The Commissioner of Taxation of the Commonwealth of Australia v Total Holdings (Australia) Pty Ltd

FEDERAL COMMISSIONER OF TAXATION v. TOTAL HOLDINGS (AUSTRALIA) PTY. LTD.
(1979) 43 FLR 217
Income Tax

COURT

FEDERAL COURT OF AUSTRALIA

GENERAL DIVISION
Northrop(1), Fisher(2) and Lockhart(3) JJ.

CATCHWORDS

Income Tax - Allowable deductions - Interest paid by taxpayer to its parent company upon moneys borrowed by taxpayer - Carry forward of loss by taxpayer disallowed by Commissioner - Losses carried forward representing interest paid to parent company of taxpayer on so much of advances by parent company to taxpayer as were subsequently lent by taxpayer to subsidiary interest free - Whether payment of interest for purpose of furthering present or prospective income-producing activities an allowable deduction - Income Tax Assessment Act 1936 (Cth.), s. 51.

HEADNOTE

At all times the taxpayer was a wholly-owned subsidiary of a French corporation. From 10th January, 1963, to 31st December, 1968, Total Australia Ltd. ("T.A.L.") was a wholly-owned subsidiary of the taxpayer. On 31st December, 1968, T.A.L. became a wholly-owned subsidiary of Total Boral Ltd., which itself was equally owned by the taxpayer and Boral Ltd. In 1972 T.A.L. again became a wholly-owned subsidiary of the taxpayer.

Between 1959 and 1965 the French corporation advanced moneys to the taxpayer at three per cent per annum. Part of these moneys were lent by the taxpayer to T.A.L. free of interest and payable on demand. The loans to T.A.L. were renegotiated in 1968 so that from 1st January, 1969, T.A.L. would pay interest to the taxpayer at seven per cent per annum. T.A.L. continued to pay that rate of interest until 1976.

In its return for the year of income 1972, the taxpayer claimed as deductions losses carried forward from previous years. The losses resulted from the payment of interest to the French corporation. The Commissioner disallowed as deductions that part of the losses as related to interest paid to the French corporation on moneys which the taxpayer lent to T.A.L. interest free.

The Supreme Court of New South Wales (Meares J.) held that the interest was incurred in carrying on business notwithstanding that the loans to T.A.L. were made free of interest, and allowed the taxpayer's appeal against the Commissioner's assessment. The Commissioner appealed to the Federal Court.

Held, per Lockhart J., Northrop and Fisher JJ. concurring, dismissing the appeal - that the question whether interest is actually incurred in gaining or producing assessable income is one mainly of fact.

The evidence did not permit the inference to be drawn that the taxpayer's main or dominant purpose in making interest-free loans to T.A.L. was to increase the capital value of T.A.L. and enable a sale of T.A.L. for a capital profit.

Quaere whether such a purpose would operate to deny a business or income-producing character to the interest-free loans made over such a long period.

Evidence admitted without objection relating to events occurring after the end of the relevant year of income could only be used, if at all, to determine the proper weight to attach to relevant events prior to the end of the relevant year of income.

HEARING

Sydney, 1979, February 26; June 13. #DATE 13:6:1979

APPEAL.

Appeal from a decision of the Supreme Court of New South Wales (Meares J.).

The facts appear from the judgment of Lockhart J.

C.V. Cullinan Q.C. and R.J. Southan, for the appellant.

R.J. Bainton Q.C. and D.G. Hill, for the respondent.

Cur. adv. vult.

Solicitor for the appellant: B. J. O'Donovan (Commonwealth Crown Solicitor).

Solicitors for the respondent: Henry Davis York & Co.

J. W. K. BURNSIDE

JUDGE1

June 13.

The following judgments were delivered.

NORTHROP J. In my opinion the appeal should be dismissed with costs. I concur in the reasons for judgment given by Lockhart J. and have nothing to add. (at p218)

JUDGE2

FISHER J. I have had the advantage of reading the judgment prepared by Lockhart J. I concur in that judgment. (at p218)

JUDGE3

LOCKHART J. This is an appeal by the Commissioner of Taxation from a decision of the Supreme Court of New South Wales in its Administrative Law Division upholding an objection by the taxpayer against an assessment to tax for the year of income ended 31st December, 1972. (at p218)

