Commissioner of Taxation v Energy Resources of Aust Ltd S190/1994 [1995] HCATrans 244 (14 August 1995)

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Sydney No S190 of 1994

B e t w e e n -

COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Applicant

and

ENERGY RESOURCES OF AUSTRALIA LIMITED

Respondent

Application for special leave to appeal

DAWSON J

McHUGH J

GAUDRON J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON MONDAY, 14 AUGUST 1995, AT 10.56 AM

Copyright in the High Court of Australia

MR D.F. JACKSON, QC: If the Court pleases, I appear with my learned friend, MR J.W. DURACK, SC, for the applicant. (instructed by the Australian Government Solicitor)

MR R.V. GYLES, QC: If the Court please, I appear with my learned friend, MR D.J. HAMMERSCHLAG, for the respondent. (instructed by Corrs Chambers Westgarth).

DAWSON J: Mr Jackson, we thought we would hear from Mr Gyles first of all in this matter.

MR JACKSON: Yes, if your Honours please.

MR GYLES: It is our submission that neither special leave question which has been identified by my learned friend fairly arises on the judgments below. Can I endeavour to explain why that it. The first special leave point which identified by my learned friends at page 2 of their submission, paragraph 3, is the so-called "realisation issue", and it was put alternatively that that arose under section 25 and section 51 of the Income Tax Assessment Act on the one hand or, on the other hand, under Division 3B of Part III of the Act.

Your Honours, as to the first of those alternatives, that is section 25/section 51, each of the judges below held that the relevant transactions were on capital and not revenue account. That is not identified as a special leave point, and nor would it be in the normal case. It is a question of fact or mixed fact and law which, we submit, was correctly decided and, in any event, is not the foundation for special leave. That being so, the so-called "realisation issue" simply does not arise on the first limb of the argument, because it is precluded by the finding that it was on capital and not revenue account. That then drives the argument to Division 3B of Part III of the Act. Now, your Honours, that division depends upon - - -

GAUDRON J: Can I take you back to the capital and revenue account?

MR GYLES: Yes.

GAUDRON J: In any event, the cost was held deductible, was it not?

MR GYLES: Not in this case.

GAUDRON J: The cost of the notes was held deductible?

MR GYLES: Not in this case, your Honour. This decision did not - it was regarded as deductible, yes - - -

DAWSON J: By the Commissioner, that is.

MR GYLES: By the Commissioner, and the parties proceeded upon that footing. It was not an issue for trial.

GAUDRON J: Yes, and you had still been proceeding on that footing?

MR GYLES: Well, I presume in later years that would be so, yes.

GAUDRON J: Yes. What difference does it make whether it is capital or income if Division 3B applies?

MR GYLES: Your Honour, I am coming to Division 3B. Your Honour is quite right. I am just putting to one side the argument that it is assessable under section 25 as income according to ordinary concepts.

GAUDRON J: But it may well be, may it not?

MR GYLES: Held not, your Honour, and we submit rightly so, and that is not the special leave point. In other words, so far as the income according to ordinary concepts is concerned, that has been decided contrary to the applicant, and their special leave point is not that finding. We also submit that, on the merits, each of the judges below were correct on that point.

DAWSON J: It is a little inconsistent, the cost of the notes, or it seems to be.

MR GYLES: Your Honour, Mr Justice Beaumont - - -

DAWSON J: We need not trouble with it, that is the way it is worked out.

MR GYLES: No. We would submit, when properly understood, no, because the question which arises upon deduction for expenses of borrowing does not decide the question as to, what might be called, deemed or notional gains.

DAWSON J: But we need not spend time on it.

MR GYLES: I would submit not. Turning then to Division 3B, which would pick up a situation which was a movement on capital account and thus excluded from section 25. Your Honours for Division 3B to apply there must be an eligible contract and an eligible contract prior to the particular date, because this is a closed period point, if I make myself clear, your Honours. There was a commencement date, and you had to have eligible contracts after that date. It was found below that there was no eligible contracts by Mr Justice Beaumont, and no eligible contract prior to the relevant date by each of Mr Justice Gummow and Mr Justice Hill. We submit that therefore one does not ever get to the question of realisation, the special leave point, under Division 3B, in this case. It is a very bad vehicle for the point, because - - -

GAUDRON J: Why does it not arise right back at the deductibility point where you are working out the cost of the notes?

