MESSENGER PRESS PROPRIETARY LTD v FC of TJudges:
Federal Court of Australia, Sydney
MEDIA NEUTRAL CITATION:
 FCA 756
1. In the 2001 financial year News Publishers Holdings Pty Ltd ('NPHP') claimed as a deduction A$629,662,666 and in the 2002 financial year A$1,419,051,871. The present proceedings are appeals against Notices of Decision on Objection by which the Commissioner disallowed the deductions.
2. The losses claimed by the taxpayers are said to flow from currency exchange losses arising, in the 2001 year, by a repayment by NPHP to another entity, News Publishers Investments Pty Limited ('NPIP'), of US$1,023,453,698 on 8 June 2001 and, in the 2002 year, by a repayment of the balance of its US dollar indebtedness to NPIP on 28 June 2002.
3. It is not in dispute that if NPHP incurred the currency exchange losses referred to then each of the 18 taxpayers is entitled to a deduction for transferred losses under s 36-17 of the Income Tax Assessment Act 1997 (Cth) ('the 1997 Act').
II. THE FACTS
4. The facts may be divided into four periods:
- (a) the 1989 events;
- (b) the 1991 restructuring and the events of 6 June 1991;
- (c) the alleged advance of 28 June 1991 and the advance of 8 July 1992;
- (d) the discharge of NPHP's liabilities to NPIP in 2001 and 2002.
(a) The 1989 events
5. In the period between 1989 and 2002, all of the applicants were members of the News Group, the ultimate holding company of which was The News Corporation Ltd ('TNCL'). Until 2004 the shares in TNCL were listed on the Australian Stock Exchange. All members of the News Group, regardless of the jurisdiction of their incorporation, were ultimately controlled by TNCL. To understand the events of 1989 it is necessary to understand the manner in which TNCL's interests in Australia, the United States and Hong Kong were held by it. In Australia, the local holding company was News Limited. Most of the interests in the United States were held by a company known, perhaps confusingly, as News Publishers Australia Pty Ltd ('NPAL US'). The News Group also held an interest in the publisher of the Hong-Kong-based English-language daily known as the South China Morning Post. This was held through a company incorporated in Bermuda called News Publishers Limited ('NPL Bermuda').
6. In fact, News Limited (the Australian company) also acted as the holding company of the US interests (NPAL US) and the Hong Kong interests (NPL Bermuda). It owned all of the shares in NPAL US and 48% of the shares in NPL Bermuda. The ownership structure as at 1989, so far as it is relevant, may therefore be depicted as follows:
It should be emphasised that this diagramme has been significantly simplified.
7. In 1989 News Limited was the chief holding, management and operating company for the News Group in a practical sense. As such its accounts were commonly provided to financial institutions and other counterparties. This made it important for News Limited to be able to demonstrate that it was a company of good financial standing particularly when it came to fundraising. This observation is of some moment because in the late 1980s News Limited had borrowed large amounts to fund its overseas operations. The interest costs associated with that funding operation had resulted in News Limited incurring substantial losses which had significantly depleted its reserves. By 31 March 1989 News Limited's capital and reserves were approximately negative $239 million.
The proposed restructure of the News Group
8. The Financial Controller of News Limited at this time was Mr Peter Macourt and he reported to the then Finance Director, Mr Peter Chegwyn. Mr Macourt thought that, although he had no concerns about News Limited's financial position, its balance sheet had the potential to cause lenders to question its ability to meet its obligations, to cause negative media coverage of its financial position and thereby to impact upon TNCL's share price and fundraising capacities. Consequently, he formed the view that it would be a good idea to rearrange the News Group so that these issues were resolved. He raised the matter with Mr Chegwyn who instructed him to investigate possible solutions. This he did. The results of that process were embodied in a memorandum written by Mr Macourt which was dated 20 May 1989. In short his proposal was simple: News Limited should sell its interests in Hong Kong represented by its 48% holding in NPL Bermuda and its US interests held through its 100% holding in NPAL US. The sale would be to other members within the News Group and the proceeds of sale would be used to reduce News Limited's intra-group debt.
