Stamoulis, Spiros v Deputy Commissioner of Taxation of the Commonwealth of Australia and Stamoulis, Harry v Deputy Commissioner of Taxation of the Commonwealth of Australia and Stamoulis, Helen v Deputy..
[1997] FCA 1133
•29 OCTOBER 1997
FEDERAL COURT OF AUSTRALIA
INCOME TAX - Assessable income - Foreign exchange loans - facility agreement made before 19 February 1986 - interest adjustable at end of six-monthly or other specified “interest periods” - whether “eligible contract” - whether loan wholly or partly “rolled over” at end of each interest period - effect of bank’s advice that “loan matures” at end of interest period and “rollover” to be arranged - whether roll-over requires expiration of term of loan or extension or other variation at election of borrower - whether foreign exchange losses deductible under s 82Z(1) - borrowed funds applied in purchase of a business including stock and debtors - business disposed of before foreign exchange loss realized - whether foreign exchange loss deductible under s 51(1) - whether occasion for loss to be found in the carrying on of the business - whether loss on capital or revenue account
Income Tax Assessment Act 1936 (Cth), ss 51, 82U, 82V, 82W, 82Z
WORDS AND PHRASES - “wholly or partly rolled over” - “roll-over” “extended”
Income Tax Assessment Act 1936 (Cth), s 82W(1)
Commissioner of Taxation v Energy Resources of Australia Ltd (1994) 54 FCR 25 applied
K D Morris & Sons Pty Ltd v Bank of Queensland Ltd (1980) 146 CLR 165 applied
AVCO Financial Services Ltd v Federal Commissioner of Taxation [1979] ATC 4,560
referred to
Lombard Australia Limited v Federal Commissioner of Taxation [1980] ATC 4,151 referred
to
Pacific Management Pty Placer Limited v Federal Commissioner of Taxation [1995] ATC
4,459 referred to
Commissioner of Taxation v Riverside Road Lodge Pty Ltd (In liquidation) (1990) 23 FCR
305 referred to
Steele v Federal Commissioner of Taxation [1997] ATC 4,239 referred to
AVCO Financial Services Ltd v Federal Commissioner of Taxation (1982) 150 CLR 510
distinguished
Thiess Toyota Pty Ltd v Federal Commissioner of Taxation [1978] ATC 4,463 distinguished
Federal Commissioner of Taxation v Cadbury-Fry Pascall (Australia) Pty Ltd [1979] ATC
4,346 distinguished
Commercial and General Acceptance Ltd v Federal Commissioner of Taxation (1976) 137
CLR 373 applied
SPIROS STAMOULIS v DEPUTY COMMISSIONER OF TAXATION OF THE
COMMONWEALTH OF AUSTRALIA
VG 476 of 1994
HARRY STAMOULIS v DEPUTY COMMISSIONER OF TAXATION OF THE
COMMONWEALTH OF AUSTRALIA
VG 100 of 1995
HELEN STAMOULIS v DEPUTY COMMISSIONER OF TAXATION OF THE
COMMONWEALTH OF AUSTRALIA
VG 101 of 1995
MELINA STAMOULIS v DEPUTY COMMISSIONER OF TAXATION OF THE
COMMONWEALTH OF AUSTRALIA
VG 102 of 1995
RYAN J
MELBOURNE
29 OCTOBER 1995
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
VG 476 of 1994
BETWEEN:
SPIROS STAMOULIS
ApplicantAND:
DEPUTY COMMISSIONER OF TAXATION OF THE
COMMONWEALTH OF AUSTRALIA
RespondentJUDGE:
RYAN J
DATE OF ORDER:
29 OCTOBER 1997
WHERE MADE:
MELBOURNE
MINUTES OF ORDER
THE COURT ORDERS THAT:
The application be dismissed.
The applicant pay the respondent’s costs, such costs to be taxed in default of agreement.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
VG 100 of 1995
BETWEEN:
HARRY STAMOULIS
ApplicantAND:
DEPUTY COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
RespondentJUDGE:
RYAN J
DATE OF ORDER:
29 OCTOBER 1997
WHERE MADE:
MELBOURNE
MINUTES OF ORDER
THE COURT ORDERS THAT:
The application be dismissed.
The applicant pay the respondent’s costs, such costs to be taxed in default of agreement.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
VG 101 of 1995
BETWEEN:
HELEN STAMOULIS
ApplicantAND:
DEPUTY COMMISSIONER OF TAXATION OF THE
COMMONWEALTH OF AUSTRALIA
RespondentJUDGE:
RYAN J
DATE OF ORDER:
29 OCTOBER 1997
WHERE MADE:
MELBOURNE
MINUTES OF ORDER
THE COURT ORDERS THAT:
The application be dismissed.
The applicant pay the respondent’s costs, such costs to be taxed in default of agreement.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
VG 102 of 1995
BETWEEN:
MELINA STAMOULIS
ApplicantAND:
DEPUTY COMMISSIONER OF TAXATION OF THE
COMMONWEALTH OF AUSTRALIA
RespondentJUDGE:
RYAN J
DATE OF ORDER:
29 OCTOBER 1997
WHERE MADE:
MELBOURNE
MINUTES OF ORDER
THE COURT ORDERS THAT:
The application be dismissed.
The applicant pay the respondent’s costs, such costs to be taxed in default of agreement.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
VG 476 of 1994
BETWEEN:
SPIROS STAMOULIS
ApplicantAND:
DEPUTY COMMISSIONER OF TAXATION OF THE
COMMONWEALTH OF AUSTRALIA
Respondent
VG 100 of 1995
BETWEEN:
HARRY STAMOULIS
ApplicantAND:
DEPUTY COMMISSIONER OF TAXATION OF THE
COMMONWEALTH OF AUSTRALIA
Respondent
VG 101 of 1995
BETWEEN:
HELEN STAMOULIS
ApplicantAND:
DEPUTY COMMISSIONER OF TAXATION OF THE
COMMONWEALTH OF AUSTRALIA
Respondent
VG 102 of 1995
BETWEEN:
MELINA STAMOULIS
ApplicantAND:
DEPUTY COMMISSIONER OF TAXATION OF THE
COMMONWEALTH OF AUSTRALIA
Respondent
JUDGE:
RYAN J
DATE:
29 OCTOBER 1997
PLACE:
MELBOURNE
REASONS FOR JUDGMENT
These are applications by each of four applicants, Spiros, Helen, Harry and Melina Stamoulis, by way of appeal from a decision of the Administrative Appeals Tribunal (“the Tribunal”) published on 8 December 1994 affirming the decision under review disallowing objections lodged against amended assessments of income tax in respect of the year ended 30 June 1988.
Background Facts
The applicants were beneficiaries of the Grater Seven Property Trust (“the Trust”) in the relevant years and the issue between the applicants and the Commissioner was whether the Trust was entitled to a deduction for losses incurred on foreign currency loans in arriving at the net income of the Trust under s 95 of the Income Tax Assessment Act 1936 (“the Act”). Some of those losses were said to have been incurred in earlier years and included in carry forward losses claimed as deductible in the year ended 30 June 1988.
In assessing the net income of the Trust for the year ended 30 June 1988, the Commissioner disallowed $875,240 of claims made in the year ended 30 June 1987 for foreign currency losses. The Commissioner excised from the taxable income for the year ended 30 June 1988 an amount of $87,722 returned as foreign currency gains. After allowing other carry forward losses, the Commissioner assessed the net income of the Trust for the 1988 year as $379,132 and amended the taxable income of each of the applicants for that year to include a share of the net income of the Trust. Each of the applicants objected to the amended assessment on the ground that the losses incurred on foreign currency loans should have been allowed as a deduction to reduce the net income of the Trust. The applicants also objected to the additional tax imposed under the amended assessments for incorrect returns. The Commissioner allowed the objections to the extent of remitting the additional tax but maintained the disallowance of the foreign currency losses.
