Unilever Aus Securities Ltd v Cmr of Taxation- Cmr of Taxation v Unilever

[1995] HCATrans 302

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney   No S31 of 1995

B e t w e e n -

UNILEVER AUSTRALIA SECURITIES LIMITED

Applicant

and

COMMISSIONER OF TAXATION

Respondent

Office of the Registry
  Sydney  No S32 of 1995

B e t w e e n -

COMMISSIONER OF TAXATION

Applicant

and

UNILEVER AUSTRALIA SECURITIES LIMITED

Respondent

Applications for special leave to appeal

BRENNAN CJ
GAUDRON J
McHUGH J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 13 OCTOBER 1995, AT 9.31 AM

Copyright in the High Court of Australia

_________________

MR G.T. PAGONE:   May it please the Court, I appear on behalf of the Commissioner of Taxation in the first and second matter.  (instructed by the
Australian Government Solicitor)

MR R.F. EDMONDS:   May it please the Court, I appear on behalf of Unilever Australia Securities Limited in both applications.  (instructed by Mallesons Stephen Jaques)

BRENNAN CJ:   Mr Pagone, is it convenient for you to go first or for Mr Edmonds to go first?

MR PAGONE:   Your Honour, it probably does not matter very much; whatever is convenient to the Court.  The facts are the same.  The issues are quite different.  Perhaps it does not matter too much who starts.

If the Court pleases, the issue in the application by the Commissioner is a timing question.  It is when should a profit be brought to account?  I should say, so as to put it in perspective, the issue in relation to the other matter is whether an amount received as a profit is received on capital account or income account.  So they are, in effect, the two issues.

The facts, your Honours, are set out very concisely in the summary of argument for the Commissioner in paragraphs 4 to 7.  Essentially, what occurred was that Unilever Australia until 9 January 1989 had obligations to make certain payments to debenture holders over a period of time and at that date, on 9 January 1987, the obligations to pay in the future amounted to, roughly, $7.3 million.  By a number of agreements, mainly dated that date but there was one that was dated in December, the

taxpayer arranged for the debts of the $7.3 million to be paid in the future by the Local Government Finance Authority of South Australia.  That series of transactions, your Honours, is what was referred to as the debt defeasance transaction.

In effect, your Honours, what happened was that Unilever went to the Local Government Finance Authority of South Australia and said, “Here is $6.3 million in cash.  Will you arrange to pay the $7.3 I owe in the future?”  The difference, roughly $1 million, was said by the Commissioner to be assessable as income.  It is conceded by my learned friend that it is profit said, however, to be on capital account and it was held by Justices Lockhart and Hill in the Full Court that the amount was indeed assessable but that the amount was assessable at the end, that is to say, when the Local Government Finance Authority of South Australia discharged the obligation rather than at the beginning when the obligation was in fact accrued.  Now, your Honours, in a nutshell, they are the facts.  That part of the decision that we seek special leave for is only the timing question.

BRENNAN CJ:   But when you say, “They are the facts”, they do not really identify the relevant facts, do they?  I mean, the relevant facts, I should have thought, is what is the profit and when did it come home and are they not questions of fact?

MR PAGONE:   Indeed, your Honour, they are.  I must say perhaps I am being a little bit more concise than I need to be or ought to be, perhaps.  Certainly the facts include that the terms of the agreement committed the Local Government Finance Authority at the commencement of the arrangement then, as it were, had a legal obligation to pay the future sum to the debenture holders as and when the debts fell due so that from Unilever’s point of view, what had occurred was that it had accrued certain rights.  The profit was brought to tax on the basis of saying, “You had $6 million roughly” - “You” being Unilever - “and you gave that $6 million to the Local Government Finance Authority of South Australia in return for its promise to discharge debts totalling $7.3 million”.  The difference was said to be assessable income.

BRENNAN CJ:   Between the amount outlaid and the value of the promise?

MR PAGONE:   Exactly, your Honour, in precisely the same way as in the Peter Dixon v Lomax Case.  It was said, “If I had 100 pounds and I give it to you on condition that you pay me back 110 pounds, the difference will be treated as being assessable income”.

