Robe River Mining Co. Pty Ltd (Formerly Cliffs Western Australian Mining Co. Pty Ltd) v Commissioner of Taxation

[1988] FCA 498

JUDGMENT No. 4 8.1 88. ........

C A T C M W O P D S

TAXATION - practice and procedure - loans f o r allowable capital expendlture - whether forelgn exchange losses o n loans allowable capital expenditure - prellmlnary questlon - dlsposltlve of appeal if adverse to applicant - relevant principles - conslderable saving in tlme and expense.

Federal Court Rules	0.29
Car1 Zeiss Stiftung v Herbert Smith & Co. L19691	1 Ch. 93

TVW Enterprlses Ltd v Duffy (Unrep. 28/3/85 Toohey J.)

Orison Pty Ltd v Strateglc Minerals Corporation NL (1987) 77 ALR

141

ROBE RIVER MINING CO. PTY LTD (FOKmerly Cllffs Western Australlan

Mining CO. Pty Ltd) v THE COMMISSIONER OF TAXATION OF THE

COMMONWEALTH OF AUSTRALIA

Nos. WAG 158, 159 and 160 of 1987

FRENCH J.
PERTH

21 APRIL 1988
IN THE FFDERAL COURT	)
OF AUSTRALIA	)
WESTERN AUSTRALIA	)
DISTRICT REGISTRY	)
GENERAL DIVISION	) Nos. WAG 158, 159 and 160 of 1957
B E T W E E N :	ROBE RIVER MINING CO. PTY LTD (Formerly Cliffs Western Australian Mining Co. Pty Ltd)

Applicant

and

THE COMMISSIONER OF TAXATION OF THE

COMMONWEALTH OF AUSTRALIA

Respondent

MINUTE OF PROPOSED ORDERS

JUDGE MAKING ORDER:	FRENCH J.
DATE OF ORDER:	21 APRIL 1988
WHERE MADE:	PERTH
THE COURT ORDERS	THAT:

1. The questlon whether foreign exchange losses incurred on

loans raised and used in	allowable capital expenditure
may themselves constitute allowable capital expenditure,

be declded separately from any other question and before
any further trial in the proceedings.

2 .          Either party be at liberty within seven ( 7 ) days to file a Minute proposing any reformulation of the prellmlnary issue for determination and such further directions as may be necessary.

c

2 .

3. The matter be listed for further directions on Thursday

5 Yay 1988 at 9.15 a.m. at which time a date wlll be

fixed for the hearing of the prelimlnary issue.

4. The costs of the applicant's motlon be in the cause.

Note: Settlement and Gntry of orders is dealt with in

Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT	)
OF AUSTRALIA	)
WESTERN AUSTRALIA	)
DISTRICT REGISTRY	)
GENERAL DIVISION	) NOS. FAG 158, 159 AND 160 OF 1987

B E T W E E N :  ROBE RIVER MINING CO. PTY LTD

(Formerly Cllffs Wes'ern Australlan

Mlnlng Co. Pty Ltd)

Appllcant

and

THE COMMISSIONER OF TAXATION OF THE

COMMONWEALTH OF AUSTRALIA

Respondent

CORAM:  FRENCH J.
21 APRIL 1988

REASONS FOR JUDGMENT

ON MOTION FOR DETERMINATION OF PRELIMINARY ISSUE

These three appeals are brought against the dlsallowance of ob~ections to three assessments each of which was dated 19 June 1985, but related to the years ended 31 December 1978, 1979 and 1980 respectively. The assessments reflected, inter alla, a disallowance of losses incurred by reason of movements in foreign exchange rates in the years of income ended 31 December 1977 to

1981 inclusive. It 1 s not necessary for present purposes to

address the way in which the losses over those four years are
brought to account in the three assessments mentioned. It is
sufficient to say that the applicant contends that they occurred
when ~t repald money borrowed for the purposes of its mining
business. It contends that of the moneys borrowed some
$24,214,480 was expended on capital items falling within the

.

definition o€ "allowable capital expendlture" in sub-s.l22A(l) of

the Income Tax Assessment Act 1936 and the balance of the loan funds on other Items of a capital nature forming an Inteqral part

of the connected facilities by means of which iron ore is mined by

the applicant and sold in marketable form.

It 1s common ground that the agreements under whlch the

applicant borrowed the loan funds required it to make its

repayment in US dollars. It is also common ground that during the period between that borrowing and the repayments in issue, the

US dollar increased in value relative to the Australian dollar and

that the applicant Incurred exchange losses of a capltal nature.

The losses are said to have totalled $2,563,600 broken

up as follows:-

1977   $ 85,956.00

1979   $ 337,633.00

1980   $ 422,589.00

1981                 $1,717,422.00

The applicant contends that it 1s ent .itled to claim the

losses as deductlons from Its assessable income in those years. However, these claimed deductions were wholly disallowed by the respondent whereupon the applicant lodged objections to the

assessments in question. The ob~ectlons	were disallowed and the
applicant's appeals are now	before the Court.