MR GYLES: Your Honour, because the deductibility point does not arise under 3B.

GAUDRON J: I know, but why do you not do the same realisation test when you are working out the cost of the notes?

MR GYLES: Your Honour, that will require a longer answer, your Honour, because this case deals with gain, not with deductibility.

GAUDRON J: But could I take you back just somewhat? In essence, it depends on how you do a calculation - - -

MR GYLES: No, with respect.

GAUDRON J: - - -does it not? Whether you do a conversion simply at the maturity date or whether you do conversions then and at the issue date and take the difference.

MR GYLES: Your Honour is assuming there that he is looking at the promissory note. Well, that is not the way the courts below looked at it. That is the problem for the applicant. Even if there were a realisation question which demanded special leave, and we submit there is not, you never get to it under either limb of assessability. Under Division 3B, it is requisite that you have an eligible contract prior to the relevant date and, on the facts, that has been rejected below so that the realisation point does not arise in this appeal. It did not arise below on those findings and would not arise, and could not arise, if special leave were granted. Your Honours would then be confronted with deciding questions of fact as to what the contract was and what its date was, and also questions of fact, presumably, as to capital income under the first heading.

McHUGH J: I know the way it is put on the special leave application, but what about the way it was put before the Full Court at page 99, line 26, where the Commissioner was of the view that:

the proper treatment for the purposes of the Act was to calculate first, in Australian dollars at the time of issue of the note -

and then subsequently at maturity date?

MR GYLES: Yes, your Honour, but that is taking the notes. Let me leave aside the question which is behind what your Honour is putting to me and point out that that deals with notes, individual notes.

McHUGH J: I appreciate that.

MR GYLES: Now, that was the argument put by the Commissioner at first instance. It was rejected and it was not pursued on the Full Court appeal, so I am told, and that appears to be correct. So one never gets to that point in this appeal. If you have no eligible contract prior to the date then 3B is irrelevant and, your Honour, no matter what the position may be in some other case, the factual findings here are against the point ever arising.

McHUGH J: I must say, one of my difficulties with the case is the way it has been conducted in the courts below, I think, with great respect.

MR GYLES: Your Honour, that does not make it a special leave point.

McHUGH J: No, I appreciate that.

MR GYLES: On the contrary, I would submit. But, your Honours, we, in any event, do not shrink from defending the principle of realisation, that is that you have got to identify your contract. But taking the simple point your Honour has taken, with a promissory note which is denominated in overseas currency and which is paid by overseas currency, there is no beginning point against which to draw a comparison to show the realised gain. Your Honour, that is our argument.

McHUGH J: Well, I know but - - -

MR GYLES: Your Honour, there may be arguments about it. Of course, there were below, but we won them and query whether that is a special leave point. It is really a factual application of a series of cases in this court, the authority of which was not challenged below. My friends are trying to convert this into a special leave case by saying, "This calls into question the earlier decisions". That is not so. None of the judges below thought they were changing any law. None of their submissions below invited them to change any law. On the contrary they were invited to apply.

DAWSON J: Each one of them decided there was no eligible contract,

or only two?

MR GYLES: Yes, that is so.

DAWSON J: Different contracts but - - -

MR GYLES: Mr Justice Beaumont said, "No eligible contract at all". The other two judges said, "No eligible contract prior to the relevant date", because it included the - - -

GAUDRON J: But that was because they so treated the nature of an eligible contract under the Act as requiring something over and above a mere note.

MR GYLES: No, your Honour, no, because, on the facts the facility agreement governed what followed and was part of the contractual relationship. Again, there could be arguments one way and another about that but they are not special leave arguments, your Honour, and neither are they the special leave point in this case.

GAUDRON J: But is there not a real question, and was it not ground 1 of the amended notice of appeal to the Full Court, whether the eligible contract was the note issued or whether you had to go back to the facilities agreement?

MR GYLES: No doubt there is an argument but my learned friends have not identified that as a special leave argument. They do not put that forward as their special leave point nor, with respect, would they have very much chance of success on that point because it really is not a very factual sort of argument. Looking at a matrix of facts and circumstances, where is the eligible contract? Did it, on these facts, include the facilities agreement, or did it not? Bearing in mind - - -

GAUDRON J: Did it include the note issue, or did it not?