The foreign currency losses were claimed to have been incurred in consequence of a loan made to the Trust by the Australia and New Zealand Banking Group Limited (“the ANZ Bank”). The following findings of fact were made by the Tribunal in respect of that loan transaction:
The losses claimed related to a foreign currency loan made to the trust by the ANZ Bank. By application dated 14 March 1985, the trustee applied to the bank for a loan to be denominated in Swiss Francs to the equivalent of $A1,500,000. This loan of 2,789,250 Swiss Francs was drawn down on 2 April 1985. No actual loan agreement was produced and it was accepted before the Tribunal that the application set out the terms of the loan. The repayment date of the loan was specified as 60 months, and two banking days after the date of the final Interest Determination Date during the Availability Period. The Availability Period was 3 months from the date of application, and the Interest Determination Date during this period was a date two banking days prior to the draw down of the loan. Effectively, the loan was repayable in five years from the date of draw down. The rate of interest payable under the loan was to be determined by the bank at the commencement of each interest period being a period of six months. The primary purpose of the loan was to fund the purchase by the trust of a wine business from L Wine Co Pty Ltd. The purchase price of the business was $1,100,000, allocated under the contract as:
Trading Stock $450,000
Plant and Equipment 380,000
Industrial Property 10,000
Debtors 260,000_______
$1,100,00
_______
A deposit of $100,000 was paid on the signing of the contract of purchase, 12 March 1985. The balance of $1,000,000.00 was provided from the bank loan. The remaining $500,000 from the loan proceeds was applied:
Grape Growers 86,300
Interest Bearing Deposit 400,000
Loan to associated Trust 13,700_______
$500,000
_______
It was further found that over the next eighteen months the $A in relation to Swiss Francs moved adversely for the Trust as borrower prompting the Trust to enter into a new agreement with the ANZ Bank to take out a loan denominated in $US with a right of election in the borrower to change to an alternative currency. The relevant loan application was dated 30 September 1986, the loan being repayable after 57 months from date of draw down. An amount of $US1,697,346 was drawn down under that new agreement and was used to repay in full the amount in Swiss Francs which had been borrowed under the earlier agreement.
Was the Swiss Francs Loan “rolled over” on 2 April 1986?
The first issue which arose both before the Tribunal and on the application to this Court was whether the original (Swiss Francs) loan had matured on its first anniversary, 2 April 1986 and on that date had been wholly “rolled over” within the meaning of s 82W(1)(b) of the Act.
Division 3B of Part III was inserted into the Act by Act No 61 of 1987. The introductory provision indicating the application of Division 3B is s 82U in these terms:
(1)This Division applies in relation to gains and losses only to the extent to which they are of a capital nature.
(2)This Division does not apply to a loss incurred by a taxpayer except to the extent to which, if the loss were not of a capital nature, a deduction would be allowable to the taxpayer under section 51 in respect of the loss.
(3)This Division does not apply to a gain made by a taxpayer under a contract except to the extent to which, if the taxpayer had incurred a loss under the contract and that loss had not been of a capital nature, a deduction would have been allowable to the taxpayer under section 51 in respect of the loss.
(4)This Division applies according to its tenor in relation to gains made and losses incurred before or after the commencement of this Division.
The “commencing day” is defined in s 82V(1) to mean 19 February 1986. However, Division 3B was made applicable to contracts entered into before the commencing day in circumstances stipulated as follows by s 82W(1):
Where, on or after the commencing day and under a contract entered into by a taxpayer before the commencing day, any of the following happens in relation to the taxpayer (otherwise than pursuant to a contractual obligation that was binding on the taxpayer before the commencing day):
(a)the taxpayer receives loan money;
(b)a loan made to the taxpayer is wholly or partly rolled over;
(c)the period for which money has been lent to the taxpayer is extended
this Division applies as if-
(d)where paragraph (a) applies - the loan money had been received by the taxpayer under a contract entered into by the taxpayer at the time when the loan money was received;
(e)where paragraph (b) applies - the loan resulting from the roll-over had been made to the taxpayer under a contract entered into by the taxpayer at the time of the roll-over; and
(f)where paragraph (c) applies - a new loan of the amount outstanding immediately before the commencement of the extension period had been made to the taxpayer under a contract entered into by the taxpayer at the commencement of the extending period.
The section which relevantly gives operative effect to Division 3B is s 82Z(1) which provides:
(1)Subject to this section, a currency exchange loss incurred by a taxpayer in a year of income under an eligible contract is an allowable deduction in respect of the year of income.
An “eligible contract” is defined as follows in s 82V(1):
“eligible contract”, in relation to a taxpayer, means-
(a)a contract entered into by the taxpayer on or after the commencing day, other than a hedging contract; or
(b)a hedging contract entered into by the taxpayer, on or after the commencing day, in relation to a contract to which paragraph (a) applies;
Clearly, the Swiss Francs loan contract into which the Trust had entered in March or April 1985 was not an “eligible contract” within that definition. However, it was contended on behalf of the applicants, both before the Tribunal and in this Court, that the Swiss Francs loan had been wholly rolled over on the anniversary of the draw-down of funds, 2 April 1986, so that Division 3B applied to it by force of s 82W(1) as if a loan had been made under a contract entered into at the time of the roll-over, i.e. on 2 April 1986. The Tribunal rejected this contention observing, at para. 10 of its reasons:
The only documents which were relied upon as evidence that the loan was rolled over at the end of each six months were letters from the bank. One dated 16 April 1985, confirming the amount and interest rate of the loan, contained a statement “Please note that this loan is due for roll over on 2/10/85” (exh D). A letter of 8 October 1985 commenced with the words “We advise that the above loan was rolled over for a further term” (exh G). A letter of 11 September 1985 stated “We advise that the above loan matures on 2/10/85... Please sign and return the enclosed selection of interest period as soon as possible to enable the Bank to arrange rollover of the facility” (exh J). The description used by the bank appears to be at odds with the terms of the original loan. Whilst a provision of the loan application allowed the bank to require repayment of the loan on demand, the absence of any specific demand meant that the loan was repayable five years from the date of draw down. The dates referred to in the letters from the bank were the commencement of a new interest period, but the Tribunal is unable to find anything in the documentation which could be interpreted as a rollover of the loan each six months. The term “rolled over” is not defined in Division 3B or anywhere else in the Act. Where used elsewhere in the Act, such as sections 27A, 58, 124PA, 160ZZK etc, it is used in the context of changes of legal ownership of property or payment of funds to which a taxpayer is entitled to another trustee in the case of rollover funds. In the Tribunal’s view, a rollover for the purpose of section 82W can only occur when the original loan matures, either by the effluxion of time or by specific action or agreement by one or both parties, and a new loan on the same or different terms replaces the original loan. The effect of the provision, in our view, is to allow the new, replacement loan to be treated as an eligible loan without requiring an actual transfer of funds between the parties.
Counsel for the applicants first pointed to a notation on an adjustment sheet issued by the Australian Tax Office in respect of the Trust’s income tax return for the year ended 30 June 1988. That notation was to this effect:
Net loss as returned
$
469221It is accepted that the contract is an eligible contract. However, any gains or losses must be realized. This involves a physical repayment of principal. Notional gains or losses on rollover are not included in income or allowable as a deduction. loss 875240
income 87772less
787466
Adjusted net income 318247
As I understand it that notation was relied on as an admission of the existence of an eligible contract. However, it is clear from the context provided by the adjustment sheet as a whole that what was accepted as an eligible contract was the whole foreign loan facility under which both the Swiss Francs loan and the second, $US, loan were made. Even if that view of the so-called admission be wrong, it cannot bind the Commissioner to assent to a conclusion of law which is contradicted by the undisputed facts.
Reference was then made to what was described as the unchallenged evidence of the applicants Spiros Stamoulis and Helen Stamoulis to the effect that the loan had been rolled over on 2 April 1986, that on the first roll-over date the Trust had incurred an exchange loss of $341,089, and that the loan was for a maximum period of five years and could be paid out on any roll-over date.
