Stamoulis, Spiros v The Commissioner of Taxation of the Commonwealth of Australia
[1998] FCA 1546
•19 NOVEMBER 1998
FEDERAL COURT OF AUSTRALIA
INCOME TAX – assessable income - foreign currency loans - loan agreement made before 19 February 1986 - period of loan provided for in agreement sixty months and two days after final “interest determination date” - interest adjustable at end of six‑monthly or other specified “interest period” - whether loan wholly or partly “rolled over” at end of each interest period or period extended for the purposes of s 82W(1)(b) of the Income Tax Assessment Act 1936 (Cth) - whether Bank’s use of expression “rollover” in correspondence to taxpayers constituted a demand for repayment of the loan.
WORDS AND PHRASES – “wholly or partly rolled over”
Income Tax Assessment Act 1936 (Cth): s 82U, s 82V(1), s 82W, s 82W(1)(b), s 82Z(1)
Div 3B of Pt III
Commissioner of Taxation v Energy Resources of Australia Ltd (1994) 54 FCR 25 - followed
SPIROS STAMOULIS v THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
VG 639 of 1997
HARRY STAMOULIS v THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
VG 637 of 1997
HELEN STAMOULIS v THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
VG 640 of 1997
MELINA STAMOULIS v THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
VG 638 of 1997
WILCOX, TAMBERLIN & GOLDBERG JJ
MELBOURNE
2 DECEMBER 1998
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
VG 639 of 1997
ON APPEAL FROM THE HONOURABLE JUSTICE RYAN
BETWEEN:
SPIROS STAMOULIS
AppellantAND:
THE COMMISSIONER OF TAXATION OF
THE COMMONWEALTH OF AUSTRALIARespondent
JUDGES:
WILCOX, TAMBERLIN & GOLDBERG JJ
DATE OF ORDER:
19 NOVEMBER 1998
WHERE MADE:
MELBOURNE
THE COURT ORDERS THAT:
The appeal be dismissed.
The appellants pay the respondent’s costs of the appeal.
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 637 of 1997
ON APPEAL FROM THE HONOURABLE JUSTICE RYAN
BETWEEN:
HARRY STAMOULIS
AppellantAND:
THE COMMISSIONER OF TAXATION OF
THE COMMONWEALTH OF AUSTRALIARespondent
JUDGES:
WILCOX, TAMBERLIN & GOLDBERG JJ
DATE OF ORDER:
19 NOVEMBER 1998
WHERE MADE:
MELBOURNE
THE COURT ORDERS THAT:
The appeal be dismissed.
The appellants pay the respondent’s costs of the appeal.
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 640 of 1997
ON APPEAL FROM THE HONOURABLE JUSTICE RYAN
BETWEEN:
HELEN STAMOULIS
AppellantAND:
THE COMMISSIONER OF TAXATION OF
THE COMMONWEALTH OF AUSTRALIARespondent
JUDGES:
WILCOX, TAMBERLIN & GOLDBERG JJ
DATE OF ORDER:
19 NOVEMBER 1998
WHERE MADE:
MELBOURNE
THE COURT ORDERS THAT:
The appeal be dismissed.
The appellants pay the respondent’s costs of the appeal.
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 638 of 1997
ON APPEAL FROM THE HONOURABLE JUSTICE RYAN
BETWEEN:
MELINA STAMOULIS
AppellantAND:
THE COMMISSIONER OF TAXATION OF
THE COMMONWEALTH OF AUSTRALIARespondent
JUDGES:
WILCOX, TAMBERLIN & GOLDBERG JJ
DATE OF ORDER:
19 NOVEMBER 1998
WHERE MADE:
MELBOURNE
THE COURT ORDERS THAT:
The appeal be dismissed.
The appellants pay the respondent’s costs of the appeal.
