Messenger Press Proprietary Limited v Commissioner of Taxation
[2012] FCA 756
•17 July 2012
FEDERAL COURT OF AUSTRALIA
Messenger Press Proprietary Limited v Commissioner of Taxation [2012] FCA 756
Citation: Messenger Press Proprietary Limited v Commissioner of Taxation [2012] FCA 756 Parties: MESSENGER PRESS PROPRIETARY LIMITED (ACN 007 563 439) v COMMISSIONER OF TAXATION
MESSENGER PRESS PROPRIETARY LIMITED (ACN 007 563 439) v COMMISSIONER OF TAXATION
LOWER BURDEKIN NEWSPAPER COMPANY PTY. LTD. (ACN 010 191 367) v COMMISSIONER OF TAXATION
MIRROR NEWSPAPERS PTY LIMITED (ACN 000 015 976) v COMMISSIONER OF TAXATION
NATIONAL RUGBY LEAGUE INVESTMENTS PTY LIMITED (ACN 081 778 538) v COMMISSIONER OF TAXATION
WESPRE PTY LIMITED (ACN 008 669 841) v COMMISSIONER OF TAXATION
NEWS FINANCE PTY (IN LIQUIDATION) (ACN 008 549 095) v COMMISSIONER OF TAXATION
RUGBY INTERNATIONAL PTY LTD (ACN 000 369 326) v COMMISSIONER OF TAXATION
HARPERCOLLINS PUBLISHERS (HOLDINGS) PTY. LIMITED (FORMERLY HARPERCOLLINS PUBLISHERS (AUSTRALIA) PTY. LIMITED) (ACN 008 431 730) v COMMISSIONER OF TAXATION
HARPERCOLLINS PUBLISHERS AUSTRALIA PTY. LIMITED (FORMERLY HARPERCOLLINS PUBLISHERS PTY LIMITED) (ACN 009 913 517) v COMMISSIONER OF TAXATION
THE HERALD AND WEEKLY TIMES PTY LIMITED (ACN 004 113 937) v COMMISSIONER OF TAXATION
THE HERALD AND WEEKLY TIMES PTY LIMITED (ACN 004 113 937) v COMMISSIONER OF TAXATION
DAVIES BROTHERS PTY LIMITED (ACN 009 475 754) v COMMISSIONER OF TAXATION
DAVIES BROTHERS PTY LIMITED (ACN 009 475 754) v COMMISSIONER OF TAXATION
NATIONWIDE NEWS PTY. LIMITED (ACN 008 438 828) v COMMISSIONER OF TAXATION
NATIONWIDE NEWS PTY. LIMITED (ACN 008 438 828) v COMMISSIONER OF TAXATION
NEWS LIMITED (ACN 007 871 178) v COMMISSIONER OF TAXATION
NEWS HOLDINGS PTY LIMITED (FORMERLY THE NEWS CORPORATION LIMITED AND NEWS HOLDINGS LIMITED) (ACN 007 910 330) v COMMISSIONER OF TAXATION
NEWS HOLDINGS PTY LIMITED (FORMERLY THE NEWS CORPORATION LIMITED AND NEWS HOLDINGS LIMITED) (ACN 007 910 330) v COMMISSIONER OF TAXATION
THE NORTH QUEENSLAND NEWSPAPER COMPANY PTY LIMITED (ACN 009 655 690) v COMMISSIONER OF TAXATION
THE NORTH QUEENSLAND NEWSPAPER COMPANY PTY LIMITED (ACN 009 655 690) v COMMISSIONER OF TAXATION
LEADER ASSOCIATED NEWSPAPERS PTY. LTD. (ACN 004 337 446) v COMMISSIONER OF TAXATION
LEADER ASSOCIATED NEWSPAPERS PTY. LTD. (ACN 004 337 446) v COMMISSIONER OF TAXATION
ADVERTISER-NEWS WEEKEND PUBLISHING COMPANY PTY. LIMITED (ACN 007 562 950) v COMMISSIONER OF TAXATION
ADVERTISER-NEWS WEEKEND PUBLISHING COMPANY PTY. LIMITED (ACN 007 562 950) v COMMISSIONER OF TAXATION
ADVERTISER NEWSPAPERS PTY LIMITED (ACN 007 872 997) v COMMISSIONER OF TAXATION
ADVERTISER NEWSPAPERS PTY LIMITED (ACN 007 872 997) v COMMISSIONER OF TAXATION
NEWS AUSTRALIA HOLDINGS PTY LIMITED (ACN 105 197 028) v COMMISSIONER OF TAXATION
NEWS HOLDINGS PTY LIMITED (FORMERLY THE NEWS CORPORATION LIMITED AND NEWS HOLDINGS LIMITED) (ACN 007 910 330) v COMMISSIONER OF TAXATION
NEWS AUSTRALIA HOLDINGS PTY LIMITED (ACN 105 197 028) v COMMISSIONER OF TAXATION
File numbers: NSD 827 of 2009
NSD 828 of 2009
NSD 829 of 2009
NSD 830 of 2009
NSD 831 of 2009
NSD 832 of 2009
NSD 833 of 2009
NSD 834 of 2009
NSD 835 of 2009
NSD 836 of 2009
NSD 837 of 2009
NSD 838 of 2009
NSD 839 of 2009
NSD 840 of 2009
NSD 841 of 2009
NSD 842 of 2009
NSD 843 of 2009
NSD 844 of 2009
NSD 845 of 2009
NSD 846 of 2009
NSD 847 of 2009
NSD 848 of 2009
NSD 849 of 2009
NSD 850 of 2009
NSD 851 of 2009
NSD 852 of 2009
NSD 853 of 2009
NSD 400 of 2010
NSD 401 of 2010
NSD 55 of 2011Judge: PERRAM J Date of judgment: 17 July 2012 Catchwords: TAXATION – Income tax – deductions – currency exchange gains & losses – whether currency exchange loss had been incurred – where taxpayer had loaned sums of money from related companies denominated in Australian dollars, US dollars and pounds sterling – where taxpayer had later discharged liabilities under the loans and incurred further liabilities by receiving and endorsing promissory notes and by issuing an unsecured demand note – where taxpayer had later discharged its foreign currency liabilities by endorsing further promissory notes that had the effect of exchanging the foreign currency liabilities for Australian currency liabilities – where the taxpayer claimed to have suffered losses as a result of adverse movements in relevant exchange rates during the period of foreign currency indebtedness – where no exchange of cash, coin or deposit funds held by banks ever took place – whether Division 3B of the Income Tax Assessment Act 1936 (Cth) applies to gains and losses arising from exchanges of liabilities denominated in foreign currency for liabilities denominated in Australian dollars where neither set of liabilities otherwise qualifies as ‘money’ – whether the concept of a ‘currency exchange loss’ in Division 3B is limited to a loss arising from the execution at different times of two opposite exchange transactions where there has been an adverse movement in the intervening period, or whether that concept can encompass other losses that relate to exchange rate fluctuations – whether the losses claimed by the taxpayer were ‘currency exchange losses’
TAXATION – Income tax – deductions – currency exchange gains & losses – requirement under Division 3B of the Income Tax Assessment Act 1936 (Cth) that currency exchange gains and losses be incurred ‘under an eligible contract’ – whether an unsecured demand note of 6 June 1991 was an eligible contract or evidence of an eligible contract – whether the eligible contract must be in force during the entirety of the conduct giving rise to the currency exchange gain or loss – whether a currency exchange gain or loss may arise under multiple eligible contracts – whether any currency exchange losses arose ‘under’ any eligible contract
TAXATION – Income tax – deductions – currency exchange gains & losses – requirement under Division 3B of the Income Tax Assessment Act 1936 (Cth) that currency exchange gains and losses be ‘of a capital nature’ – whether interest had been ‘capitalised’ by being added to the principal by accounting method – whether there had been an account stated that led to the creation of a new debt in which the principal and interest components had merged – whether, alternatively, the liability to pay interest was on revenue account and therefore deductible under s 8-1 of the Income Tax Assessment Act 1997 (Cth)
TAXATION – Income tax – relevance of commercial and accountancy practice – whether expert evidence about the manner in which foreign currency liabilities are accounted for is relevant to the question of whether there has been a currency exchange gain or loss
Legislation: Acts Interpretation Act 1901 s 23(b)
Corporations Act 2001 (Cth) s 251A(6)
Corporations Law s 1308(2)
Income Tax Assessment Act 1936 Div 3B, ss 20, 51, 82U, 82V, 82W, 82X, 82Y, 82Z
Income Tax Assessment Act 1997 ss 8-1, 32-17Cases cited: Armco (Australia) Pty Ltd v Federal Commissioner of Taxation (1948) 76 CLR 584 cited
Arthur Murray (NSW) Pty Ltd v Commissioner of Taxation (1965) 114 CLR 314 cited
ASIC v Hellicar (2012) 286 ALR 501; [2012] HCA 17 followed
Bailes v Modern Amusements Pty Ltd [1964] VR 436 cited
Bank of New South Wales v Brown (1983) 151 CLR 514 followed
BHP Billiton Finance Ltd v Federal Commissioner of Taxation (2009) 72 ATR 746; [2009] FCA 276 cited
Chan v Cresdon (1989) 168 CLR 242 cited
Coles Myer Finance Ltd v Federal Commissioner of Taxation (1993) 176 CLR 640 cited
Commissioner of Taxation v Citibank Ltd (1997) 44 FCR 434 cited
Commissioner of Taxation v Energy Resources of Australia Limited (1996) 185 CLR 66 distinguished
Commissioner of Taxation v Energy Resources of Australia Ltd (1994) 54 FCR 25 followed
Commissioner of Taxes (SA) v Executive Trustee and Agency Co of South Australia Limited (1938) 63 CLR 108 (‘Carden’s Case’) cited
Deveynes v Noble (1816) 1 Mer 529; 35 ER 767 (‘Clayton’s Case’) applied
Emu Brewery Mezzanine Ltd (in liq) v Australian Securities and Investments Commission (2006) 32 WAR 204 cited
Federal Commissioner of Taxation v Clarke (2011) 190 FCR 206 cited
Federal Commissioner of Taxation v Energy Resources of Australia Ltd (1994) 28 ATR 67 cited
Federal Commissioner of Taxation v James Flood Pty Ltd (1953) 88 CLR 492 followed
Federal Commissioner of Taxation v Sara Lea Household & Body Care (Australia) Pty Ltd (2000) 201 CLR 520 cited
Moss v Hancock [1899] 2 QB 111 considered
Pattinson v Marine Midland Ltd [1984] AC 362 cited
Placer Development Limited v Commonwealth (1969) 121 CLR 353 cited
Texas Co (Australasia) Ltd v Federal Commissioner of Taxation (1940) 63 CLR 382 cited
Travelex Ltd v Federal Commissioner of Taxation (2008) 71 ATR 216; [2008] FCA 1961 citedM Ferrier,‘Hedging of Foreign Currency’ (1997) 26 Australian Tax Review 83
Goode on Payment Obligations in Commercial and Financial Transactions (Thompson Reuters, 2nd Ed, 2009)
Mason & Carter’s Restitution Law in Australia (LexisNexis Butterworths, 2nd Ed, 2008)
C Proctor, Mann on the Legal Aspects of Money (Oxford University Press, 6th Ed, 2005)
FA Walker, Money, Trade and Industry (London, 1882)Date of hearing: 5 – 8 December 2011 Place: Sydney Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 268 Counsel for the Applicants: NJ Young QC, M Richmond SC, C Burnett, C Peadon Solicitor for the Applicants: Allens Arthur Robinson Counsel for the Respondents: J de Wijn QC, A Broadfoot, L Hespe Solicitor for the Respondents: Maddocks
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 827 of 2009
BETWEEN: MESSENGER PRESS PROPRIETARY LIMITED (ACN 007 563 439)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
JUDGE:
PERRAM J
DATE OF ORDER:
17 JULY 2012
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The parties bring in short minutes of order by 31 July 2012 to give effect to these reasons.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 828 of 2009
BETWEEN: MESSENGER PRESS PROPRIETARY LIMITED (ACN 007 563 439)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
JUDGE:
PERRAM J
DATE OF ORDER:
17 JULY 2012
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The parties bring in short minutes of order by 31 July 2012 to give effect to these reasons.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 829 of 2009
BETWEEN: LOWER BURDEKIN NEWSPAPER COMPANY PTY. LTD. (ACN 010 191 367)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
JUDGE:
PERRAM J
DATE OF ORDER:
17 JULY 2012
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The parties bring in short minutes of order by 31 July 2012 to give effect to these reasons.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 830 of 2009
BETWEEN: MIRROR NEWSPAPERS PTY LIMITED (ACN 000 015 976)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
JUDGE:
PERRAM J
DATE OF ORDER:
17 JULY 2012
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The parties bring in short minutes of order by 31 July 2012 to give effect to these reasons.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 831 of 2009
BETWEEN: NATIONAL RUGBY LEAGUE INVESTMENTS PTY LIMITED (ACN 081 778 538)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
JUDGE:
PERRAM J
DATE OF ORDER:
17 JULY 2012
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The parties bring in short minutes of order by 31 July 2012 to give effect to these reasons.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 832 of 2009
BETWEEN: WESPRE PTY LIMITED (ACN 008 669 841)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
JUDGE:
PERRAM J
DATE OF ORDER:
17 JULY 2012