McHUGH J:   But even if the profit arose in January 1987, as you say, it would not be for the amount that you claim, would it, for this reason, that the present value of the $7.385 million as at January 1987 would be less than that particular sum?

MR PAGONE:   Your Honour, it is true that the present value of the $7.3 million would be less than the, as it were, difference.

GAUDRON J:   It may even be the $6 million.

MR PAGONE:   Indeed, it may.  But our system of taxation, your Honours, depends upon the nominal value of money and, indeed, your Honours, if the propositions being put to me were to be correct, whenever money was advanced at interest or something akin to interest, there would be the difference, the interest factor or the thing akin to interest would not be brought to tax, at least in part if not in whole, because in the Lomax Case where money was lent, at least in the example put by the Court, the 100 pounds, on condition that 110 pounds was repaid, the difference would not have been treated as being income because, at the end of the day, the present value was, in part, reflective of the time value of money.  So that a present value calculation would always, very frequently at any rate, produce the oddity that the interest factor would not be brought to account as tax.

GAUDRON J:   But does not the present value point to the answer to the question of fact as to when the income came home?

MR PAGONE:   Your Honour, with respect, no, because the present value calculation taken at either end, assuming that the two are the same, that the present value of $6 million when payable was $7 million and vice versa, would produce no assessable income at all because when the time came for the discharge of the obligation what the Local Government Finance Authority would be paying would be 7.3, that is true, but the 7.3 would be no more than the then present value inflated for interest and time of the 6.3.  So that, again, one would have the result that the income would not have been assessable at all.

Your Honours, may I also answer this question by saying this, that if one were to do the present value calculation, the outcome would be inconsistent with the decision in Coles Myer Finance because there what one had was promissory notes and bills discounted.  One way of seeing the discount is, of course, that it is no more than the present value of the future obligation to pay.  If so, there would be no room at all for allowing the deduction that was allowed by this Court, unanimously - I think unanimously.  I think perhaps your Honour may have been in dissent on that point.

McHUGH J:   No, no.

MR PAGONE:   No, on the contrary, your Honour decided it completely in favour of the taxpayer on that point, as I recall.

McHUGH J:   That is so.

MR PAGONE:   But the rest of the Court, of course, spread the period over time.  But there would not be any justification for that, your Honour, if the present value calculations were to be undertaken.

Your Honours, when all is said and done, a debt defeasance arrangement, when stripped of the language and the label, is no more than the acquisition of a promissory note.  What Unilever did, in substance, and to a large extent, in form, was to go to the Local Government Finance Authority of South Australia and say, “I wish to buy your promise to pay” in precisely the same way, in effect, as occurred in Coles Myer Finance with the promissory notes and bills of exchange, the difference between this case and that case being, first of all, that this is on income side not the deduction side.

McHUGH J:   It is true enough that one looks at nominal values when one is talking about income deductions on the other side but here we are getting into a quite special area of profits which are then treated as, in effect, income.  It may be that a different approach is required in determining what is a profit and one has to really look at the present values of money.

MR PAGONE:   Your Honour, that may be so.  It is respectfully submitted that it is not.  But if it is then, your Honours, that is of course why the Court ought to grant special leave or one of the reasons why because that issue, starkly as your Honour has put it, has never been considered by this Court at all.  It is obviously a widespread application of importance and ought to be considered by the Court.

Your Honours, the reason it is not so is because what one must never lose sight of in this case is that Unilever had $6 million.  It has said to the Local Government Finance Authority, “Here is $6 million.  Will you please discharge my future obligation of $7 million”.

McHUGH J:   Yes, but it did not have $7 million.  You see, that is the problem.  It had an obligation to pay $7 million in the future.