It was accepted that the terms of the first loan contract were to be derived, at least in part, from the foreign currency loan application made by the Trust to the ANZ Bank. That document contained in cl 1 the following definitions:
“Interest Determination Date” means a date two Banking Days prior to the commencement of an Interest Period;
“Interest Payment Date” means the last day of an Interest Period, and in the case of an Interest Period exceeding six months, the last day of each successive period of six months within such Interest Period and the last day of each Interest Period;
“Interest Period” means each period of six months (or such other period as the Bank and the Customer may agree) beginning on the last day of the immediately preceding such period but so that:
(i)the first Interest Period for the Loan Facility shall commence on the date on which the first Advance is drawndown hereunder; and
(ii)If an Interest Period would otherwise end on a day which is not a Banking Day, such Interest Period shall be extended to end on the next succeeding day which is a Banking Day unless such next succeeding Banking Day falls in another calendar month in which case such Interest Period shall end on the immediately preceding Banking Day; and
(iii)If an Interest Period ends on the last day of a month (or on a day for which there is no numerically corresponding day in the month in which the next succeeding Interest Period would otherwise end) the next succeeding Interest Period shall, subject to the provisions of sub-paragraph (ii) above, end on the last day of a month; and
(iv)the last Interest Period shall expire on the last Repayment Date;
These clauses governed repayment of principal and the payment of interest:
4.REPAYMENT
4.01The Customer shall repay the Loan Facility on demand, and unless and until demanded in the Repayment Instalments and on the Repayment Dates set out in the Schedule.
5.INTEREST
5.01The Customer shall pay interest on the Loan Facility for each Interest Period on demand, but unless and until demanded in arrears on each Interest Payment Date in accordance with the following provisions of Clause 5. The Customer may by notice in writing given to the Bank not less than five Banking Days prior to the end of each Interest Period select the term of the next succeeding Interest Period. Such selection shall be subject to the consent of the Bank, and in the absence of such consent or selection by the Customer such Interest Period shall have a duration of six months.
5.02The rate of interest applicable during each Interest Period shall be the rate per annum determined by the Bank to be the aggregate of the Margin and the rate (rounded upwards if necessary to the nearest one-eighth of one percent) at which deposits in the Loan Currency for a period equal to the Interest Period and in amounts equivalent to or comparable with (in the judgement of the Bank) the amount of the Advance are offered to prime banks by the Bank in the Singapore Interbank Market at or about 11.00 a.m. (Singapore Local Time) two Banking Days prior to the beginning of such Interest Period.
5.03The Bank shall notify the customer as soon as possible after each Interest Determination Date of the interest rate determined as aforesaid. The Bank’s determination shall be conclusive and binding on the Customer.
5.04Interest at the rates determined as aforesaid shall be based on the actual number of days elapsed calculated by either the 360 day year or 365 day year method in accordance with the interbank market practice for the Loan Currency and shall accrue from day to day.
5.05If any moneys payable by the Customer hereunder are not received on the due date for payment thereof then the customer shall on demand:
(a)pay to the bank interest on such moneys at a rate which shall be the aggregate of the Default Margin and of the rate at which deposits in the Loan Currency are offered to prime banks by the Bank for one month or such other period as the Bank may determine in the Singapore Interbank Market from the due date of such payment, such rate being re-calculated, at one monthly intervals or such other period as the Bank may determine, until the date when such moneys have been paid to the Bank; and
(b)indemnify the Bank against any loss or expense which, after taking into account such additional interest as aforesaid, the Bank may suffer as a result of such non-receipt.
Other relevant provisions in the Foreign Currency Loan Application were:
12.EXCHANGE RATE INDEMNITY
12.01If at any Interest Payment Date after the end of the Availability Period or after the Loan Facility is drawn in full (whichever is the earlier) the equivalent in Australian dollars of the amount of the Loan Currency outstanding under the Loan Facility converted at the Bank’s spot rate of exchange two Banking Days prior to such date exceeds the Loan Facility (“the excess”) and provided that the excess is more than 5 per centum of the Loan Facility the Customer shall lodge with the Bank the amount of the excess on term deposit in Australian dollars from such date for the period ending on the next succeeding Interest Payment Date at the Bank’s interest rate for term deposits of like tenor and amount current on the date of lodgement (with interest to be paid to the Customer), and any such term deposit maturing on an Interest Payment Date shall be applied to meet the Customer’s obligation to lodge a term deposit with the Bank pursuant to this Clause 12.01 on such date and on a Repayment Date the Bank shall be entitled to apply and set off such term deposit against the obligation of the Customer to repay the Loan Facility.
13.FINANCIAL STATEMENTS
13.01The Customer shall furnish to the Bank promptly after the end of each financial year and at such other times as the Bank shall require true and correct financial statements accounts and reports showing the Customer’s transactions and financial position (which shall when required by the Bank be duly audited).
Clauses 1 to 8 of the Schedule to the Loan Application recited:
1.Loan Facility: ONE MILLION FIVE HUNDRED THOUSAND
DOLLARS ($A amount of approved limit)
2. Loan Currency: SWISS FRANCS (in words only)
3. Availability Period expires: 3 months after the date of this Application
4. Fees: Establishment Fee: $15,000
Commitment Fees: 1.5 % per annum of the undrawn Loan Facility from the date commencing one month after the date of this Application until the earlier of the Loan Facility being drawn in full or the expiration of the Availability Period, payable quarterly in arrears.
5.Margin 1.5 % per annum (years 1 - 5 inclusive)
6.Default Margin: the Margin plus 1.0% per annum
7.Repayment Dates: commencing 60 months and two Banking days after the date of the final Interest Determination Date during the Availability Period.
8.Repayment Instalments 100 % of the Loan Facility on the first Repayment Date
Funds were drawn down under the facility on 4 April 1985 and on 16 April 1985 the ANZ Bank wrote this letter to the Trustee of the Trust:
RE - FOREIGN CURRENCY LOAN
Further to our letter of 4th April, 1985, we advise the following particulars for your records with regard to the abovementioned facility -
Loan Amount
- CHF2,789,250-00 (After conversion @ 1.8595)
Interest Due on 2/10/85
- CHF114,804-00
Interest Rate of 8.097% p.a.
- Base rate 5.9375
- Including withholding tax 6.597
- Including margin 8.097Please note that this loan is due for roll over on 2/10/85.
Should you have any queries, please do not hesitate in contacting us.
On 11 September 1985, the ANZ Bank wrote again to the Trustee advising:
RE: FOREIGN CURRENCY LOAN AUD1,500,000
We advise that the above loan matures on 2/10/85.
Please sign and return the enclosed selection of interest period as soon as possible to enable the Bank to arrange rollover of the facility.
Subsequently, the ANZ Bank on 30 September 1995 sent the Trustee a “confirmation of loan” confirming “our loan to you from 2/10/85 to 2/04/86”.
A short while later, on 8 October 1985, the ANZ Bank wrote this letter to the Trustee:
FOREIGN CURRENCY LOAN - AUD 1,500,000 CHF 2,789,250
We advise that the above loan was rolled over for a further term.
Details as follows:-
Interest paid for preceding period and charged to account on 2/10/85 - CHF 114804-83 @ 1.515 = AUD 75,778-77.
Interest rate 6.917.
Maturity Date - 2/4/86.
Interest CHF 97535-06 will be converted at the current rate of exchange at maturity.
Due to exchange rate fluctuations, the amount of $341,089 is required to be lodged on Term Deposit to cover clawback.
Please forward the said amount as soon as possible marked for my attention.
Those documents emanating from the ANZ Bank were said to evidence a new loan or a loan resulting from a roll-over on 2 October 1985 for a further term expiring on 2 April 1986.
A similar “confirmation of loan” confirming “our loan to you from 2/4/86 to 2/10/86” was issued by the ANZ Bank on 26 March 1986.
Reference was made, as an aid in construing s 82W(1) of the Act, to the explanatory memorandum circulated with the Bill which was passed as Act No 61 of 1987. That memorandum included this passage in relation to roll-overs:
With certain exceptions, a rollover (in whole or part) or extension, on or after 19 February 1986, of a borrowing contracted for before that date will be taken as a borrowing or loan made by the taxpayer at the time of the rollover or at the commencement of the extension period. An exception is where the taxpayer was contractually bound, before 19 February 1986, to make the rollover or to extend the period of the borrowing or loan.