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The parties bring in short minutes of order by 31 July 2012 to give effect to these reasons.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 833 of 2009
BETWEEN: NEWS FINANCE PTY (IN LIQUIDATION) (ACN 008 549 095)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
JUDGE:
PERRAM J
DATE OF ORDER:
17 JULY 2012
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The parties bring in short minutes of order by 31 July 2012 to give effect to these reasons.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 834 of 2009
BETWEEN: RUGBY INTERNATIONAL PTY LTD (ACN 000 369 326)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
JUDGE:
PERRAM J
DATE OF ORDER:
17 JULY 2012
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The parties bring in short minutes of order by 31 July 2012 to give effect to these reasons.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 835 of 2009
BETWEEN: HARPERCOLLINS PUBLISHERS (HOLDINGS) PTY. LIMITED (FORMERLY HARPERCOLLINS PUBLISHERS (AUSTRALIA) PTY. LIMITED) (ACN 008 431 730)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
JUDGE:
PERRAM J
DATE OF ORDER:
17 JULY 2012
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The parties bring in short minutes of order by 31 July 2012 to give effect to these reasons.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 836 of 2009
BETWEEN: HARPERCOLLINS PUBLISHERS AUSTRALIA PTY. LIMITED (FORMERLY HARPERCOLLINS PUBLISHERS PTY LIMITED) (ACN 009 913 517)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
JUDGE:
PERRAM J
DATE OF ORDER:
17 JULY 2012
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The parties bring in short minutes of order by 31 July 2012 to give effect to these reasons.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 837 of 2009
BETWEEN: THE HERALD AND WEEKLY TIMES PTY LIMITED (ACN 004 113 937)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
JUDGE:
PERRAM J
DATE OF ORDER:
17 JULY 2012
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The parties bring in short minutes of order by 31 July 2012 to give effect to these reasons.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 838 of 2009
BETWEEN: THE HERALD AND WEEKLY TIMES PTY LIMITED (ACN 004 113 937)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
JUDGE:
PERRAM J
DATE OF ORDER:
17 JULY 2012
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The parties bring in short minutes of order by 31 July 2012 to give effect to these reasons.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 839 of 2009
BETWEEN: DAVIES BROTHERS PTY LIMITED (ACN 009 475 754)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
JUDGE:
PERRAM J
DATE OF ORDER:
17 JULY 2012
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The parties bring in short minutes of order by 31 July 2012 to give effect to these reasons.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 840 of 2009
BETWEEN: DAVIES BROTHERS PTY LIMITED (ACN 009 475 754)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
JUDGE:
PERRAM J
DATE OF ORDER:
17 JULY 2012
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The parties bring in short minutes of order by 31 July 2012 to give effect to these reasons.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 841 of 2009
BETWEEN: NATIONWIDE NEWS PTY. LIMITED (ACN 008 438 828)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
JUDGE:
PERRAM J
DATE OF ORDER:
17 JULY 2012
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The parties bring in short minutes of order by 31 July 2012 to give effect to these reasons.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 842 of 2009
BETWEEN: NATIONWIDE NEWS PTY. LIMITED (ACN 008 438 828)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
JUDGE:
PERRAM J
DATE OF ORDER:
17 JULY 2012
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The parties bring in short minutes of order by 31 July 2012 to give effect to these reasons.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 843 of 2009
BETWEEN: NEWS LIMITED (ACN 007 871 178)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
JUDGE:
PERRAM J
DATE OF ORDER:
17 JULY 2012
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The parties bring in short minutes of order by 31 July 2012 to give effect to these reasons.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 844 of 2009
BETWEEN: NEWS HOLDINGS PTY LIMITED (FORMERLY THE NEWS CORPORATION LIMITED AND NEWS HOLDINGS LIMITED) (ACN 007 910 330)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
JUDGE:
PERRAM J
DATE OF ORDER:
17 JULY 2012
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The parties bring in short minutes of order by 31 July 2012 to give effect to these reasons.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 845 of 2009
BETWEEN: NEWS HOLDINGS PTY LIMITED (FORMERLY THE NEWS CORPORATION LIMITED AND NEWS HOLDINGS LIMITED) (ACN 007 910 330)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
JUDGE:
PERRAM J
DATE OF ORDER:
17 JULY 2012
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The parties bring in short minutes of order by 31 July 2012 to give effect to these reasons.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 846 of 2009
BETWEEN: THE NORTH QUEENSLAND NEWSPAPER COMPANY PTY LIMITED (ACN 009 655 690)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
JUDGE:
PERRAM J
DATE OF ORDER:
17 JULY 2012
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The parties bring in short minutes of order by 31 July 2012 to give effect to these reasons.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 847 of 2009
BETWEEN: THE NORTH QUEENSLAND NEWSPAPER COMPANY PTY LIMITED (ACN 009 655 690)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
JUDGE:
PERRAM J
DATE OF ORDER:
17 JULY 2012
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The parties bring in short minutes of order by 31 July 2012 to give effect to these reasons.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 848 of 2009
BETWEEN: LEADER ASSOCIATED NEWSPAPERS PTY. LTD. (ACN 004 337 446)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
JUDGE:
PERRAM J
DATE OF ORDER:
17 JULY 2012
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The parties bring in short minutes of order by 31 July 2012 to give effect to these reasons.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 849 of 2009
BETWEEN: LEADER ASSOCIATED NEWSPAPERS PTY. LTD. (ACN 004 337 446)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
JUDGE:
PERRAM J
DATE OF ORDER:
17 JULY 2012
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The parties bring in short minutes of order by 31 July 2012 to give effect to these reasons.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 850 of 2009
BETWEEN: ADVERTISER-NEWS WEEKEND PUBLISHING COMPANY PTY. LIMITED (ACN 007 562 950)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
JUDGE:
PERRAM J
DATE OF ORDER:
17 JULY 2012
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The parties bring in short minutes of order by 31 July 2012 to give effect to these reasons.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 851 of 2009
BETWEEN: ADVERTISER-NEWS WEEKEND PUBLISHING COMPANY PTY. LIMITED (ACN 007 562 950)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
JUDGE:
PERRAM J
DATE OF ORDER:
17 JULY 2012
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The parties bring in short minutes of order by 31 July 2012 to give effect to these reasons.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 852 of 2009
BETWEEN: ADVERTISER NEWSPAPERS PTY LIMITED (ACN 007 872 997)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
JUDGE:
PERRAM J
DATE OF ORDER:
17 JULY 2012
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The parties bring in short minutes of order by 31 July 2012 to give effect to these reasons.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 853 of 2009
BETWEEN: ADVERTISER NEWSPAPERS PTY LIMITED (ACN 007 872 997)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
JUDGE:
PERRAM J
DATE OF ORDER:
17 JULY 2012
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The parties bring in short minutes of order by 31 July 2012 to give effect to these reasons.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 400 of 2010
BETWEEN: NEWS AUSTRALIA HOLDINGS PTY LIMITED (ACN 105 197 028)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
JUDGE:
PERRAM J
DATE OF ORDER:
17 JULY 2012
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The parties bring in short minutes of order by 31 July 2012 to give effect to these reasons.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 401 of 2010
BETWEEN: NEWS HOLDINGS PTY LIMITED (FORMERLY THE NEWS CORPORATION LIMITED AND NEWS HOLDINGS LIMITED) (ACN 007 910 330)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
JUDGE:
PERRAM J
DATE OF ORDER:
17 JULY 2012
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The parties bring in short minutes of order by 31 July 2012 to give effect to these reasons.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 55 of 2011
BETWEEN: NEWS AUSTRALIA HOLDINGS PTY LIMITED (ACN 105 197 028)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
JUDGE:
PERRAM J
DATE OF ORDER:
17 JULY 2012
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The parties bring in short minutes of order by 31 July 2012 to give effect to these reasons.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 827 of 2009
BETWEEN: MESSENGER PRESS PROPRIETARY LIMITED (ACN 007 563 439)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 828 of 2009
BETWEEN: MESSENGER PRESS PROPRIETARY LIMITED (ACN 007 563 439)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 829 of 2009
BETWEEN: LOWER BURDEKIN NEWSPAPER COMPANY PTY. LTD. (ACN 010 191 367)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 830 of 2009
BETWEEN: MIRROR NEWSPAPERS PTY LIMITED (ACN 000 015 976)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 831 of 2009
BETWEEN: NATIONAL RUGBY LEAGUE INVESTMENTS PTY LIMITED (ACN 081 778 538)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 832 of 2009
BETWEEN: WESPRE PTY LIMITED (ACN 008 669 841)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 833 of 2009
BETWEEN: NEWS FINANCE PTY (IN LIQUIDATION) (ACN 008 549 095)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 834 of 2009
BETWEEN: RUGBY INTERNATIONAL PTY LTD (ACN 000 369 326)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 835 of 2009
BETWEEN: HARPERCOLLINS PUBLISHERS (HOLDINGS) PTY. LIMITED (FORMERLY HARPERCOLLINS PUBLISHERS (AUSTRALIA) PTY. LIMITED) (ACN 008 431 730)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 836 of 2009
BETWEEN: HARPERCOLLINS PUBLISHERS AUSTRALIA PTY. LIMITED (FORMERLY HARPERCOLLINS PUBLISHERS PTY LIMITED) (ACN 009 913 517)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 837 of 2009
BETWEEN: THE HERALD AND WEEKLY TIMES PTY LIMITED (ACN 004 113 937)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 838 of 2009
BETWEEN: THE HERALD AND WEEKLY TIMES PTY LIMITED (ACN 004 113 937)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 839 of 2009
BETWEEN: DAVIES BROTHERS PTY LIMITED (ACN 009 475 754)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 840 of 2009
BETWEEN: DAVIES BROTHERS PTY LIMITED (ACN 009 475 754)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 841 of 2009
BETWEEN: NATIONWIDE NEWS PTY. LIMITED (ACN 008 438 828)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 842 of 2009
BETWEEN: NATIONWIDE NEWS PTY. LIMITED (ACN 008 438 828)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 843 of 2009