9. At that time News Limited's principal creditors were News Finance Ltd ('News Finance') and News Group Holdings Pty Ltd. Mr Macourt's memorandum suggested that News Limited owed News Finance two debts of A$176,593,000 and US$758,652,000. At the exchange rates prevailing at the time of Mr Macourt's memorandum (A$1 = US$0.7450) these two debts would have required, in total, A$1,194,918,000 to discharge. So far as the debts to News Group Holdings Pty Ltd were concerned there appear to have been two: one of £278,024,000 and another of US$391,404,000. At the time of Mr Macourt's memorandum these would have required A$1,104,590,000 to discharge. It follows that in order to discharge News Limited's intra-group debt it was likely that it would need to raise from the sale of NPAL US and its 48% interest in NPL Bermuda a sum in the vicinity of A$2,299,508,000 (that is, the sum of A$1,194,918,000 and A$1,104,590,000).
10. The memorandum went on to suggest that News Limited's interest in NPAL US might be sold for US$1,823,100,000 to News Group Holdings Pty Ltd which, it will be recalled, was one of its two principal intra-group creditors. So far as its 48% interest in NPL Bermuda was concerned, the proposed sale price was to be US$2,270,000,000 which was then equivalent to A$3,046,980,000.
11. For the purposes of the present case the events surrounding the sale of NPAL US to News Group Holdings Pty Ltd are of contextual significance only. This is not so, however, in relation to the sale of the 48% interest in NPL Bermuda. Mr Macourt's memorandum suggested that the interest in NPL Bermuda would be sold to a new entity, NPIP. NPIP would be capitalised to the extent of the required purchase price by NPHP (the central company in this case) and NPHP would, in turn, obtain funds equivalent to the US$2,270,000,000 purchase price by way of two intercompany loans of US$1,815,284,000 and £292,972,000 from News Finance. News Limited would then be in a position to repay the debts owed to News Group Holdings and News Finance. In effect, the News Limited US dollar and Australian dollar denominated debts would be transferred to NPHP and the 48% interest in NPL Bermuda would end up with NPIP which would then be owned by NPHP. It will be noted that this would have left substantial surplus funds in News Limited's hands - these related to other aspects of Mr Macourt's restructuring proposal which are not germane to this case.
12. I infer that Mr Chegwyn received Mr Macourt's memorandum on or about 20 May 1989 (being the date it bears). He told Mr Macourt that he should arrange for the proposal to be considered by the directors of each of the relevant entities under Mr Chegwyn's supervision. Mr Macourt thereafter caused to be prepared proposed minutes of meetings of the directors of each of the relevant entities. These were TNCL, News Limited, News Finance, NPHP and NPIP. The actual drafting of the minutes was attended to by Mr Anthony Gregg, then a partner at Clayton Utz. He had previously reviewed Mr Macourt's proposal although not from a tax perspective.
13. Without dwelling on the detail of the actual meetings, it suffices to say that the proposal, subject to some variations, was effected by resolutions made on 26 May 1989; settlement appears to have occurred on or about 31 May 1989. The variations were as follows: the originally proposed loans by News Finance to NPHP were respectively US$1,815,284,000 and £292,972,000. These amounts were ultimately reduced to US$1,033,643,102 and £292,971,509 and, at the same time, an additional loan of A$1,000,000,000 was extended. The reasons for these variations are not presently material.
14. The following events appear also to have occurred: on 26 May 1989 the directors of NPHP and News Finance resolved to execute a standby credit agreement pursuant to which News Finance would provide NPHP with a revolving standby credit facility. This agreement was in fact signed on 31 May 1989. The agreement was to apply to any loans made between 31 May 1989 and 31 March 1992. Under cl 2.1, News Finance agreed with NPHP that it would 'from time to time and at its discretion make advances to [NPHP] up to a maximum principal sum outstanding not exceeding US$4,000,000,000 or its equivalent in other currencies acceptable to [News Finance]'. The loans would bear interest under cl 4.1 at LIBOR (the London Interbank Offered Rate) plus 0.6975 'or such other amount agreed upon from time to time'.
15. Returning to 26 May 1989, the directors of NPHP, in apparent anticipation that the standby credit facility would be executed, resolved to apply to News Finance for loans of 'up to' A$3 billion; at the same time, the directors of News Finance resolved to lend NPHP funds up to that amount or its foreign currency equivalent. The use of the words 'up to' reflected the practical matter that the precise figures would not be known until completion (each board resolution authorised the directors or secretary 'to do all such matters as were required to give effect' to the resolutions). Mr Macourt explained in his evidence that it was his practice to consult with the Finance Director of TNCL in relation to the question of the funding needed to implement a transaction. That man (a Mr Sarazen) would usually dictate the currency in which funding would be provided by News Finance in order to reflect the sources of funding then available to it. In keeping with that practice, Mr Macourt consulted with Mr Sarazen shortly after the standby credit facility was executed. It was following that discussion - probably on 31 May 1989 - that the final break-up of currencies was determined.