The applicant moves for orders that:-

1.    The principal issue of whether any o f the exchange

losses of the a2pllcant constltute "allowable

capital expendlture" within the definition in sub-section 1 2 2 A ( 1 ) of the Income Tax Assessment Act ( 1 9 3 6 ) ("the principal issue") and the issue oE quantum be separated and the principal issue be trled i n this Honourable Court as a preliminary issue.

2.    The question of quantum be held in abeyance pending the outcome of the principal issue.

Counsel for the applicant had some difficulty in

indicatlng precisely how it was that the so called principal issue could be separated from the issue of quantum. In the event 1t was suggested by counsel for the respondent that the real preliminary question could be formulated as follows - assuming the borrowed moneys to have been used for the purposes contemplated by s .122A, could the loss incurred by foreign exchange movements in relation

to those funds be allowable capital expenditure within the section. Counsel for the applicant accepted that as a more appropriate formulatlon of the principal issue than that set out in the motion.

It seems to be agreed on both sides, that the

preliminary issue so formulated would, if resolved adversely to
the applicant, dispose of the appeals.	It was also common ground

that argument on that issue would take no more than two days. A full hearing of the appeal on the other hand could occupy up to two weeks.

The Court has power to make the orders sought by the

applicant pursuant to 0.29 of the Federal Court Rules. The

relevant principles governing thc exercise of the discretion to direct a separate trial of an issue were enumerated b y Lord Dennlng in Car1 Zeiss Stiftung v Herbert Smith h Co. [l9691 1 Ch.

93 at 98:-

"I know that it has been said on one or two occassions

that a preliminary issue should be ordered only when, whichever way it is decided, it is conclusive of the

whole matter. That was said by Lord Evershed MR in

Windsor Refrigerator	Co. Ltd v Branch Nominees Ltd
([l9611 Ch.88; [l9611 Ch.	375 at 396); and Harman LJ in
Yeoman Credit Ltd v Latter ((1961) 1 WLR 828 at 835).	I
do not think that is correct.

The true rule was stated by Romez LJ in Everett v Ribbands (L19521 1 KB 112): "Where you have a point of

law whlch, if decided in one way, is going to be

decisive of litigation, then advantage ought to be taken of the facilities afforded by the Rules of Court to have

i t dlsposed of at the	close of pleadlngs, or very
shortly after the close of pleadings."	I have always

understood such to be the practice. I quite agree that in many cases the facts and law are so mixed u p that It is very undesirable to have a preliminary issue. I

always like to know the facts before deciding the law."

This approach was followed by Toohey J. in - TVW

Enterprises Ltd v Duffy (Unrep. 28.3.85) where his Honour went on

to say:-

"Order 29 r.2 provides a useful procedure in certain cases though its usefulness depends upon the obtaininq of answers which are likely to make a substantive

hearing unnecessary, at least if the questions are

answered in a particular way. The decision ultimately is one for the Court though naturally it will have relevant consideration to weigh the time likely to be regard to the attitude of the parties.. . It is also a

taken in the hearing of a preliminary issue and the availability of hearlng dates for that purpose aqalnst the time and expense o € a substantlve hearing and the

length of time likely to elapse beEore such a hearlng will take place." See also Orison Pty Ltd v Strategic

Minerals Corporation NL ( 1 9 8 7 ) 7 7 ALR 1 4 1 at 1 4 9 - 1 5 0

Although it does not emerge with any clarity from the pleadings, it seem5 that the respondent will take the position at the hearing that foreign exchange losses are not capable of constituting allowable capital expenditure notwithstanding that they may have been incurred in connection with loans raised for the purpose of such expenditure.

In the circumstances, it seems to me that that is a

preliminary issue which, sub~ect to proper formulation, could lead to considerable saving In time and expense. In the circumstances, I am prepared to give a direction for the trial of that question

as a preliminary issue. However I will allow the parties an

opportunity to settle the terms of the preliminary issue 1f some more precise expression of it is thought desirable. I will allow

time to bring a minute into court reflecting these proposed orders

and any necessary directions in connectlon therewith.

I certify that this and the preceding

four ( 4 ) pages are a true copy of the

Reasons for Judgment	of his Honour
Justlce French.
Associate:	LW-

Counsel for the Appllcant: Flr W.D.C. nillon

Solicitors f o r the hppllcant: Mallesons Stephen Jaques

Counsel for the Fespondent: Mr	P. Corbould
Sollcltors for	the Respondent: Australian Government Solicltor

Date of Hearing: 20 April 1988 Date of Judgment: 21 April 1988