BETWEEN: NEWS LIMITED (ACN 007 871 178)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 844 of 2009
BETWEEN: NEWS HOLDINGS PTY LIMITED (FORMERLY THE NEWS CORPORATION LIMITED AND NEWS HOLDINGS LIMITED) (ACN 007 910 330)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 845 of 2009
BETWEEN: NEWS HOLDINGS PTY LIMITED (FORMERLY THE NEWS CORPORATION LIMITED AND NEWS HOLDINGS LIMITED) (ACN 007 910 330)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 846 of 2009
BETWEEN: THE NORTH QUEENSLAND NEWSPAPER COMPANY PTY LIMITED (ACN 009 655 690)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 847 of 2009
BETWEEN: THE NORTH QUEENSLAND NEWSPAPER COMPANY PTY LIMITED (ACN 009 655 690)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 848 of 2009
BETWEEN: LEADER ASSOCIATED NEWSPAPERS PTY. LTD. (ACN 004 337 446)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 849 of 2009
BETWEEN: LEADER ASSOCIATED NEWSPAPERS PTY. LTD. (ACN 004 337 446)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 850 of 2009
BETWEEN: ADVERTISER-NEWS WEEKEND PUBLISHING COMPANY PTY. LIMITED (ACN 007 562 950)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 851 of 2009
BETWEEN: ADVERTISER-NEWS WEEKEND PUBLISHING COMPANY PTY. LIMITED (ACN 007 562 950)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 852 of 2009
BETWEEN: ADVERTISER NEWSPAPERS PTY LIMITED (ACN 007 872 997)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 853 of 2009
BETWEEN: ADVERTISER NEWSPAPERS PTY LIMITED (ACN 007 872 997)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 400 of 2010
BETWEEN: NEWS AUSTRALIA HOLDINGS PTY LIMITED (ACN 105 197 028)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 401 of 2010
BETWEEN: NEWS HOLDINGS PTY LIMITED (FORMERLY THE NEWS CORPORATION LIMITED AND NEWS HOLDINGS LIMITED) (ACN 007 910 330)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 55 of 2011
BETWEEN: NEWS AUSTRALIA HOLDINGS PTY LIMITED (ACN 105 197 028)
ApplicantAND: COMMISSIONER OF TAXATION
Respondent
JUDGE:
PERRAM J
DATE:
17 JULY 2012
PLACE:
SYDNEY
REASONS FOR JUDGMENT
I. INTRODUCTION........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[1]
II. THE FACTS........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....
[4]
(a) The 1989 events........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..
[5]
Introduction........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....
[5]
The proposed restructure of the News Group........ ........ ........ ........ ........ ........ ........ ..
[8]
The events on and around 31 May 1989........ ........ ........ ........ ........ ........ ........ ........ ..
[17]
The first advances subsequent to the 1989 restructuring on 28 June 1989........ .....
[32]
(i) Did the transaction occur?........ ........ ........ ........ ........ ........ ........ ........ .......
[33]
(ii) How was the transaction settled?........ ........ ........ ........ ........ ........ ........ .....
[42]
(iii) What legal obligations were created and/or discharged by the settlement events?........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
[51]
The advance of 28 December 1989........ ........ ........ ........ ........ ........ ........ ........ ........ .
[53]
(b) The 1991 restructuring and the events of 6 June 1991........ ........ ........ ........ ....
[59]
The redemption by NPL Bermuda of NPIP’s shares........ ........ ........ ........ ........ .......
[62]
The incurring of a liability by NPHP to NPIP........ ........ ........ ........ ........ ........ ........
[72]
The reduction of NPHP’s debt to News Finance and News Limited........ ........ .......
[79]
(c) The alleged advance of 28 June 1991 and the advance of 8 July 1992........ ...
[89]
(i) The alleged advance of 28 June 1991........ ........ ........ ........ ........ ........ ........ ......
[89]
(ii) The advance of 8 July 1992........ ........ ........ ........ ........ ........ ........ ........ ........ ....
[97]
(d) The discharge of NPHP’s liabilities to NPIP in 2001 and 2002........ ........ ......
[101]
The 8 June 2001 repayment........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....
[103]
The final phase in the discharge on 28 June 2002........ ........ ........ ........ ........ ........ ..
[106]
(e) Summary of relevant transactions........ ........ ........ ........ ........ ........ ........ ........ .....
[110]
III. CONSIDERATION........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......
[111]
(a) Characterising the events which occurred........ ........ ........ ........ ........ ........ ........
[121]
(i) The advances and discharges of 31 May 1989, 28 June 1989 and 28 December 1989
[123]
(ii) The advances and discharges of 6 June 1991........ ........ ........ ........ ........ ........ .
[149]
(iii) The advances and discharges of 12 March 1992 and the advance of 8 July 1992
[156]
(iv) The advances and discharges of 8 June 2001 and 28 June 2002........ ........ ..
[157]
(b) Exchange loss issues........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..
[160]
The relevance of accounting evidence........ ........ ........ ........ ........ ........ ........ ........ .....
[164]
(i) Exchange of ‘money’ or exchange of liabilities?........ ........ ........ ........ ........ .....
[182]
(ii) Is Division 3B limited to exchange losses?........ ........ ........ ........ ........ ........ .....
[198]
(iii) The nature of the losses claimed by NPHP........ ........ ........ ........ ........ ........ ...
[203]
(c) Did the losses arise under an eligible contract?........ ........ ........ ........ ........ ........
[222]
(i) Was there an eligible contract?........ ........ ........ ........ ........ ........ ........ ........ .......
[225]
(ii) Did the losses arise ‘under’ the contract?........ ........ ........ ........ ........ ........ .......
[237]
(d) The position of the interest liabilities........ ........ ........ ........ ........ ........ ........ ........
[252]
IV. RESIDUAL MATTERS........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........
[266]
V. RELIEF........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....
[267]
I. INTRODUCTION
In the 2001 financial year News Publishers Holdings Pty Ltd (‘NPHP’) claimed as a deduction A$629,662,666 and in the 2002 financial year A$1,419,051,871. The present proceedings are appeals against Notices of Decision on Objection by which the Commissioner disallowed the deductions.
The losses claimed by the taxpayers are said to flow from currency exchange losses arising, in the 2001 year, by a repayment by NPHP to another entity, News Publishers Investments Pty Limited (‘NPIP’), of US$1,023,453,698 on 8 June 2001 and, in the 2002 year, by a repayment of the balance of its US dollar indebtedness to NPIP on 28 June 2002.
It is not in dispute that if NPHP incurred the currency exchange losses referred to then each of the 18 taxpayers is entitled to a deduction for transferred losses under s 36-17 of the Income Tax Assessment Act 1997 (Cth) (‘the 1997 Act’).
II. THE FACTS
The facts may be divided into four periods:
(a)the 1989 events;
(b)the 1991 restructuring and the events of 6 June 1991;
(c)the alleged advance of 28 June 1991 and the advance of 8 July 1992;
(d)the discharge of NPHP’s liabilities to NPIP in 2001 and 2002.
(a) The 1989 events
Introduction
In the period between 1989 and 2002, all of the applicants were members of the News Group, the ultimate holding company of which was The News Corporation Ltd (‘TNCL’). Until 2004 the shares in TNCL were listed on the Australian Stock Exchange. All members of the News Group, regardless of the jurisdiction of their incorporation, were ultimately controlled by TNCL. To understand the events of 1989 it is necessary to understand the manner in which TNCL’s interests in Australia, the United States and Hong Kong were held by it. In Australia, the local holding company was News Limited. Most of the interests in the United States were held by a company known, perhaps confusingly, as News Publishers Australia Pty Ltd (‘NPAL US’). The News Group also held an interest in the publisher of the Hong-Kong-based English-language daily known as the South China Morning Post. This was held through a company incorporated in Bermuda called News Publishers Limited (‘NPL Bermuda’).
In fact, News Limited (the Australian company) also acted as the holding company of the US interests (NPAL US) and the Hong Kong interests (NPL Bermuda). It owned all of the shares in NPAL US and 48% of the shares in NPL Bermuda. The ownership structure as at 1989, so far as it is relevant, may therefore be depicted as follows:
It should be emphasised that this diagramme has been significantly simplified.
In 1989 News Limited was the chief holding, management and operating company for the News Group in a practical sense. As such its accounts were commonly provided to financial institutions and other counterparties. This made it important for News Limited to be able to demonstrate that it was a company of good financial standing particularly when it came to fundraising. This observation is of some moment because in the late 1980s News Limited had borrowed large amounts to fund its overseas operations. The interest costs associated with that funding operation had resulted in News Limited incurring substantial losses which had significantly depleted its reserves. By 31 March 1989 News Limited’s capital and reserves were approximately negative $239 million.
The proposed restructure of the News Group
The Financial Controller of News Limited at this time was Mr Peter Macourt and he reported to the then Finance Director, Mr Peter Chegwyn. Mr Macourt thought that, although he had no concerns about News Limited’s financial position, its balance sheet had the potential to cause lenders to question its ability to meet its obligations, to cause negative media coverage of its financial position and thereby to impact upon TNCL’s share price and fundraising capacities. Consequently, he formed the view that it would be a good idea to rearrange the News Group so that these issues were resolved. He raised the matter with Mr Chegwyn who instructed him to investigate possible solutions. This he did. The results of that process were embodied in a memorandum written by Mr Macourt which was dated 20 May 1989. In short his proposal was simple: News Limited should sell its interests in Hong Kong represented by its 48% holding in NPL Bermuda and its US interests held through its 100% holding in NPAL US. The sale would be to other members within the News Group and the proceeds of sale would be used to reduce News Limited’s intra-group debt.
At that time News Limited’s principal creditors were News Finance Ltd (‘News Finance’) and News Group Holdings Pty Ltd. Mr Macourt’s memorandum suggested that News Limited owed News Finance two debts of A$176,593,000 and US$758,652,000. At the exchange rates prevailing at the time of Mr Macourt’s memorandum (A$1 = US$0.7450) these two debts would have required, in total, A$1,194,918,000 to discharge. So far as the debts to News Group Holdings Pty Ltd were concerned there appear to have been two: one of £278,024,000 and another of US$391,404,000. At the time of Mr Macourt’s memorandum these would have required A$1,104,590,000 to discharge. It follows that in order to discharge News Limited’s intra-group debt it was likely that it would need to raise from the sale of NPAL US and its 48% interest in NPL Bermuda a sum in the vicinity of A$2,299,508,000 (that is, the sum of A$1,194,918,000 and A$1,104,590,000).
