Commissioner of Taxation of the Commonwealth of Australia v ICI Australia Limited M53/1996 [1996] HCATrans 508 (13 December 1996)

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Melbourne Nos M53 and M54 of 1996

B e t w e e n -

THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Applicant

and

ICI AUSTRALIA LIMITED

Respondent

Applications for special leave to appeal

GAUDRON J

McHUGH J

GUMMOW J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 13 DECEMBER 1996, AT 11.43 AM

Copyright in the High Court of Australia

MR B.J. SHAW, QC: May it please the Court, in these applications I appear with my learned friend, MR G.J. DAVIES, for the applicant Commissioner. (instructed by the Australian Government Solicitor)

MR R.F. EDMONDS, SC: May it please the Court, on these applications I appear for the respondent. (instructed by Mallesons Stephen Jaques)

GAUDRON J: The Court would be assisted if you would go first, Mr Edmonds.

MR EDMONDS: Your Honours, there are two main reasons why the respondent submits that special leave should not be granted in these applications. The first is that on the questions of whether the assumption transaction gave rise to a profit for the respondent, and the character of that profit, they are principally questions of fact and raise no new or fundamental issue concerning income or the nature of income. This is exemplified by the following matters: firstly - - -

GAUDRON J: There is no dispute that you made a profit, is there?

It is only a question of how it is characterised, is it not?

MR EDMONDS: Your Honour, there is a dispute, and maybe they are two parts or two sides of the same coin, but there is a dispute as to whether the profit is a profit for the purposes of the Assessment Act and - - -

GAUDRON J: Yes, well that is a question of law.

MR EDMONDS: - - -the other side of the coin is that goes to the character of the profit, whether it is revenue or capital. But it could not be seriously suggested that the value of the Melbourne and Metropolitan Works Boards promise to the respondent, at the time it was given, was anything other than the amount which the respondent paid to the MMBW. Such a conclusion is not inconsistent with the decision in the Myer Case. On the contrary, it is entirely consistent. In Myer Emporium, the loan agreement and the assignment were not separate and independent transactions but were, as this Court found, integral elements in one profit-making scheme, the arrangement there taking place three days after the making of the loan.

Here, the borrowings by the respondent, under the debenture trust deed, they took place up to 20 years before the assumption transaction. Now the difference between those two situations lies at the heart of what this Court said by the Court in Myer Emporium and could I take the Court to page 216, at about point 5 of the page, the third paragraph in the middle of the page, where the Court said:

If the two transactions, namely the loan agreement and the assignment, are considered as separate and independent transactions, Myer's argument that no relevant profit arose from the assignment has compelling force. The consideration payable for the assignment reflected the true value of the chose in action which Myer assigned. But once the two transactions are seen as integral elements in one profit-making scheme, it is apparent that Myer made a relevant profit, that profit being the amount payable on the assignment. As a result of the two transactions Myer, having lent $80,000,000 on 6 March 1981 repayable in accordance with the terms of the loan agreement, had profited by 9 March 1981 to the extent of the first interest payment received on 6 March 1981 and the sum of $45,370,000 paid for the assignment, the principal on the loan being intact.

The decision of the Full Court below was a decision on its own facts is best exemplified by the decision - - -

GAUDRON J: But the same could be said of every tax case, could it not, that it is a decision on its own facts?

MR EDMONDS: To some extent, your Honour, yes. What I seek to show by these submissions, however, is that there is no new or fundamental question of law or principle which goes to the nature of income that arises out of this particular case and that is best exemplified by the decision of the Full Court in the Unilever Case, which is referred to in my summary where, in that case, in the case of a finance company, an identical fact transaction was held to give rise to a profit on revenue account and special leave to appeal from that decision was refused.

In Unilever, it was conceded before the Full Court that a profit arose and the Court held that the profit was income because it arose in the ordinary course of the taxpayer's business as a finance company where, as in this case, any profit arises otherwise than in the ordinary course of the taxpayer's business. Whether in that situation, the profit constitutes income, depends very much on the circumstances of the case and again, if I could refer the Court to what was said by this Court in the Myer Emporium Case at page 209, in the last paragraph on that page, commencing:

Although it is well settled that a profit or gain [made in the ordinary course of carrying on a business constitutes income, it does not follow that a profit or gain made in a transaction entered into otherwise than in the ordinary course of carrying on the taxpayer's business is not income. Because a business is carried on with a view to profit, a gain made in the ordinary course of carrying on the business is invested with the profit-making purpose, thereby stamping the profit with the character of income. But a gain made otherwise than in the ordinary course of carrying on the business which nevertheless arises from a transaction entered into by the taxpayer with the intention or purpose of making a profit or gain may well constitute income. Whether it does depends very much on the circumstances of the case.

And, what I seek to get from that, your Honour, is that, once again, the Court there is emphasising that where a profit or gain arises otherwise in the ordinary course of a taxpayer's business, whether or not it constitutes income for the purposes of the Assessment Act is dependant on the facts and circumstances of the particular case.

The respondent accepts that there may be circumstances when it is correct to characterise the difference between the amount of a borrowing and the lesser amount paid to secure the indemnification of that liability as a profit for the purposes of the Assessment Act. For example, in an instantaneous defeasance, where the defeasance takes place within days of the borrowing and is in contemplation at the time of the borrowing, but otherwise, a payment to secure a relief from an obligation, particularly an obligation where as here incurred on capital account, is not converted into a profit-making undertaking or scheme, because, by paying early a lesser outlay is required than if it were discharged on the due date.

GUMMOW J: Where do you say Justice Sundberg went wrong in his dissenting judgment, if I can put it that way, in dealing with Myer's Case?