MR GYLES: Or, did it include the note issue, but if it did include it did it also include the contract which predated the relevant time? That is why, your Honours, it is a very unsatisfactory vehicle to have this Court - if this appeal goes on it will almost certainly go off on points other than that which my learned friends have identified because the second point, which is not the realisation issue - before parting from realisation, your Honours understand we put the proposition that so far as an individual promissory note is concerned, applying the decisions of this Court, we submit that there is very little chance of success in an argument which would indicate that that required a before and after comparison leading to a realised gain.

DAWSON J: The trouble is, of course, they went beyond this question in the court below.

MR GYLES: Your Honour, that is often enough the case, is it not? That is often enough the case, but it does not, I submit, provide a vehicle for this point to be determined. Your Honours, to try and tease out of these facts the point of general principle is exceedingly difficult because it depends entirely upon how you construe the contracts. It cannot be looked at in isolation. There is no point of principle here which has not been looked at in a - - -

DAWSON J: The point of principle that they seek to provide is whether you have currency gains or losses when a whole transaction is dealt with in a foreign currency and you really do not get to the point until the contract has concluded.

MR GYLES: Correct. That is so, your Honour, but is there any doubt about - at its broadest level, there is no doubt about the principle. The question is how you apply it in factual situations, and whilst there may be room for an argument about that, the Full Court has looked it, indeed four judges have looked at it and they have decided it our way.

DAWSON J: And you say, well, anyway it does not matter in this case because - - -?

MR GYLES: There is no eligible contract prior to the time on the findings below.

Your Honours, the second point, which is identified by my learned friends is identified at page 2, paragraph 4 of their submissions and that, in terms, depends upon whether a profit or loss is realised upon discharge under an eligible contract. Now, if there is no eligible contract in the relevant sense, post the time, then just as the realisation issue does not arise nor does the "made under" issue arise, for precisely the same reasons. You must identify, as the judges below took some care to identify, what they regarded as the eligible contract, and you must then decide whether whatever happened was made under that contract - realised under that contract. Your Honours, again, even if the point did arise, and we say it does not because there is no eligible contract in the relevant sense, we submit there is no sufficient reason to doubt the decision below nor is there any general principle involved. To decide whether a particular gain or profit is made under a particular form of contract, your Honours, is hardly the sort of thing which this Court would grant special leave upon. There is no reason, in our submission, to doubt what was said below about this.

GAUDRON J: But does it not all proceed on the basis that the note issue itself standing alone could not be an eligible contract?

MR GYLES: No. Well, Mr Justice Beaumont said that but not the other two judges in the majority. They said there was no eligible contract - - -

GAUDRON J: Did not they have to go on and ask that further question? It is all very well to say the facilities agreement was outside the time limit. That still leaves the question whether the note issue is an eligible contract within the meaning of the division.

MR GYLES: Your Honour, they did look at that and they decided that it was not.

GAUDRON J: Because it did not require conversion, in essence.

MR GYLES: Not really, your Honour. What they said was here you start off your contractual arrangements with document A which, in effect, governs all that follows and is incorporated in all that follows. It is as simple as that. We submit that their Honours were right about that and that once they are right about that then there is no eligible contract but the question as to whether they were right or not depends entirely upon the facts of the case. There is no general principle involved, in our submission. The decision below does not depend upon any general proposition or principle, it depends entirely upon how one construes the contractual arrangements between the parties and for that reason, in our submission, neither question A arises or, if it does arise, would be sufficient to warrant the grant of special leave.

Your Honours appreciate, as I have said earlier, so far as the note issue is concerned, a note itself is only a unilateral obligation and for the reasons dealt with in some of the judgments below and there is no possibility of making a realised gain under such a note and that is, no doubt, the reason why there was a shift in the argument in the courts below once that difficulty emerged before Mr Justice Davies. So that, in our respectful submission, your Honours, the questions do not arise in the normal way and if they did, they would not warrant the grant of special leave.

DAWSON J: Thank you Mr Gyles. Mr Jackson?

MR JACKSON: Your Honours, the difficulty in the case or the potential difficulties that it is said might make the case in some way go off if it got to the Court arise only, with respect, from the possibility, as perhaps happened in the Full Court of the Federal Court, that the core issue in the case was not kept in mind. What I mean by that is that your Honours will see that the nature of the case is that set out at page 99 in the first new paragraph on the page where what has to be borne in mind is that the respondent sought a deduction under section 51(1) and the deduction was for what it said was the amount of the discount in respect of particular notes in that year. So it is not a question of looking at the whole of the transaction. The discount that was sought as the deduction was in respect of the year.