The memorandum went on to suggest that News Limited’s interest in NPAL US might be sold for US$1,823,100,000 to News Group Holdings Pty Ltd which, it will be recalled, was one of its two principal intra-group creditors. So far as its 48% interest in NPL Bermuda was concerned, the proposed sale price was to be US$2,270,000,000 which was then equivalent to A$3,046,980,000.
For the purposes of the present case the events surrounding the sale of NPAL US to News Group Holdings Pty Ltd are of contextual significance only. This is not so, however, in relation to the sale of the 48% interest in NPL Bermuda. Mr Macourt’s memorandum suggested that the interest in NPL Bermuda would be sold to a new entity, NPIP. NPIP would be capitalised to the extent of the required purchase price by NPHP (the central company in this case) and NPHP would, in turn, obtain funds equivalent to the US$2,270,000,000 purchase price by way of two intercompany loans of US$1,815,284,000 and £292,972,000 from News Finance. News Limited would then be in a position to repay the debts owed to News Group Holdings and News Finance. In effect, the News Limited US dollar and Australian dollar denominated debts would be transferred to NPHP and the 48% interest in NPL Bermuda would end up with NPIP which would then be owned by NPHP. It will be noted that this would have left substantial surplus funds in News Limited’s hands – these related to other aspects of Mr Macourt’s restructuring proposal which are not germane to this case.
I infer that Mr Chegwyn received Mr Macourt’s memorandum on or about 20 May 1989 (being the date it bears). He told Mr Macourt that he should arrange for the proposal to be considered by the directors of each of the relevant entities under Mr Chegwyn’s supervision. Mr Macourt thereafter caused to be prepared proposed minutes of meetings of the directors of each of the relevant entities. These were TNCL, News Limited, News Finance, NPHP and NPIP. The actual drafting of the minutes was attended to by Mr Anthony Gregg, then a partner at Clayton Utz. He had previously reviewed Mr Macourt’s proposal although not from a tax perspective.
Without dwelling on the detail of the actual meetings, it suffices to say that the proposal, subject to some variations, was effected by resolutions made on 26 May 1989; settlement appears to have occurred on or about 31 May 1989. The variations were as follows: the originally proposed loans by News Finance to NPHP were respectively US$1,815,284,000 and £292,972,000. These amounts were ultimately reduced to US$1,033,643,102 and £292,971,509 and, at the same time, an additional loan of A$1,000,000,000 was extended. The reasons for these variations are not presently material.
The following events appear also to have occurred: on 26 May 1989 the directors of NPHP and News Finance resolved to execute a standby credit agreement pursuant to which News Finance would provide NPHP with a revolving standby credit facility. This agreement was in fact signed on 31 May 1989. The agreement was to apply to any loans made between 31 May 1989 and 31 March 1992. Under cl 2.1, News Finance agreed with NPHP that it would ‘from time to time and at its discretion make advances to [NPHP] up to a maximum principal sum outstanding not exceeding US$4,000,000,000 or its equivalent in other currencies acceptable to [News Finance]’. The loans would bear interest under cl 4.1 at LIBOR (the London Interbank Offered Rate) plus 0.6975 ‘or such other amount agreed upon from time to time’.
Returning to 26 May 1989, the directors of NPHP, in apparent anticipation that the standby credit facility would be executed, resolved to apply to News Finance for loans of ‘up to’ A$3 billion; at the same time, the directors of News Finance resolved to lend NPHP funds up to that amount or its foreign currency equivalent. The use of the words ‘up to’ reflected the practical matter that the precise figures would not be known until completion (each board resolution authorised the directors or secretary ‘to do all such matters as were required to give effect’ to the resolutions). Mr Macourt explained in his evidence that it was his practice to consult with the Finance Director of TNCL in relation to the question of the funding needed to implement a transaction. That man (a Mr Sarazen) would usually dictate the currency in which funding would be provided by News Finance in order to reflect the sources of funding then available to it. In keeping with that practice, Mr Macourt consulted with Mr Sarazen shortly after the standby credit facility was executed. It was following that discussion – probably on 31 May 1989 – that the final break-up of currencies was determined.
Because the Commissioner contends that there can be no foreign currency exchange losses without an exchange of foreign currency it is necessary to attend in detail to the manner in which settlement occurred.
The events on and around 31 May 1989
The first step appears to have been the completion of a cheque voucher in respect of a cheque which was to be drawn by News Finance. This was signed by at least Mr Chegwyn and Mr Macourt. Prior to Mr Macourt signing the voucher, it had been completed by other persons (who were not identified). At that time it revealed the following information:
PAYEE: SIBHAND PTY LIMITED [scil: the original name of NPHP]
IN PAYMENT OF: LOANS – US$1,796,743,102
– [£]292,971,509
– A$1,000,000[,000]AMOUNT: [A]$2,974,708,426.00
Cheque No: 272461
DATE: 30/5/89
The voucher noted the Australian dollar loan as being for ‘A$1,000,000.00’. A loan of one million Australian dollars, however, is inconsistent with all other evidence on this point. It is clear that the loan was for one billion Australian dollars. I consider the notation on the voucher to be a mistake.
The identity of the bank upon whom this large cheque was to be drawn was not identified on the voucher (which is unexceptional). The cheque in question was not in evidence. Since it was drawn nearly a quarter of a century ago this is unsurprising.
It is, however, clear that cheque 272461 was, in fact, drawn upon the Commonwealth Bank at its branch on the corner of Pitt Street and Martin Place in Sydney. On 31 May 1989 that bank debited an Australian dollar account in the name of News Finance in respect of cheque 272461 in four separate sums totalling A$2,974,708,426. There was another debit on the same day in respect of another cheque, number 272462, which was in the sum of A$297,503,582. These two cheques resulted in debits to the account which totalled A$3,272,212,008. On the same day there were six credits to the same account totalling A$3,272,212,009. It will be observed that there is a A$1 difference. I am unable to say definitively what cheque 272462 related to or what the source of the credits was. However, recourse to Mr Macourt’s memorandum suggests that the net cash flow in and out of News Finance on the occurrence of the restructuring was expected to be equal. As events transpired there appears to have been a A$1 anomaly. The account balance on the day before was A$13,466.48 in debit and, following the activity on 31 May, it was A$13,465.48 in debit.
There is no direct evidence as to who presented cheque 272461. But the following can be determined: on 31 May 1989 NPHP subscribed for 50,000 ordinary shares and 19,400 preference shares in NPIP. According to the subscription application executed by NPHP on 31 May 1989 each ordinary share was issued at a par value of A$1 and a premium of A$9,999; each preference share was issued for A$1 at a premium of A$127,561.29. These imposed on NPHP an obligation to pay NPIP A$2,974,708,426 which is the same amount as cheque 272461. The Australian dollar nature of that obligation is important and should be noted. The application recorded the fact that a cheque in that sum was attached.
Settlement occurred on 31 May 1989. Although there is some evidence to suggest that it occurred on 26 May 1989 (namely, the entries in the register of members) or on 5 June 1989 (namely, the date of the share certificates), I consider that it is much more likely that it occurred on the day the cheques were presented, i.e. 31 May 1989. The magnitude of the cheques are such that it may be inferred that it would be irrational for there to be any delay between settlement and presentation. I so conclude.
There is no direct evidence of what occurred at settlement on 31 May 1989 but the most likely inference is that News Finance handed cheque 272461 to a person representing NPHP and that person then attached it to the subscription application which was then given to a person representing NPIP. The minutes of a directors meeting of NPIP held on 26 May 1989 contemplated that NPIP would purchase News Limited’s 48% holding in NPL Bermuda for US$2,270,000,000 ‘or its Australian Dollar equivalent’. Although Mr Macourt’s memorandum of 20 May 1989 had originally contemplated an exchange rate between the US and Australian dollars of 0.7450 it is apparent that, on 31 May 1989, a rate of 0.7631 was used. Using that rate, the Australian dollar equivalent of News Limited’s selling price for NPL Bermuda was A$2,974,708,426 which was the precise amount of cheque 272461. From that I infer two matters. First, News Limited agreed to accept cheque 272461 in discharge of NPIP’s obligation to pay it the purchase price of US$2,270,000,000; secondly, the cheque was physically delivered to News Limited by NPIP. What precisely happened then may be discerned from a restructuring diagramme in Mr Macourt’s memorandum. Although the figures are incorrect because of their revision on the day, that diagramme makes clear the flow of funds was from News Finance through several interposed entities to News Limited and then back to News Finance. I will not set that diagramme out but it suffices that one may infer from it that the cheque was given by News Limited to News Finance which then presented it for payment. As such News Finance was both the drawer of the cheque and ultimately its holder in due course. Upon presentation the Commonwealth Bank then both debited and credited News Finance’s account at its Pitt Street and Martin Place Branch. This account of events, it may be admitted, is deficient in that it does not provide any explanation of how the A$1 anomaly to which I have referred arose. However, I do not see that as a sufficient reason for rejecting its correctness: de minimis non curat lex.
What then appears to have occurred is this: a few days later on 5 June 1989 NPIP issued the relevant share certificates to NPHP. This shareholding had been entered into NPIP’s register of members on 26 May 1989.
At some time during June 1989 corresponding entries were inserted in the general ledger for NPHP. Although Mr Macourt was ultimately responsible for the maintenance of this general ledger as the financial controller of News Limited, the actual entries were done by News Group accounts staff. Mr Macourt thought this would most likely have been done by reference to the record or records of the actual making of the loans. It seems to me there is no reason not to accept that proposition.
The general ledger for NPHP records borrowings from News Finance in the following amounts:
(a)A$1 billion;
(b)US$1,033,643,102 (equivalent of A$1,354,531,650 at a conversion rate of A$1 = US$0.7631); and
(c)£292,971,509 (equivalent of A$620,176,776 at a conversion rate of A$1 = £0.4724).
The general ledger also records as liabilities three loans owing by NPHP to News Finance as follows:
(a)account number 711-195-745-002 entitled ‘NEWS FINANCE A$ LOAN’ with two entries of A$500,000,000 which total A$1 billion;
(b)account number 711-195-745-003 entitled ‘NEWS FINANCE US$ LOAN’ with two entries of A$454,531,650 and A$900,000,000. These appear besides the words ‘31/5 US$1,033,643,102’ and ‘31/5 US$ @ 7631’;
(c)account number 711-195-745-007 entitled ‘NEWS FINANCE STG LOAN’ (STG being shorthand for ‘pounds sterling’) with one entry for A$620,176,776. This appears next to the words ‘31/5 292,971,509 @ 4724’.
Mr Macourt believed, and I accept, that this is likely to have occurred in June 1989. The copy of the general ledger in evidence bore a date and time of 16 August 1989 at 11:57 pm but this was, I accept, the time at which it was printed out.
