Commissioner of Taxation v Murray Leisure Group Pty Limited S171/1999 [2000] HCATrans 269 (26 May 2000)

Office of the Registry

Sydney Nos S164 to S167 of 1999

B e t w e e n -

COMMISSIONER OF TAXATION

Applicant

and

CONSOLIDATED PRESS HOLDINGS LIMITED

Respondent

Office of the Registry

Sydney Nos S168 to S171 of 1999

B e t w e e n -

COMMISSIONER OF TAXATION

Applicant

and

MURRAY LEISURE GROUP PTY LIMITED

Respondent

Applications for special leave to appeal

GAUDRON J

McHUGH J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 26 MAY 2000, AT 11.13 AM

Copyright in the High Court of Australia

_____________________

MR B.J. SHAW, QC: In these matters, if the Court pleases, I appear with MR G.T. PAGONE, QC, MR G.J. DAVIES, QC and MR M.K. MOSHINSKY. Perhaps, if I might say, I have asked Mr Davies if he would argue this matter. (instructed by the Australian Government Solicitor)

MR R.F. EDMONDS SC: May it please the Court, in these applications I appear with my learned friend, MR M. RICHMOND, for the respondent. (instructed by Gilbert & Tobin)

GAUDRON J: Yes, Mr Davies.

MR DAVIES: If the Court pleases, the issue concerns the meaning of the expression "a business of trading in tainted assets" that appears in Part X of the Act and section 446(1)(j).

GAUDRON J: But it does not simply concern the meaning of it. There is a factual issue underlying the matter, is there not?

MR DAVIES: There are no facts in issue. The facts that are not in dispute are that the company was a finance company that issued publicly listed bonds on the Swiss bond market, that - - -

GAUDRON J: My understanding is that it is in issue as to whether or not it was discounted - well, it is said that it had in fact ceased discounting bills two years before this.

MR DAVIES: It is not in dispute that it ceased purchasing discounted bills of exchange in December 1988 which - - -

GAUDRON J: And it ceased lending money itself in - - -

MR DAVIES: No, your Honour, that is not said and the fact was that after it ceased acquiring the discounted bills of exchange it did two things, it made loans from time to time to members of the group and it deposited money and interest with some independent banks.

GAUDRON J: Now, in the respondent's reply it is that a year before this transaction was entered into it had ceased lending money to companies in the group and its only activity at the time when this transaction was entered into was depositing money by way of security for loans to other companies of the group.

McHUGH J: There is a finding at 72, is there not?

GAUDRON J: It perhaps does not - - -

MR DAVIES: Your Honour, it is true to say that the activities of purchasing bills of exchange ceased as of December 1988. Thereafter, the company continued to lend moneys, at interest, to members of the group and it deposited moneys and interest with banks. Those activities were occurring when these transactions were entered into.

GAUDRON J: You have to then make the argument that to lend money and deposit interest - a person who is a money lender who enters into a debt defeasance transaction is, on that account - - -

McHUGH J: Trading in bonds, loans, bills of exchange and bank deposits.

MR DAVIES: Yes.

McHUGH J: Is not the problem that you seek to use the word "trade" - the meaning of "trade" as a noun in a context where it is used as a verb?

MR DAVIES: Your Honour, to get that - it is true that there might be a distinction. It depends upon the context in which the word is used, in our submission. In this case, the word is used in conjunction with the description "tainted assets" and when one looks at the description of the things that are described as tainted assets, they include matters that in the ordinary course of commerce are not ordinary bought or sold and, moreover, are not ordinarily the subject of commercial dealings as assets.

McHUGH J: I can think of legitimate commercial transactions where one would trade in bank deposits, for example, fixed deposits, trade in bonds, trade in loans, trade in bills of exchange - no problem about it, but - - -

MR DAVIES: That is true, your Honour, but the definition includes things as well as such things as interest rate swap contracts. That would not be dealt with as assets or bought or sold, currency swap contracts, forward interest rate contracts, and, your Honour, life assurance policies. Now, it would be odd, in our submission, that in a section dealing with passive income referring to the description:

income derived from carrying on a business of trading in tainted assets - - -

McHUGH J: To find in an Act of Parliament the term "tainted assets" is so surprising to me that the Parliament would use such a term that it would not surprise me what this legislation did.