Now the second thing about it, your Honours, was that any question about it being a transaction that was capital or income was, in the event, irrelevant because as you will see from page 102, lines 10 to 22, the parties were in agreement that the discount was something which was on revenue account and, therefore, deductable. So that the question which arose and the matter which was fundamentally in issue was the question of the quantum of the discount and the quantum of the discount could be arrived at in one of two ways: one being the way contended for by the respondents, that is, you take the number of American dollars in the discount and change it to Australian dollars; the other being the way contended for by the Commissioner and that is what your Honours will see on the second-half of page 99.

The point of distinction between the present case and Caltex is simply that in Caltex, your Honours, the deduction claimed would not have been allowable at all if it is correct to say that the present case is one that is similar to Caltex in the ultimate result. What I mean by that, your Honours, is that the Caltex case was simply one where the principle that we are contending for was said to be the correct principle but in the end is said not to apply because there had not yet been a maturation of the quantum of the liability in United States dollars, but the whole claim for deduction on behalf of the respondent is one where there is such a case, there is a claim, and it is a question whether they are right or wrong about the amount of it.

If I could just say one further thing about it, it is this. What your Honours will see is that so far as Division 3B is concerned, there is no point of course for the other side in seeking to rely upon Division 3B because Division 3B would only add something to their assessable income or would take something off it but the whole case on their part was that there was an allowable deduction in the ordinary way; Division 3B did not apply.

So far as the Commissioner was concerned it is said it is accepted as an allowable deduction. The quantum of it is something to be worked out if the court, inconsistently with the view adopted by the parties, took the view that the deduction claimed was something that was really on capital account, it still fell within Division 3B and the issue in relation to Division 3B was one that in a sense was very clearly raised and, indeed, your Honours, if one goes to the terms of Division 3B, if I could just take your Honours to that for a moment.

Your Honours should have a copy that just shows Division 3B. I think it contains perhaps fewer provisions. What your Honours will see in relation to Division 3B if I could deal with it very briefly indeed, is that Division 3B deals with gains or losses. Your Honours will see the two charging or exempting provisions in 82Y and 82Z. The core provisions there are the terms "currency exchange gain" and "currency exchange loss". They are defined by section 82V(1). Your Honours will see that they simply say gain or loss:

to the extent to which it is attributable to currency exchange rate fluctuations -

Your Honours will also see that if one goes to 82U and particularly subsections (2) and (3) that the difference between these and sections 25 and 51, gains and losses, is simply that they are of a "capital nature" and, your Honours, all that is required by 82Y and Z is that the gain or loss occur under an "eligible contract", a term itself defined by section 82V(1). Your Honours will see I refer to paragraph (a) in that definition.

Your Honours, 82V(3) is a provision which, in our submission, has particular relevance here where the notes were not executed until after the commencing date because what you will see is that it says that:

where a taxpayer acquires rights or obligations arising under a contract, this Division applies in relation to the taxpayer as if the contract had been entered into by the taxpayer at the time when, and for the purposes for which, the taxpayer acquired the rights or obligations.

So, your Honours, even if it be that the true analysis of the arrangements is to say, not withstanding the differences in the parties, not withstanding any other differences, that in reality the contract in every case consists of a number of documents including those anterior in time to the notes of the immediately related documents, one still has 82V(3) saying that the relevant time is the time at which the obligations arose.

GAUDRON J: Was that raised below?

MR JACKSON: Yes, your Honour. I was not in the case but I understand, specifically, that was raised. Your Honours, if I could just go to the views taken by the Full Court in deciding against the applicant, they were two. The first was that there was no currency exchange gain or loss. Your Honours will see the summary of what was said referred to in paragraph 24 of our written submissions and, your Honours, if I could go specifically to what was said by Justice Gummow at page 91 lines 24 to 42, that seems to contain an assumption towards the bottom of the page between lines 35 to 40, if I may say so with respect, that there must in some way be some realisation in actual Australian dollars other than for the purpose of income tax of course. What was said by the members of the Court, in our submission, inevitably puts a gloss which simply does not represent their clear and, with respect, fairly stark terms.