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
ON APPEAL FROM THE HONOURABLE JUSTICE RYAN
VG 639 of 1997
BETWEEN:
SPIROS STAMOULIS
AppellantAND:
THE COMMISSIONER OF TAXATION OF
THE COMMONWEALTH OF AUSTRALIARespondent
VG 637 of 1997
BETWEEN
HARRY STAMOULIS
AppellantAND:
THE COMMISSIONER OF TAXATION OF
THE COMMONWEALTH OF AUSTRALIARespondent
VG 640 of 1997
BETWEEN
HELEN STAMOULIS
AppellantAND:
THE COMMISSIONER OF TAXATION OF
THE COMMONWEALTH OF AUSTRALIARespondent
VG 638 of 1997
BETWEEN
MELINA STAMOULIS
Appellant
AND:
THE COMMISSIONER OF TAXATION OF
THE COMMONWEALTH OF AUSTRALIA
Respondent
JUDGES:
WILCOX, TAMBERLIN & GOLDBERG JJ
DATE:
2 DECEMBER 1998
PLACE:
MELBOURNE
REASONS FOR JUDGMENT
THE COURT: On 19 November 1998 we heard four appeals arising from orders of Ryan J on 29 October 1997 whereby he dismissed applications by each of the four appellants. The applications challenged a decision of the Administrative Appeals Tribunal (“the Tribunal”) on 8 December 1994 confirming the respondent’s decision to disallow objections lodged against amended assessments of income tax in respect of the year ended 30 June 1988. As they raised common issues, Ryan J heard the four appeals together. Ryan J determined the issues before him by reference to s 82W and s 51 of the Income Tax Assessment Act 1936 (Cth) (“the Act”) but the appellants abandoned their grounds of appeal based on s 51 of the Act. So the only issue before the Court was the interpretation and application of s 82W of the Act. With the assistance of the written submissions of both counsel, and after hearing oral elaboration of those submissions by counsel for the appellants, we formed a view that the appeals should be dismissed with costs. We so ordered and said we would give reasons at a later date. These are our reasons.
Background
The facts to which we now refer are taken from the judgment of Ryan J and based substantially on the findings of the Tribunal. Save for the characterisation of what are said to be roll‑overs of the loan, they are not contentious.
Each of the four appellants is and was at relevant times a beneficiary of the Grater Seven Property Trust (“the Trust”). They contended that the net income of the Trust was to be assessed under s95 of the Act after deducting losses incurred on a foreign currency loan. Apparently some of the losses were said to have been incurred in earlier years but they had been included in carried forward losses which were claimed as deductible in the year ended 30 June 1988.
The issue for determination arises because 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 also excised from the taxable income of the Trust for the year ended 30 June 1988 $87,722 which was returned as foreign currency gain. After allowing other carried 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 appellants of that year to include a share of the net income of the Trust. Each appellant objected to the amended assessment on the ground that the losses incurred on the foreign currency loan should have been allowed as a deduction to reduce the net income of the Trust.
The losses claimed related to a foreign currency loan made to the Trust by the Australia and New Zealand Banking Group Ltd (“the Bank”). On 14 March 1985 the Trustee of the Trust applied to the Bank for a loan of $A1,500,000 to be denominated in Swiss Francs (“CHF”). It is necessary to refer to some of the provisions of that loan application and we will return to them. The loan of CHF 2,789,250 was drawn‑down on 2 April 1985. No formal loan agreement was produced and it was accepted before the Tribunal that the loan application form signed by the Trustee set out the terms of the loan. That form provided in effect that the provision of the loan funds should be regarded as an acceptance of the offer contained in the application The repayment date of the loan was expressed to be sixty months and two banking days after the final interest determination date during the availability period which, in the events which occurred, was effectively 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 six month interest period. The primary purpose of the loan was to fund the purchase by the Trust of a wine business. As the claim for a deduction under s 51 of the Act has been abandoned, it is not necessary to consider the purpose of the loan any further.
Subsequent to the draw‑down of the loan the exchange rate of Australian dollars to Swiss Francs moved adversely for the Trust to the extent that at 2 October 1986 the Australian dollar equivalent of the borrowed CHF 2,789,250 had become $A2,725,740. Prior to 30 September 1986 the Trustee discussed with the Bank its growing indebtedness in Australian dollars and interest costs and it was agreed that the Trustee would enter into a new loan agreement for a borrowing of $A1,500,000 with a provision to allow the borrower to convert to an alternative currency. The loan application for this borrowing was dated 30 September 1986 and was for a period of fifty‑seven months from the date of draw‑down. The loan was taken in United States dollars ($US1,697,346) and used to repay the Swiss Francs borrowed under the first loan agreement.
The exchange loss in respect of which the appellants claim a deduction is said to have occurred on 2 April 1986. The reason given for that claim is that the loan was “rolled over” on that day for the purposes of s 82W of the Act.
The loan agreement
It is necessary, in order to put Ryan J’s reasons in context and to understand the submissions of the parties, to set out certain provisions of the loan application which constituted the loan agreement between the parties and certain parts of subsequent Bank correspondence.
Paragraph 1 of the schedule identified the loan facility as $A1,500,000 and para 2 identified the currency as Swiss Francs. The expression “Interest Determination Date” was defined as meaning:
“a date two Banking Days prior to the commencement of an Interest Period”.
The expression “Interest Period” was defined as meaning:
“each period of six months (or such other period as the Bank and the Customer may agree) beginning of the last day of the immediate preceding such period …”
Clause 4 of the loan application form which was headed “REPAYMENT” provided:
“The 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”.
