argument was rejected by the majority in the following terms:
(1) At 156, Lockhart J said:
‘Although the evidence about the activities of UAS is sparse, it was the finance arm of UAL until 1983. UAS ceased trading thereafter on the short term money market, issued no further debenture stock and made no subsequent loans to companies in the Unilever Australia group including UAL. Nevertheless, it continued to service the loans which were still outstanding including the receipt of interest upon loans made by it to members of the UAL group and the payment of interest upon moneys borrowed by it. I note that the report of the directors on the balance sheet and accounts of UAS for the year ended 31 December 1987 stated that UAS’s principal activity was to provide finance to the Unilever group of companies through the existing issue of debentures and that there had been no significant change in the nature of UAS’s activities during the year.
In my opinion it was in the ordinary course of the business of UAS as a finance company to make the necessary arrangements to repay moneys borrowed by it and to service the payment to it of moneys lent by it. UAS’s business did not come to an end after the defeasance arrangements had been made. Its business included always the elements of borrowing, lending and repaying moneys borrowed, servicing the loans including receipt of interest. It was a necessary incident of UAS’s business that its debts would be discharged. UAS’s business was continuing at all material times.
The defeasance arrangements were unusual, but, they nevertheless generated profit or gain to UAS in the course of its business activities which was income according to ordinary concepts.
(2) At 187, Hill J said:
‘The present is not a case where UAS, in the relevant sense, put an end to its business by virtue of the defeasance transaction. Rather, although UAS had resolved not to expand its business but run it down, its business was still continuing. That business included the receipt of interest on funds lent out by it and the payment of interest on moneys borrowed by it. It continued at the least until the moneys borrowed had been repaid and indeed perhaps thereafter, or at least while moneys were owing to it, by Unilever related companies.’
In my view, the facts of the present case, in particular those facts relating to EFGA’s activities after 1990 as outlined above, point more strongly to a conclusion that it continued to carry on its business of lending money after 1990, and that loans it made to ELFIC and EFGS after that year were made in the ordinary course of that business, than the facts upon which the majority relied in UAS for their conclusion that the activities of UAS after the defeasance arrangement amounted to a continuation of UAS’ business of lending money to the Unilever Australia group.
If only by way of example, the payments and repayments by ELFIC in respect of its borrowings from EFGA over the period from 1991 to 1998 were as follows:
Year ELFIC’s payments and repayments in respect of its borrowings from EFGA
$1991 343,269,727 1992 95,370,771 1993 196,085,655 1994 68,159,243 1995 27,429,722 1996 5,151,937 1997 197,559,461 1998 75,682,570 Total 1,008,709,086
And the payments and repayments in respect of EFGS’ borrowings from EFGA for the 1990 to 1998 years were as follows:
Year ELFIC’s payments and repayments in respect of its borrowings from EFGA
$1990 18,398,065 1991 5,188,793 1992 9,258,872 1993 4,864,981 1994 765,078 1995 27,020 1996 48,455 1997 4,132,235 1998 0 Total 42,683,502
Which brings me to the Commissioner’s contention referred to at [22] above that after 1990 EFGA’s activities were confined to serving the purposes of its parent company in maximising the realisation of the assets that were held by the Finance group. This is not the first time this argument has been run albeit in slightly different factual circumstances and articulations. It has invariably been rejected. It was first rejected in Commissioner of Taxation v Bivona Pty Ltd (1990) 21 FCR 562 at 569:
‘The respondent’s activities consisted principally of the borrowing and lending of money. By far the greatest proportion of its income consisted of interest on moneys lent and its largest outgoing was interest on moneys borrowed from overseas. There was no suggestion that any of the relevant transactions were shams. Even if it were right to describe the role of the respondent in its activities of lending money, as counsel for the Commissioner did, as a “conduit” for its parent company or other members of the group, that begs, not answers, the question whether the activities of the respondent are correctly characterised as its principal business consisting of the lending of money.’
More recently, a Full Court in Federal Commissioner of Taxation v Tasman Group Services Pty Ltd (2009) 180 FCR 128 at [56] confirmed that response:
‘While it may be accepted that the business was being financed by SBC, this does not inevitably lead to the conclusion that SBC was carrying on the business. It is a trite proposition that, where a subsidiary, even if wholly owned by a parent company, carries on a business, the business is that of the subsidiary not the parent. Irrespective of how closely it may monitor the business activities of the subsidiary, the parent does not itself carry on those activities but is engaged in the separate business of a parent or holding company which is, normally, the receipt of income in the form of dividends from the subsidiary.’
A similar argument was recently run in BHP Billiton Finance and again rejected at [19]:
‘The fact that Finance was the vehicle which financed the Group entities selected by BHPB as the vehicles through which the Group's investment decisions were executed, does not make Finance's business an appendage to the business of the Group as a whole; any more than it makes Finance a mere conduit of BHPB’s business.’
Again, it must be rejected here.