MR PAGONE:   Quite so, your Honour.  But if what Unilever had done was to have gone to a bank and said, “I have $6 million.  I wish to put it on term deposit”, so that at the end of the period of time it would have got the $7.3 million and then charged that or assigned that right to somebody else.  The difference would have been, as it happens, interest and would have been assessable over time.  The only difference, your Honours, the only material difference between the two cases is that here, from the outset Unilever has ensured that the promise to pay - and mind you, it is a promise to pay money - is on its account but to another person.  It is submitted, your Honours, that that, with respect, is not a difference.

BRENNAN CJ:   But take your example of putting it on deposit with the bank and then following that by an assignment of the debt owed by the bank to the debenture holders, what would have been the tax situation of Unilever?

MR PAGONE:   Of course we would say, your Honour, the result would have been that Unilever would have been assessable.

BRENNAN CJ:   When?

MR PAGONE:   In the case of interest, your Honour?

BRENNAN CJ:   Well, the hypothesis.

MR PAGONE:   In the hypothesis:  over the period of time.

BRENNAN CJ:   Yes.

MR PAGONE:   But, your Honour, not at the end.

BRENNAN CJ:   I am assuming that the interest would have been payable at the end of the period.

MR PAGONE:   Indeed, your Honour, but interest accrues from day to day irrespective of when it is payable and for that reason the interest would have accrued as income to the taxpayer.

BRENNAN CJ:   That was a hypothesis which, at all events, was not embraced by either party in this litigation.

MR PAGONE:   It is true that it was not advanced strenuously by either party or, indeed, perhaps at all.  I submit with respect that is probably right, it was not.  But that is not to say this Court would not - if it felt that that was the correct answer, would indeed say, “We don’t like yours and we don’t like yours but the answer is in the middle if one spreads it over time”.  One certainly does not want to say that the Court would be precluded from reaching that conclusion merely because the parties have been advocating strongly one or the other.

Your Honours, may I say this, that the Commissioner does not resile for one minute from the proposition that it is assessable at the beginning because what is different.  I was going to say that there were two differences between us and Coles Myer, and the second difference between us and Coles Myer is this:  whereas a deduction is brought to account on a jurisprudential basis, income is brought to account on the basis of ordinary concepts and usages.  Here, what happened was that right from the beginning what Unilever acquired was a valuable right which was so valuable to it that it was able to delete the liabilities from its balance sheet.

GAUDRON J:   And its value was a future value.

MR PAGONE:   With respect, your Honour, its value was a present value.  It was a present value but sounding in payment in the future but the value accrued at the present.  Your Honour, even Mr Justice Beaumont, who decided against us on the critical point, does say, clearly, that the value to Unilever was a value that accrued at the beginning.  It may assist if I just point your Honours to pages 78 and 79 of the application book where his Honour analyses in really great detail what the relationship between Unilever and Local Government Finance Authority was and at line 36 he says: 

As to the relationship between the respondent and LGFASA, in my opinion, the assumption of liability by LGFASA in the form of the promise given by it in the terms of cl.4(a) of the Liability Assumption Agreement would be specifically enforced, if necessary, by a court order made against LGFASA - - -

GAUDRON J:   Yes, but it would only be enforced in this sense, would it not, if the Finance Authority was so disposing its assets as to make it impossible for it to perform?

MR PAGONE:   Indeed.

GAUDRON J:   But it would not be enforced in any sense of requiring immediate payment.

MR PAGONE:   No, your Honour, of course not.  No, with respect, we accept that, your Honour.

GAUDRON J:   So, it is still a future obligation in a sense.  It is an obligation which does not come home until the future.

MR PAGONE:   It depends on what “come home” means, your Honour.

GAUDRON J:   Does not come home to the Finance Authority until the future.

MR PAGONE:   The obligation to pay, your Honour, no.  But the right acquired accrued at the beginning.  That is the only point, your Honour. 

GAUDRON J:   But it is a right of specific performance of a very particular kind.

MR PAGONE:   Quite so, your Honour.

specifically enforced, if necessary, by a court order made against LGFASA on the application of the respondent, before the respondent discharged its secondary liability to -

the trustee -

and the debenture holders -

and references are set out.