Where the new provisions apply to deem a borrowing or loan that is rolled over or extended to be a new borrowing or loan, that new borrowing or loan will be taken into account at the value, at the time of the rollover, of the currency that is rolled over or in the case of an extension of a borrowing or loan, as the amount outstanding under the contract immediately before the commencement of the extension period.
Whether the whole or a part of a loan had been rolled-over, and so falls within the scope of this legislation, will ordinarily be clear from the facts of the particular case. The exercise, on or after 19 February 1986, of an option to renew a loan in whole or in part would give rise to a new loan. On the other hand, the mere regular adjustment during the term of a loan of the loan interest rate would not result in the loan being taken as a new loan. For example, the use of an interest rate re-setting facility such as revolving note issues, some of which occur on or after 19 February 1986, to set a market interest rate on a loan would not make the loan a new loan where the relevant borrowing was contracted for before 19 February 1986, was for a specified amount and a fixed term, and the borrower was, before 19 February 1986, committed to that facility by the underlying loan contract or a related contract (e.g., a currency swap contract).
The same memorandum directed the following explanation specifically to cl 82W(1) of the Bill:
Section 82W will give effect, in circumstance where a contract has been entered into before 19 February 1986, to the intention that the contract date of each borrowing under a drawdown facility be taken to be the date on which the borrowing is actually drawn down. It will also mean that the rollover or extension of a pre-19 February 1986 borrowing contracted for on or after that date, constitutes a new borrowing for the purpose of the new measures.
Section 82W will not apply in a retrospective manner to bring a drawdown, rollover or extension of a loan within the new provisions where the taxpayer was contractually bound to make the drawdown, rollover or extension before 19 February 1986.
Sub-section 82W(1) applies where, on or after 19 February 1986 and under a contract entered into by a taxpayer before that date -
.the taxpayer receives loan money, that is, the loan money is drawn down (paragraph (a));
.a loan made to the taxpayer is rolled over in whole or part (paragraph (b)); or
.the taxpayer obtains an extension of the period of a borrowing that he has made (paragraph (c)),
otherwise than pursuant to a contractual obligation that was binding on the taxpayer before 19 February 1986.
Where paragraph (a) of the sub-section applies, Division 3B, by paragraph (d) is to apply to the drawdown as if the taxpayer had entered into a contract to borrow the money drawn down at the time when the money was received.
By paragraph (e) of the sub-section, where paragraph (b) applies to a borrowing that is rolled over in whole or part by a taxpayer, Division 3B is to apply as if the taxpayer had entered into a contract to borrow the money rolled over at the time of the rollover.
Where paragraph (c) of the sub-section applies to a borrowing by a taxpayer, paragraph (f) will apply Division 3B to the extension of that borrowing as if the amount of borrowings outstanding immediately before the commencement of the extension period had been borrowed by the taxpayer under a contract entered into at the commencement of the extension period.
The words in parenthesis in the introductory stipulation in s 82W(1) are important because they make clear that the roll-over or extension contemplated respectively by paragraphs (a) and (b) must not occur by force of a contract made before 19 February 1986. As is said, in effect, twice in the Explanatory Memorandum an exception has been created “where the taxpayer was contractually bound before 19 February 1986 to make the rollover or to extend the period of the borrowing or the loan”. In other words, the roll-over or extension must occur as a result of the exercise of an option or election by the borrower.
Mr Searle of Counsel for the applicants relied heavily on the judgments of a Full Court of this Court in Commissioner of Taxation v Energy Resources of Australia Ltd (1994) 54 FCR 25 where Beaumont J, at 29, referred to s 82W(1) of the Act which he characterised as “a transitional provision ... dealing with a contract of loan to a taxpayer entered into before the commencing day ...”. In that case, the Full Court was concerned with the application of Division 3B of Pt III of the Act to Euronotes issued by the respondent (“ERA”) pursuant to a facility agreement made between ERA and the Commonwealth Bank of Australia and some 23 other banks. The facility agreement was made in conjunction with three other agreements and all of them were entered into before 19 February 1986. The Euronotes issued under it were each in $US for a term of three months. None carried interest but they were taken up by the tendering banks at a discount on their face value and, on maturity, the face value was paid to the note holder, principally from the proceeds of the new issue, supplemented by ERA’s other $US funds. The Commissioner regarded each note as “an eligible contract” and sought to assess ERA for currency gains represented by appreciation in the $A as against the $US between the date of issue and the date of payment of each note. The Commissioner was prepared to allow currency “losses” on the same principle where those had been incurred in respect of particular notes. Beaumont J concluded that no foreign exchange gains or losses had been realised on payment of the Euronotes because no conversion from $US to $A had occurred or had been required, the conversion being merely notionally imputed by the Commissioner. His Honour also indicated, at 48:
Nor, since no “loan” is involved, could the transitional provisions of s 82W(1), which deal with the “roll-over”, or extension, of loans made under a contract entered into before the commencing day, apply here in my opinion. As has been seen, we are concerned here with the issue of notes at a discount, a transaction both in form and in substance different from a loan.
In the same case, Gummow J, at 50, summarized the effect of Division 3B in these terms:
Division 3B was inserted in the Act by s 9 of the Taxation Laws Amendment Act 1987 (Cth). This statute came into operation on the day it received the Royal Assent, 5 June 1987, although it applies to certain contracts entered into on or after the prior “commencing day” of 19 February 1986 (s 82V(1)). In certain circumstances where there is a “roll-over” (an undefined term) of a loan made to the taxpayer under a pre-commencing day contract, Div 3B applies as if the loan resulting from the roll-over had been made to the taxpayer under a contract made at that later date (s 82W(1)). The present case does not concern any loan of money to the taxpayer. As Beaumont J explains in his reasons for judgment, the issue of notes at a discount differs in form and substance from a loan.
Gummow J went on to refer to the definition of “eligible contract” and “hedging contract” in s 82B(1) and observed, at 53:
First, in order to determine whether there is an “eligible contract” it may be necessary to look to more than one contract. Several instruments, taken together, may comprise the “eligible contract”. Secondly, if there are related contracts each of which is an eligible contract, both must post-date 19 February 1986.
...
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. Such a use is apt where, as in the present case, the eligible contract in question is identified by the statute as having been entered into by the party said to have made the gain. Thus, gain as a sub-contractor would not suffice as a gain under the head contract: cf Marrow v Flimby and Broughton Moor Coal and Fire Brick Co Ltd [1898] 2 QB 588 at 597; Fitzpatrick v Evans & Co [1902] 1 KB 505 at 509.
More loosely, a gain may be made under a contract where this has come about by reason of the existence of the contract or the performance of the contract, whether or not the gain was made in exercise of a right or discharge of an obligation conferred or imposed upon the party or some other person. In that sense, it is enough that the contract is, in a broad sense, a source of the gain made by the party in question: cf Mercantile Mutual Life Insurance Co Ltd v Australian Securities Commission (1993) 40 FCR 409 at 442; General Newspapers Pty Ltd v Telstra Corporation (1993) 45 FCR 164 at 170-173. The narrower construction is to be preferred to the looser construction.
His Honour agreed with the view expressed by Beaumont J that, on the facts of the case, no gain attributable to currency rate fluctuations had been realised in respect of currency purchased in the exercise of a right conferred by, or the discharge of an obligation imposed by, any contract entered into after 19 February 1986. However, he went on, at 56 to suggest, obiter, that:
It is unnecessary to determine whether, if a contrary construction were placed upon each of the contracts put forward by the Commissioner, the taxpayer ought nevertheless to succeed because of the “umbrella” effect of the Euronote Facility on all that was done in providing finance to the taxpayer. In particular, as I have indicated, the Euronote Facility provided for a reduction on 30 June of each year until 1994 in the amount of the total commitment. It also conferred upon the taxpayer, as between it and the parties to the Euronote Facility, a right to payment of the proceeds of the notes.
However, the better view is that the gain in question is not made under an “eligible contract” unless substantially all of the rights and obligations in question are found in the contract or contracts (and I have indicated there may be more than one) which together make up the “eligible contract”. Here the “eligible contract” embraced not only the immediate transaction pursuant to which the individual notes were issued and dealt with, but the Euronote Facility and the contracts in the forms of the annexures to the Euronote Facility. The terms of these instruments provided the source of what one might call those secondary contracts. But the Euronote Facility and associated contracts were made at too early a date to qualify collectively as an “eligible contract” within the meaning of Div 3B.