In my view, there was no error in the primary judge’s conclusion that EFGA continued to carry on its business of lending money to the group after 1990, notwithstanding that its object in doing so was ultimately to wind up or discontinue that business, and that loans it made to ELFIC and EFGS after that year were made in the ordinary course of that business. It follows that I agree with the primary judge that EFGA is entitled to a deduction under s 25-35(1)(b) of the 1997 Act for the amounts of the debts owing to it by ELFIC and EFGS that were written off as bad during the 1998 year of income. Like the primary judge, it is unnecessary for me to consider the alternative relief claimed under s 8-1 of the 1997 Act.
This ground of the Commissioner’s appeals cannot be sustained.
EFGT, FGL and Amayana
The claims by EFGT, FGL and Amayana for deductions in respect of bad debts relate only to the interest component of the debts written off as bad.
The primary judge held that FGL and Amayana were entitled to allowable deductions under s 25-35(1)(a) and also under s 8-1 of the 1997 Act (Reasons [154], [155] and [160]).
In relation to EFGT, the primary judge found that the debts owed to EFGT by EFGA which were written off as bad in 1998 were in respect of money lent by EFGT in the ordinary course of its business of lending money (Reasons [145]). His Honour held that it followed that deductions were allowable to EFGT for the debts written off as bad under s 25-35(1)(b) and that it was not necessary to consider the application of s 25-35(1)(a) or s 8-1 (Reasons [148]).
Before the primary judge the respondents had submitted that only the interest component of the bad debts were allowable deductions for EFGT under s 25-35(1)(a) and/or s 8-1. EFGT had not relied upon s 25-35(1)(b) in its notice of objection. In those circumstances, the application of s 25-35(1)(b) in relation to EFGT was not pressed in these appeals. Nevertheless, EFGT, like FGL and Amayana, relied on both ss 25-35(1)(a) and 8‑1 as grounds for deductions for the interest component of the debts written off as bad.
Three requirements need to be satisfied for a deduction under s 25-35(1)(a):
(1)There must be a debt (the first requirement);
(2)the debt, or part of the debt, must be written off as bad in the year of income (the second requirement); and
(3)the debt must be in respect of an amount included in the taxpayer’s assessable income in the current or a prior year (the third requirement).
The Commissioner accepted that the first and second requirements are satisfied in relation to each of EFGT, FGL and Amayana.
As to the third requirement, each of EFGT, FGL and Amayana had returned the whole of the interest charged on their respective loans as assessable income in the years in which it accrued (Reasons [51], [52]) and each had been assessed in the relevant years of income on the basis that the interest had been properly returned.
However, the Commissioner contended that this was not sufficient to satisfy the third requirement because the interest income was incorrectly returned in the relevant years. The Commissioner relied on two grounds for this contention and his consequential contention that the deductions were not allowable under s 25-35(1)(a):
(1)First, he submitted that the interest was returnable on a cash basis rather than on an accruals basis because none of EFGT, FGL and Amayana carried on a business of lending money; as no interest had been received, there was nothing to be included in the assessable income;
(2)secondly, he submitted that the respective taxpayers had ‘no real intention or expectation that the interest would be paid’; accordingly, the return of interest did not give a substantially correct reflex of the taxpayer’s true income in the years before the debts were written off.
The first ground raises a matter of principle; the second a matter of evidence, although they are really two sides of the same coin. The difficulty with each is that the coin has gone out of circulation.
With respect to the evidentiary matter, there is no evidence to support the conclusion that the respective taxpayers had ‘no real [whatever that means] intention or expectation that the interest would be paid’. Sham was not alleged. Even if there were no such intention or expectation, it would not lead to the conclusion that the taxpayers should not have returned the interest income as and when it accrued, but only when it was received.
The Commissioner pointed to the following matters as evincing no real intention or expectation on the part of the respective taxpayers that the interest would be paid:
(1)ELFIC and EFGS suffered losses continually from 1988. By the end of the 1990 year each had negative shareholders’ funds. It follows from FGL’s decision to cease all but its brewing business and divest itself of all other assets, that the Finance group entities’ balance sheets could not improve but only decline as the asset realisation program proceeded;
(2)EFGA management recognised at least by April 1991 that EFGA would not even break even in future years without the provision of interest-free funding especially given the declining capacity of ELFIC and EFGS to satisfy their obligations to EFGA as their assets were reduced;
(3)the capacity of ELFIC, EFGS and EFGA to satisfy their interest obligations was further reduced by the economic circumstances which prolonged the asset realisation program and forced further expenditure on the acquisition and holding of property assets;
(4)the removal of the strategic hold assets from the Finance group to the New Lensworth Group in 1997, to the subsequent benefit of FGL suggests that there was no intention that the internal funding entities were to be paid the interest they charged;
(5)with particular respect to Amayana, its prospects of being paid the interest it continued to charge were even more remote. It remained an unsecured creditor of EFGA, ranking behind EFGT and FGL after the security structure was established in 1991. Later, it acquired further debt to facilitate the sale of EFG Financial Limited.
With respect, absent a proffered process of reasoning, of which there is none, I am unable to perceive how any or all of these matters lead to a conclusion that ‘the respective taxpayers had no … intention or expectation that the interest would be paid’.