In other words, even if not giving rise to a “debt” in the strict sense -(see In re Michell Freelove v Mitchell [1913] Ch D 201 at 206) the respondent’s rights as against LGFASA in this regard had accrued before the dates for redemption of the - - -

GAUDRON J:   That does not seem to me to be right unless there is something very peculiar about the arrangement, about the written contract.  They would have rights if there were, for example, an indication that there would be no performance of the obligation.  But the right to have the obligation performed would not - - -

MR PAGONE:   I accept that, your Honour.  The right to have the obligation to pay performed could only be enforced at the time performance arose.

McHUGH J:   And it is a right that arises in Equity as those cases cited show.

MR PAGONE:   Indeed, your Honour.

McHUGH J:   And unless it was an indemnity it would not be enforceable at common law beforehand.

MR PAGONE:   Your Honours, there were - I do not need to pursue the point about indemnities.  All that is so and all these cases were referred to by the Court in Coles Myer and accepted.  All that is said, your Honours, is that there was a right; it was a right at the beginning.  The question is, is that enough?  Now, I see that the light has emerged, your Honours.  There are a number of matters that I did want to say in addition.

BRENNAN CJ:   There are cross appeals in this.  It may be, if counsel are agreeable to this, to have 30 minutes on either side with a 10 minute reply.

MR PAGONE:   If your Honours please.

MR EDMONDS:   If the Court pleases.

BRENNAN CJ:   Now, Mr Pagone, could I put this to you.  It seems to me that, in a sense, you are on the horns of a dilemma.  Either the profit consists of the difference between the liability to pay $6 million or the payment of $6 million and the liability to pay $7 million or it consists of the difference between $6 million and the value of the promise to pay $7 million.

MR PAGONE:   Yes, your Honour.

BRENNAN CJ:   If it is the difference between the $6 million and the $7 million then that difference arose at the time when the $7 million was paid.  If, on the other hand, it consists of the value of the promise and $6 million compared, then it is a question of what the value of the promise was at the date of the agreement and that might result in no profit but the concession on which the whole litigation proceeded was that there was a profit.

MR PAGONE:   Your Honour, the concession was not made lightly; it was made because, as a matter of commercial substance, it was essential to be able to get out from the balance sheet the liability.  That was the whole point of the arrangement, your Honour.  It is often the case that there will be a promise to pay.

BRENNAN CJ:   But the entitlement, as it were, to take it out of the balance sheet was not dependent upon the classification of the arrangement as giving rise to a profit, it was as the result of the extinguishment, practically speaking, of the liability.

MR PAGONE:   Indeed, your Honour, that is perfectly so.  But the way your Honour puts the proposition, on the face of it, does create a dilemma and a difficulty but, your Honour, with respect, once one looks at the authorities, the dilemma disappears because if the promise had been a promise to pay Unilever, it is submitted that the authorities are beyond doubt that the amount would have been brought to account as assessable income at the outset unless it is interest, in which case it would have been spread.  No question of valuation. 

Rowe’s Case is a good example of that.  In Rowe’s Case there was the selling by a trader of trading stock.  At times it required payment over a very long period of time - five years.  The Court held that what was assessable was the whole of the amount payable even though it might not be payable for quite some time.  No question of valuation.  The only difference, your Honour - the only difference is that here the promise to pay money is not to Unilever but to Unilever’s benefit.

Whilst what your Honour puts to me is, I accept, intellectually a difficulty, it is one that, it is submitted, should not present the difficulty here or, if it does, should be answered in the same way so as to create consistency with the other cases.  So that where the promise is not a promise to pay me, as a taxpayer, but a promise to pay another person so as to discharge an obligation that I have, that the nominal amount should be the amount taken into account and that it ought to be taken into account as income at the outset in the same way as a promise to pay me would have been taken into account.

McHUGH J:   Perhaps these problems arise only because the receipt of the $7 million-odd by Unilever, when it was received, was on capital account and so was the $6 million so that these problems do not really arise.  They only arise if we treat this as an income, profit.