16. Because the Commissioner contends that there can be no foreign currency exchange losses without an exchange of foreign currency it is necessary to attend in detail to the manner in which settlement occurred.
The events on and around 31 May 1989
17. The first step appears to have been the completion of a cheque voucher in respect of a cheque which was to be drawn by News Finance. This was signed by at least Mr Chegwyn and Mr Macourt. Prior to Mr Macourt signing the voucher, it had been completed by other persons (who were not identified). At that time it revealed the following information:
|PAYEE:||SIBHAND PTY LIMITED [scil: the original name of NPHP]|
|IN PAYMENT OF:||LOANS||-||US$1,796,743,102|
The voucher noted the Australian dollar loan as being for 'A$1,000,000.00'. A loan of one million Australian dollars, however, is inconsistent with all other evidence on this point. It is clear that the loan was for one billion Australian dollars. I consider the notation on the voucher to be a mistake.
18. The identity of the bank upon whom this large cheque was to be drawn was not identified on the voucher (which is unexceptional). The cheque in question was not in evidence. Since it was drawn nearly a quarter of a century ago this is unsurprising.
19. It is, however, clear that cheque 272461 was, in fact, drawn upon the Commonwealth Bank at its branch on the corner of Pitt Street and Martin Place in Sydney. On 31 May 1989 that bank debited an Australian dollar account in the name of News Finance in respect of cheque 272461 in four separate sums totalling A$2,974,708,426. There was another debit on the same day in respect of another cheque, number 272462, which was in the sum of A$297,503,582. These two cheques resulted in debits to the account which totalled A$3,272,212,008. On the same day there were six credits to the same account totalling A$3,272,212,009. It will be observed that there is a A$1 difference. I am unable to say definitively what cheque 272462 related to or what the source of the credits was. However, recourse to Mr Macourt's memorandum suggests that the net cash flow in and out of News Finance on the occurrence of the restructuring was expected to be equal. As events transpired there appears to have been a A$1 anomaly. The account balance on the day before was A$13,466.48 in debit and, following the activity on 31 May, it was A$13,465.48 in debit.
20. There is no direct evidence as to who presented cheque 272461. But the following can be determined: on 31 May 1989 NPHP subscribed for 50,000 ordinary shares and 19,400 preference shares in NPIP. According to the subscription application executed by NPHP on 31 May 1989 each ordinary share was issued at a par value of A$1 and a premium of A$9,999; each preference share was issued for A$1 at a premium of A$127,561.29. These imposed on NPHP an obligation to pay NPIP A$2,974,708,426 which is the same amount as cheque 272461. The Australian dollar nature of that obligation is important and should be noted. The application recorded the fact that a cheque in that sum was attached.
21. Settlement occurred on 31 May 1989. Although there is some evidence to suggest that it occurred on 26 May 1989 (namely, the entries in the register of members) or on 5 June 1989 (namely, the date of the share certificates), I consider that it is much more likely that it occurred on the day the cheques were presented, i.e. 31 May 1989. The magnitude of the cheques are such that it may be inferred that it would be irrational for there to be any delay between settlement and presentation. I so conclude.
22. There is no direct evidence of what occurred at settlement on 31 May 1989 but the most likely inference is that News Finance handed cheque 272461 to a person representing NPHP and that person then attached it to the subscription application which was then given to a person representing NPIP. The minutes of a directors meeting of NPIP held on 26 May 1989 contemplated that NPIP would purchase News Limited's 48% holding in NPL Bermuda for US$2,270,000,000 'or its Australian Dollar equivalent'. Although Mr Macourt's memorandum of 20 May 1989 had originally contemplated an exchange rate between the US and Australian dollars of 0.7450 it is apparent that, on 31 May 1989, a rate of 0.7631 was used. Using that rate, the Australian dollar equivalent of News Limited's selling price for NPL Bermuda was A$2,974,708,426 which was the precise amount of cheque 272461. From that I infer two matters. First, News Limited agreed to accept cheque 272461 in discharge of NPIP's obligation to pay it the purchase price of US$2,270,000,000; secondly, the cheque was physically delivered to News Limited by NPIP. What precisely happened then may be discerned from a restructuring diagramme in Mr Macourt's memorandum. Although the figures are incorrect because of their revision on the day, that diagramme makes clear the flow of funds was from News Finance through several interposed entities to News Limited and then back to News Finance. I will not set that diagramme out but it suffices that one may infer from it that the cheque was given by News Limited to News Finance which then presented it for payment. As such News Finance was both the drawer of the cheque and ultimately its holder in due course. Upon presentation the Commonwealth Bank then both debited and credited News Finance's account at its Pitt Street and Martin Place Branch. This account of events, it may be admitted, is deficient in that it does not provide any explanation of how the A$1 anomaly to which I have referred arose. However, I do not see that as a sufficient reason for rejecting its correctness: de minimis non curat lex.