Hill J also considered the operation of Division 3B and pointed out, at 69:
It will be noted that the facilities agreement itself was entered into on 22 January 1986 and so would not be an eligible contract. However each time ERA offered notes for tender and, in the result, issued and sold at a discount its promissory notes, the arrangements so made constituted a contract and was in the result, when made after 19 February 1986, an eligible contract.
As to the application of s 82W(1), his Honour observed, at 70:
In a case such as the present where a funding arrangement is constituted by a Facility Agreement, which does not bind the person for whom funds are provided to utilise that facility but binds the financiers to make funds available where required, there may be said to be two contracts under which the ultimate note discount arrangement or loan is made: the Facilities Agreement and the ultimate agreement entered into, as in the present case, for the discounting of the note. Which contract is regarded as being the relevant contract under which the note discounting transactions were made is a question which depends upon the proper meaning of the phrase “under a contract” in the circumstances of the case.
...
The expression “under a contract” must, of necessity, be construed by reference to the context in which it appears. That context in Div 3B includes the provisions of s 82W(1). That subsection contemplates that where a taxpayer receives a loan which the taxpayer is not bound to take in a case where there is a previous contract entered into by the taxpayer before the commencement date pursuant to which the loan is to be made, the loan would, but for the terms of the subsection, be made under the original contract rather than the source of the ultimate obligation, namely, the loan. It likewise contemplates that a loan roll-over resulting in a new loan agreement and a new loan would not, but for the subsection, result in the loan being made under the roll-over contract, but rather that the roll-over, if contemplated by an earlier contract not binding the taxpayer to take out the loan, would be made under the earlier contract.
There is no definition in the Division of the expression “roll-over”, but the expression has a well understood commercial meaning. In the case of a loan it contemplates the renewal of the loan at the time of maturity, generally at a rate of interest based on the then ruling rate at the time of renewal (cf the Macquarie Dictionary definition of “rollover provision”) and in the case of bills or promissory notes, the issue of new bills or notes at the time of maturity of earlier notes, resulting in the discharge of the liability on the earlier bills or notes, the new bills or notes being discounted generally at some prevailing rate (cf K D Morris & Sons Pty Ltd v Bank of Queensland Ltd (1980) 146 CLR 165).
After agreeing with Beaumont and Gummow JJ that the application of s 82W(1) to loans did not extend to bill or note discounting facilities, Hill J continued, at 71:
Two conclusions may, however, be drawn from s 82W(1). The first is that s 82W(1) recognises for the purposes of the Division the view taken by the statutory majority in Caltex Ltd v Commissioner of Taxation (Cth) (1960) 106 CLR 205 that where funds are made available by way of a loan (or for that matter a discounting transaction) on terms that those funds may only be used to pay out an existing indebtedness, no gain or loss is realised. Second, s 82W(1) contemplates that a loan (and a fortiori, the same would follow with a discount transaction) made pursuant to a Facility Agreement will have been made under that Facility Agreement rather than under the fresh contractual arrangement made thereafter.
Reference was then made to the judgments of members of the High Court in K D Morris & Sons Pty Ltd v Bank of Queensland Ltd (1980) 146 CLR 165, including this passage from the joint judgment of Stephen and Wilson JJ, at 173:
This was no case of the occasional acceptance of bills by the Bank in a number of transactions each one unconnected with the others. It was, rather, a case of acceptances by the Bank pursuant to a contractual obligation originally undertaken by it in 1973. It was essential to the whole concept of the Bank’s commercial bill acceptance facility that there should be this continuity of obligation; without it the facility was denied its prime character, that of a means of providing to the Company over a period of years access to funds.
The Bank’s contractual obligation arose out of the concluded negotiations between it and the Company in the second half of 1973, which culminated in the acceptance on 30th August 1973 of the Bank’s offer contained in its several letters written on various dates earlier in that month. That offer, once accepted, obliged the Bank to accept the Company’s initial bills up to a maximum of $1 million and to go on accepting new replacement bills as existing bills matured and were retired ...
Once it availed itself of the facility the Company also became subject to a continuing obligation. That obligation was to put the Bank in funds in respect of the Bank’s payment of bills on their maturity ...
So long as the Company continued, as it in fact did, to use the roll over mechanism to discharge its periodic obligation to the Bank it was continually subject to this liability.
In applying that passage to the facility which had been extended to ERA, Hill J went on to conclude, at 72:
The same can be said of the present Facilities Agreement, albeit that it differed in two respects from that in K D Morris & Sons: the first in that it was a note rather than bill facility; the second that the Facility did not contemplate the same parties would continue to roll-over the notes at the end of each cycle, but rather that individual members of the consortium varying from time to time would so do. Neither of these differences, in my view, is however material.
Once ERA availed itself of the Facility it became subject to a continuing obligation in respect of the face value of the notes reduced in accordance with the Facilities Agreement or payments which ERA at its option might make discharging the Facility obligation. Likewise, although individual members of the consortium did not have a specific obligation to purchase ERA’s notes, there was an obligation that notes would be purchased from within the consortium providing access to the funds (subject to scheduled reductions) over the 8 year term of the Facility.
Two conclusions seem to me to follow. The first is that in the context of the agreement it is incorrect to see each roll-over as a discharge of indebtedness upon a new indebtedness arising from the issue and discounting of fresh notes for the same reasons as the statutory majority in Caltex took the view that no exchange loss arose. Secondly, and more fundamental for the present case, it seems to me that the relevant contract under which the notes were issued was the Facilities Agreement rather than the individual contracts arising out of the acceptance of tenders for purchase of notes and the issue and sale of those notes at a discount.
The second of these conclusions suffices to determine that part of the appeal which conerns Div 3B. If ERA did make a realised currency exchange gain or loss, such a gain was a loss or gain made under the Facilities Agreement and accordingly not made or incurred under an eligible contract (s 82V(1)) and not therefore assessable income (s 82Y) or an allowable deduction (s 82Z) for the purposes of Div 3B.
The orders of this Court in Commissioner of Taxation v ERA were affirmed by the High Court in a case of the same name ([1996] ATC 4,536) without any discussion of the concepts of rollover or extension of a loan. In my view, far from supporting the applicants’ contentions, the relevant passages from the judgments in this Court in Commissioner of Taxation v ERA confirm that, to fall within s 82W(1), a roll-over or extension of a loan must occur at the election of the borrower and not be merely an adjustment of the interest rate or another event contemplated by the facility agreement or other “umbrella” arrangement as occurring during the term of the loan at the election of the lender.
The interpretation which I favour is generally supported by definitions of the expression “roll-over” in commercial and general dictionaries. See e.g. Macquarie Dictionary 2nd Edn p 1523 (definition of “rollover provision”) S.P. Valentine, International Directory of the Securities Industry (1985) p 171, The McGraw-Hill Dictionary of Modern Economics 2nd Edn p 513 and Nemmers Dictionary of Economics and Business (1978) p 418.
There is nothing in the other two authorities to which I was referred by Counsel for the applicants which detracts from the interpretation which I consider should be given to s 82W(1).
AVCO Financial Services Ltd v Federal Commissioner of Taxation [1979] ATC 4,560 concerned the treatment of foreign exchange gains and losses made by a finance company on foreign currency borrowings between 1972 and 1977. In describing the different means used by the taxpayer to borrow funds, Kearney J drew a distinction between term loans and “commercial paper loans”. His Honour’s description of the latter transactions included these passages, at 4,564:
With respect to the commercial paper loans, the loans after being drawn down have been in most instances subsequently “rolled over” either with or without additional draw down being finally repaid by an advance from another lender or by cash payment by the taxpayer, or by a combination of both. Again, in most instances the rolling over has occurred several times, frequently on five or six occasions. Such roll over has occurred usually at three-monthly, and sometimes at six-monthly intervals, the period being dictated of course by the dates upon which successive promissory notes fell due for payment.