MR PAGONE:   No, your Honour, because one of the things that was said in Myer Emporium was that a receipt may be received in the ordinary income, it is assessable - as an incident it is assessable, or if the nature of the transaction, albeit in other circumstances on capital account, show profit-making purpose.  So that a transaction such as this, it would be submitted, putting to one side Unilever’s actual circumstances but on the timing question, which is the only thing I am interested in, the answer would be the same because it would always be said by the Commissioner that a transaction such as this was always bound to produce profit and that would always be a profit‑making purpose within the Myer Emporium test.

BRENNAN CJ:   What is the reference to Rowe’s Case?

MR PAGONE:   Your Honours, I actually have some copies of that case.  It is (1971) 124 CLR at page 461.  The headnote, your Honours, adequately sums up the facts.  The relevant parts of the judgments, your Honours, apart from Mr Justice Walsh, who decided it at first instance, Justice Menzies at page 449 through to page 451, and your Honours will see that what his Honour does there is to look at the leading cases on what method gives a true reflex:  Carden’s Case, the standard texts, looking at accounting concepts, and concludes at page 450 that what the taxpayer was doing was wrong, that what should have been brought to account is the whole of the amount upon the sale.  At the bottom of page 450 there is a secondary argument which is a profit-emerging basis of a very particular kind.  That, too, is rejected.

GAUDRON J:   But his Honour does seem to be concentrating on the fact that he was dealing with a trader.

MR PAGONE:   Yes, quite so, your Honour.  Yes, I accept that.

GAUDRON J:   And the distinction is made at page 450 between a trader and a professional man.

MR PAGONE:   Quite so, your Honour, but that is what made it on revenue account for them and what would make it on revenue account here, your Honour, is that this is a finance company or, at least, the finance company of the group, in exactly the same way as Coles Myer Finance was the finance company of the Coles Myer group.  In any event, the transaction itself here is designed to produce the very profit that was, in fact, produced.

His Honour Justice Gibbs delivers a concurring narrower judgment but for present purposes effectively it is the same point.

BRENNAN CJ:   But is not the point of Rowe’s Case this, that if you are looking at the question of income under section 25, you are looking for what is the most appropriate method of determining what is an appropriate reflex

of the situation and having regard to the nature of the trade that was carried on by Rowe & Son, in this case the answer was so-and-so.  Alternatively, you can say, “Well now, it may be that you’re going to bring profit to account, that is, net profit,  taking on one side an outlay, on the other receipt”, and that profit may come in, as I suggest to you, under section 26A.  Now, if you determine what the profit is, then you can say when the profit accrues and, again, they said under the facts of this case, the profit accrues at the beginning.  Now, it seems to me that that case is very distinguishable from the present because, here, the question is, “As a matter of fact, what gives the best reflex of the situation?” and one answer to that, which the Full Court has endorsed, is that you give the answer that they have given.

The next is the profit:  “What is the profit?”  Well, if you take one of the horns of the dilemma that I put to you before, the profit accrues at the later date.

MR PAGONE:   Your Honours, if what your Honour is putting to me is that all these questions are questions I will have to deal with and, indeed, if one gets special leave I will have to deal with them but if what your Honour wants me to do is to say why the conclusion ought to be the conclusion that I ultimately contend for then I perfectly happy to do that too, your Honour, but - - -

BRENNAN CJ:   You need time to do it.

MR PAGONE:   - - - it may take some time.

BRENNAN CJ:   Yes, all right, Mr Pagone.

MR PAGONE:   I cannot put anything further, your Honour.  If your Honours please.

BRENNAN CJ:   Yes, Mr Edmonds.

MR EDMONDS:   If the Court pleases.  Perhaps, your Honours, I could deal with my learned friend’s application first, the timing question, and I will deal with that shortly.  There are, in my submission, three reasons why special leave should not be granted in relation to this application, that is on the timing point.  The first is that the decision below on the issue, at the time of derivation, is not attended with any real doubt.  It was not necessary for the learned primary judge, or Justice Beaumont in the Full Federal Court, to decide this issue but it is apparent from their reasons for judgment that they, too, would have decided the issue the same way as Justices Lockhart and Hill, that is, that no profit or gain came home until the debenture holders were paid out by the Local Government Finance Authority of South Australia. 