23. What then appears to have occurred is this: a few days later on 5 June 1989 NPIP issued the relevant share certificates to NPHP. This shareholding had been entered into NPIP's register of members on 26 May 1989.
24. At some time during June 1989 corresponding entries were inserted in the general ledger for NPHP. Although Mr Macourt was ultimately responsible for the maintenance of this general ledger as the financial controller of News Limited, the actual entries were done by News Group accounts staff. Mr Macourt thought this would most likely have been done by reference to the record or records of the actual making of the loans. It seems to me there is no reason not to accept that proposition.
25. The general ledger for NPHP records borrowings from News Finance in the following amounts:
- (a) A$1 billion;
- (b) US$1,033,643,102 (equivalent of A$1,354,531,650 at a conversion rate of A$1 = US$0.7631); and
- (c) £292,971,509 (equivalent of A$620,176,776 at a conversion rate of A$1 = £0.4724).
26. The general ledger also records as liabilities three loans owing by NPHP to News Finance as follows:
- (a) account number 711-195-745-002 entitled 'NEWS FINANCE A$ LOAN' with two entries of A$500,000,000 which total A$1 billion;
- (b) account number 711-195-745-003 entitled 'NEWS FINANCE US$ LOAN' with two entries of A$454,531,650 and A$900,000,000. These appear besides the words '31/5 US$1,033,643,102' and '31/5 US$ @ 7631';
- (c) account number 711-195-745-007 entitled 'NEWS FINANCE STG LOAN' (STG being shorthand for 'pounds sterling') with one entry for A$620,176,776. This appears next to the words '31/5 292,971,509 @ 4724'.
27. Mr Macourt believed, and I accept, that this is likely to have occurred in June 1989. The copy of the general ledger in evidence bore a date and time of 16 August 1989 at 11:57 pm but this was, I accept, the time at which it was printed out.
28. One important matter should be noted. The original cheque voucher had suggested a loan of US$1,796,743,102 but the general ledger suggests one of US$1,033,643,102. At the exchange rate recorded in the general ledger (and any other plausible exchange rate) it is plain that the figure on the cheque voucher cannot have been correct. At some time after Mr Macourt signed the voucher but at or before the time the general ledger was completed in June 1989 a person has inscribed the correct figure of US$1,033,643,102 on the cheque voucher. The identity of that person is not known.
29. It will be necessary later in these reasons to give a precise legal characterisation to the events which I have just described. For present purposes the following should be observed:
- (a) NPHP received a cheque from News Finance made payable to it for A$2,974,708,426;
- (b) in return for that cheque it incurred a liability to repay to News Finance three interest bearing amounts in three different currencies - Australian dollars, US dollars and pounds sterling;
- (c) although it incurred liabilities to repay in these currencies it did not receive any money in US dollars or pounds sterling; instead, it received by delivery only the physical chattel constituted by cheque 272461 with a face value of A$2,974,708,426;
- (d) not having a bank account it did not seek to present that cheque for collection and payment through the banking system; and
- (e) instead, it either endorsed the cheque to NPIP or, if it was a bearer cheque, negotiated it by delivery to NPIP in discharge of its obligation denominated in Australian dollars to pay NPIP the subscription moneys due on the allotment of the shares.
30. Although it is certainly true that liabilities to pay foreign moneys were created by these events it is equally clear that no foreign currency in the sense of coin, cash or money held on deposit with a bank or other deposit-taking financial institution actually changed hands. NPHP neither received nor passed anything on but cheque 272461 for A$2,974,708,426. At the moment of settlement NPHP's Australian dollar liability to NPIP (for the shares) was replaced by a multicurrency debt to News Finance.