The expression “Repayment Dates” was defined as meaning:
“the repayment program set out in the Schedule”.
The expression “Repayment Instalment” was defined as meaning:
“the amount of the Loan Facility (expressed as a percentage) due for repayment on a Repayment Date as set out in the Schedule”.
Paragraph 7 of the Schedule was in the following form:
“Repayment Dates: … commencing 60 months and two Banking days after the date of the final Interest Determination Date during the Availability Period.”
The following paragraph appeared at the end of the Schedule:
“The making of an Advance by the Bank to the Customer shall be, and be evidence of, the acceptance by the Bank of this Application on the terms and conditions herein set out.”
The effect of all these provisions was that unless and until the Bank made a demand for repayment of the loan facility the Trust was not obliged to repay the loan for the sixty month two day period specified.
Clause 5 of the loan application form headed “INTEREST” provided in cl 5.01:
“The Customer shall pay interest on the Loan Facility for each Interest Period on demand, but unless and until demanded in arrears on each Interest Period Payment Date in accordance with the following provisions of Clause 5. The Customer may by notice in writing give to the Bank not less than five Banking Days prior to the 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”.
The correspondence from the Bank relied on by the appellants was in the following terms. On 4 April 1985 the Bank wrote to the Trustee in relation to the foreign currency loan of $A1,500,000 and set out the manner in which the loan had been disbursed. On 16 April 1985 the Bank wrote to the Trustee, further to its letter of 4 April 1985 and set out the particulars of the loan. Those particulars included interest due on 2 October 1985 and the letter stated:
“Please note that this loan is due for roll over on 2/10/85.”
On 30 September 1985 the Bank sent the Trustee a confirmation of loan form which confirmed “our loan to you from 2/10/85 to 2/04/86”. On 8 October 1985 the Bank wrote to the Trustee advising that the loan was “rolled over for a further term” and noted in the details of the loan “Maturity Date – 2/4/86”. On 11 September 1985 the Bank wrote to the Trustee in relation to the loan and advised that “the above loan matures on 2/10/85”.
Reasoning of primary judge
Ryan J identified the relevant issue before him as being whether the original Swiss Franc loan had matured on its first anniversary, 2 April 1986, and on that date been wholly “rolled over” within the meaning of s 82W(1)(b) of the Act. His Honour noted that Div 3B of Pt III was inserted into the Act by Act No 61 of 1987 and he identified the “commencing day” as defined in s 82V(1) as 19 February 1986. He then referred to s 82W(1) which is in the following terms:
“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 extension period.” (Emphasis added)
His Honour noted that the section which relevantly gives operative effect to Div 3B is s 82Z(1) which provides:
“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 in s 82V(1), in relation to a taxpayer as meaning:
“(a)a contract entered into by the taxpayer on or after the commencing day [19 February 1986], 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;”
His Honour recognised that the contract for the Swiss Franc loan entered into March or April 1985 was not an “eligible contract” within that definition and then addressed the appellants’ contention that the Swiss Franc loan had been wholly rolled‑over on 2 April 1986 so that Div 3B applied to it by force of s 82W(1) of the Act as if a loan had been made under a contract entered into at the time of the roll‑over, that is to say on 2 April 1986. His Honour analysed various provisions in the foreign currency loan application which was accepted as defining the terms of the first loan contract. His Honour then noted that funds were drawn‑down under the facility on 4 April 1985, that on 16 April 1985 the Bank wrote to the Trustee informing it that the loan was “due for roll‑over” on 2 October 1985, that on 11 September 1985 the Bank wrote to the Trustee advising that the loan “matures” on 2 October 1985, that on 30 September 1985 the Bank sent the Trustee a “confirmation of loan” confirming “our loan to you from 2/10/85 to 2/04/86” and that on 8 October 1985 the Bank wrote to the Trustee advising that the loan had been rolled‑over for a further term and that the “maturity date” was 2 April 1986. He rejected the submission that these documents evidenced a new loan resulting from a roll‑over on 2 October 1985 for a further term expiring on 2 April 1986. He also rejected the submission that dicta of the Full Court of this Court in Commissioner of Taxation v Energy Resources of Australia Ltd (1994) 54 FCR 25 supported the appellants’ contentions. Rather, he suggested, passages from the judgments in that case confirmed 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.”
His Honour found, in our view correctly, that there was nothing in the loan agreement 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 a single repayment date stipulated in the schedule being sixty months from, at the latest, 14 June 1985 and that 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 Bank for any given interest period to be excessive. His Honour held that the Bank’s letter of 11 September 1985 referring to the fact that the loan matures on 2 October 1985 was not making a demand for repayment but was rather identifying the next interest period.