The second reason why I would respectfully submit special leave should not be granted is because the conclusion below accords with three authorities of this Court referred to in our summary of argument, and I refer to the Texas Case, the Armco Case and the decision of this Court in Caltex that it is the point of discharge of a liability which determines whether any profit or loss in relation to the liability has come home or been incurred.  Now, while each of those cases, your Honours, concerned exchanged gains or losses, it is submitted the principle is the same.  Rowe’s Case, as has been rightly pointed out by your Honour Justice Gaudron, involved trading stock.  The tax accounting principles for receipts and outgoings is different from the tax accounting principles in relation to profits and losses.  One only has to refer to the learned work of Professor Parsons where one sees that he devotes a separate chapter to tax accounting principles of receipts and outgoings, a separate chapter to the tax accounting principles relevant to profits and losses and a separate chapter to tax accounting principles relevant to trading stock.

The third reason why special leave should be refused is that to hold that the profit or gain, whatever it might be and however it might be measured, came home at the time the defeasance transactions were implemented would involve the contingency of the financial capacity of the assumption party months and, in this case, indeed, years down the track.  It would involve a predication as to the financial capacity down the line of the entity to meet its financial obligations.

Now, in my respectful submission, such a predication has more to do with speculation than commercial reality.  It is, as your Honour the Chief Justice has said, the adoption of those principles which reflect the best reflex of when it has come home.  For those reasons, the respondent submits that special leave on the timing point should be refused.

If I could come to Unilever’s own application.  There are three aspects of this case which warrant a grant of special leave.  The first is what I call the underlying issue, that is, the character of a gain which arises from the discharge of a liability incurred on capital account as distinct from on revenue account.  It is an important issue; an important one for all corporate taxpayers whether they carry on business as finance companies or whether they carry on business as in the ICI Case which has been referred to in the outlines from both parties and which is currently still in the Federal Court. 

It is an important issue, irrespective of the business.  It is an issue which this Court has, to my knowledge, considered on only one previous occasion and that is in the decision in Commercial and General Acceptance Limited, 137 CLR 373.

The second aspect which I would submit warrants a grant of special leave refers to the different principles applied by the members of the Full Federal Court in determining the underlying issue, the majority applying principles articulated by this Court in Myer Emporium, those principles being applicable to the acquisition and sale of property.  The dissenting judge, Justice Beaumont, applying principles following the exchange gain and loss cases such as International Nickel, CAGA and Avco Financial Services.  That divergence impels one to invite this Court to resolve the divergence.

The third aspect is the context in which the issue arises, the context in which many of Australia’s major companies have been confronted with in recent years where the financial borrowing constraints and reporting obligations under debenture trust deeds have caused them to find ways in which those constraints and obligations might be removed without having to obtain the agreement of all debenture holders which, from a practical point of view or in reality is a practical impossibility.

If I could just return briefly to each of those matters.  In relation to the first aspect, I acknowledge that in Avco this Court rejected the Commissioner’s submission that exchange gains and losses in connection with overseas borrowings by a finance company were always an affair of capital.  However, both in that case and in the case of International Nickel, it was observed that exchange gains and losses were an ordinary incident of overseas borrowings by a finance company or, in the words of Justice Mason, as he then was, in the latter case, in the International Nickel Case, such gains and losses constituted “supervening circumstances ordinarily encountered in trade”.

Now, just as this Court rejected the Commissioner’s submission in Avco that exchange gains and losses in connection with overseas borrowings by a finance company were always on capital account, it is submitted respectfully that the view of the majority in the Full Federal Court relies on a principle which equally demands rectification by this Court, namely, that all gains and losses incurred in connection with borrowings by a finance company are always an affair of revenue irrespective of the circumstances of their discharge.