31. Thus was concluded the first stage of the 1989 restructuring. It is now useful to turn to the second stage.
The first advances subsequent to the 1989 restructuring on 28 June 1989
32. The taxpayers contend that on 28 June 1989 News Limited (not News Finance) lent to NPHP an amount of US$168,456,000 said to be equivalent to A$226,571,621 and that this was used to purchase further shares in NPIP. The Commissioner does not accept that the evidence establishes that this occurred. Three questions arise: (i) did the transaction occur at all; (ii) how was it settled; and (iii) what were the legal obligations created and/or discharged by the settlement events?
(I) Did the transaction occur?
33. Did News Limited advance funds to NPIP to permit NPHP to subscribe for further shares in NPIP? The answer is yes.
34. The available evidence is as follows: first, on 21 June 1989, there was a meeting of the directors of NPIP the minutes for which record that 'on or about 28 June next [i.e. 1989] the company would receive direct from News Limited the sum of US$168,456,000 and which will represent the subscription proceeds by [NPHP]' for a further allotment of shares in NPIP.
35. The directors also resolved on 21 June 1989 that, subject to the receipt by NPIP of the sum of US$168,456,000, those shares should be allotted to NPHP. The contemplated allotments were 5,000 ordinary shares each at par value of A$1 and a premium of A$9,999 and such number of redeemable preference shares at a par value of A$1 with the necessary premium to ensure that the cost of the allotment would equate to the Australian dollar value of US$168,456,000.
36. At another meeting of directors of NPIP held almost two years later (on 17 April 1991) the directors behaved in a way which was inconsistent with there having been no transaction on 28 June 1989. In part the minutes provide:
The Chairman referred to the Minutes of the meeting of Directors held on 21 June 1989 and noted that the sum of US$168,456,000 had been received by [NPIP] on 28 June 1989 and that, accordingly, the allotment to [NPHP] of the ordinary shares and the redeemable preference shares in the capital of [NPIP] referred to in the Minutes of the meeting of Directors on 28 June 1989 had been effected.
37. This mattered because no share certificates had been issued; consequently, NPIP resolved to issue the relevant share certificates. Specifically, on 17 April 1991 the directors of NPIP resolved to issue share certificates for 5,000 ordinary shares and 1410 redeemable preference shares at a premium of A$125,227.10. The total value of the ordinary and preference shares was A$226,571,621, which was equal as at 20 June 1989 to US$168,456,000.
38. The clarity with which these minutes record that the transaction occurred is detracted from to a certain extent by its treatment in the general ledgers of NPIP and News Limited. As at 28 June 1989 the general ledger of NPIP recorded a loan to it by News Limited of A$226,571,621 with a description 'US$168,456,000'. That ledger is not consistent with the transaction contemplated by the directors on 21 June 1989 which did not involve an Australian dollar loan by News Limited to NPIP. Nor is it consistent with NPIP's subsequent issue of share certificates to NPHP which is inexplicable if the ledger is correct. The position espoused in the general ledger appears, perhaps unsurprisingly, to have found its way into the notes to the audited account of NPIP for the year ending 30 June 1989. Note 9 records that NPIP received a non-interest bearing loan from News Limited for '$226,571,621' which it says 'was invested in additional share capital of [NPL Bermuda]'. For reasons to which I will return I accept NPIP did acquire further shares in NPL Bermuda.
39. At a time which I cannot precisely determine, NPIP and News Limited's general ledgers were varied to reverse the original reference to a loan from News Limited to NPIP. In NPIP's ledger there is a description 'ADJJNL' which Mr Macourt said means a journal entry correcting an earlier incorrect entry in the general ledger. There were corresponding adjustments in the News Limited general ledger which resulted in the reversal of the loan to NPIP and the creation of a loan to NPHP of A$226,571,621 described as 'NEWS PUB HOLDINGS US$LOAN'. Each of these journal entries bears the date '1/7/89'. There is no evidence as to who carried out the entries or when this occurred. It seems to me unlikely, however, that they occurred on 1 July 1989. The audited accounts for NPIP for the year ending 30 June 1989 refer to a loan from News Limited. These were signed by the directors on 29 November 1989. It is unlikely, had the journal entries actually occurred on 1 July 1989, that those accounts would have referred to the loan as being from News Limited. On the other hand the print-outs of the general ledgers which are in evidence are each dated 20 September 1990. I therefore conclude only that the reversals were entered into the general ledger sometime between 29 November 1989, when the directors signed the NPIP accounts, and 20 September 1990, when a ledger appears to have been processed.