With respect to the matter of principle, and with respect to those responsible for putting the submission, it has no factual or legal foundation. It is disappointing that it was thought necessary to be made.
It lies at the heart of the Commissioner’s submission that unless a company is carrying on a business of lending money, when he concedes that an accruals basis of tax accounting interest income is appropriate, the appropriate basis on which the company is to return interest on a loan it makes in the course of carrying on its business is when it is received, that is, a cash basis. For this proposition, the Commissioner relies on the authority of Favaro v Federal Commissioner of Taxation (1996) 34 ATR 1 and the authorities referred to therein as well as a one line statement from the work of the late RW Parsons, Income Taxation in Australia – Principles of Income, Deductibility and Tax Accounting, Law Book Company Limited, 1985, at [11.248]: ‘Generally, interest will be accounted for on a cash basis’. The case of Favaro concerned interest earned on funds in an Italian bank by individual members of a family and interest earned on their investment in Italian government bonds. It had nothing whatsoever to do with the case of interest on a loan made by a company in the course of carrying on its business. The conclusion of the Court (Branson J) in that case that the interest in question was to be taxed on a cash or receipts basis is totally irrelevant to the issue at hand. The reliance on the one line statement taken from the work of the late RW Parsons disrespects the author and his work; it is quoted out of context and, for that reason, is equally irrelevant to the issue at hand.
There is no dispute that each of EFGT, FGL and Amayana carried on business and that the loans, in respect of which interest accrued but was not paid and ultimately written off, were made in the course of those businesses. In the case of EFGT the primary judge found that its business was one of lending money and that the money it had lent was made in the ordinary course of that business (Reasons [145]). While the respondents do not rely on that finding to press a claim that EFGT is entitled to a deduction for the bad debt write off under s 25-35(1)(b) (see [48] above), they do rely on it in pressing a claim that EFGT is entitled to a deduction for the interest component of the bad debt write off under s 25-35(1)(a) and/or s 8‑1. And in those circumstances, the Commissioner, in his submissions, conceded that it was appropriate for EFGT to bring the interest to account on an accruals basis. In the case of FGL, the primary judge found that while it was not carrying on a business of lending money, it was carrying on business as a holding company and that it was not disputed that it included as part of the assessable income derived from that business in previous years the interest charged to EFGT (Reasons [154]). In the case of Amayana, the primary judge did not specifically characterise the nature of its business by description, but it was never disputed that its loans to EFGA were made in the course of its business ‘and it was therefore appropriate to record unpaid interest as a receivable in Amayana’s accounts’ (Reasons [160]).
The relevant authorities in this area, at least in the modern era, start with a decision of the New Zealand Court of Appeal in Commissioner of Inland Revenue v The National Bank of New Zealand (1976) 2 NZTC 61,150. While the case concerned a bank, it was what fell from the bench and its subsequent consideration and application in Australia that provides its relevance to the issue at hand. That case concerned the practice that had been adopted by the Bank over many years of not bringing into the Bank’s profits interest debited to a customer’s account which was regarded as being ‘in doubt of ultimate realisation’. Instead, it was carried to a ‘suspense account’ and was only credited to the Bank’s profits if and when the view of it as doubtful changed, or the interest was actually received. The Bank returned its assessable income on the same basis and the Commissioner ultimately took issue with that. The Court of Appeal held that the interest in the suspended interest account was derived by the Bank in the income year in which it was debited to the customer and became due. In the course of his reasons, Cooke J, as he then was, canvassed the authorities in New Zealand, England, Scotland, Australia, Canada and the United States. In relation to the Australian authorities, his Honour concluded at 61,168:
‘Taken as a whole the Australian cases show that accountancy evidence may be important, and they emphasise that in every case the ideal is what Dixon J. called “a substantially correct reflex” of the particular taxpayer’s income; but they seem to me to provide no ground for thinking that the tax legislation allows a business enterprise, not operating generally on a cash basis, in computing its gross profits to ignore doubtful debts, even if through the technique of a suspense account that approach may be made acceptable for general accounting purposes.’ (Emphasis added.)
The National Bank of New Zealand case was referred to with apparent approval by a Full Court of this Court (Bowen CJ, Fisher and Lockhart JJ) in National Commercial Banking Corporation of Australia and evinced the following responses from the late RW Parsons in his work, referred to above. At [11.43] the learned author wrote:
‘Where the lending of money is an aspect of a taxpayer’s business, such that the loans are revenue assets, interest on those loans will it seems be subject to accounting on a accruals basis. This may be the consequence of the New Zealand Court of Appeal decision in National Bank of N.Z. Ltd v C.I.R. (NZ) (1977) 77 ATC 6001. The principle of that case may extend to a taxpayer who trades in debts, to a life insurance company that invests in debts, and to a taxpayer that engages in a business of investing involving the switching of investments. The last situation was the facts, as understood by Gibbs J., in London Australia Investment Co. Ltd (1977) 138 CLR 106.’