GAUDRON J:   But there is a narrower way of looking at this matter too, which is the way that Mr Pagone advanced, namely, that it was a profit‑making venture.

MR EDMONDS:   I am about to come to that, your Honour.  It raises the second aspect, that is, the principles that were applied.  In my submission, the majority in the Full Federal Court - the reliance of the majority on the general principles articulated by this Court in Myer Emporium is wrong for the reason that those principles are concerned with situations where the profit arises from the acquisition and sale of property not with a profit measured by the extinguishment or reduction of a liability in the context of such operations.

Now, even if, contrary to that submission, there is some common ground amongst these different principles, it has to be remembered, as her Honour Justice Gaudron just pointed out, it was fundamental to the decision of this Court in Myer Emporium that the relevant transaction be undertaken for the purpose of profit making.  So much is recognised in the respondent’s summary of argument.  In my learned friend’s summary of argument at paragraphs 3, 8 and 12, the respondent asserts that the applicant entered into the transaction for the purpose of making the profit that was in fact made.  But the learned primary judge found that the defeasance arrangements were entered into for the purpose of securing relief from the onerous reporting conditions and financial constraints imposed by the debenture trust deed.  That appears at page 6 of the application book, lines 35 to 40.  Nothing was said, your Honours, in the Full Federal Court to cast doubt on that finding.

BRENNAN CJ:   But the proposition that the purpose was to obtain a profit is no more and no less than saying the purpose of entering into this transaction was to secure the payment by the South Australian organisation of $7 million.

MR EDMONDS:   That might be the consequence of the transaction, with respect, your Honour.

BRENNAN CJ:   It is the transaction.

MR EDMONDS:   It is the transaction.

BRENNAN CJ:   And the transactions purpose must be ascertained by reference to what the transaction is.

MR EDMONDS:   That is true, your Honour, but all I seek to make of what I just put to the Court was that there was an express finding by the learned primary judge that Unilever’s purpose in entering into this was to rid itself of the reporting obligations and the borrowing constraints that were imposed on it by the debenture trust deed.

The third aspect, the context in which the issue arises, your Honours, is one which can be expected to confront corporate taxpayers right across the board whenever they seek to discharge a liability for less or more than its face value in the context of business operations.  In this regard, contrary to the respondent’s outline of argument, there is really no difference between this case and the facts of ICI.  The only difference one can detect is that, in the case of ICI, it was a holding company whereas the applicant in this case, at least up until the time of the defeasance arrangements, was a finance company for the Unilever group in Australia, and that difference, while it existed, was not, in my respectful submission, critical,

BRENNAN CJ:   This ICI Case is one that is wending its way through the Federal Court, is it?

MR EDMONDS:   It is at the moment, yes, your Honour.  It is expected that it will probably be heard by the Full Federal Court in February next year.

For those reasons, your Honours, the applicant submits that there should be a grant of special leave on the character of the profit.  If the Court pleases.

BRENNAN CJ:   What do you say the profit is?

MR EDMONDS:   Your Honour, if the calculation is the value of the promise at the time it was given and $6 million, then there is no profit.

BRENNAN CJ:   But there was a concession that there was.

MR EDMONDS:   The case below and both at first instance and on appeal, it was conceded that there was a profit.  There is still an outstanding dispute between the parties as to how much that profit is and, as indicated in the decision of the Full Federal Court, ultimately, they have directed the matter to be sent back to the primary judge for that issue to be determined if the parties cannot agree on it, and the parties at this point in time cannot agree on it because, as appears from our outline of argument, your Honours will have noted that for statutory accounting purposes the profit that was brought to account was only $120,000, not the $1 million, being the difference between $7 million and $6 million.  So, while Unilever conceded that there was a profit arose out of this transaction, there is still no agreement on what the quantum of that profit is.

BRENNAN CJ:   What do you say the profit is?