The second thing, your Honours, is both at least two members of the Court treat the relevant contract as being the facilities agreement plus perhaps other documents. We refer to that in paragraphs 26 and 28. May we say two things in response to that. The first is that we have referred already to section 82V(3). The second thing is of course the fact that not all the parties to the various documents were the same and your Honours will see that referred to in summary in our written submissions in paragraph 9.

It is elaborated upon more fully, your Honours, in the material in support of the application at page 143, paragraphs 9, 10,.16 and 21. What we submit is that the issue is one of importance and is one where the dicta of the Court in the Caltex case and in succeeding cases support the contention we seek to advance as to the manner of calculation of the amount in question.

DAWSON J: Thank you, Mr Jackson. Mr Gyles?

MR GYLES: If your Honours please, a couple of points. The first is that my learned friend seems to imply by his submissions that this case had to do with deductions under section 51. If I could ask your Honours to go to page 7 of the book, Mr Justice Davies there very shortly recites how the point arises and it is not as my learned friend implied. Line 6:

The Commissioner brought to account as ERA's assessable income -

amounts for 1987 and 1988:

The Commissioner seeks to support the assessment of the alleged overall exchange gains by reference to Division 3B.....or alternatively, to s25(1).

It was a case, your Honour, not about the calculation of a deduction, it was a case about the assessment of income gained.

McHUGH J: But does not that depend upon which way you look at it and from which party's point of view? That is why I asked you at page 99 - my question was whether it was a case about deduction.

MR GYLES: No, your Honour, it is not, it never was. Deductions come into the case in one indirect way but Mr Justice Beaumont spent some time looking at the issue about whether the deduction was properly allowed in order to cast some light upon the point but, your Honour, it was not a case about deductions and that would never be part of the appeal as Mr Justice Davies makes clear and my friend, whilst he put that proposition, did not take your Honours to any basis upon which it could be argued that this was a case about the calculation of the deduction, it was not. It was bringing to assessable income, either under 25 or Division 3B, what were alleged to be gains.

GAUDRON J: But to some extent it is the same question.

MR GYLES: It is not really, your Honour, it is not at all.

GAUDRON J: When you are looking at the cost of the notes, leaving aside those in which at maturity the payout figure was less in Australian dollars than at issue, leaving those aside for one moment, there is still a question as to the cost of the notes, whether you do it in terms of deductibility or whether you do it in terms of Division 3B.

MR GYLES: No, your Honour, with respect, so far as deduction is concerned that is not the point. The deduction is for the discount.

GAUDRON J: Yes, you have deducted at what I will call the maturity date conversion element.

MR GYLES: But so far as the discount is concerned, your Honour, the calculation of the discount is one thing where you have a discount from face value at a particular point of time. The courts have said in other decisions, not this decision, that a discounted bill is the equivalent of the expense of borrowing and is therefore deductible. There is no difficulty about that. That is how the deduction arises, your Honours.

GAUDRON J: But there is a question, is there not, and it is the same question, whether you look at it in terms of deductibility or under Division 3B whether where the Australian dollar advanced as against the US dollar but without advancing so much that there was a gain in any real sense, what the cost is.

MR GYLES: No so, your Honour, the discount is clear. The basis of the deduction of the discount is clear. It may, your Honour, become clearer if we go to ground 1 of the grounds of appeal which is the only conceivable ground which could go to this issue ultimately and that is at page 22 of the book. My learned friend's oral argument proceeds no doubt for obvious reasons to indicate, your Honour, as an issue, not the ones he has identified on his application, but another issue. He has picked up some loose ball from the Court and is trying to run with it.

Your Honours, the statement of the ground of appeal indicates his difficulty because a Euronote - and this is I think taking your Honour's point - is not a contract at all; it is a unilateral obligation. They were always in difficulty upon that point and your Honours will note there is no mention of that ground of appeal of 82V(3) to which my learned friend referred in argument today. We submit he is trying to construct from what has fallen from the Court an argument which does not find itself reflected in the judgments below. I was not below either, but it does not pay to blame the judgments below and, indeed, it is contrary to the findings of the four judges who have looked at the matter. So, in our submissions, my learned friend's argument is based upon a foundation of straw and that, try as he might, he cannot find a point of principle which actually arises for determination in this case if special leave were granted.

DAWSON J: There will be a grant of special leave in this matter. The Court will adjourn to reconstitute once again.

AT 11.30 AM THE MATTER WAS CONCLUDED.