40. A final piece of evidence consists of a facility deed between News Limited and NPHP dated 13 May 1991. On 17 April 1991 the directors of NPHP had resolved that it should be executed as it reflected an advance made to NPHP on 28 June 1989 of US$168,456,000. It recorded an agreement that it was retroactively to apply to loans made from 28 June 1989. It specifically referred to the loan made on 28 June 1989 of US$168,456,000 by News Limited to NPHP. The primary relevance of this agreement, so it seems to me, is that it demonstrates conduct consistent with the loan having taken place on 28 June 1989. Later in these reasons (at -), I conclude that what, in fact, occurred was not a loan by News Limited to NPHP of US$168,456,000, but the incurring by NHPH to News Limited of a debt of A$226,571,621. However, that is unrelated to the question presently under consideration, namely, whether anything occurred at all.
41. Taking all of this together I cannot, therefore, accept the Commissioner's submission that it has not been shown that anything occurred on 28 June 1989. Furthermore, the evidence of Mr Macourt and Note 9 to the accounts of NPIP indicate that the purpose of the transaction was to permit the acquisition by NPIP of further shares in NPL Bermuda. Of course, precisely the same structure had been used in May 1989; that is, a loan (on that occasion) by News Finance to NPHP to permit an equity injection into NPIP in turn to permit it to acquire shares in NPL Bermuda. The similarity in the transactional structure provides further comfort in reaching the conclusion that the advance alleged by the taxpayers did occur. The real puzzles of this transaction concern not whether it occurred but how it settled.
(II) HOW WAS THE TRANSACTION SETTLED?
42. The original transaction on 31 May 1989 had featured a cheque the delivery of which discharged successive monetary obligations: first, News Finance discharged its obligation to lend to NPHP money by delivering the cheque; secondly, NPHP then used delivery of this same cheque to discharge its obligation to pay the subscription money to NPIP. In the case of the transaction of 28 June 1989, however, there is no direct evidence of the mechanism by which the transaction settled. The minutes of a meeting of the directors of NPIP for 21 June 1989 (referred to above at ) had recorded that NPIP would receive the sum of US$168,456,000 from News Limited (not NPHP). This suggests, as one might expect, that NPHP had requested News Limited to pay NPHP the loan money by instead paying it directly to NPIP in discharge of its (NPHP's) monetary obligation to pay NPIP the allotment consideration. This view of what occurred is supported by Mr Macourt, who swore that NPHP had directed News Limited to pay NPIP. This is important: it signals the presence of a payment by request. What was missing as at 28 June 1989 was any obligation on the part of News Limited to lend money to NPHP. Unlike the May 1989 advances by News Finance, there was no antecedent loan agreement. It is true that the deed of 13 May 1991 purported retroactively to say that what had occurred on 28 June 1989 was a loan by News Limited to NPHP of US$168,456,000. But the fact is that on that day News Limited had no contractual obligation whatsoever to pay NPHP anything by way of loan. Although Mr Macourt called News Limited's payment to NPIP a payment at the direction of NPHP it was, in fact, a payment by request. No obligation of News Limited to NPHP was discharged by its act of paying NPIP. Instead, as will be seen, rather than a monetary obligation to lend being discharged by the payment to NPIP, what occurred was the creation of a debt owed by NPHP to News Limited flowing from the payment by request.
43. What moved from News Limited to NPIP? There was no evidence of any payment instrument changing hands (in contradistinction to the settlement of 31 May 1989 which had involved a personal cheque); nor was there any evidence of any form of settlement across the books of one or more banks.
44. Mr Macourt was cross-examined about this by Mr de Wijn QC, who appeared with Mr Broadfoot and Ms Hespe of counsel for the Commissioner. He was not able to recall any specific payment instrument having been used. Given that the transaction had happened 22 years beforehand this evidence is inherently credible. It does not follow, however, that there was no such instrument.
45. The fact that there is no direct evidence of how the payment was made by News Limited to NPIP does provide material from which an inference could be drawn that no such payment was ever made. But there is also material from which the opposite inference can be drawn. The first of these is the minutes of the meeting of directors of NPIP of 21 June 1989. These were signed by the Chairman and they indicated an anticipation on NPIP's part that the money would be received by it 'direct from News Limited'. The subsequent minutes of 17 April 1991 indicate that such funds had been received on 28 June 1989. These minutes, too, are signed by the Chairman. Both of these documents are business records and were admitted into evidence without objection. They provide, therefore, some evidence of the truth of their contents:
ASIC v Hellicar (2012) 286 ALR 501 at 519-20 ;
 HCA 17 at . In particular, they are evidence that a payment was anticipated to be made by News Limited to NPIP on 21 June 1989 and that by 17 April 1991 it was believed that it had been received on 28 June 1989. One can reach that conclusion without resort to s 251A(6) of the Corporations Act 2001 (Cth) ('A minute that is so recorded and signed is evidence of the proceeding, resolution or declaration to which it relates, unless the contrary is proved').