One important matter should be noted. The original cheque voucher had suggested a loan of US$1,796,743,102 but the general ledger suggests one of US$1,033,643,102. At the exchange rate recorded in the general ledger (and any other plausible exchange rate) it is plain that the figure on the cheque voucher cannot have been correct. At some time after Mr Macourt signed the voucher but at or before the time the general ledger was completed in June 1989 a person has inscribed the correct figure of US$1,033,643,102 on the cheque voucher. The identity of that person is not known.
It will be necessary later in these reasons to give a precise legal characterisation to the events which I have just described. For present purposes the following should be observed:
(a)NPHP received a cheque from News Finance made payable to it for A$2,974,708,426;
(b)in return for that cheque it incurred a liability to repay to News Finance three interest bearing amounts in three different currencies – Australian dollars, US dollars and pounds sterling;
(c)although it incurred liabilities to repay in these currencies it did not receive any money in US dollars or pounds sterling; instead, it received by delivery only the physical chattel constituted by cheque 272461 with a face value of A$2,974,708,426;
(d)not having a bank account it did not seek to present that cheque for collection and payment through the banking system; and
(e)instead, it either endorsed the cheque to NPIP or, if it was a bearer cheque, negotiated it by delivery to NPIP in discharge of its obligation denominated in Australian dollars to pay NPIP the subscription moneys due on the allotment of the shares.
Although it is certainly true that liabilities to pay foreign moneys were created by these events it is equally clear that no foreign currency in the sense of coin, cash or money held on deposit with a bank or other deposit-taking financial institution actually changed hands. NPHP neither received nor passed anything on but cheque 272461 for A$2,974,708,426. At the moment of settlement NPHP’s Australian dollar liability to NPIP (for the shares) was replaced by a multicurrency debt to News Finance.
Thus was concluded the first stage of the 1989 restructuring. It is now useful to turn to the second stage.
The first advances subsequent to the 1989 restructuring on 28 June 1989
The taxpayers contend that on 28 June 1989 News Limited (not News Finance) lent to NPHP an amount of US$168,456,000 said to be equivalent to A$226,571,621 and that this was used to purchase further shares in NPIP. The Commissioner does not accept that the evidence establishes that this occurred. Three questions arise: (i) did the transaction occur at all; (ii) how was it settled; and (iii) what were the legal obligations created and/or discharged by the settlement events?
(i) Did the transaction occur?
Did News Limited advance funds to NPIP to permit NPHP to subscribe for further shares in NPIP? The answer is yes.
The available evidence is as follows: first, on 21 June 1989, there was a meeting of the directors of NPIP the minutes for which record that ‘on or about 28 June next [i.e. 1989] the company would receive direct from News Limited the sum of US$168,456,000 and which will represent the subscription proceeds by [NPHP]’ for a further allotment of shares in NPIP.
The directors also resolved on 21 June 1989 that, subject to the receipt by NPIP of the sum of US$168,456,000, those shares should be allotted to NPHP. The contemplated allotments were 5,000 ordinary shares each at par value of A$1 and a premium of A$9,999 and such number of redeemable preference shares at a par value of A$1 with the necessary premium to ensure that the cost of the allotment would equate to the Australian dollar value of US$168,456,000.
At another meeting of directors of NPIP held almost two years later (on 17 April 1991) the directors behaved in a way which was inconsistent with there having been no transaction on 28 June 1989. In part the minutes provide:
The Chairman referred to the Minutes of the meeting of Directors held on 21 June 1989 and noted that the sum of US$168,456,000 had been received by [NPIP] on 28 June 1989 and that, accordingly, the allotment to [NPHP] of the ordinary shares and the redeemable preference shares in the capital of [NPIP] referred to in the Minutes of the meeting of Directors on 28 June 1989 had been effected.
This mattered because no share certificates had been issued; consequently, NPIP resolved to issue the relevant share certificates. Specifically, on 17 April 1991 the directors of NPIP resolved to issue share certificates for 5,000 ordinary shares and 1410 redeemable preference shares at a premium of A$125,227.10. The total value of the ordinary and preference shares was A$226,571,621, which was equal as at 20 June 1989 to US$168,456,000.
The clarity with which these minutes record that the transaction occurred is detracted from to a certain extent by its treatment in the general ledgers of NPIP and News Limited. As at 28 June 1989 the general ledger of NPIP recorded a loan to it by News Limited of A$226,571,621 with a description ‘US$168,456,000’. That ledger is not consistent with the transaction contemplated by the directors on 21 June 1989 which did not involve an Australian dollar loan by News Limited to NPIP. Nor is it consistent with NPIP’s subsequent issue of share certificates to NPHP which is inexplicable if the ledger is correct. The position espoused in the general ledger appears, perhaps unsurprisingly, to have found its way into the notes to the audited account of NPIP for the year ending 30 June 1989. Note 9 records that NPIP received a non-interest bearing loan from News Limited for ‘$226,571,621’ which it says ‘was invested in additional share capital of [NPL Bermuda]’. For reasons to which I will return I accept NPIP did acquire further shares in NPL Bermuda.
At a time which I cannot precisely determine, NPIP and News Limited’s general ledgers were varied to reverse the original reference to a loan from News Limited to NPIP. In NPIP’s ledger there is a description ‘ADJJNL’ which Mr Macourt said means a journal entry correcting an earlier incorrect entry in the general ledger. There were corresponding adjustments in the News Limited general ledger which resulted in the reversal of the loan to NPIP and the creation of a loan to NPHP of A$226,571,621 described as ‘NEWS PUB HOLDINGS US$LOAN’. Each of these journal entries bears the date ‘1/7/89’. There is no evidence as to who carried out the entries or when this occurred. It seems to me unlikely, however, that they occurred on 1 July 1989. The audited accounts for NPIP for the year ending 30 June 1989 refer to a loan from News Limited. These were signed by the directors on 29 November 1989. It is unlikely, had the journal entries actually occurred on 1 July 1989, that those accounts would have referred to the loan as being from News Limited. On the other hand the print-outs of the general ledgers which are in evidence are each dated 20 September 1990. I therefore conclude only that the reversals were entered into the general ledger sometime between 29 November 1989, when the directors signed the NPIP accounts, and 20 September 1990, when a ledger appears to have been processed.
A final piece of evidence consists of a facility deed between News Limited and NPHP dated 13 May 1991. On 17 April 1991 the directors of NPHP had resolved that it should be executed as it reflected an advance made to NPHP on 28 June 1989 of US$168,456,000. It recorded an agreement that it was retroactively to apply to loans made from 28 June 1989. It specifically referred to the loan made on 28 June 1989 of US$168,456,000 by News Limited to NPHP. The primary relevance of this agreement, so it seems to me, is that it demonstrates conduct consistent with the loan having taken place on 28 June 1989. Later in these reasons (at [143]-[147]), I conclude that what, in fact, occurred was not a loan by News Limited to NPHP of US$168,456,000, but the incurring by NHPH to News Limited of a debt of A$226,571,621. However, that is unrelated to the question presently under consideration, namely, whether anything occurred at all.
Taking all of this together I cannot, therefore, accept the Commissioner’s submission that it has not been shown that anything occurred on 28 June 1989. Furthermore, the evidence of Mr Macourt and Note 9 to the accounts of NPIP indicate that the purpose of the transaction was to permit the acquisition by NPIP of further shares in NPL Bermuda. Of course, precisely the same structure had been used in May 1989; that is, a loan (on that occasion) by News Finance to NPHP to permit an equity injection into NPIP in turn to permit it to acquire shares in NPL Bermuda. The similarity in the transactional structure provides further comfort in reaching the conclusion that the advance alleged by the taxpayers did occur. The real puzzles of this transaction concern not whether it occurred but how it settled.
(ii) How was the transaction settled?
The original transaction on 31 May 1989 had featured a cheque the delivery of which discharged successive monetary obligations: first, News Finance discharged its obligation to lend to NPHP money by delivering the cheque; secondly, NPHP then used delivery of this same cheque to discharge its obligation to pay the subscription money to NPIP. In the case of the transaction of 28 June 1989, however, there is no direct evidence of the mechanism by which the transaction settled. The minutes of a meeting of the directors of NPIP for 21 June 1989 (referred to above at [34]) had recorded that NPIP would receive the sum of US$168,456,000 from News Limited (not NPHP). This suggests, as one might expect, that NPHP had requested News Limited to pay NPHP the loan money by instead paying it directly to NPIP in discharge of its (NPHP’s) monetary obligation to pay NPIP the allotment consideration. This view of what occurred is supported by Mr Macourt, who swore that NPHP had directed News Limited to pay NPIP. This is important: it signals the presence of a payment by request. What was missing as at 28 June 1989 was any obligation on the part of News Limited to lend money to NPHP. Unlike the May 1989 advances by News Finance, there was no antecedent loan agreement. It is true that the deed of 13 May 1991 purported retroactively to say that what had occurred on 28 June 1989 was a loan by News Limited to NPHP of US$168,456,000. But the fact is that on that day News Limited had no contractual obligation whatsoever to pay NPHP anything by way of loan. Although Mr Macourt called News Limited’s payment to NPIP a payment at the direction of NPHP it was, in fact, a payment by request. No obligation of News Limited to NPHP was discharged by its act of paying NPIP. Instead, as will be seen, rather than a monetary obligation to lend being discharged by the payment to NPIP, what occurred was the creation of a debt owed by NPHP to News Limited flowing from the payment by request.
What moved from News Limited to NPIP? There was no evidence of any payment instrument changing hands (in contradistinction to the settlement of 31 May 1989 which had involved a personal cheque); nor was there any evidence of any form of settlement across the books of one or more banks.
Mr Macourt was cross-examined about this by Mr de Wijn QC, who appeared with Mr Broadfoot and Ms Hespe of counsel for the Commissioner. He was not able to recall any specific payment instrument having been used. Given that the transaction had happened 22 years beforehand this evidence is inherently credible. It does not follow, however, that there was no such instrument.
The fact that there is no direct evidence of how the payment was made by News Limited to NPIP does provide material from which an inference could be drawn that no such payment was ever made. But there is also material from which the opposite inference can be drawn. The first of these is the minutes of the meeting of directors of NPIP of 21 June 1989. These were signed by the Chairman and they indicated an anticipation on NPIP’s part that the money would be received by it ‘direct from News Limited’. The subsequent minutes of 17 April 1991 indicate that such funds had been received on 28 June 1989. These minutes, too, are signed by the Chairman. Both of these documents are business records and were admitted into evidence without objection. They provide, therefore, some evidence of the truth of their contents: ASIC v Hellicar (2012) 286 ALR 501 at 519-20 [69]; [2012] HCA 17 at [69]. In particular, they are evidence that a payment was anticipated to be made by News Limited to NPIP on 21 June 1989 and that by 17 April 1991 it was believed that it had been received on 28 June 1989. One can reach that conclusion without resort to s 251A(6) of the Corporations Act 2001 (Cth) (‘A minute that is so recorded and signed is evidence of the proceeding, resolution or declaration to which it relates, unless the contrary is proved’).