The appeal concerns the question whether interest paid by the taxpayer to its parent company upon moneys borrowed by the taxpayer from it are deductible under s. 51 of the Income Tax Assessment Act 1936 (Cth.) ("the Act"). (at p218)
The facts are not in dispute. The taxpayer was incorporated in New South Wales on 25th January, 1955, for the purpose of acquiring and holding shares in Total Australia Ltd. ("T.A.L."). The activities of the taxpayer have been principally the acquisition and holding of shares in and the making of loans to T.A.L. (at p218)
Since the incorporation of the taxpayer, the sole beneficial owner of its issued share capital has been Compagnie Francaise Des Petroles ("C.F.P."), a company incorporated in France. (at p219)
T.A.L. was incorporated in New South Wales and, since its incorporation, it has carried on the business of marketing and distributing petroleum products in various parts of Australia through service stations owned by it and others to users of petroleum products. (at p219)
From 10th January, 1963, to 31st December, 1968, T.A.L. was a wholly-owned subsidiary of the taxpayer. Prior to 10th January, 1963, the taxpayer owned beneficially variously 2,162,566 and 9,997,924 shares in the capital of T.A.L. (at p219)
On 31st December, 1968, the taxpayer and its nominees transferred the whole of the issued share capital of T.A.L. to Total Boral Ltd., the shares in which were owned equally by the taxpayer and Boral Ltd. (at p219)
Between 17th August, 1959, and 31st December, 1965, C.F.P. advanced to the taxpayer a total sum of $22,969,875. Those moneys were used by the taxpayer for three purposes: to make loans to T.A.L. for use by it in its business; to pay for shares acquired by the taxpayer in T.A.L.; and to finance the operations of the taxpayer itself. The amount used by the taxpayer for the purpose of making loans to T.A.L. during this period was $15,261,279. (at p219)
All loans by C.F.P. to the taxpayer during the period 17th August, 1959, to 31st December, 1965, were made on terms that they were repayable by equal half-yearly repayments over an agreed period, being ten years in the case of loans made to 1963, and five years in the case of subsequent loans; and that the amount of the loans should bear interest at the rate of three per cent per annum. (at p219)
The terms of all loans to the taxpayer extant on 31st December, 1965, were varied by consolidating the same into one loan of $23,000,000 which was made up of capitalization of interest and certain of the principal. (at p219)
Further loans were made by C.F.P. to the taxpayer between 1st January, 1966, and 31st December, 1968, such loans being made on terms that they were repayable by equal half-yearly repayments over a period of ten years commencing on a date five years from the commencement of the year in which a particular loan was made; and that the amount of the loans should bear interest at the rate of three per cent per annum. (at p219)
The amounts advanced by C.F.P. to the taxpayer in the period from 1st January, 1966, to 31st December, 1968, were used by the taxpayer, as to the sum of $1,500,000, by lending the same to T.A.L. for use by it in its business and, as to the balance, to finance the operations of the taxpayer. (at p219)
Interest on loans made by C.F.P. to the taxpayer was payable in Paris on 30th June and 31st December each year. (at p220)
All the agreements for loan between C.F.P. and the taxpayer were in writing and provided that the moneys lent would be allocated by the taxpayer to investments in Australia approved by C.F.P. (at p220)
The procedure adopted at all relevant times by the taxpayer in seeking advances from C.F.P. was that towards the end of each calendar year a budget for the following calendar year was prepared by T.A.L. and submitted to the taxpayer's Board. Subject to the approval of the budget by the taxpayer's Board, a request was made by the taxpayer to C.F.P. for an advance to be made of a nominated amount. On approval of that request an agreement was entered into in Paris whereby C.F.P. agreed to advance to the taxpayer the required amount. If the whole of the advance was not drawn down, an agreement was subsequently entered into varying the terms of the loan agreement by reducing the amount of the agreed advance. If additional amounts were required, a supplemental agreement was entered into between the taxpayer and C.F.P. relating to the additional advance. (at p220)
All loans made by the taxpayer to T.A.L. in the period from 1st January, 1960, to 31st December, 1968, were on terms that the same were interest free and repayable on demand. (at p220)
By agreement made on 13th August, 1968, between the taxpayer and T.A.L., T.A.L. agreed with the taxpayer that the whole of the amount outstanding by T.A.L. to the taxpayer would from 1st January, 1969, bear interest at the rate of seven per cent per annum. (at p220)
The rate of seven per cent was struck after Boral Ltd. acquired a fifty per cent interest in Total Boral Ltd. (at p220)