... In some instances commercial paper loans have been drawn down and subsequently repaid by cash or an advance by another lender or by a combination of both, without having been rolled over. On one occasion, a commercial paper loan after having been drawn down and rolled over, was finally consolidated into a term loan which has not yet been repaid.
In the cases involving a roll over the obligation under a particular agreement which is due to mature is extended on like terms without necessitating formal repayment and redrawing of funds. The taxpayer in such case draws a cheque in favour of the lender for the amount of accrued interest at date of maturity, and receives the original promissory note duly cancelled in exchange for a new promissory note for the amount then outstanding, whether it be the original loan debt or that amount together with an additional advance from the original lender.
That description, I consider, reinforces the view that a roll-over occurs contemporaneously with the maturation or falling due for payment of an initial or subsequent loan. An essential feature noted by his Honour was the cancellation of the original promissory note and the issue of a new one in its place.
Similarly in Lombard Australia Limited v Federal Commissioner of Taxation [1980] ATC 4,151, Powell J, at 4,159, gave this summary description of the effect of a complex series of loans into which the taxpayer, another finance company had entered:
As can be seen from the table [“National Westminster Bank Loans”] which I have earlier set out and from this short history of each relevant loan, there were many options open to, and exercised by, the taxpayer in respect of each of the Burston & Texas, International Commercial and National, facilities, those options being:
1.whether each facility should be drawn down in one, or more than one, loan;
2.in the event of more than one loan, the amounts in which, and the times at which, each such loan should be drawn down;
3.in relation to any loan, the currency in which, and the period for which, the loan should initially be drawn down;
4.whether, upon maturity, any loan should be repaid or “rolled over”;
5.if “rolled over”, in what currency, and for what period, should any such loan be “rolled over”.
... So, too, decisions as to the period of any loan or “roll-over” were affected by the varying rates of interest applying to loans of varying duration. Finally decisions as to the currency in which a loan was initially drawn down, or into which, on a “roll-over” it was converted, were affected not only by the actual rates of interest offered but also by the possible advantage to be obtained from a likely depreciation of a particular currency, or the possible disadvantage to be suffered from a likely appreciation of a particular currency, against the Australian dollar.
There has been no suggestion that the expressions “rolled over” and “roll-over” used in s 82W(1) are technical terms having a special meaning to be attributed by reference to the way in which they are used by those who customarily engage in banking or other commercial transactions. Accordingly, no expert evidence was sought to be adduced to illuminate their meaning. Nor are they technical legal terms requiring their meaning to be resolved as a question of law; (Commissioners for Special Purpose of Income Tax v Pemsel [1891] AC 531 at 580). The Tribunal therefore had to ascribe to the expressions, as a matter of fact, their ordinary English meaning having regard to the statutory context in which they appear; see e.g. Herbert Adams Pty Ltd v Federal Commissioner of Taxation (1932) 47 CLR 222. I have been unable to detect any error of law in the Tribunal’s approach to that question. Indeed, for reasons which I have endeavoured to explain, I would myself attribute the same meaning to the expressions as the Tribunal gave to them.
It therefore becomes necessary to consider whether the Tribunal correctly applied Division 3B and, in particular, s 82W(1) construed in the way outlined above, to the facts involved in the arrangements between the Trust and the ANZ Bank.
There is nothing in the agreement accepted as having been embodied in the loan application to indicate that the Trust could elect not to keep the loan on foot after the expiration of the first or any subsequent Interest Period except the last, which was to occur on the single repayment date stipulated in the Schedule being 60 months from, at the latest, 14 June 1985. Of course, the loan was also repayable on demand by the ANZ Bank. Interest was to be payable in arrears at the end of each Interest Period with a right in the customer, with the agreement of the ANZ Bank, to alter the length of the next Interest Period. In default of agreement on a change in the Interest Period, each Interest Period was to be six months.
Thus, when the ANZ Bank wrote to the Trustee on 11 September 1985 that “the above loan matures on 2/10/85” it was not, in my view, making a demand for repayment of the Principal amount. Rather, it was indicating that, in the absence of a request by the Trustee for a different Interest Period, the next Interest Period would expire at the end of the ensuing six months. Subsequently, by its letter of 8 October 1986, the ANZ Bank determined, in accordance with cl 5.02 of the loan application, that the interest rate for the next Interest Period expiring on 2 April 1986 would be 6.917%. There was no right in the Trustee as the customer to repay the loan or otherwise withdraw from the facility agreement because it deemed the interest rate determined by the ANZ Bank for any given interest period to be excessive. By cl 5.03 of the loan application, the ANZ Bank’s determination of the rate was conclusive and binding on the customer. Nor did the obligation to lodge the amount of the “excess”, being the deterioration at any Interest Payment Date of the value of the Australian dollar relative to the currency in which the loan was denominated, give the Trustee an election to make an early repayment of the principal.
In the present case, all that occurred on 2 April 1986 was the expiration of the second Interest Period and the concomitant determination by the ANZ Bank, pursuant to cl 5.02 of the loan application, of the interest rate for the succeeding Interest Period. By contrast, on 30 September 1986, there occurred a consensual discharge of the facility agreement and the erection of a new agreement for a loan denominated in $US. That new loan agreement was clearly an “eligible contract” as defined in s 82W(1)(a).
The fact that the ANZ Bank described what happened at the end of an Interest Period as a “roll-over” or referred to the date at the end of an Interest Period as the “maturity date” does not allow those events to amount to a loan having been rolled over or the period for which money had been lent having been extended within the meaning of s 82W(1)(b) properly construed with the aid of the preparatory material contained in the Explanatory Memorandum. That material makes clear, in my view, that a roll-over or extension could only occur after the pre 19 February 1986 loan contemplated by the agreement embodied in the loan application had, in fact, matured or had been discharged either upon demand having been made by the lender or by mutual consent of the borrower and the lender. Mutual consent of that kind actually made possible the erection, on 30 September 1986, of the alternative agreement for a loan in $US which is accepted on both sides as an eligible contract for the purpose of s 82W(1). It is to be noted that, contrary to the suggestion in the evidence of Spiros Stamoulis and Helen Stamoulis, that the loan could be paid out on any roll-over date, there is no indication in the foreign currency loan application that the Trustee was to have a right to repay the principal, with or without penalty, at any time before the expiration of the full five year term of the loan.
For these reasons, I have been led to conclude that the Tribunal correctly applied Division 3B when it rejected the contention that a new “eligible contract” did not come into existence on the expiration, on 2 April 1986, of the second Interest Period contemplated by the original loan agreement. I turn now to consider the applicants’ alternative contention that the Tribunal erred in concluding that the foreign currency exchange loss which the Tribunal found had been incurred on 2 October 1986 was not deductible pursuant to s 51(1) of the Act.
Was the foreign exchange loss deductible under s 51(1)?
The Tribunal’s reasoning on this second point is expressed as follows in paras 13, 14 and 15 of its reasons:
13. It was further argued for the applicants that the exchange loss is an allowable deduction, at least in part, under the provisions of section 51(1). It was said that, of the $A1,500,000 borrowed on 2 April 1985, $796,300 or 53 per cent of the moneys borrowed was on revenue account. The $796,300 consisted of:
Payment for Stock 450,000
Purchase of Debtors 260,000
Payment to Grape Growers 86,300$796,300
It was submitted that these three items were on revenue account and any exchange loss related to the funds borrowed for this expenditure was also on revenue account. It was further argued that the proceeds of the loan generally were part of the fixed circulating capital of the trust and remained so.