To conclude that there was no payment by some mechanism would be to conclude that the minutes of 17 April 1991 are false. As at that date, the making of a false statement with knowledge of its falsity was an offence against State law: s 1308(2) Corporations Law.
The evidence would not justify the conclusion that such an offence had been committed; that is, there is no material to justify a conclusion that the minutes were knowingly false. The options then are:
(a)no payment took place, the minutes of 17 April 1991 are in error and Mr Chegwyn, who signed the minutes, overlooked the fact the payment had not been made; or
(b)the payment was made, the minutes of 17 April 1991 are correct, Mr Chegwyn correctly signed them but the payment instrument or instruments by which the payment was made have been lost in the intervening years.
Proposition (a) involves concluding that 3 separate mistakes have been made: a mistake in failing to effect payment; a mistake in drawing the minutes; and a mistake in not reading them properly or alternatively in not being informed that the payment had not been made. Proposition (b) involves one mistake, namely, the loss of the instruments.
Since I regard the loss of the instruments as relatively unsurprising (cf. the remarks of Edmonds and Gordon JJ in Federal Commissioner of Taxation v Clarke (2011) 190 FCR 206 at 225 [64]-[65] on the loss of documentation over an extended period) proposition (b) is less complex than proposition (a). I prefer it for that reason.
I conclude, therefore, that News Limited paid NPIP by some mechanism which the evidence does not directly disclose. Given that NPIP did not maintain a bank account and that it had no antecedent indebtedness to News Limited I infer that the payment was made by the delivery of a payment instrument such as a cheque or promissory note. I am not able to determine the precise nature of that instrument or the currency in which it was denominated or what NPIP subsequently did with it.
(iii) What legal obligations were created and/or discharged by the settlement events?
Whatever the nature of the instrument handed by News Limited to NPIP it was accepted by NPIP in discharge of NPHP’s obligation to pay NPIP the subscription monies for the issue of shares. No such process of discharge occurred between News Limited and NPHP. News Limited had no obligation to lend NPHP money and did not do so. Instead, it merely performed an act at NPHP’s request, which discharged NPHP’s monetary obligation to pay subscription monies to NPIP. I deal with the legal consequences of this below at [143]-[147].
I turn then to the second further advance.
The advance of 28 December 1989
The applicants contend that on 28 December 1989 NPHP borrowed a further US$204,000,000 from News Finance to purchase more shares in NPIP. Again, the Commissioner submits that the evidence does not sufficiently establish this matter.
The general ledger for News Finance for the year ended 30 June 1990 records an entry dated 28 December 1989 for A$256,120,527 for the account 745-195-711-003 which was entitled ‘NEWS PUB HOLDINGS US$ LOAN’ and described as ‘28/12 204M @7965’.
The minutes of a meeting of directors of NPHP dated 28 December 1989 record a decision to subscribe for further preference shares in NPIP for the Australian dollar equivalent of US$204 million. The minutes of a meeting of directors of NPIP dated 14 August 1991 suggest that the issue of the share certificate was overlooked until that time. There is no direct evidence of what NPIP used the proceeds of this share allotment for. Mr Macourt swore, however, that it was used by NPIP to purchase more shares in NPL Bermuda. At this time Mr Macourt remained the financial controller of News Limited and was responsible for the supervision of the general ledger in question. I see no reason not to accept his evidence about this.
Accordingly, I conclude that to meet its obligations to pay NPIP the subscription moneys, NPHP incurred a liability to News Finance which was accounted for in US dollars. Because the general ledger records an Australian dollar sum I infer that, as with the earlier allotments, the consideration required by NPIP from NPHP was denominated in Australian dollars. This is consistent with NPHP’s subscription obligation itself being denominated in Australian dollars. I am unable to determine the precise mechanics of the settlement but, by whatever means News Finance satisfied its obligations to NPHP, I am clear that this was not done by anything which might be called a payment of coin, cash or debts owed by deposit-taking financial institutions. At the end of this transaction, NPHP had exchanged an Australian dollar liability to NPIP for the allotment of shares in it for a debt obligation to News Finance denominated in US dollars. Because it will be relevant later, it should be stated that this advance by News Finance to NPHP was governed by the standby credit agreement of 31 May 1989 (see above at [14]). I also infer that News Finance’s act of making the loan followed upon a determination by it that it would do so, thereby triggering an obligation upon it to lend under the agreement.
One further matter which should be noted is that whilst NPIP had originally acquired News Limited’s 48% interest in NPL Bermuda, the effect of the two further advances just considered and their utilisation by NPIP to acquire further shares in NPL Bermuda must, as a matter of arithmetic, have increased NPIP’s shareholding in NPL Bermuda beyond 48%.
It is necessary now to turn to what the taxpayers referred to as the 1991 restructuring.
(b) The 1991 restructuring and the events of 6 June 1991
During the 1990 financial year the group’s current borrowings (that is, those due within the next 12 months) increased by 500% from A$500 million to A$3 billion. On top of that, its long-term debts were in the order of A$7.5 billion. This debt burden, together with the downturn in the world economy, gave rise to what the Chairman and Chief Executive of TNCL, Mr Rupert Murdoch, described as ‘a severe liquidity crisis’ within the group. The crisis was resolved by a renegotiation of terms with the News Group’s external creditors. The group undertook a reorganisation of its worldwide operations in 1991 in response to the terms of that renegotiation. The purpose of the reorganisation from the Australian operations’ perspective was to enable News Finance to retire about US$2 billion owed to an English News Group entity, Ordinto Investments.
In May 1991 the directors of TNCL, News Limited, NPIP and NPHP agreed to a reorganisation of the News Group’s assets in order to reduce foreign related party debt. According to Mr Macourt, the reason this was to be done was to increase the profitability of the Australian operations. It was anticipated that this would generate increased franking credits which could then be distributed to shareholders as franked dividends.
In very broad summary what happened was this: NPL Bermuda redeemed the shares held by NPIP for a price of US$3,020,000,000. Part (but not all) of those funds was then lent by NPIP to NPHP and thereafter used by NPHP to reduce the extent of its debt to News Finance and News Limited. In turn, News Finance used the funds to reduce its liabilities to Ordinto Investments. These transactions are complicated by the use of a large number of promissory notes none, apart from one, of which was presented for payment.
The redemption by NPL Bermuda of NPIP’s shares
One begins then with an agreement entered into on 4 June 1991 between NPIP and NPL Bermuda entitled ‘SHARE REDEMPTION/PURCHASE AGREEMENT’. The directors of NPIP resolved on 31 May 1991 that this agreement should be executed. The minutes recited the need for the Australian companies to reduce ‘foreign related party debt’ which I take to be a reference to the liabilities to Ordinto Investments. They also record the Chairman saying that ‘this course could best be achieved by [NPIP] repatriating its investment in [NPL Bermuda] in which it held a 48% interest’. For the reason I have flagged above at [57] this cannot be correct – NPIP had initially acquired 48% of NPL Bermuda but had also acquired further shares in NPL Bermuda as a result of the further advances of 28 June 1989 and 28 December 1989. In any event, the board of NPIP resolved to enter into the redemption arrangement. The subscription agreement does not mention the 48% but it does identify three parcels of NPL Bermuda shares which is consistent with the idea that NPIP made three separate acquisitions of shares. The sale price was agreed to be US$3,020,000,000 ‘in lawful currency of the United States’. The agreement, by cl 10, was to be governed by the laws of Bermuda.
As it happens, NPL Bermuda did not give to NPIP US$3,020,000,000 ‘in lawful currency of the Unites States’. Instead the obligation to do so was satisfied – I infer with NPIP’s consent – by the delivery of a note for US$3,020,000,000 issued by NPL Bermuda to NPIP. This occurred on 6 June 1991. The note was entitled ‘UNSECURED DEMAND LOAN NOTE’. It was expressed to be subject to the laws of Bermuda and was issued under the seal of NPL Bermuda.
In the case of this transaction there exists the historical advantage that the solicitor, Mr Gregg, kept a detailed memorandum of what occurred which was prepared within a relatively short time after the transaction.
According to Mr Gregg’s memorandum, NPL Bermuda then ‘satisfied’ its liability on the note by distributing to NPIP sixteen promissory notes held by NPL Bermuda. This also occurred on 6 June 1991. Although Mr Gregg’s memorandum does not say this in terms, I infer that the unsecured demand note was redelivered to NPL Bermuda resulting in its satisfaction. I make that assumption because Mr Gregg’s memorandum suggests that the unsecured demand note was satisfied by the endorsement to NPIP of several promissory notes then held by NPL Bermuda. Parts of the evidence suggest that the notes may have been ‘transferred’; in addition, two witnesses who were present at the settlement – Mr Zelkha of Ernst & Young and Mr Traill of Arthur Andersen & Co – gave evidence that they saw the endorsements actually occur. Mr Gregg’s memorandum uses the expression ‘assigned by endorsement’. It seems to me that Mr Gregg’s memorandum is the most reliable account of what occurred. To that I would add this: Mr Gregg was cross-examined before me and it would be fair to say that I obtained the impression that detailed, correct and precise terminology was important to him. For example, Mr Gregg was cross-examined by Mr de Wijn about another unsecured demand note in these terms:
Yes. Now, can I then ask you to go to – so can I then ask you to go to the note that’s at page 587? --- Yes
Is that a note that you prepared? --- Yes
And that was a note that was issued as the consideration for the assignment of seven promissory notes, was it not? --- It was – I would not express it that way. It was issued as consideration for a loan.
Okay? --- A US dollar loan
Okay. No US dollars were advanced to [NPHP], were they? --- Correct. They were not.
And no Australian dollars were advanced to [NPHP]? --- Correct. They were not.
And the only relevant transaction that moved the issue of the note that you see at page 587 is the transfer to NPHP of a series of promissory notes; is that correct? --- I think you said the only relevant transaction. The parties agreed – these were my instructions and this, I think, I have documented – the parties agreed that there would be a US dollar loan which would be made and evidenced by the endorsement of these loan notes.
So the – so are you saying that the loan was a loan of the notes? --- No, the loan was not a loan of the notes.
It may be that the taxpayers’ submission is really addressed to the issue of quantification. But even so, I do not think it matters. The initial conversion of Australian dollars into pounds sterling was certainly a conversion event. Once that conversion had occurred NPHP was exposed to the potential of fluctuations in the value of the Australian dollar. The exchange rate in which that fluctuation risk initially arose was the Australian dollar – pound sterling rate. The exchange by NPHP of its liability in pounds sterling for a liability in US dollars simply changed the exchange rate in which the fluctuation risk existed to another exchange rate (the US dollar – Australian dollar exchange rate).
Against this the Commissioner submitted that what had occurred was not a refinancing and that the loan to NPIP was a fresh loan disconnected from the antecedent transactions. I reject this: one liability was used to extinguish the other. It was a refinancing.
As to the events of 28 June 1991: first, as explained above this transaction actually occurred on 12 March 1992. Secondly, despite that, the effect of the transaction was that NPHP reduced its antecedent Australian dollar debt to News Finance by incurring a US dollar liability to NPIP. It was, therefore, a conversion event. The fact that the incorrect promissory note was used has no consequence: in both cases its delivery was treated as a discharge of the underlying monetary obligation.