Interest at the rate of seven per cent per annum continued to be paid by T.A.L. to the taxpayer until the 1976 year of income notwithstanding that Boral Ltd. ceased to hold its interest in Total Boral Ltd. in the 1971 year of income. T.A.L. again became a subsidiary of the taxpayer during the 1972 year of income. (at p220)
In its return of income for the year ended 31st December, 1972, the taxpayer returned a taxable income of nil arrived at after deducting losses of prior years which were carried forward and incurred as a result of the payment of interest on the loans from C.F.P. (at p220)
The Commissioner allowed as deductions such of the losses carried forward as represented interest paid by the taxpayer to C.F.P. on so much of the moneys advanced by C.F.P. to the taxpayer as were subsequently employed by the taxpayer either in paying for shares it acquired in T.A.L. or in lending moneys to T.A.L. with interest; but he disallowed as deductions such of the losses carried forward as represented interest paid to C.F.P. on so much of the advances by C.F.P. to the taxpayer as were subsequently lent by the taxpayer to T.A.L. interest free. (at p221)
The evidence does not disclose how the Commissioner arrived at the apportionment of losses; but it was common ground that nothing turned on this. (at p221)
The Commissioner disallowed the claim for deduction of losses of prior years in the sum of $24,450. There is no dispute that, if the claim was properly disallowed, that is the correct figure. (at p221)
Both parties agree that it is s. 51 of the Act which determines the deductibility or otherwise of the interest payments. (at p221)
Section 51, so far as relevant, provides: "(1) 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." (at p221)
The relation between the two limbs of sub-s. (1) was described by Fullagar J. in John Fairfax and Sons Pty. Ltd. v. Federal Commissioner of Taxation (1959) 101 CLR 30 in these terms: "The two categories of s. 51 (1) are clearly not mutually exclusive, and it has indeed been said that 'in actual working' the addition of the second category 'can add but little to the operation of the leading words "losses or outgoings to the extent to which they are incurred in gaining or producing the assessable income"' Ronpibon Tin N.L. v. Federal Commissioner of Taxation (1949) 78 CLR 47, at p 56 . But it was not denied that there may be cases which fall outside the first category and within the second. The first is directed to expenditure incurred in the actual course of producing assessable income: Amalgamated Zinc (De Bavay's) Ltd. v. Federal Commissioner of Taxation (1935) 54 CLR 295, at pp 303, 309 and W. Nevill & Co. Ltd. v. Federal Commissioner of Taxation (1937) 56 CLR 290, at p 305 . It is, primarily at least, concerned with expenditure voluntarily incurred for the sake of producing income. Its scope is not, of course, confined to cases where the income is derived from carrying on a business. The second may be thought to be concerned rather with cases where, in the carrying on of a business, some abnormal event or situation leads to an expenditure which it is not desired to make, but which is made for the purposes of the business generally and is reasonably regarded as unavoidable: Hannan, Principles of Income Taxation (1946) p. 291; Federal Commissioner of Taxation v. Snowden & Willson Pty. Ltd. (1958) 99 CLR 431 " (1959) 101 CLR, at p 40 . (at p222)
The words "the assessable income" and "such income" refer to assessable income generally of the taxpayer and not to the assessable income of a particular accounting period: Ronpibon Tin N.L. v. Federal Commissioner of Taxation per Latham C.J., Rich, Dixon, McTiernan and Webb JJ. (1949) 78 CLR, at p 56 ; Federal Commissioner of Taxation v. Snowden & Willson Pty. Ltd. per Dixon C.J. (1958) 99 CLR, at p 436 ; John Fairfax and Sons Pty. Ltd. v. Federal Commissioner of Taxation per Dixon C.J. (1959) 101 CLR, at p 35 and per Menzies J. (1959) 101 CLR, at p 46 ; Commissioner of Taxation v. Finn per Dixon C.J. (1961) 106 CLR 60, at p 68 ; and A.G.C. (Advances) Ltd. v. Federal Commissioner of Taxation per Barwick C.J. (1975) 132 CLR 175, at p 189 and per Mason J. (1975) 132 CLR, at pp 196-197 . (at p222)
As to the first limb of s. 51, the phrase "incurred in gaining or producing the assessable income" has been construed to mean "incurred in the course of gaining or producing the assessable income": Amalgamated Zinc (De Bavay's) Ltd. v. Federal Commissioner of Taxation per Latham C.J. (1935) 54 CLR, at p 303 and per Dixon J. (1935) 54 CLR, at p 309 ; W. Nevill & Co. Ltd. v. Federal Commissioner of Taxation per Dixon J. (1937) 56 CLR, at p 305 ; the Ronpibon Tin case per Latham C.J., Rich, Dixon, McTiernan, and Webb JJ. (1949) 78 CLR, at pp 56-57 . (at p222)
For expenditure to be an allowable deduction as an outgoing incurred in gaining or producing the assessable income, it must be incidental and relevant to that end: the Ronpibon Tin case (1949) 78 CLR, at p 56 . (at p222)