At [11.44] and [11.45], he wrote:
‘Where a taxpayer carries on a business, one judgment will be made as to the appropriate basis of accounting in regard to all items that are active income of that business. …
If a taxpayer is held to conduct one business of selling and repairing motor cars, he will account on one basis, almost certainly on an accruals basis, for all items of active income of that business.’
Finally at [11.53], he wrote:
‘A doubt that a claim to a receipt will be followed by an actual receipt does not prevent or qualify derivation. The New Zealand Court of Appeal so held in National Bank of N.Z. Ltd (1977) 77 A.T.C. 6001. The taxpayer’s doubts may be expressed by writing-off under s. 63 the whole or some part of the amount derived as a bad debt, and a failure to obtain payment may give rise to a deduction for a loss under s. 51 (1). National Bank resulted in a change in bankers’ practice. Prior to that case the practice was that so much of an amount of interest receivable whose actual receipt was doubted would not be treated as income derived. Since the case the practice has become to include the full amount of interest receivable.’
The foregoing analysis uses as its starting point the Commissioner’s contention that EFGT, FGL and Amayana incorrectly returned the interest income on an accruals basis when they should have accounted for it on a cash basis and concludes that the Commissioner’s contention is wrong for the reasons given in that analysis. The same conclusion can be reached by using as a starting point the application of first principles.
Generally speaking, the determination of whether income is to be recognised on a cash receipts or an accruals basis is done by applying ordinary business and commercial principles adopting a method of accounting that gives a true or substantially correct reflex of the income derived: Commissioner of Taxes (SA) v Executor Trustee and Agency Co of South Australia Ltd (1938) 63 CLR 108 at 152 – 154 per Dixon J with whom Rich and McTiernan JJ agreed (‘Carden’s case’); Ballarat Brewing Co Limited v Federal Commissioner of Taxation (1951) 82 CLR 364 at 368 per Fullagar J, and Brent v Federal Commissioner of Taxation (1971) 125 CLR 418 at 428 per Gibbs J.
The object of the 1936 Act and 1997 Act (together ‘the Assessment Acts’) is to discover those gains that have come home to the taxpayer in a realised or immediately realisable form during the relevant year of income: Carden’s case at 155 per Dixon J, with whom Rich and McTiernan JJ agreed. It is not necessary for an amount to be received before it is derived: Federal Commissioner of Taxation v Orica Ltd (1998) 194 CLR 500 at [24] per Brennan CJ and the cases there cited. The relevant gain can be a chose in action that has vested in the taxpayer provided that a distinct set of legal relations has come into existence during the year of income: see, for example, Abbott v Philbin [1961] AC 352 and Donaldson v Commissioner of Taxation [1974] 1 NSWLR 627 at 642 – 644.
The treatment of amounts in a taxpayer’s financial statements and accounting records, even if not determinative, are both relevant and significant in determining whether its assessable interest income is to be recognised on receipt or on accrual of the entitlement and are evidence of the test that ought to be applied: Arthur Murray (NSW) Pty Limited v Federal Commissioner of Taxation (1965) 114 CLR 314 at 318 per Barwick CJ, Kitto and Taylor JJ; International Nickel Australia Ltd v Federal Commissioner of Taxation (1977) 137 CLR 347 at 367 per Mason J; Commissioner of Taxation v Citibank Ltd & Ors (1993) 44 FCR 434 at 443 per Hill J with whom Jenkinson and Einfeld JJ agreed; BHP Billiton Petroleum (Bass Strait) Pty Ltd v Commissioner of Taxation (2002) 126 FCR 119 at [50], [67] – [68] per Hill and Heerey J.
EFGT, FGL and Amayana (and EFGA) included their relevant interest entitlements in the reported income in their accounts on an accruals basis and those accounts were audited.
The taxation treatment which EFGT, FGL and Amayana (and EFGA) afforded to their interest entitlements was appropriate having regard to both their circumstances and the structure of the Assessment Acts:
(1)The circumstances of Amayana and EFGT (and EFGA) were that they had borrowings that related directly to the loans which they had made on which interest accrued (Reasons [51], [52], [118], [119], [123], [145], [160]). The accruing liability for interest on their borrowings was the cost to them of using loan funds to earn income by lending at interest. In circumstances where a legal or jurisprudential approach is required to determine whether a liability has been incurred to found a deduction (Coles Myer Finance Limited v Federal Commissioner of Taxation (1993) 176 CLR 640 at 662 – 663 per Mason CJ, Brennan, Dawson, Toohey and Gaudron JJ), and where a pecuniary obligation must become due in the sense of a presently existing liability to have been incurred (Nilsen Development Laboratories Pty Ltd v Federal Commissioner of Taxation (1981) 144 CLR 616 at 623, per Barwick CJ and at 627 per Gibbs J), bringing amounts of interest to account as and when they accrue gives a more reliable reflex of the lending companies’ assessable income – both the lending companies’ liabilities for interest and their entitlements to interest would be brought to account in the same period to which they relate: cf., J Rowe & Son Pty Ltd v Federal Commissioner of Taxation (1971) 124 CLR 421 at 448 per Menzies J.