46. To conclude that there was no payment by some mechanism would be to conclude that the minutes of 17 April 1991 are false. As at that date, the making of a false statement with knowledge of its falsity was an offence against State law: s 1308(2) Corporations Law.
47. The evidence would not justify the conclusion that such an offence had been committed; that is, there is no material to justify a conclusion that the minutes were knowingly false. The options then are:
- (a) no payment took place, the minutes of 17 April 1991 are in error and Mr Chegwyn, who signed the minutes, overlooked the fact the payment had not been made; or
- (b) the payment was made, the minutes of 17 April 1991 are correct, Mr Chegwyn correctly signed them but the payment instrument or instruments by which the payment was made have been lost in the intervening years.
48. Proposition (a) involves concluding that 3 separate mistakes have been made: a mistake in failing to effect payment; a mistake in drawing the minutes; and a mistake in not reading them properly or alternatively in not being informed that the payment had not been made. Proposition (b) involves one mistake, namely, the loss of the instruments.
49. Since I regard the loss of the instruments as relatively unsurprising (cf. the remarks of Edmonds and Gordon JJ in
Federal Commissioner of Taxation v Clarke (2011) 190 FCR 206 at 225 - on the loss of documentation over an extended period) proposition (b) is less complex than proposition (a). I prefer it for that reason.
50. I conclude, therefore, that News Limited paid NPIP by some mechanism which the evidence does not directly disclose. Given that NPIP did not maintain a bank account and that it had no antecedent indebtedness to News Limited I infer that the payment was made by the delivery of a payment instrument such as a cheque or promissory note. I am not able to determine the precise nature of that instrument or the currency in which it was denominated or what NPIP subsequently did with it.
(III) What legal obligations were created and/or discharged by the settlement events?
51. Whatever the nature of the instrument handed by News Limited to NPIP it was accepted by NPIP in discharge of NPHP's obligation to pay NPIP the subscription monies for the issue of shares. No such process of discharge occurred between News Limited and NPHP. News Limited had no obligation to lend NPHP money and did not do so. Instead, it merely performed an act at NPHP's request, which discharged NPHP's monetary obligation to pay subscription monies to NPIP. I deal with the legal consequences of this below at -.
52. I turn then to the second further advance.
The advance of 28 December 1989
53. The applicants contend that on 28 December 1989 NPHP borrowed a further US$204,000,000 from News Finance to purchase more shares in NPIP. Again, the Commissioner submits that the evidence does not sufficiently establish this matter.
54. The general ledger for News Finance for the year ended 30 June 1990 records an entry dated 28 December 1989 for A$256,120,527 for the account 745-195-711-003 which was entitled 'NEWS PUB HOLDINGS US$ LOAN' and described as '28/12 204M @7965'.
55. The minutes of a meeting of directors of NPHP dated 28 December 1989 record a decision to subscribe for further preference shares in NPIP for the Australian dollar equivalent of US$204 million. The minutes of a meeting of directors of NPIP dated 14 August 1991 suggest that the issue of the share certificate was overlooked until that time. There is no direct evidence of what NPIP used the proceeds of this share allotment for. Mr Macourt swore, however, that it was used by NPIP to purchase more shares in NPL Bermuda. At this time Mr Macourt remained the financial controller of News Limited and was responsible for the supervision of the general ledger in question. I see no reason not to accept his evidence about this.
56. Accordingly, I conclude that to meet its obligations to pay NPIP the subscription moneys, NPHP incurred a liability to News Finance which was accounted for in US dollars. Because the general ledger records an Australian dollar sum I infer that, as with the earlier allotments, the consideration required by NPIP from NPHP was denominated in Australian dollars. This is consistent with NPHP's subscription obligation itself being denominated in Australian dollars. I am unable to determine the precise mechanics of the settlement but, by whatever means News Finance satisfied its obligations to NPHP, I am clear that this was not done by anything which might be called a payment of coin, cash or debts owed by deposit-taking financial institutions. At the end of this transaction, NPHP had exchanged an Australian dollar liability to NPIP for the allotment of shares in it for a debt obligation to News Finance denominated in US dollars. Because it will be relevant later, it should be stated that this advance by News Finance to NPHP was governed by the standby credit agreement of 31 May 1989 (see above at ). I also infer that News Finance's act of making the loan followed upon a determination by it that it would do so, thereby triggering an obligation upon it to lend under the agreement.