In Charles Moore & Co. (W.A.) Pty. Ltd. v. Federal Commissioner of Taxation (1956) 95 CLR 344 Dixon C.J., Williams, Webb, Fullagar and Kitto JJ. said: "the phrase 'incidental and relevant' when used in relation to the allowability of losses as deductions do not refer to the frequency, expectedness or likelihood of their occurrence or the antecedent risk of their being incurred, but to their nature or character. What matters is their connection with the operations which more directly gain or produce the assessable income" (1956) 95 CLR, at p 351 . (at p222)
For expenditure to constitute a deduction under s. 51, it is not necessary that the taxpayer carries on a business. It is sufficient for the purposes of the first limb of the subsection that the expenditure be incurred in relation to the management of the income-producing enterprise of the taxpayer: Federal Commissioner of Taxation v. Green (1950) 81 CLR 313, at p 319 . (at p223)
As to the second limb, it is clear that there must be a relation or nexus between the expenditure and the carrying on of the relevant business: Federal Commissioner of Taxation v. Snowden & Willson Pty. Ltd. (1958) 99 CLR 431 . (at p223)
In John Fairfax and Sons Pty. Ltd. v. Federal Commissioner of Taxation Menzies J. said that in order that an outgoing falls within the second limb of the subsection it "must have been incurred in the carrying on of a business, that is, it must be part of the cost of trading operations" (1959) 101 CLR, at p 49 . (at p223)
The word "necessarily" where appearing in the subsection means "clearly appropriate" or "adapted for": see Commonwealth v. Progress Advertising & Press Agency Co. Pty. Ltd. per Higgins J. (1910) 10 CLR 457, at p 469 ; the Ronpibon Tin case (1949) 78 CLR, at p 56 and Federal Commissioner of Taxation v. Snowden & Willson Pty. Ltd. especially per Dixon C.J. (1958) 99 CLR, at pp 436-437 and per Fullagar J. (1958) 99 CLR, at p 444 . (at p223)
In order to be deductible, a loss which flows from carrying on a business, need not necessarily be incurred in a year when the taxpayer is actively carrying on that business: see A.G.C. (Advances) Ltd. v. Federal Commissioner of Taxation (1975) 132 CLR 175 . (at p223)
The question whether interest is actually incurred in gaining or producing assessable income is one mainly of fact: see Usher's Wiltshire Brewery Ltd. v. Bruce (1915) AC 433, at p 466 ; New Zealand Flax Investments Ltd. v. Federal Commissioner of Taxation (1938) 61 CLR 179, at p 198 ; Texas Co. (Australasia) Ltd. v. Federal Commissioner of Taxation per Starke J. (1940) 63 CLR 382, at p 450 . (at p223)
In the Ronpibon Tin case Latham C.J., Rich, Dixon, McTiernan and Webb JJ. said: "The question what expenditure is incurred in gaining or producing assessable income is reduced to a question of fact when once the legal standard or criterion is ascertained and understood" (32). (at p223)
If a liability for interest is incurred for the purpose of introducing capital into an income gaining business, the payment of interest is allowable as a deduction: see Federal Commissioner of Taxation v. Munro (33); Texas Co. (Australasia) Ltd. v. Federal Commissioner of Taxation per Latham C.J. (34) and per Dixon J. where his Honour said: "Some kinds of recurrent expenditure made to secure capital or working capital are clearly deductible. Under the Australian system, interest on money borrowed for the purpose forms a deduction. So does the rent of premises and the hire of plant" (1940) 63 CLR, at p 468 . (at p224)
If a taxpayer with a continuing business incurs a liability for interest being incidental to or connected with the operations or activities regularly carried on for the production of income, the interest is an allowable deduction. The circumstance that each item of expenditure cannot be traced to a particular item of income does not prevent the deduction of the expenditure: see Ward & Co. Ltd. v. Commissioner of Taxes (1923) AC 145, at p 148 ; De Bavay's case (1935) 54 CLR, at p 307 ; W. Nevill & Co. Ltd. v. Federal Commissioner of Taxation (1937) 56 CLR, at p 305 and Texas Co. (Australasia) Ltd. v. Federal Commissioner of Taxation per Starke J. (1940) 63 CLR, at p 451 . (at p224)
In my opinion if a taxpayer incurs a recurrent liability for interest for the purpose of furthering his present or prospective income-producing activities, whether those activities are properly characterized as the carrying on of a business or not, generally the payment by him of that interest will be an allowable deduction under s. 51: see Munro's case (40); Texas Co. (Australasia) Ltd. v. Federal Commissioner of Taxation (1940) 63 CLR 382 ; Federal Commissioner of Taxation v. Green per Latham C.J., McTiernan, Webb, Fullagar and Kitto JJ. (1950) 81 CLR, at p 319 ; and Usher's Wiltshire Brewery Ltd. v. Bruce (1915) AC 433 . (at p224)
I say "generally" as some qualification may be necessary in appropriate cases, for instance, where interest is paid by a taxpayer as a prelude to his being in a position whereby he may commence to derive income. In such cases the requirement that the expenditure be incidental and relevant to the derivation of income may not be satisfied: see Lodge v. Federal Commissioner of Taxation (1972) 128 CLR 171 ; Commissioner of Taxation v. Hatchett (1971) 125 CLR 494 . (at p224)