His Honour concluded that all that occurred on 2 April 1986 was the expiration of the second interest period and determination of the interest rate for the succeeding interest period. His Honour held that the Bank correspondence, although referring to a “roll‑over” and “maturity date” did not allow the events which occurred to amount to a roll-over of the loan or an extension of the period for which money had been lent within the meaning of s 82W(1)(b) of the Act.
His Honour concluded that a roll‑over or extension could only occur after the pre‑19 February 1986 loan had, in fact, matured or been discharged either by demand being made by the Bank or mutual consent of the Trustee and the Bank. His Honour found that occurred on 30 September 1986 when an alternative agreement was entered into.
Appellants’ submissions
The appellants submitted that, in notifying the Trustee that the loan was due for roll‑over and had been rolled‑over for a further term, the Bank used the expression “roll‑over” in the sense explained by Hill J in Commissioner of Taxation v Energy Resources of Australia Ltd (supra) at 70‑71. Although the appellants were not prepared to submit the Bank demanded repayment of the loan on specific dates they did submit that the Bank’s use of the expression “roll‑over” meant that it was requiring repayment of the loan and was saying that it was prepared to renew the loan.
The appellants accepted that it was critical to their case that the Bank had made a demand for repayment of the loan at the end of the first and second sixth month periods after the draw‑down of the loan.
The appellants also submitted that as a matter of construction s 82W(1)(b) does not require an election of the borrower and as his Honour had found that the roll‑over or extension must occur as a result of the exercise of an option or election of the borrower he had misconstrued and misapplied s 82W.
The Commissioner submitted that in order for s 82W(1)(b) to apply there has to be a new loan replacing a previous loan, reliance being placed upon Commissioner of Taxation v Energy Resources of Australia Ltd (supra) at 70 per Hill J and the explanatory memorandum to Div 3B of Pt III of the Act. The Commissioner submitted that in this sense the loan was not wholly or partly rolled‑over or alternatively if it was, it was rolled‑over pursuant to a contractual obligation that was binding on the Trustee before 19 February 1986.
Conclusions
We are satisfied that the period of the loan provided for in the agreement between the Bank and the Trustee was the period of sixty months and two days specified in the schedule in the loan application form. We are also satisfied that at no stage did the Bank exercise the right given to it by cl 4.01 of the loan application form to make a demand for repayment of the loan. The appellants could not point to any such demand. We accept that the relevant Bank officer from time to time referred to the loan as being due for “roll‑over” or having been “rolled‑over” and having a “maturity date” on 2 April 1986. However, we are unable to see how the use of those expressions constituted a demand for repayment of the loan. It seems to us the Bank officer was referring to reconsideration or readjustment of the interest payable as provided for in cl 5.01 of the loan application form. We accept that the expression “roll‑over” has the meaning given to it by Hill J in Commissioner of Taxation v Energy Resources of Australia Ltd (supra). Hill J said at 70‑71:
“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.”
Although this is the correct meaning of the expression, we do not think the Bank officer used it in this sense. If he had intended to do so, he would have been taking a course quite contrary to the terms of the agreement constituted by the loan application form. The acceptance of the application did not give rise to an “umbrella” agreement in the sense that it provided for periodic repayment and re‑lending of the facility provided. The Swiss Franc loan was advanced by way of a single draw‑down on 2 April 1985. Indeed, the clause which allowed for pre‑payment of the whole of the facility provided that subject to the notice specified the Trustee could pre‑pay the whole of the loan facility or such lesser amount as the Bank might agree on any day which was the last day of an interest period but that any amount repaid or pre‑paid would not be available for reborrowing.
We are satisfied that his Honour correctly construed and applied s 82W. When his Honour said that the roll‑over or extension must occur as a result of the exercise of an option or election by the borrower he was saying no more than that there has to be at the time of the claimed roll‑over the equivalent of a novation, that is to say, there has to be a fresh or new agreement entered into in relation to the borrowing of the relevant funds. By referring to the words “option” and “election” his Honour was saying no more than that the borrower must enter into a new contract. This is made clear by his Honour’s observation that the relevant roll‑over or extension must not be:
“merely an adjustment of 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.”
Reference to this passage makes it clear that his Honour was drawing a clear distinction between a contractual obligation to borrow money entered into before 19 February 1986 and a contractual obligation to borrow money entered into after that date.
For these reasons we dismissed the appeal with costs.
I certify that this and the preceding nine (9) pages are a true copy of the Reasons for Judgment herein of the Honourable Justices Wilcox, Tamberlin and Goldberg JJ
Associate:
Dated: 2 December 1998
Counsel for the Appellants Mr P K Searle Solicitor for the Appellants: Holding Redlich Counsel for the Respondent: Mr T P Murphy Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 19 November 1998 Date of Judgment: 2 December 1998
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