MR EDMONDS: It was not so much that he went wrong, your Honour, it was his view of the facts. He took the view - and I was about to come to this - that because the transaction would inevitably give rise to a profit, in other words, the - - -

McHUGH J: Not inevitably give rise to a profit, but it seemed to be central to what your client was doing that they would achieve making a profit - - -

MR EDMONDS: Yes.

McHUGH J: - - - and they were so concerned about making a profit that they abandoned the initial plan for early redemption in the debentures.

MR EDMONDS: But, your Honour, it was found, both by the learned primary judge and by the majority in the Full Court that the respondent entered into the principal assumption agreement for the purpose of alleviating the adverse consequences of the assets to liability restrictions imposed by the debenture trust deed, which placed significant inhibitions - - -

GUMMOW J: Well there are various ways they could have gone about doing that, I suppose. Is that not something the judge fixed on in his dissenting judgment?

MR EDMONDS: Well if the company had been able to, and gone out and been able to secure the agreement of every debenture holder, the simple way to do this would have been to go out and offer them a sum of money at a particular point in time, but you only needed one debenture holder not to agree to that course and the restrictions imposed by the debenture trust deed would have remained. Had they gone out, and instead of paying this sum to the Melbourne and Metropolitan Board of Works, they paid this sum to all the debenture holders, had they agreed to accept it, there would be no question as to whether it is a profit or that the profit was an assessable profit for the purpose of the Assessment Act.

McHUGH J: But they took into account market considerations; I mean, once the interest rates started to decline they knew it was going to be a very expensive process.

MR EDMONDS: True, your Honour, but what your Honour is putting to me is this: if one accepts that the purpose which drove this transaction was the one I have just referred to, the fact that the company went out and sought to achieve it for the cheapest possible cost, does not, in my respectful submission, convert it into a profit-making undertaking or scheme.

McHUGH J: Well, perhaps that is one of the problems of Myer's Case in that this case might be a suitable vehicle to explain Myer or at least, for some of us who did not sit on it, to look at it again.

MR EDMONDS: That might be the case, your Honour, but, in my respectful submission, it happens every day with companies. They have long-tail liabilities. They might be long-tail liabilities which are owed to other entities; they may be long-tail liabilities or obligations they have to their executive staff, and it happens every day that a company, faced with the prospect of a particular executive who is no longer wanted, who has a contract under which the aggregate of the payments under the contract to which he will be entitled might amount to - well, in this city, I understand it might be $2 million - they might pay him out for $1 million. Now what is being put against me is that by doing that, by adopting the cheapest course in the interests of the company, it is being put that the company has embarked upon a profit-making undertaking or scheme, because one can say, yes, there is a profit; the profit is the difference between the aggregate of the payments they would have had to pay to the executive over the period of the contract and what they actually pay. Now, in my respectful submission, the fact that - - -

GAUDRON J: This is not quite the same case; that is not truly analogous, is it, because in fact the debenture holders are not paid out in this case until the expiry of the debenture term? That is what makes a real difference, I suggest.

MR EDMONDS: Well, your Honour, all I was seeking to do by that example was to show that - it was put to me by his Honour Justice McHugh that really the company was concerned with, I think he referred to the term, market considerations, and that therefore does this raise the sceptre of it being a profit-making undertaking or scheme. What I sought to do by that analogy - and I agree with your Honour, it is not directly in point, but nevertheless it illustrates the point I seek to make and that is that simply because the company chooses a course which is the cheapest in all the circumstances to secure relief from the impediments of the debenture trust deed, does not convert the transaction into a profit-making undertaking or scheme.

McHUGH J: There may be questions as to whether there is any profit at all. I know that there is no theory of economic equivalents underlying this Act, but speaking for myself I always had difficulty in this idea that if you pay the present value of money now to discharge a long-term liability, that you made a profit, and I know in a book sense you do, but in a real sense you do not, not having regard to the time value of money.

MR EDMONDS: Exactly, that is right, and that is the point I made earlier. It would be different had they borrowed this money on day one and in contemplation of borrowing it on day one had defeased it on day three, then quite clearly you are bringing a fact situation very close to the fact situation in Myer, because that is what occurred in Myer; they made the loan and at this time they made the loan, within three days of making the loan they assigned the income stream, and the court said it would be fine if the transactions were not interdependent and integral parts of a profit-making scheme, because if they were independent transactions then quite rightly, the amount received was equal to the value of the chose in action assigned. And a fortiori here, the amount which the respondent had to pay to have the MMBW assume the obligations was, it is submitted, equal to the value of that promise.

McHUGH J: But, if you look at all the considerations in the case, the Federal Court judges are split 2:2, at the moment you have got a 2:1 decision, there are some complex points under the capital gains tax legislation; I know the definition of "assets", I think it has been changed, has it not, since this applicable legislation, but there are a number of points, and it really does seem a special leave case, Mr Edmonds. You may well be successful on the appeal.

MR EDMONDS: Could I finish my submissions by just coming to the second reason why I would submit special leave should be refused and that is, with respect to one of the two capital gains issues which your Honour has just raised, the issue has been overtaken by legislative amendment and the other, the disposal issue, is predicated on an affirmative answer to the first. So, as to the first use issue, as to whether the right which the respondent had to compel the Melbourne and Metropolitan Board of Works to perform its promise, whether that was an asset, under the old definition, and such authority as exists has held that to be an asset it had to be a proprietary right, that is no longer a matter of public importance because, whether or not it is a proprietary right now, it will be an asset and, as the second issue is predicated on an affirmative answer to the first, I would submit that, on the disposal issue, that this is not an appropriate vehicle in which to ventilate that particular issue. If the Court pleases, they are my submissions.

GAUDRON J: Thank you. Yes, we need not trouble you, Mr Shaw. There will be a grant of special leave in this case.

AT 12.01 PM THE MATTER WAS CONCLUDED