The Commissioner does not dispute the right of the taxpayer to deduct so much of the interest paid to C.F.P. as is referable to the moneys borrowed from C.F.P. which were in turn, or their monetary equivalent was, used by the taxpayer to acquire, by purchase or allotment, shares or further shares in T.A.L. As the shares held by the taxpayer in T.A.L. were by their very nature inherently capable of generating dividends from T.A.L., whether in the short or long term, when profits were made by T.A.L., the moneys thus expended, the Commissioner agreed, were outgoings incurred in carrying on the taxpayer's business of a holding company or were directly related to the income-producing activities of the taxpayer. (at p225)
Nor does the Commissioner deny the taxpayer the deductibility of interest paid to C.F.P. on moneys lent by it to the taxpayer which were, or the monetary equivalent was, then lent to T.A.L. with interest at seven per cent per annum. (at p225)
The Commissioner asserts that the position is different as to moneys advanced by the taxpayer to T.A.L. free of interest. Although conceding that the taxpayer carried on a business, namely holding shares in T.A.L., he contends that there is no direct nexus between any income-producing activities of the taxpayer and the making of advances interest free to T.A.L. The Commissioner concedes that, if the advances were made with interest, there would be a relevant nexus between moneys received from C.F.P. and moneys advanced to T.A.L., because the interest paid on the loan from C.F.P. of three per cent would be measured, to some extent, the exact proportion not being relevant in the Commissioner's view, by the interest received from T.A.L. (at p225)
In support of his contention the Commissioner asserts that the purpose of the taxpayer in borrowing from C.F.P. and lending to T.A.L. free of interest was to render T.A.L. profitable as soon as possible so that some of the shares held by the taxpayer in T.A.L. could be disposed of to a purchaser outside the Total group for a capital profit. The Commissioner disavowed that the profits arising from such disposition of shares in T.A.L. would answer the description of income according to ordinary concepts or would fall for tax under s. 26 (a) of the Act. (at p225)
Fundamental to the Commissioner's argument is the evidence of Monsieur Dalemont. Monsieur Dalemont gave evidence both by affidavit and orally. He was cross-examined briefly; but not only is there no suggestion that his evidence ought not to be accepted, the Commissioner in fact relies on it. Monsieur Dalemont was employed by C.F.P. as one of its general managers in charge of foreign refining and foreign marketing operations and as general manager of operations of C.F.P. He was also a director of C.F.P. from January 1973 until January 1977. He was a director of T.A.L. from June 1955 until November 1968. He formed the opinion that T.A.L. would commence to earn a profit around the end of the 1960's and he so informed the board of C.F.P., as did other directors of T.A.L. Monsieur Dalemont gave evidence that it has been the policy of the Total group to establish trading subsidiaries in various countries throughout the world and make them profitable, or as he put it "stand on their own feet", as soon as possible. Sometimes the group had disposed, in one form or another, of portion of its holding in the trading subsidiary to outside interests for capital profit. This was always a possibility in the case of the investment in the Australian trading subsidiary; but it was not a purpose or object in establishing that subsidiary, or, indeed, in its being funded by the taxpayer from time to time over the relevant years. It may not have been profitable. If it was, then portion of the taxpayer's shareholding may have been disposed of; but again it may not. (at p226)