14. The evidence showed that the wine business purchased in March 1985 was subsequently sold to H. Pty Ltd in September 1985. Having found that the loss on currency exchange was realised on 2 October 1986, we take the view that the loss was only incurred on that date. The trust had ceased having any interest in the wine business some 12 months previously. Whilst it might be said that interest on borrowed money accrues from day to day and is incurred daily, the foreign currency loss is incurred on the date that the foreign currency is realised. At that date, it is not possible to accept any nexus between the loss and any expenditure incurred some 18 months previously in relation to a business which ceased some 12 months previously. Having reached that view, it is unnecessary to consider whether it is possible to apportion the loss between revenue and capital. Given that the loan was entered into predominantly for the acquisition of a business, it may well be argued that the whole of the borrowings were on capital account. The decision of the Federal Court in FC of T v Hunter Douglas Limited 83 ATC 4562 supports this view. The original acquisition of trading stock as one of the assets acquired in the purchase of the business can be distinguished from the purchase of stock by a taxpayer in the course of conducting a business and decisions such as that in Thiess Toyota Pty Ltd v FC of T 78 ATC 4463 and FC of T v Cadbury-Fry Pascall (Australia) Pty Ltd 79 ATC 4346 can be distinguished.
15. Mr Searle then sought to argue that the relevant funds can be traced through the G Trust to loans to other associated trusts and entities for the production of assessable income. The best that he was able to demonstrate was that loans totalling $1,356,498 at 30 June 1987 and $1,700,278 at 30 June 1988 had been made to trustees of other trusts (exh A, T13). During both those years, substantial distributions of income were received by two of those trusts. Apart from the statement in evidence and Mr Searle’s submission, no evidence of any direct nexus between loans to trusts and derivation of trust income was produced. The arguments were in, general, non specific terms. Whilst not made clear in evidence, it would appear that the other trusts were discretionary trusts and the investments by the G Trust were by way of unsecured loans, not in any form of fixed investment in equity. No evidence of the use of the funds by these associated trusts was provided. Consequently, we are unable to ascertain any direct or even indirect nexus between the funds borrowed and their investment and derivation of assessable income. As a result, we are unable to see that section 51 provides any basis for deductibility of the foreign currency loss realised in October 1986.
Mr Searle submitted that the Tribunal had erred in law in concluding that, as at 2 October 1986 when the foreign currency loss was incurred or realised, “it is not possible to accept any nexus between the loss and any expenditure incurred some 18 months previously in relation to a business which ceased some 12 months previously”. It is clear that the mere lapse of time between the cessation of a business and the incurring of a loss or expenditure on revenue account in relation to that business does not preclude that loss or expenditure from being deductible under s 51(1).
Thus, in Pacific Management Pty Placer Limited v Federal Commissioner of Taxation [1995] ATC 4,459 the taxpayer had contracted in 1978 to supply a conveyor system to a coal company. In July 1981 it sold its conveyor belt business to another company but shortly afterwards the coal company commenced legal proceedings against the taxpayer in respect of alleged deficiencies in the conveyor system. Those proceedings were eventually settled on terms that the taxpayer should pay $325,000 to the plaintiff together with legal fees of $58,379. It was held by a Full Court of this Court on appeal that the moneys paid pursuant to the settlement were deductible under s 51(1).
After analysing the reasoning of the High Court in Amalgamated Zinc (De Bavay’s) Ltd v Federal Commissioner of Taxation (1935) 54 CLR 295 and AGC (Advances) Ltd v Federal Commissioner of Taxation (1975) 132 CLR 175, the Full Court concluded, at 4,464:
In our view AGC should be taken as establishing the proposition that provided the occasion of a business outgoing is to be found in the business operations directed towards the gaining or production of assessable income generally, the fact that that outgoing was incurred in a year later than the year in which the income was incurred and the fact that in the meantime business in the ordinary sense may have ceased will not determine the issue of deductibility. There is no relevant distinction to be drawn between losses and outgoings. Provided the occasion for the loss or outgoing is to be found in the business operations directed to gaining or producing assessable income, that loss or outgoing will be deductible unless it is capital or of a capital nature.
On the facts of the present case the occasion of the loss or outgoing ultimately incurred in the year of income was the business arrangement entered into between Placer and NWCC for the supply of the conveyor belt which was alleged to be defective. The fact that the division had subsequently been sold and its active manufacturing business terminated does not deny deductibility to the outgoing. A finding to the contrary would lead to great inequity. Many businesses generate liabilities which may arise in the considerable future. Such liabilities are sometimes referred to as “long tail liabilities”. To preclude deductibility when those liabilities come to fruition on the basis that the active trading business which gave rise to them had ceased would be unjust.
... The case of Inglis v FC of T 80 ATC 4001; (1979) 28 ALR 425 upon which the Commissioner relied, provides no authority to the contrary. It is clearly distinguishable. In that case the occasion of the outgoings in question was not to be found in some prior primary production business. Indeed it had been concluded at first instance that no business had been carried on at all and that conclusion was confirmed on appeal. If anything the expenditure for which deduction was claimed was expenditure to preserve the property as a pastoral property and had the character of capital.
Similarly the comments by Northrop and Fisher JJ in Paklan Pty Ltd (In Liq) v FC of T (1983) 67 FLR 328 at 351 may be taken to suggest that in that case the occasion of the outgoing to pay retirement benefits being incurred was not to be found at all in the earlier business of the taxpayer.
Ultimately we did not understand senior counsel for the Commissioner to contend otherwise. It was conceded that the mere circumstance that business had ceased for some years did not disentitle Placer to a deduction. Rather it was said that the fact that business had long since terminated was but one among many relevant factors to be considered in determining whether there existed the necessary connection between the outgong and the production of assessable income as required by the s 51(1).
No doubt it is true that all relevant facts will need to be considered in the circumstances of a particular case. However the present is a case where all relevant facts were known and had been put by agreement to the Tribunal. In our view those relevant facts resulted necessarily in the conclusion that the amounts payable under the settlement to NWCC and the legal costs incurred in respect thereof were allowable deductions in the year of income.
Similarly, in Commissioner of Taxation v Riverside Road Lodge Pty Ltd (In liquidation) (1990) 23 FCR 305 the taxpayer borrowed moneys for the purpose of buying land, erecting a motel on it and providing plant and equipment and working capital. Later, on 31 January 1979, the taxpayer sold the land and business to a unit trust and leased them back so that it could continue to conduct the motel business. The Commissioner disallowed a deduction for the portion of loan interest referable to the land and buildings. The Full Court, at 313 made these general observations about s 51(1) of the Act:
The language of the section introduces, as Professor R W Parsons points out in his work Income Taxation in Australia: Principles of Income, Deductibility and Tax Accounting (LBC) (1985), pars 5-37 to 5-48, an element of contemporaneity. Thus an outgoing may be precluded from deductibility if it be incurred at a point too soon before the commencement of the business or income producing activity (Commissioner of Taxation (Cth) v Maddalena (1971) 45 ALJR 426; Lodge v Commissioner of Taxation (Cth) (1972) 128 CLR 171) or if it is incurred after the business or activity has ceased (for example Amalgamated Zinc (De Bavay’s)), at least in the latter case where a considerable time had passed and the taxpayer had given up all thought of mining. However, the subsequent case of AGC (Advances) Pty Ltd (supra) while not a case where the business had wholly ceased, although operations had been suspended, suggests that there should be some qualification to the absolute principle suggested in Amalgamated Zinc (De Bavay’s). Mason J in AGC (Advances) Ltd at 197-198, discussing a loss incurred by writing off a debt after a company had ceased to carry on as a going concern the business in which the debt was created, remarked that:
“even in such a case it may be correct to speak of the loss as having been incurred in the carrying on of the business. This is because the occasion for the loss is to be found in a transaction entered into in the carrying on of the business for the purpose of producing assessable income ...”
After observing that the case had to be resolved by determining whether the essential character of the interest outgoings after the sale and lease back was such that they were incurred by the taxpayer in the course of the gaining or production of assessable income, or, having regard to the business then carried on, they were necessarily incurred by the taxpayer in carrying on that business, the Full Court continued, at 315:
A question arises in this case as to when the interest outgoings ceased to have the necessary character of incidental and relevant outgoings. As at 1 February 1979 the loan to Perpetual Trustees was repayable on 1 May 1979. It was in fact repaid on that date. The remaining interest was incurred pursuant to the terms of a new borrowing entered into after the restructuring. It seems to us that it does not follow from Amalgamated Zinc (De Bavay’s) case, particularly if regard be had to the comments of Mason J in AGC (Advances) Ltd to which we have referred, that the mere fact that the land and buildings were sold necessarily results in the conclusion that as and from the date of sale the whole of the interest incurred was not deductible. The respondent, pursuant to the contractual arrangements it had entered into, was obliged when it was an owner/operator to continue to pay interest until 1 May 1979. Had it sought to discharge its obligation to the mortgagee, it could have been required to pay interest to this date. In the circumstances of the present case therefore it cannot be said that the change in character of the business activity of the respondent immediately excluded the interest payable by it to the mortgagee from deductibility. Rather it seems to us that the respondent was entitled to a deduction of such part of the disallowed interest as related to the borrowing of moneys reflected in the Perpetual Trustees’ mortgage until 1 May 1979 and as related to the land and buildings upon which the motel was situated. It will be necessary to remit the assessment of the 1979 year back to the Commissioner to re-assess the amount of the deduction in accordance with these reasons ...