(2)Further, these companies and FGL had interest entitlements accrue in recoverable form – interest was ordinarily calculated on a daily basis and capitalised monthly – which allowed further interest to be charged on any accrued but unpaid amounts (Reasons [19], [20]). Accruals in such circumstances have sufficiently come home to be regarded as derived.
(3)The structure of the Assessment Acts is such that a deduction arises upon the writing off of a bad debt that has previously been included in assessable income. The Assessment Acts do not call for consideration of the debtor’s capacity to pay a debt as a condition of and before its inclusion in assessable income of the creditor. To the contrary, the Assessment Acts contemplate inclusion in assessable income and the allowance of a subsequent deduction if and when it is ascertained that the debt is bad and is written off: National Bank of New Zealand per Cooke J at 61,168; National Commercial Banking Corp at 119 – 121.
In considering the tax consequences of the intra-group funding arrangements, the fact of a tax consequence (in the present matters the deductions being allowable) resulting from a given transaction, attracts no inference that the parties to the transaction entered into it or carried it out for the dominant purpose of obtaining that tax consequence: Hart at [15] per Gleeson CJ and McHugh J and at [65] per Gummow and Hayne JJ. This is particularly so when assessable income is also produced by the scheme identified.
The various tax results were the ordinary taxation reflex of the making of loans at interest. Viewed in isolation, nothing about them suggests a tax purpose. On any view, the s 177D(b)(iv) consideration is, as the learned primary judge concluded, neutral at best (see [187] above).
Any change in the financial position of the relevant taxpayer that has resulted, or will result, or may reasonably be expected to result from the scheme – s 177D(b)(v)
Any change in the financial position of a person with a connection with the relevant taxpayer – s 177D(b)(vi)
It is convenient to deal with these two matters together.
In relation to (v), the Commissioner pointed out that while the net asset position of the Finance group entities continued to deteriorate, interest continued to accrue. According to the Commissioner, there was no justification for plunging the Finance group and the funding entities further into debt by the continued charging, capitalisation and compounding of interest that could not be paid. Correspondingly, as the Finance group’s ability to repay debt deteriorated, so did the financial position of the funding entities. Nevertheless, interest continued to accrue down the funding chain beginning with FGL itself, then at the Amayana/FBGTA level, then at the EFGA level and finally at the ELFIC/EFGS level. According to the Commissioner, the explanation lies in the tax benefits to be obtained by the transfer of tax losses arising from the charging of interest and, once the asset realisation program had been completed and the extent of the deficiency ascertained, the writing off of the corresponding interest income as bad debts. According to the Commissioner, the financial position of the Finance group was, further, prejudiced by:
(i)The selling down of assets as part of the process of winding down those businesses since those entities were unable to pay interest. The sell down further reduced the income and assets of the Finance group businesses and their ability to pay interest;
(ii)the removal of potentially profitable assets into the New Lensworth Group;
(iii)in Amayana’s case, by the acquisition of EFGA’s debt to EFG Financial.
Finally, the Commissioner submitted that the creditor companies’ financial positions were manipulated to maximise the amount of interest outstanding on debts owed to them.
In relation to (vi), the Commissioner observed that each entity in the funding chain was adversely affected by the financial deterioration of the Finance group companies, exacerbated by the continued accrual of interest. Other entities in the Foster’s Group (Ashwick, Nexday and EFGI) benefited from the losses magnified by the continued accrual of interest, by the receipt of transfers of those losses.
In relation to (v), the learned primary judge concluded at Reasons [263]:
‘There were clearly changes in the respective financial positions of various members of the Foster’s Group from time to time between 1989 and 2000. … On balance, I do not regard these changes, or those more specifically indicated by the Commissioner, as strengthening or weakening the inference that the alleged scheme was entered into or carried out for the dominant purpose of obtaining a tax benefit.’
In relation to (vi), the learned primary judge concluded at Reasons [266] – [267]:
‘The changes identified by the Commissioner under this head were said to be consistent with the dominant purpose of obtaining the tax benefits flowing from the scheme.
Because of the elaborate inter-connected group structure of FGL and its subsidiaries action taken in response to changed financial circumstances in respect of one member of the Group necessarily had repercussion for one or more other members of the Group. However, I do not regard any changes in the financial position of one or more Foster’s Group companies which were connected in that way to a particular taxpayer member of the Group as having any purposive significance of the kind to which s 177D(b)(vi) points. In my view, all of the changes which can be characterised as relevant to this criterion have been evaluated in the application of the criteria erected by sub-paragraphs (i), (iii) and (v) of s 177D(b).’
There is no evidence, nor does the Commissioner refer to any evidence, to support the claim that any of the respondents manipulated their financial positions. In addition, the Commissioner has not alleged that any of the transactions the subject of these appeals were shams.