Monsieur Dalemont deposed in his affidavit to having discussed the subject of borrowings between the taxpayer and T.A.L. with one of the directors of the taxpayer who subsequently became its chairman. He said that he recalls they discussed the need for T.A.L. to finance its oil stocks in Australia in the short term with Australian banks or other finance institutions. Monsieur Dalemont said that he negotiated overdraft facilities for the taxpayer with the Banque Nationale de Paris initially to a limit of $500,000 which was varied later from time to time. He said that, to enable the most advantageous arrangements to be made, it was essential that the operating results of T.A.L. appeared "no worse than was unavoidable" and that this played a part in the decision by the taxpayer to lend moneys to T.A.L. free of interest. He said that when the decision was made by the Board of the taxpayer that its loans to T.A.L. would be free of interest, the taxpayer's Board considered the then and future needs of T.A.L. to borrow money in Australia from banks or other finance institutions to finance its purchase and holding of crude and refined oil in Australia; and also considered the desirability from the point of view of T.A.L., and therefore of the taxpayer, and ultimately of C.F.P., of T.A.L.'s accounts revealing an operating profit as soon as possible. He said that the funding of T.A.L. by interest-free loans was the best and most obvious means of establishing T.A.L. as a profit-making subsidiary as soon as possible and of presenting its accounts in the most favourable light. (at p226)
From 1957 until 1968, when Boral Ltd. acquired its holding of fifty per cent of the share capital of Total Boral Ltd., moneys were from time to time borrowed by the taxpayer from C.F.P. at an interest rate of three per cent for the purpose of funding the marketing operations of T.A.L. Monsieur Dalemont said that in lending money interest free to T.A.L. the taxpayer acted as an arm of C.F.P. having the objective of bringing profits to T.A.L. more quickly, so that in due course profits would be received by the taxpayer by way of dividend or interest, and ultimately those profits would be paid by the taxpayer to C.F.P. He said that the purpose was to bring about a faster return to the taxpayer on the funds invested by it in T.A.L. and correspondingly a faster return on the moneys invested by C.F.P. (at p227)
Monsieur Dalemont said that at all times from 1955 until 1977, C.F.P. has followed "a policy of dividend flow for its affiliated companies". (at p227)
He said that towards the end of the 1960's it became apparent that it was no longer as profitable as before for T.A.L. to import refined oil products into Australia, and that it was less expensive to bring crude oil into Australia in larger tankers. Boral Ltd. had a refinery but no outlet for petroleum products. T.A.L. had outlets for petroleum products but no refinery. Hence the arrangement was reached for a combined refining and marketing operation between Boral Ltd. and the Total group. Under that arrangement, crude oil was to be imported into Australia at world market prices (posted prices) less rebates, on a basis that meant that the Australian joint investment would receive crude oil at competitive prices. In the arrangements between the two groups, discussions took place as to the rate of interest that should be charged by both Boral Ltd. and the taxpayer on loans made to T.A.L. Monsieur Dalemont said that as Boral Ltd. was a public company, it would not consider lending money at no interest. He said that he arranged for loans from the taxpayer to T.A.L. to be at the same rate of interest as loans from Boral Ltd. to Total Boral Refineries Ltd. The rate finally determined was seven per cent per annum being a relatively low long-term interest rate. (at p227)
All loans by the taxpayer to T.A.L. were repayable on demand, so that there was nothing to prevent the taxpayer, at any time it wished, saying to T.A.L. that, if it wished to retain the use of the loan moneys, it would henceforth be obliged to pay interest. This is precisely what happened in 1968 when Boral Ltd. took up its fifty per cent shareholding in Total Boral Ltd. Interest was thereafter repayable at seven per cent per annum and was in fact charged, not only whilst the joint enterprise with Boral subsisted but, after its termination in 1972, when interest at seven per cent continued to be charged through to the income year 1976, notwithstanding that T.A.L. had become again a subsidiary of the taxpayer. Thus, after 1968 the taxpayer derived assessable income from the payments of interest at the rate of seven per cent per annum by T.A.L. and, during the same years, paid interest to C.F.P. at the rate of three per cent per annum. (at p227)