The taxpayers did not rely on the transaction of 8 July 1992 as a conversion event (and it was not, in any event, such a transaction).
As to (iii): s 20(1) of the 1936 Act provided at the relevant time:
For all the purposes of this Act, income wherever derived and any expenses wherever incurred shall be expressed in terms of Australian currency.
This had the effect of requiring NPHP to express its interest obligations to NPIP in Australian dollars (which it did in each income year). It is not controversial that, in some circumstances, the operation of s 20(1) can bring about an event which may give rise to an exchange loss or gain where the expenses involved are paid at a later time and when the exchange rate has shifted in the intervening period: Texas Co (Australasia) Ltd v Federal Commissioner of Taxation. It was for that reason that the taxpayers submitted that the expression by it of the interest due to NPIP on the US dollar facility in Australian dollars was an initial conversion event.
The Commissioner did not really doubt that proposition. Instead he submitted that the interest had been capitalised by being added to the loan principal and had thereby lost its character as income. This mattered because it is established that s 20 does not apply on capital account: Energy Resources (High Court) at 77.
Below at [252]-[265] I reject the proposition that the interest lost its quality as income. It follows that I accept that s 20(1) operated and that each debiting of interest was a conversion event.
I turn then to the outward events. In the case of the 8 June 2001 event NPHP converted a US dollar liability to NPIP into an Australian dollar liability to TNCL. This was a conversion for the purposes of Division 3B. In the case of the 28 June 2002 event NPHP effectively discharged the remaining US dollar debt to NPIP using an Australian dollar debt owed by NPIP to it. In other words, it discharged a US dollar liability with an Australian dollar debt. This was a conversion event.
For those reasons I accept the taxpayers’ case on conversion events save for three matters:
(a)I find that there was no exchange of currencies on 28 June 1989, but that there was a conversion event in respect of the liability incurred on that day on 6 June 1991;
(b)I do not accept that the sterling – US dollar conversion was relevantly a conversion event; and
(c)whilst I accept that the 28 June 1991 event was a conversion event I find that it occurred on 12 March 1992.
It follows, subject to those matters, that I accept that the losses claimed were losses within the meaning of Division 3B.
(c) Did the losses arise under an eligible contract?
The two basic questions which arise here are whether the taxpayers can identify an eligible contract and then whether they can prove that the above losses arose under it.
The taxpayers submitted that the exchange losses had been incurred ‘under’ the unsecured demand note of 6 June 1991 for US$2,847,080,544. This was because they had been incurred in the process of discharging NPHP’s obligations to NPIP under that note. The necessity for the losses to arise ‘under’ the note arose from the language of s 82Z(1) which permitted deduction of exchange losses only so long as they were ‘incurred by a taxpayer in a year of income under an eligible contract’. An eligible contract was defined in s 82V(1) to mean a contract entered into after 19 February 1986.
The Commissioner’s response to this was twofold: the unsecured demand note was not a contract; the losses did not arise under its terms.
(i) Was there an eligible contract?
The Commissioner’s first contention requires analysis of the nature of the unsecured demand note and the circumstances surrounding its creation. The Commissioner’s initial contention was that the note was a promissory note and that a promissory note was not a contract, being a creature of the law merchant. The taxpayers parried this thrust with an emphatic denial that a promissory note could not be a contract. Further, perhaps spurred on by Mr Gregg’s confident evidence under cross-examination that the unsecured demand note was not a promissory note at all (see, for example, [65]-[66] above), the taxpayers then put that, in truth, it was a debenture. So viewed it was to be seen as a non-negotiable security for a loan transaction. The taxpayers thereafter maintained their argument about the contractual nature of promissory notes as a backstop to be called up only if the debenture argument fell over. During the taxpayers’ address in reply a variant on these arguments was developed: immediately preceding the 1991 transaction there had been an agreement between the parties that NPHP would borrow, and NPIP would lend, the money the subject of the demand note. Viewed from that perspective the demand note was evidence of the terms of an antecedent agreement and it was the agreement which was the eligible contract.
This last version of the arguments was, in fact, the one originally advanced by the taxpayers in their Further Amended Appeal Statement. There it was said that the losses had been suffered under an eligible contract consisting of ‘the contract of loan evidenced by the Unsecured Demand Note’.
In my opinion it is the final (and first) argument of the taxpayers which is sound. One begins with the physical reality of what occurred on 6 June 1991 in London. By the time the settlement meeting had arrived at this transaction Mr Gregg was acting for both NPIP and NPHP. Wearing his hat as NPIP’s attorney he delivered to NPHP the seven promissory notes referred to above at [74]. In return, wearing his hat as NPHP’s attorney, he delivered the unsecured demand note. This was a process of exchange and it was simultaneous. Such a process of exchange is consistent both with the existence of an anterior contract and with the inconsistent proposition that the terms of the loan were to be sourced exclusively in the unsecured demand note itself. Put another way, the exchange event may reflect the playing out of events ordained in a pre-existing agreement. On the other hand, the parties may have had no pre-existing agreement contenting themselves instead that the money would be advanced simultaneously with the delivery of a note both acknowledging and regulating the debt which then arose. It is necessary, therefore, to look further afield and beyond the exchange event itself to determine what the parties intended.
The language of clause (i) of the note (which is set out above at [75]) is consistent, in part, with the concept of an antecedent contract: ‘In consideration of [NPIP] making a loan of US$ 2,847,080,544 to [NPHP] on 6th June 1991 by the endorsement and delivery of certain notes to [NPHP],…[NPHP]…promises to pay bearer (the “Holder”) on demand the sum of…US$2,847,080,544’. This is consistent with the existence of a pre-existing contract because the words ‘In consideration of…’ do not reflect the reality of the exchange situation. The loan could not be the consideration for the promise to pay (evidenced by the note) because at delivery it was already past consideration. Those words are apt to suggest that the note was documenting something which had already occurred. Only by locating the agreement between the parties before the legal moment of exchange perfected by Mr Gregg can the words ‘In consideration of…’ be rescued from legal meaninglessness and only then by reading them as historical.
Other aspects of the note perhaps point in other directions. For example, clause (iv) specified that the note might be transferred or assigned with NPHP’s prior consent but that it was not a negotiable instrument. It may be that clause (iv) lends some support to the idea that there was no antecedent contract because it suggests, perhaps obliquely, an anticipation that the parties might look to the instrument alone for their rights (it may also be that it has the precisely opposite effect).
I do not think that it would be easy to resolve what NPHP and NPIP intended if recourse were to be had merely to the terms of the note and the exchange event. Fortunately, this is not necessary. The documentation preceding settlement on 6 June 1991 shows, to a tolerable degree of clarity, that the parties had intended there to be a loan agreement. This material is as follows:
The minutes of a meeting of the board of directors of NPIP dated 31 May 1991. These recorded, inter alia, that ‘The Chairman also noted that it was proposed that [NPIP] would apply the balance of the loan receivables referred to…above by interest bearing, on demand, loan to [NPHP], its immediate holding company, and that such loan be effected by [NPIP] in favour of [NPHP] of the balance of such loan receivable distributed to [NPIP] by NPL [Bermuda]’.
The minutes of a meeting of the directors of NPHP held on 5 June 1991. These minutes are set out above at [76]. Important factors include the reference at [5(a)] to a decision to borrow the money on the terms of a note to be determined and the statement at [1] that the loan ‘would be evidenced by [NPHP] issuing to [NPIP] a Demand Promissory Note bearing a market rate of interest’ (emphasis added).
From these minutes I would infer: the existence of an antecedent agreement that NPHP would borrow from NPIP the sum of US$2,847,080,544; that the loan would be at a market rate; and that the final terms would be evidenced in the terms of the unsecured demand note to be drafted by others. On this topic, I was also referred to two memoranda prepared after the settlement occurred which recorded the settlement procedure. Beyond establishing the physical events which I have described above, I do not think that they advance matters. The existence of an antecedent agreement was, however, supported by a facsimile from Mr Traill to Mr Macourt dated 6 June 1991. It stated that ‘Today, the following transactions will occur…The remaining notes will be assigned [by NPIP] to NPHP by way of loan to NPHP for US$2,847,080,544’.
I conclude, therefore, that there was a contract between NPIP and NPHP on, or perhaps shortly before, 6 June 1991 and that under the agreement NPHP incurred a liability to NPIP for an on-demand US-dollar-denominated interest bearing debt. The terms of this agreement were reflected in the unsecured demand note which was delivered.
It follows that I reject the Commissioner’s primary contention that there was no eligible contract because there was no contract at all. Strictly that makes it unnecessary to enter the fray as to whether the unsecured demand note was a promissory note. Whether it was a promissory note or not had no impact on the antecedent contract whose terms it evidenced. In Emu Brewery Mezzanine Ltd (in liq) v Australian Securities and Investments Commission (2006) 32 WAR 204 the appellant issued an information memorandum inviting investors to participate in a fundraising proposal under which it would issue promissory notes. To obtain a note an investor had to fill out an application form which was expressed to be executed as a deed. Although there was some disagreement between McLure JA, on the one hand, and Pullin and Buss JJA, on the other, about some aspects of the characterisation of the transaction in question, all proceeded on the basis that there was an agreement for loan separate from the promissory notes by which the loan was carried into effect. Indeed, McLure JA said (at 209 [12]): ‘It is not unusual for a promissory note to co-exit with another underlying agreement.’
It is not necessary, therefore, for me to reach a concluded view on whether the unsecured demand note was a promissory note so that it could not also be a contract.
(ii) Did the losses arise ‘under’ the contract?
Here the argument of the Commissioner was that that the loan agreement evidenced by the unsecured demand note did not contain any term requiring, or authorising, NPHP to convert currency.
This result can be achieved only if the language of ss 82Y and 82Z that the losses or gains should occur ‘under an eligible contract’ requires it. This in turn directs attention to the word ‘under’ and the nouns which are governed by it. These are, respectively, ‘gain’ (s 82Y) and ‘loss’ (s 82Z). If the words ‘under an eligible contract’ invoke notions of authorisation and permission then they must do so in respect of gains and losses and not in respect of the exchange transactions which conceptually prefigure them. It is, however, unwarranted to suggest that the words ‘under an eligible contract’ require the gain or loss claimed itself to be authorised by the contract. If that were a correct reading it would make very problematic the references to loans and options in ss 82W and 82X.
A safer approach in my opinion is to adopt the approach of Gummow J in Energy Resources (Full Federal Court) where his Honour said this of the provisions (at 53B & 54D):
In ordinary parlance, to speak of a gain being made “under” an eligible contract suggests that the gain was made in exercise of a right or discharge of an obligation conferred or imposed, as the case may be, by the terms of the eligible contract.
…
In my view, a currency exchange gain, for the purposes of the Division, shall be taken to have been made or incurred under an eligible contract when realised in respect of currency purchased in the exercise of rights or the performance of obligations arising under the terms of the eligible contract.
One such example would be a contract for the sale of goods by an Australian buyer or seller where the money of account and of payment, or the money of payment, was not Australian currency. Another would be a hedging contract entered into in relation to the primary contract.