MR DAVIES: Yes. There are two points of principle that we highlight and take issue with in relation to the Full Court. The first is the statement that appears on page 72 of the Full Court's decision. This is in relation to the submission that the company was not trading in bonds. The court disposed of that argument against the Commissioner on the basis that the description "trading in tainted assets" means applies to tainted assets in their character as assets and bonds are not the assets of the bond issuer.

Now, that is a statement derived, presumably, from section 446(1)(j) and will be applicable to all of the types of things that fall within the description "tainted assets".

GAUDRON J: That may be so and that may raise an interesting question to be determined in a proper case. The question is whether this is a proper case because, in essence, you have got to rely, have you not, on the single transaction to make good that proposition in circumstances where the bill discounting activities had ceased long before.

MR DAVIES: No, your Honour. The redemption of the bond activities had not ceased. Those activities continued and, further, there were numerous other loans made thereafter.

GAUDRON J: Where do we find a proper statement of factual findings which you say would enable the question to be determined and the findings that are not in dispute?

MR DAVIES: At page 52 the Full Court accepts the learned primary judge's characterisation of the business as being:

the borrowing of money and the lending of funds through the Consolidated Press Group of International Companies by way of loan or bill discounting so as to produce a profit.

There was then, your Honours, the finding at the bottom of page 69 that:

the debt defeasance transactions were sufficiently connected to its ordinary functions of borrowing and lending to justify the treatment of the gains therefrom as income.

The Full Court then disposes of the case, firstly on the basis that the transactions in relation to bonds were not transactions concerning assets and then disposed of the case in relation to bills of exchange on the basis that they did not involve sales, having noted at page 72, lines 36 to 44, that the bills of exchange ceased being purchased as at 20 December 1988. The regularity of the transactions were relied upon by the Commissioner before the Full Court and the Full Court just does not deal with the position of the making of the loans after December 1988. It is true to say, your Honour, that the Full Court just did not turn its mind to what we say was a relevant inquiry.

GAUDRON J: Yes, well, this makes it a particularly difficult case in which to say it is a suitable vehicle, does it not? On any view, the question whether - I will just call it the foreign corporation - traded in "tainted assets" is a mixed question of fact and law, is it not?

MR DAVIES: It is, your Honour.

GAUDRON J: And, where are our facts?

MR DAVIES: With this exception, your Honour - - -

GAUDRON J: You represent the Commissioner who made the assessment, presumably made it on the basis of facts known, and you have not proved all the surrounding facts, it seems to me.

MR DAVIES: With this exception, your Honour. It is not disputed that the company issued publicly listed bonds on the Swiss bond market and redeemed them.

GAUDRON J: Yes.

MR DAVIES: And, that this debt defeasance transaction took place in the course of those activities.

GAUDRON J: No.

MR DAVIES: Your Honour, we say, in our submission, that that was a business of trading in bonds within the meaning of the Act.

GAUDRON J: No, let us start again. There was a stage at which it was discounting bills, yes?

MR DAVIES: There was, yes, your Honour.

GAUDRON J: Was it ever issuing bonds itself?

MR DAVIES: Yes, your Honour, it issued bonds in 1984 - - -

GAUDRON J: Up until when, yes.

MR DAVIES: - - -and 1985 on the Swiss bond market.

GAUDRON J: Yes, and then?

MR DAVIES: And it used the proceeds from the issue of the bonds to acquire bills of exchange.

GAUDRON J: Yes.

MR DAVIES: That procedure continued until December 1988 and then the proceeds, instead of then on-lending the - or transferring the funds through the bills of exchange facility they substituted a facility for loans, bank loans and direct loans.

GAUDRON J: Yes, and it was thereafter that they entered into the debt defeasance transaction.

MR DAVIES: Yes, your Honour.

GAUDRON J: This is two years thereafter?

MR DAVIES: The debt defeasance transactions, your Honour, were entered into in - - -

McHUGH J: They were for the 1991 tax year, were they not, and the 1992 tax year?

MR DAVIES: This is when the profit arises, your Honour.

GAUDRON J: That is right.

MR DAVIES: The profit arises when the bonds are redeemed.

GAUDRON J: And it has got to be at that stage, has it not, that the company is carrying on the business of trading in "tainted assets"?

MR DAVIES: Yes, your Honour, and our submission was that at that time where one has evidence of redemption of - - -

GAUDRON J: Past activities.