The interest, so far as it related to the shareholders’ loan accounts, is in a different position. Although these loans were as at 31 January 1979 not repayable until some time in the future, an arrangement was reached, presumably on 1 February 1979, with the shareholders that all shareholders’ loans would be extended until 31 December 1985. In these circumstances we are of the view that the relevant connection between the interest outgoings and the respondent’s business activities was broken on 1 February 1979 so that no part of the interest thereafter incurred was deductible.
It is trite to observe that Riverside Road concerned the deductibility of interest payments on moneys borrowed originally to acquire the physical structure intended to be used to produce income. The present case concerns a loss incurred when the taxpayer was required to repay the capital sum or principal borrowed for a similar purpose. The question which the Tribunal therefore had to resolve was whether a foreign exchange loss incurred in making that repayment was incurred in gaining or producing assessable income or was necessarily incurred in carrying on a business for the purpose of gaining or producing such income within the meaning of s 51(1) of the Act. That sub-section provides:
All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income.
Although the Tribunal in para 14 of its reasons quoted above acknowledged that interest accrues periodically, whereas the foreign exchange loss incurred on 2 October 1986 accrued at a single identifiable point of time, it does not seem to have erected any distinction in principle between the two types of outgoing. Rather, it found that the facts of the present case precluded the acceptance of a nexus between the foreign exchange loss and the carrying on of a business acquired in March 1985 and sold in September of the same year.
It is clear that interest on a loan taken out to finance the acquisition of assets purchased with a view to the eventual conduct of a business may be incurred too early for the expenditure to be referable to the use of the capital asset in producing assessable income or to be necessarily incurred in carrying on a business for the purpose of producing assessable income; see e.g. the majority judgment in Steele v Federal Commissioner of Taxation [1997] ATC 4,239 and the cases there cited. Equally, an outgoing in the nature of interest or otherwise, incurred after the taxpayer has ceased to carry on the relevant business may not be deductible, not because of the mere lapse of time, but because the carrying on of the business cannot be regarded as in fact the occasion of the outgoing in the sense used by Mason J in AGC (Advances) Ltd v Federal Commissioner of Taxation (1975) 132 CLR 175 at 198. Thus, the Full Court in Riverside Road Lodge (supra) was able to say, at 315, of the interest on shareholders’ loan accounts after 1 February 1979 that “the relevent connection between the interest outgoings and the respondent’s business activities was broken on 1 February 1979 so that no part of the interest thereafter incurred was deductible”.
If it were appropriate to equate the foreign exchange loss in the present case with interest on funds borrowed to acquire the wine business, the relevant nexus might have been preserved had some business-connected explanation like a penalty for early repayment suggested itself for the failure to repay the foreign exchange loan between September 1985 and October 1986. No such explanation is disclosed by the evidence and I consider that the Tribunal was correct in finding that no nexus existed between the loss in October 1986 and the carrying on of the wine business.
Even if the conclusion just reached were wrong, I would have regarded the outgoing constituted by the foreign exchange loss as falling within the first limb of the exception to s 51(1) as being a loss of capital or of a capital nature. “Borrowing money to carry on business or to pay liabilities incurred in carrying on business is prima facie to increase the capital employed in the business...” (Caltex Ltd v Federal Commissioner of Taxation (1960) 106 CLR 205 per Menzies J at 251). That was described by Lockhart J in Federal Commissioner of Taxation v Hunter-Douglas Ltd [1983] ATC 4,562 at 4,575 as “no more than a prima facie presumption”. However, the presumption is stronger, I think, where the money borrowed is for the acquisition, rather than the carrying on, of the business notwithstanding that what is acquired includes, as here, trading stock and debtors.
The presumption to which I have just referred does not apply where foreign currency funds are borrowed by a finance company as a necessary incident of its business. In that case, the borrowings, and any consequential exchange gains or losses, are on revenue account (AVCO Financial Services Ltd v Federal Commissioner of Taxation (1982) 150 CLR 510). Similarly, where a foreign exchange debt is incurred as a necessary part of purchasing trading stock for use in an existing business already being conducted by the taxpayer the repayment of that debt and any concomitant gain or loss will be on revenue account; Thiess Toyota Pty Ltd v Federal Commissioner of Taxation [1978] ATC 4,463 and Federal Commissioner of Taxation v Cadbury-Fry Pascal(Aust) Ltd [1979] ATC 4,346. In the latter case, Jenkinson J said, at 4,351, of moneys paid to a UK parent company to reimburse it for payments to suppliers of cocoa beans and cocoa butter to the Australian subsidiary:
I think that the expenditure here in question - the payments in reduction of the loan account - was in substance part of the regular outlay of the respondent for raw materials regularly acquired by it for manufacture.
...The payments in question were not in my opinion repayment of loan funds forming part of the profit-yielding subject, but part of the continual flow of working expenses, and made on revenue account.
In the present case, the use to which the loans were to be put was the laying out of them in an indivisible payment of the price of a business. That was in no sense part of the continuing flow of working expenses, although undoubtedly stock-in-trade and the receipt of payments from debtors make their contribution to the working cash-flow of the business after the taxpayer has commenced to carry it on. In my view, the principal, if not the sole, purpose of the borrowing was the acquisition of the business structure which the Trust intended to exploit for the earning of profit. Accordingly, there can be paraphrased to apply to the present case the following passage from the judgment of Mason J in Commercial and General Acceptance Ltd v Federal Commissioner of Taxation (1976) 137 CLR 373 at 384:
In these circumstances the principal purpose of the borrowing was to strengthen “the business entity, structure, or organization set up or established for the earning of profit”; it was not part of the process by which the organization operated to obtain regular returns, this being the distinction drawn by Dixon J. in Sun Newspapers Ltd. v. Federal Commissioner of Taxation (1938) 61 C.L.R. 337, at p. 359 in elaborating the difference between expenditure and outgoings on revenue account and on capital account. In truth the transaction was designed to strengthen the framework within which the taxpayer intended to carry on business - see Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. [1964] A.C. 948, at p. 959; B.P. Australia Ltd. v. Federal Commissioner of Taxation (1965) 112 C.L.R. 386, at p. 392; [1966] A.C. 224, at p. 232.
At the end of the same judgment, his Honour observed at 385:
The present case is to be distinguished from cases in which a manufacturer or trader buys or sells stock-in-trade for a price payable in a foreign currency which appreciates or depreciates before payment is made. Then there is a case for saying that the exchange gain or loss forms part of the taxpayer’s assessbale income or is an outgoing in gaining or producing assessable income (Texas Co. (Australasia) Ltd. v. Federal Commissioner of Taxation (1940) 63 C.L.R. 382; cf. Armco (Australia) Pty. Ltd. v. Federal Commissioner of Taxation (1948) 76 C.L.R. 584; Caltex Ltd. v. Federal Commissioner of Taxation (1960) 106 C.L.R. 205).
Conclusion
For the reasons indicated above each of the two attacks maintained against the conclusions reached by the Tribunal has failed. Each application must therefore be dismissed with costs.
I certify that this and the preceding thirty-one (31) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Ryan.
Associate:
Dated: 29 October 1997
Counsel for the Applicants: Mr P Searle Solicitor for the Applicants: Holding Redlich Counsel for the Respondent: Mr T Murphy Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 27 May 1996 Date of Judgment: 29 October 1997
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