This is inconsistent with the Commissioner’s approach as is, I think, the acceptance by Hill J in the same case that the repayment of a loan could generate a loss under an eligible contract (at 72G-73B). The Commissioner pointed to other cases where the expression ‘under a contract’ had been interpreted usually to require the location of the right in question from amongst the fabric of a particular contract’s terms. Reference was made in particular to Federal Commissioner of Taxation v Sara Lea Household & Body Care (Australia) Pty Ltd (2000) 201 CLR 520 and Chan v Cresdon Pty Ltd (1989) 168 CLR 242 at 249. I do not think, however, that these assist. In both cases what was involved was the question of rights and obligations and their relation to the contract in question. In this case ss 82Y and 82Z search not for a right but instead for a loss or gain ‘under an eligible contract’. Those words are apt to provide good reason to distinguish those authorities.
The Commissioner also relied on a passage in the High Court’s decision in Energy Resources (at 79):
Where a taxpayer borrows money on capital account in US dollars and repays the loan in US dollars, it makes no revenue profit or loss from the borrowing even though the exchange rate may be different at each date. Indeed, arguably it makes no profit or loss. If it converts the US dollars that it receives into Australian dollars and then converts Australian dollars into US dollars to repay the loan, it may make a profit or loss on the transaction. But the profit or loss results from the exchange transaction and not from the borrowing.
(Emphasis added; references omitted.)
This provides, on its face, some support for the Commissioner’s position. However, the statement appears in a section of the judgment which was not concerned with Division 3B. The argument which was being addressed was whether any loss had been suffered at all. On the other hand the Court dealt with the Division 3B issue this way (at 81):
Division 3B has no application to the present case. In so far as the cost of the discount represents a loss to the taxpayer, it was a revenue loss. Consequently, Div 3B has no application (s 82U(1)). Furthermore, for the reasons that we have already given, the taxpayer made no currency exchange gain or loss. The unit of account and the unit of payment under the contract or contracts involved in this case were US dollars. The taxpayer made no gain or loss under those contracts that was “attributable to currency exchange rate fluctuations”.
(Emphasis added.)
The emphasised words refer back to the passage relied upon by the Commissioner but only in regard to the question of whether the loss had occurred. I do not read the Court as giving any consideration to the meaning of the expression ‘loss…under an eligible contract’.
For those reasons I accept that it is sufficient for the purposes of Division 3B for a loss to result from the repayment, as here, of a foreign currency loan when there has been a decline in the value of the Australian dollar. In such cases the loss arises under the loan agreement.
That conclusion is sufficient to entitle the taxpayers to the losses claimed resulting from the decline in the comparative value of the Australian dollar from 6 June 1991 to June 2002, that is the losses arising from its loans from NPIP. It does not explain quite so readily how it is entitled to the losses arising from the original advance in US dollars and pounds sterling in 1989 from News Finance. This is because, on one view, those transactions had run their course by 6 June 1991 by the partial refinancing by NPIP.
On balance I do not consider this is a problem. The first reason this is so relates to an obvious avoidance issue. Bearing in mind the fact that the present debate applies equally to gains as well as losses, the scheme of Division 3B could be defeated if a substantial proportion of the loss could be confined to a different eligible contract to the one under which the final realisation event occurs. For example, if A borrows US dollars from Bank X and uses this to buy Australian dollars and there is thereafter a substantial increase in the Australian dollar then the ensuing gain which would be made on reconversion and repayment may be evaded, on the Commissioner’s arguments, by refinancing the debt with a new bank, Bank Y, just before repayment.
The second reason relates to the first and that is, as the taxpayers correctly submit, the reference to ‘eligible contract’ in ss 82Y and 82Z includes a reference to the plural: s 23(b) Acts Interpretation Act 1901 (Cth). It is possible therefore for there to be more than one eligible contract under which the gains or losses arise. Here this would include the 1989 facility agreement between NPHP and News Finance under which the May 1989 advances occurred.
Since the advance of 28 June 1989 did not involve a conversion event the question of an eligible contract does not arise.
In the case of the advance of 28 December 1989 by News Finance, the eligible contract is provided by the original standby credit facility of 26 May 1989 which was to govern future loans as well as well of those of 26 May 1989.
The Commissioner’s next response to this was to submit that the events of 6 June 1991 operated as a complete severance from the events of 1989. They were not to be seen as a refinancing of the same obligation. As I have said above at [212], I do not accept this. What was involved was, in my opinion, a refinancing of Australian dollar and pound sterling debt into US dollar debt alone.
The taxpayers are therefore entitled to succeed in respect of the conversion events they nominate, subject to what I have said at [220]. It is not necessary to deal with the taxpayer’s argument that they suffered a loss on the conversion of the sterling debt into the US dollar debt. Had it been necessary I would have considered that the losses contemplated by Division 3B are Australian dollar losses.
(d) The position of the interest liabilities
Section 20 of the 1936 Act required the US dollar interest debited to NPHP to be converted to Australian dollars as it was incurred. Its operation was that the Australian dollar value of the interest was determined as the loan progressed and recorded as such. On the other hand, NPHP did not use an Australian dollar resource to repay the principal until 2001 and 2002.
The first question which arises concerns the losses arising as a result of the interest charges. The taxpayers’ and the Commissioner’s primary submission was that the interest had been ‘capitalised’ and therefore was not a revenue account. This position appears to have been taken, as a matter of fact, in NPHP’s returns for the years ending 30 June 2001 and 2002. Then, drawing on the principle that foreign currency gains or losses realised on the discharge of a liability take their character from the liability discharged, it was submitted that the losses arising from the devaluation in the Australian dollar were also on capital account. Consequently, they were claimable under Division 3B.
Why had the interest been capitalised? The only substantive answer to this question proffered by either party was that there had been an account stated whereby the pre-existing debts (consisting one assumes of both principal and interest) had been converted into a new fresh debt in which the principal/interest components had merged and had no longer maintained an independent existence.
There is no doubt that an account stated has that effect. ‘If the debt is discharged, whether by account stated, by payment or by other means, a liability which takes its place will be of a different character’: Bank of New South Wales v Brown (1983) 151 CLR 514 at 546 per Brennan J.
However, in this case the evidence for an account stated falls well short of the mark. It rests on Mr Macourt’s claim that at the end of each year the accrued interest was added to the principal. The adding of interest to a principal sum in a set of accounts occurs in every case in which compound interest is charged. The mere fact that interest is added to principal and interest charged thereon does not create, in an ordinary case, an entirely new debt. This, in fact, was the very question decided in Brown. Gibbs CJ put it this way (at 523):
When, in accordance with normal banking practice, accrued interest is debited to a customer’s current account, and itself bears interest, it may be convenient to say that, as between the banker and the customer, and those who stand in their shoes, the interest is treated as capital. In truth, however, the interest is not converted into capital, and the rights of third parties must be determined on the footing that the interest retains its character as such.
Brennan J (at 545-546) made the same point, as did Dawson J (at 555). The reasons for judgment of Mason and Wilson JJ avoided precisely answering the question but they provide very little comfort for it (at 531-532).
There are cases where the arrangement between the parties can have a different effect. Gordon J’s recent decision in BHP Billiton Finance Ltd v Federal Commissioner of Taxation (2009) 72 ATR 746; [2009] FCA 276 is an example. There the agreement included cll (b) and (g) whose effect was that at the end of each period the total of the then existing principal and interest was rolled over into a new loan: see [21]. Applying Brown her Honour concluded that the interest had been truly capitalised: [154]. Those facts are far from the facts of this case. On no view was a new loan involved. Accordingly, I do not accept that the interest was ‘capitalised’; it was merely added to the principal. ‘The total sum may appropriately be described as “principal”, but capitalization in this sense is no legal alchemy for changing the character of a debt for interest’: Brown at 546 per Brennan J.
It seems to me, therefore, that the taxpayers’ primary case on this point fails. However, sensibly enough, they put an alternative argument that they were entitled to claim the losses on revenue account. Having referred to Mr Macourt’s evidence on the capitalisation of interest, the taxpayers’ written submission continued:
If this does not amount to an account stated, and it is submitted that it does not, the accrued interest liability would remain as a liability on revenue account until it was discharged on 28 June 2002. It follows that the currency exchange loss realised on the discharge of that liability would also be on revenue account and, accordingly, that the currency exchange loss would be deductible under s8-1 in the year of income ending 30 June 2002.
I accept this submission.
The Commissioner’s submissions on the taxpayers’ arguments about interest were as follows:
(a)the interest had been capitalised and was no longer on the revenue account;
(b)in any event, the terms of the demand note did not permit the charging of interest on unpaid interest. It followed that the charging of the interest had to have occurred under a separate contract and the terms of that contract had not been sufficiently proved;
(c)there was no actual expenditure or disbursement in 2002 ‘involving a conversion of currency’.
I do not accept any of these arguments. As to (a), for the reasons already given the capitalised interest did not lose its character as income. In any event, the taxpayers’ case on this point was an alternate argument which only arises on the hypothesis that Division 3B does not apply, i.e. that the interest charges are not on capital account.
As to (b), I agree that the terms of the unsecured demand note did not provide for the charging of interest on unpaid interest. But, contrary to the balance of the submission, the terms of the agreement under which interest was charged are perfectly plain. Both NPIP and NPHP assented to an arrangement under which interest was charged on interest on the same terms as specified in the unsecured demand notes.
As to (c), it is true that Dixon J spoke in Armco (Australia) Pty Ltd v Federal Commissioner of Taxation (1947) 76 CLR 584 at 618 of foreign currency losses arising from the operation of accruals accounting on a transaction denominated in foreign currency when ‘actual’ expenditure occurred at a later date and the exchange rate had moved. It is implicit in this submission that the discharge which occurred was not actual. In light of the Commissioner’s acceptance that the transactions were real ones it is difficult to accept this submission. A variant of it was to insist that there needed to be an ‘actual’ ‘conversion of currency’. In that form, the argument was a rebadged version of the Commissioner’s argument under Division 3B. But there is nothing in Armco which requires actual currency to change hands.
In those circumstances, I reject the Commissioner’s arguments. The interest was on revenue account and was deductible under s 8-1 and s 51.
IV. RESIDUAL MATTERS
There was an issue between the parties as to whether the exchange rates which were to be used were the internal rates used by the News Group or the published spot rates. What the taxpayers are entitled to claim is the losses arising from fluctuations in currency exchange rates. The Act does not specify spot rates. So long as the rates used are bona fide (and there is no suggestion in this case they were not), I do not see why the spot rate must be used.
V. RELIEF
The taxpayers have succeeded in showing that the assessments are excessive. I do not think, at least at this stage, that I should attempt to assess the taxpayers’ liability myself. This is because my conclusions that there was no conversion event on 28 June 1989 and that the promissory note apparently issued on 29 June 1991 was in fact delivered on 12 March 1992 may affect the calculations.
The appropriate course in each mater is to set aside the objection decision and to order the Commissioner to determine the taxpayer’s objection in accordance with this Court’s reasons. The Commissioner must pay the taxpayers’ costs. Given the number of matters I will direct the parties to bring in short minutes reflecting these conclusions by 31 July 2012.
I certify that the preceding two hundred and sixty-eight (268) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Perram. Associate:
Dated: 17 July 2012
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