MR DAVIES: And present, your Honour, because we know that in 1990 and 1991 the bonds are being redeemed and it is on the basis of the redemption of the bonds in those years that the assessment is raised. Now, the activity of having issued the bonds in 1984 and 1985 and then arranging for their redemption through the defeasance agreements and then redeeming them pursuant to those agreements in 1991 and 1992 is said by the Commissioner to be an activity of trading in bonds. The Full Court dealt with that submission by saying - by holding that when one looks at the section it must be a dealing with the "tainted asset" in its characteristic as an asset, not as a liability. It did not deal with it on any other basis.

McHUGH J: The substitution of the term "dealing" for "trading" itself seems to me to suggest error or at least an invitation to error. The section has not used the term "dealing", it has used "trading".

MR DAVIES: It has, your Honour, yes. Trading could mean dealing. It could mean sell. It depends upon the context. Now, if one looks at the word "tainted assets"-

McHUGH J: Yes, but trading most always, and I think probably always, involved dealing, but dealing does not always involve trading.

MR DAVIES: No, your Honour, that is so. In our submission, the activity of having issued bonds in return for cash on the publicly market and then over a period of years making partial redemptions and then in 1991 and 1992 making various redemptions in return for cash - I am sorry, paying cash in return for the redemptions of the bonds, coupled together with the fact that it has all been driven by profit in a commercial arena constitutes, in our submission, trading.

McHUGH J: But what is special about the case? It is just a pure factual case and you say there has been a wrong finding of fact.

MR DAVIES: It is not so much the finding of fact, your Honour, it is the statement of law that the expression "trading in" applies to those things in their character as assets. Now, that, your Honour, has a flow-on effect for the operation of the Part. I take your Honours, for example, to section 450. Section 450 deals specifically with the "tainted income" of overseas subsidiaries of Australian financial institutions. Your Honours will see that in certain circumstances listed in subsection (1):

The passive income, or the tainted services income, of a company -

is not to include - go to subsection (1)(b):

the income derived from carrying on a business of trading in any or all of the following tainted assets -

Now, the "tainted assets" referred to, your Honours, are things that are not normally traded as assets and the statement by the Full Court that the provision of trading in "tainted assets" only applies in their character as assets will constitute a significant limitation on the operation of section 450, and, similarly - - -

McHUGH J: I am not following this point. The section itself says:

the income was derived from carrying on a business of trading in or all of the following tainted assets - - -

MR DAVIES: No, the start is that the passing income will not include - paragraph (b) - that income, because without that exclusion it is sought that the passive income would otherwise have included those things. Now, the Full Court has said in relation to the expression "trading in.....tainted assets" which appears in paragraph (b) that it only applies to tainted assets in their capacity as assets.

GAUDRON J: Do complete your submissions if you wish to.

MR DAVIES: Your Honour sees one further one of significance and that is the section that immediately appears after section 446(1), that is 446(2) deals with the passive income of life assurance companies. The passive income is to be worked out in the way that is different from other types of CFCs. I will not go through the formula that is provided for but the first thing to note is that the first thing that is done is to work out the adjusted passive income which is defined to mean "the amount that, apart from this subsection, would be the passive income of the company".

GAUDRON J: How does that bear on the question? The only question really is what is the meaning and operation of carrying on business of trading in tainted assets.

MR DAVIES: It is, your Honour. It is this, because a tainted asset includes a life assurance policy, and one would have thought that the business of issuing life assurance policies by a life assurance company would constitute the business of trading in tainted assets. Now, if the Full Court is right then it would not, because a life assurance policy is not an asset of the assurance company. We say that it is a question of law and it has flow-on effects for other important sections of Part X. If your Honours please.

GAUDRON J: Yes, thank you, Mr Davies. We need not trouble you, Mr Edmonds.

The question whether a foreign corporation carries on the business of trading in tainted assets is a mixed question of fact and law. In these applications, the question that arises is whether a foreign corporation carried on business of that description at the time of the debt defeasance transaction which is in issue in these matters. In circumstances in which the company ceased discounting bills two years before engaging in that transaction, this is not a suitable vehicle to explore the meaning and operation of section 446(1)(j) on the Income Tax Assessment Act 1936 . Accordingly, special leave is refused. The matter having been the subject of written submissions, it is refused with costs.

We will adjourn briefly to reconstitute.

AT 11.37 AM THE MATTER WAS CONCLUDED