MR EDMONDS:   Your Honour, I say that the profit is to be measured not only by reference to the difference between $7 million and $6 million but also by the cost incurred by the taxpayer in defeasing its interest obligations on the debt.  You will recall, your Honour, that the transaction with which we are concerned here only defeased or the assumption party only assumed Unilever’s principal obligations on redemption or maturity of the debentures.  The interest obligations were, effectively, defeased by another means involving the purchase of zero coupon bonds.

However, had those interest obligations not also been defeased, it would not have been possible for Unilever to remove the liability from its balance sheet and that, after all, was one of the objects of the exercise.  So, so far as the quantum of the profit is concerned, we say that it has to be reduced.  The $1 million has to be reduced by the cost to the taxpayer of purchasing the zero coupon bonds in order to have its interest obligations - - -

BRENNAN CJ:   What are the components of the calculation, however it might be drafted?  Whatever the result of it may be, what are the components of the calculation of the profit?

MR EDMONDS:   The components are, setting it up the top, the amount of the debentures paid out on maturity, $7 million; less what was paid to assume those principal obligations, $6 million, leaving $1 million; less the cost to also remove the interest obligations from the balance sheet.

BRENNAN CJ:   It seems as though the two cases have passed like ships in the night, does it not?

MR EDMONDS:   While it was conceded, your Honour, from the very outset that there was a profit involved in this matter, it has always been an issue between us as to the quantum of that profit.

BRENNAN CJ:   But you are looking at the profit from the point of view of your debenture holders and the company.  Mr Pagone looks at the profit from the point of view of the relationship between the company and the South Australian organisation.

MR EDMONDS:   I am looking at the profit, your Honour, from the point of view of what it cost the company to be able to, in accordance with the accounting standards at the time, remove this liability from its balance sheet, acknowledging that the liability is really a twin liability, a liability to pay the principle and a liability to pay the interest on the principle from the time of the defeasance transaction until the maturity of the debentures.

BRENNAN CJ:   If the Federal Court’s decision stood, the latter of those costs would be a deductible allowance, would it not?  An allowable deduction?

MR EDMONDS:   What we would say, your Honour, is that it would enter into the computation of the profit.

BRENNAN CJ:   Put it either way, it either enters into the computation of the profit or, the profit being brought to account, it becomes an allowable deduction.

MR EDMONDS:   Allowable deduction, yes, your Honour.  Unless your Honours have any further questions, they are my submissions.

BRENNAN CJ:   Thank you.  Mr Pagone.

MR PAGONE:   Your Honours, in relation to the application by Unilever, all I have really got to say is that the issues that would be raised might be very interesting but this will not be the case to raise them.  The facts of this case are simply not likely to enliven the questions about assessability because of the particular nature of this taxpayer as being a finance company, having entered into an arrangement as part of its business and the proceeds would be assessable, in my submission, on probably all three limbs of assessability raised by the Myer Emporium Case and, at the end of the day, what my learned friend really needs to do is to say that this case is different because this company was winding down its operations and if that is ultimately right, that is something special about this case that will not.....anything about anything else.  In any event, the decision is plainly correct, that the amount was assessable.

May I only say this about profit-making purpose:  that my learned friend’s submissions about the purpose not being a profit-making purpose really is just a play with words.  The purpose of the transaction was to produce the thing that was the profit, and so far as the integers of the profit are concerned, it would be open to the Court to identify what the elements of the profit would be.  If it was minded to take up the case irrespective of the fact that there may ultimately be a dispute about the underlying

valuations, that would be a matter that could be referred back to the Federal Court.  If your Honours please.

BRENNAN CJ:   The Court will adjourn briefly in order to see what course it should take.

AT 10.20 AM SHORT ADJOURNMENT

UPON RESUMING AT 10.29 AM:

BRENNAN CJ:   On the particular facts of the present case, including the concession as to the making of a profit, the prospects of success either for the taxpayer or the Commissioner on appeal are not such as to warrant a grant of special leave.  Moreover the facts of the case do not make it a suitable vehicle for considering the issues which the Commissioner seeks to raise.  For these reasons special leave is refused.

AT 10.30 AM THE MATTER WAS CONCLUDED