In respect of the financial deterioration, the primary judge accepted that, while there were changes in the respective financial positions of various members of the Foster’s group from time to time between 1989 and 2000, ‘many of those changes resulted from external forces which were regarded, for reasons unrelated to any tax benefit, as compelling internal adjustments of assets and liabilities and a re-arrangement of security over some assets’: Reason [263]. The primary judge went on: ‘Some of those adjustments, although they involved a substitution of internal lenders for outside financiers, did not significantly change the financial position of the relevant borrower. Corresponding changes also resulted in some lending companies within the Foster’s group deriving assessable income in the form of interest on loans which had not been derived before the changes occurred’: Reasons [263].
The primary judge’s conclusions are supported by his findings of fact and the evidence. The commencement of borrowing from the Foster’s group companies in August 1989 produced little change in the financial position of EFGA, ELFIC or EFGS. EFGA had been obtaining its circulating capital via debt funding already, and ELFIC and EFGS simply continued to obtain their circulating capital from EFGA. Rather, the one effect of FGL’s intervention was that it enabled Finance group companies to avoid a fire sale and the associated expected losses, and instead to pursue an orderly realisation of assets. Another effect was that an income stream flowed to FGL which contributed to its profits and dividend paying capacity: see Appendix 3, Table 11. Accordingly, FGL’s loans to EFGA from before November 1989 (and then subsequently, via AML Finance and EFGT) and Amayana’s loans to EFGA from July 1990, enabled EFGA to continue to fund the Finance group companies and to meet the further commitments which evolved as the orderly realisation of assets was pursued.
The considered view of Finance group management and their external advisers at the time was that this was the best strategy for maximising the Finance group’s recoupment from the finance businesses it had built up over the years. The loans from FGL, AML Finance and Amayana before October 1991, and from EFGT after October 1991 refinanced prior funding arrangements and otherwise enabled further lending to assist in the recovery of loans made. Upon the refinancing of EFGA, EFGA continued its orderly realisation of its assets with a view to maximising recoveries and collections. The financial consequences for EFGT were that it incurred interest expense on its borrowings from FGL for which it claimed deductions and it earned and returned interest income on its lending to EFGA; it received substantial repayments and payments on its loans and accrued interest and made repayments and payments to FGL.
Any other consequences for the relevant taxpayer or for any person referred to in s 177D(b)(vi) of the scheme being entered into or carried out – s 177D(b)(vii)
Both before the primary judge and on the appeals, the Commissioner accepted that there were no other consequences for the respondent taxpayers or for any person referred to in s 177D(b)(vi).
Nature of any connection between the relevant taxpayer and any person referred to in s 177D(b)(vi) – s 177D(b)(viii)
Before the primary judge, the Commissioner reiterated that the companies referred to under s 177D(b)(vi) had all been wholly-owned subsidiaries of FGL and subject to its direction in the implementation of intra-group funding arrangements. Under that direction, the lending companies had continued to make advances to the borrowers at interest in circumstances in which no independent lender would have done so.
On this matter, the primary judge concluded at Reasons [270]:
‘The inter-connection between companies in the Foster’s group and the fact that they were subject to the overall direction of FGL has already been noted and evaluated in the application of other criteria postulated in s 177D(b). The making of loans and the giving of guarantees and letters of comfort to borrowers within the group which would have been hopelessly insolvent if considered as independent entities, is readily explicable by the need to preserve the financial viability of the Foster’s group as a whole. In my view, those features of the nature of the connection does not support any inference that the dominant purpose of those who administered the connected activities of the Foster’s group was to obtain a tax benefit.’
I totally agree with the primary judge’s conclusion on this matter. The respondent taxpayers are all companies within the Foster’s group. In isolation this circumstance is at best neutral. If, however, as the Commissioner would put it, the focus is enlarged to accommodate the parlous financial position of the borrower entities, then the examination also must include the wider circumstances of those companies. Upon that examination, it would not be concluded that any person entered into or carried out the arrangements posited for the sole or dominant purpose of securing a tax benefit for one or more of the respondent taxpayers.
Conclusion as to Section 177D(b) ‘Purpose’
For the foregoing reasons, and those reflected in the reasoning of the learned primary judge, having regard to the matters enumerated in s 177D(b) it would not be concluded that any of the persons who entered into or carried out either the wide scheme, or any of the narrower schemes posited by the Commissioner did so for the sole or dominant purpose of enabling any of the respondent taxpayers to obtain a tax benefit.
It follows that this ground of the Commissioner’s appeals cannot be sustained.
CONCLUSION
As all of the Commissioner’s grounds of appeal on the substantive issues have failed, like the learned primary judge, it is unnecessary to consider the issue of penalties.
All the appeals must be dismissed and the Commissioner must pay the respondents’ costs of the appeals as agreed or, in default of agreement, as taxed.