There may be some question as to the use that may be made of evidence as to events occurring in years of income after the year ended 31st December, 1972, although evidence of those events was admitted before the learned trial judge without objection, and it was not submitted to this Court that such evidence could not be taken into consideration. If use is to be made of it at all, it is to determine the proper weight to attach to relevant events occuring during the years of income up to and including the year of income ended 31st December, 1972: see Willis v. Commonwealth per Dixon J. (1946) 73 CLR 105, at p 116 and Nelungaloo Pty. Ltd. v. Commonwealth per Williams J. (1947) 75 CLR 495, at p 515 . The conclusions I have reached would be the same whether or not events after 31st December, 1972, are taken into consideration. (at p228)
In my opinion the evidence does not permit the inference to be drawn that it was the dominant or, for that matter, any purpose of the taxpayer, in making interest-free loans to T.A.L. that once T.A.L. became profitable, a substantial portion of the shares held by the taxpayer in T.A.L. would be disposed of to some outsider for capital profit. Even if the evidence did warrant the drawing of this inference, I am far from satisfied that it would operate to deny a business or income-producing character to the interest-free loans over such a long period of time. However, not only does the evidence not justify the drawing of the inference sought by the Commissioner; rather it establishes that the making of the interest-free loans to T.A.L. was incidental and relevant to the derivation of income by the taxpayer and formed part of its business activities. (at p228)
This is a case of a large group of companies with international affiliations establishing through the taxpayer a trading subsidiary in Australia, requiring the outlay of large sums of moneys over a long period of time. Indeed, some $23,000,000 had been advanced by C.F.P. to the taxpayer by 31st December, 1965. When fifty per cent interest in T.A.L. was sold to Boral Ltd. in 1968 interest was charged by the taxpayer on the loans outstanding by T.A.L. at seven per cent per annum and continued to be charged after the 1972 tax year notwithstanding that Boral Ltd. withdrew from the joint enterprise in 1972. When the taxpayer received the moneys advanced by C.F.P. it used them in one of three ways: by taking up shares or purchasing shares in T.A.L., keeping moneys for its own running expenses and as to the greater part by making interest-free loans to T.A.L. (at p228)
The moneys advanced by C.F.P. to the taxpayer were required, by the terms of the loan agreements, to be allocated by the taxpayer to investments in Australia approved by C.F.P. The loans were all long-term loans so structured that the taxpayer had the use of the money for a long period of time. In my opinion, it is clear from the evidence that the moneys borrowed by the taxpayer from C.F.P. were to be used by it for financing T.A.L. in whatever way was regarded as appropriate from time to time, whether this be by taking up shares in T.A.L. or making advances to it with or without interest and, if with interest, at whatever rate of interest might be thought appropriate. It was regarded as appropriate to fund T.A.L. primarily by interest-free loans, not only to place it in the best light so far as its accounts were concerned, but to minimize the tax consequences that would flow from the acquisition of further shares by the taxpayer in T.A.L. and the consequent payment of dividends by T.A.L. to it, assuming there were sufficient profits. Those dividends would not be deductible to T.A.L. (at p229)
The loans by the taxpayer to T.A.L. were repayable on demand. Thus it was within the power of the taxpayer, at any time it wished, to restructure the financing of T.A.L. by calling up the loans and using the funds in some other way, whether by taking up further shares in T.A.L. or the making of loans at an appropriate rate of interest. Also, there was no guarantee that the many millions of dollars which the taxpayer had invested in T.A.L. would ultimately produce a profitable trading entity. (at p229)
The activities of the taxpayer were designed to render T.A.L. profitable as soon as commercially feasible and to promote the generation of income by T.A.L. and its subsequent derivation by the taxpayer and thence C.F.P. (at p229)
In my opinion the liability for interest of the taxpayer to C.F.P. was incidental and relevant to the derivation of its income and was part of its business activities. The payment of interest satisfied the tests required in respect of each limb of s. 51. (at p229)
For these reasons, in my opinion the appeal should be dismissed with costs. (at p229)

ORDER

Appeal dismissed with costs.

[1979] FCA 53

13 JUNE 1979