I certify that the preceding two hundred and six (206) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Edmonds. Associate:
Dated: 8 April 2011
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 34 of 2010
VID 35 of 2010
VID 36 of 2010
VID 37 of 2010
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: ASHWICK (QLD) NO 127 PTY LTD (ACN 010 577 456)
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 38 of 2010
VID 39 of 2010
VID 40 of 2010
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: ELFIC PTY LTD (ACN 007 606 206)
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 41 of 2010
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: EFG SECURITIES PTY LTD (ACN 005 489 029)
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 42 of 2010
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: EFG AUSTRALIA PTY LTD (ACN 006 357 035)
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 43 of 2010
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: EFG TREASURY PTY LTD (ACN 050 431 699)
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 44 of 2010
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: EFG INVESTMENTS PTY LTD (ACN 006 169 955)
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 45 of 2010
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: FOSTER'S GROUP LTD (ACN 007 620 886)
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 46 of 2010
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: AMAYANA PTY LTD (ACN 006 908 738)
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 47 of 2010
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: NEXDAY PTY LTD (ACN 003 621 681)
Respondent
JUDGES:
BENNETT, EDMONDS AND MIDDLETON JJ
DATE:
8 April 2011
PLACE:
mELBOURNE
REASONS FOR JUDGMENT
MIDDLETON J:
I agree that the appeals should be dismissed with costs for the reasons given by Edmonds J.
I certify that the preceding one (1) numbered paragraph is a true copy of the Reasons for Judgment herein of the Honourable Justice Middleton. Associate:
Dated: 8 April 2011
Appendix 1
Appendix 2
Appendix 3
Table 1Payments and repayments made by borrowers to lenders 1990 to 1998
Year EFGT to FGL
$EFGA to EFGT
$EFGA to Amayana
$EFGS to EFGA
$ELFIC to EFGA
$Amayana to FBGTA
$1990 18.4M 1991 42M 5.2M 343M 34.1M 1992 135M 165M 90M 9M 95M 90.2M 1993 149M 9M 5M 196M 0 1994 143M .0006M .8M 68M 0 1995 153M .0008M .03M 27M 0 1996 48M .05M 5M .009M 1997 318M 540M 4M 198M 0 1998 93M 295M .0008M - 76M 0 1990 to 1998 1,041M 1,010M 132M 43M 1,009M 124.3M Appendix 3
Table 2EFGA
Reported operating profits (losses)
1985 – 1998
Year Reported operating profits (losses) of EFGA
$1985 11,401,000 1986 17,502,000 1987 38,561,000 1988 45,108,000 1989 40,549,000 1990 (28,363,000) 1991 (232,955,000) 1992 (782,570,000) 1993 (6,800,000) 1994 (44,184,082) 1995 2,231,701 1996 (126,356,924) 1997 (1,562,914) 1998 (1,422,910) Appendix 3
Table 3EFGA
Total reported operating revenue, total reported interest income and total reported interest expense
1985 – 1998
Year Total reported operating revenue
$Total reported interest income
$Total reported interest expense
$1985 11,420,000 0 0 1986 20,028,000 168,000 1,000 1987 239,805,000 194,787,000 203,630,000 1988 296,493,000 222,875,000 187,565,000 1989 412,429,000 336,714,000 326,481,000 1990 408,196,000 368,259,000 343,737,000 1991 313,025,000 254,642,000 241,682,000 1992 175,532,000 175,515,000 161,311,000 1993 120,970,000 120,942,000 112,511,000 1994 104,173,224 104,163,975 100,267,066 1995 142,819,386 142,684,117 140,885,858 1996 159,848,697 159,848,697 153,330,954 1997 132,080,290 132,080,290 128,846,043 1998 86,813,428 86,813,428 83,609,336 Appendix 3
Table 4EFGA
Amounts owed by related parties
1988, 1990, 1992
Related Party Amounts owed to EFGA by related parties as at 30 June 1988
$1990
$1992
$Elders Finance Limited (Lensworth) 51,765,809 286,881,211 403,187,226 EFGS 1,090,321 80,839,862 77,516,104 EFG Services Pty Ltd 0 1,790,136 0 Elders Futures 1,319,160 216,598 0 Elders Investment Management Ltd 0 305,824 0 ELFIC 1,332,924,962 991,793,213 1,300,557,100 Elders Rural Finance 49,670,215 18,861,852 0 Elders Trade Financiers Limited 24,974,706 2,322,249 0 EFGSB UK Limited (Cobbold Roach) 2,304,830 371,121 0 EFG Administration UK Limited (Elders Keep Brothers Ltd) 1,889,702 21,308,676 0 EFG Investments UK Limited 0 106,762 0 Elders Finance Group UK Limited 99,388,505 52,264,361 0 Elders Finance Holdings (UK) Limited 5,945,613 29,460,921 0 Elders Finance Limited (UK) 0 220,758,165 0 Elders Real Estate Limited 0 9,245,289 0 Elders Finance Inc 0 14,153,225 0 FGL 40,114,125 48,000,000 48,000,000 EFGT 0 0 45,352,196 Elders Malt 6,815,998 0 0 R&T Agriculture 2,225,711 0 0 Swisstex Finance Pty Ltd 10,720,551 0 0 Elders Merchant Finance HK 32,258 0 0 RTG 27,884,600 0 0 Elders London 25,359,028 0 0 Elders Keep Ltd 36,610,436 0 0 EFL Birmingham 15,258,474 0 0 EFL Corporate 213,721,678 0 0 EFIB (Bahrain) 60,118,955 0 0 EAFL (HK) 4,818,565 0 0 EFG Sydney 770,492 0 0 Appendix 3
Table 5EFGA
Balances of debts owed to Amayana, EFGT, FGL, EFG Financial, Elders Finance & Investment Bank and AML Finance
1989 – 1998
Year Balances of debts owed by EFGA to: Amayana
$
EFGT
$
FGL
$
EFG Financial
$
Elders Finance & Investment Bank
$AML Finance
$
1989 0 0 N/A N/A N/A 4,708,183 1990 0 0 155,614,740 183,618 133,954,872 59,469,548 1991 251,690,081 0 403,147,714 101,258,735 0 495,132,079 1992 214,195,597 969,479,476 0 110,531,196 0 1993 230,678,439 1,226,882,044 0 120,516,106 0 1994 245,371,822 1,305,027,889 0 121,389,229 0 1995 265,838,058 1,413,879,053 0 129,926,436 0 1996 420,953,007 1,531,493,429 0 0 0 1997 452,762,985 1,087,665,011 750 0 0 1998 489,243,394 849,965,535 0 0 0 Appendix 3
Table 6EFGA
Interest incurred on loan debts owed to Amayana, EFGT, FGL, EFG Financial, Elders Finance & Investment Bank and AML Finance
1989 – 1998
Year Amayana
$
EFGT
$
FGL
$
EFG Financial
$
Elders Finance & Investment Bank
$AML Finance
$
1989 0 0 14,219,240 10,015 14,892,327 1,516,856 1990 0 0 25,305,172 18,542 17,794,353 3,444,859 1991 31,022,110 0 51,672,304 1,915,813 13,768,953 37,212,030 1992 23,272,972 58,919,064 15,981,386 7,751,362 15,527,723 1993 16,482,842 82,710,022 0 5,835,423 0 1994 14,693,383 78,147,827 0 5,234,609 0 1995 20,466,236 108,851,164 0 7,892,230 0 1996 23,678,135 117,575,840 750 7,462,247 0 1997 28,989,033 96,503,042 750 0 0 1998 25,036,634 57,645,096 750 0 0 Appendix 3
Table 7EFGA
Total reported assets (net of provisions)
1990 to 1998
Year Total reported assets (net of provisions) of EFGA
$1990 1,846,698,000 1991 1,478,135,000 1992 666,691,000 1993 664,011,000 1994 705,560,429 1995 854,279,475 1996 877,995,925 1997 422,595,126 1998 193,117,220
Appendix 3
Table 8EFGT
Reported operating revenue, interest income and interest expense
1992 – 1998
Year Total reported operating revenue
$Total reported interest income
$Total reported interest expense
$1992 61,559,131 61,599,131 61,599,131 1993 111,844,168 92,826,180 93,062,277 1994 87,106,299 87,106,299 87,067,587 1995 124,679,940 124,677,317 124,549,218 1996 138,987,259 138,987,259 139,487,717 1997 112,133,473 107,760,172 108,171,192 1998 59,599,437 59,599,437 59,631,683 Appendix 3
Table 9Amayana
Total reported operating revenue, total reported interest income and total reported interest expense
1991 – 1999
Year Total reported operating revenue of Amayana
$Total reported interest income of Amayana
$Total reported interest expense of Amayana
$1991 38,464,627 38,464,627 38,464,627 1992 34,437,029 34,437,029 34,437,029 1993 16,506,552 16,506,552 16,506,552 1994 14,693,383 14,693,383 14,693,383 1995 20,617,455 20,466,236 20,466,236 1996 22,106,652 22,106,652 22,106,652 1997 20,267,902 20,267,902 20,267,902 1998 16,875,354 16,875,354 16,875,354 1999 0 0 0 Appendix 3
Table 10FGL
Reported operating revenue and interest income
1989 – 1998
Year Total reported operating revenue
$Total reported interest income
$1989 5,003,378,000 541,311,000 1990 4,883,808,000 600,533,000 1991 3,147,798,000 473,068,000 1992 609,235,000 417,266,000 1993 213,959,000 152,923,000 1994 621,400,000 103,200,000 1995 352,113,667 155,984,658 1996 573,474,616 169,802,169 1997 177,226,035 164,274,163 1998 327,260,806 65,371,572 Appendix 3
Table 11FGL
Opening retained profits or losses, operating profit after tax, dividends and interest on loans from FGL to EFGT
1992 – 1998
Year Opening retained profits (losses) Operating profit after tax
$Dividends
$Interest on loans from FGL to EFGT
$1992 (263,924,000) (966,160,000) 82,400,000 60,759,870 1993 (1,312,354,000) 194,173,000 189,368,000 80,340,400 1994 (1,308,300,000) 196,600,000 191,900,000 68,189,266 1995 (1,303,500,645) 204,562,324 204,168,914 84,305,518 1996 (1,303,453,058) 500,205,073) 215,760,943 88,158,387 1997 284,445,669 104,688,969 200,636,816 76,880,140 1998 188,497,713 264,335,256 188,395,145 47,514,675
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