57. One further matter which should be noted is that whilst NPIP had originally acquired News Limited's 48% interest in NPL Bermuda, the effect of the two further advances just considered and their utilisation by NPIP to acquire further shares in NPL Bermuda must, as a matter of arithmetic, have increased NPIP's shareholding in NPL Bermuda beyond 48%.
58. It is necessary now to turn to what the taxpayers referred to as the 1991 restructuring.
(b) The 1991 restructuring and the events of 6 June 1991
59. During the 1990 financial year the group's current borrowings (that is, those due within the next 12 months) increased by 500% from A$500 million to A$3 billion. On top of that, its long-term debts were in the order of A$7.5 billion. This debt burden, together with the downturn in the world economy, gave rise to what the Chairman and Chief Executive of TNCL, Mr Rupert Murdoch, described as 'a severe liquidity crisis' within the group. The crisis was resolved by a renegotiation of terms with the News Group's external creditors. The group undertook a reorganisation of its worldwide operations in 1991 in response to the terms of that renegotiation. The purpose of the reorganisation from the Australian operations' perspective was to enable News Finance to retire about US$2 billion owed to an English News Group entity, Ordinto Investments.
60. In May 1991 the directors of TNCL, News Limited, NPIP and NPHP agreed to a reorganisation of the News Group's assets in order to reduce foreign related party debt. According to Mr Macourt, the reason this was to be done was to increase the profitability of the Australian operations. It was anticipated that this would generate increased franking credits which could then be distributed to shareholders as franked dividends.
61. In very broad summary what happened was this: NPL Bermuda redeemed the shares held by NPIP for a price of US$3,020,000,000. Part (but not all) of those funds was then lent by NPIP to NPHP and thereafter used by NPHP to reduce the extent of its debt to News Finance and News Limited. In turn, News Finance used the funds to reduce its liabilities to Ordinto Investments. These transactions are complicated by the use of a large number of promissory notes none, apart from one, of which was presented for payment.
The redemption by NPL Bermuda of NPIP's shares
62. One begins then with an agreement entered into on 4 June 1991 between NPIP and NPL Bermuda entitled 'SHARE REDEMPTION/PURCHASE AGREEMENT'. The directors of NPIP resolved on 31 May 1991 that this agreement should be executed. The minutes recited the need for the Australian companies to reduce 'foreign related party debt' which I take to be a reference to the liabilities to Ordinto Investments. They also record the Chairman saying that 'this course could best be achieved by [NPIP] repatriating its investment in [NPL Bermuda] in which it held a 48% interest'. For the reason I have flagged above at  this cannot be correct - NPIP had initially acquired 48% of NPL Bermuda but had also acquired further shares in NPL Bermuda as a result of the further advances of 28 June 1989 and 28 December 1989. In any event, the board of NPIP resolved to enter into the redemption arrangement. The subscription agreement does not mention the 48% but it does identify three parcels of NPL Bermuda shares which is consistent with the idea that NPIP made three separate acquisitions of shares. The sale price was agreed to be US$3,020,000,000 'in lawful currency of the United States'. The agreement, by cl 10, was to be governed by the laws of Bermuda.
63. As it happens, NPL Bermuda did not give to NPIP US$3,020,000,000 'in lawful currency of the Unites States'. Instead the obligation to do so was satisfied - I infer with NPIP's consent - by the delivery of a note for US$3,020,000,000 issued by NPL Bermuda to NPIP. This occurred on 6 June 1991. The note was entitled 'UNSECURED DEMAND LOAN NOTE'. It was expressed to be subject to the laws of Bermuda and was issued under the seal of NPL Bermuda.
64. In the case of this transaction there exists the historical advantage that the solicitor, Mr Gregg, kept a detailed memorandum of what occurred which was prepared within a relatively short time after the transaction.
65. According to Mr Gregg's memorandum, NPL Bermuda then 'satisfied' its liability on the note by distributing to NPIP sixteen promissory notes held by NPL Bermuda. This also occurred on 6 June 1991. Although Mr Gregg's memorandum does not say this in terms, I infer that the unsecured demand note was redelivered to NPL Bermuda resulting in its satisfaction. I make that assumption because Mr Gregg's memorandum suggests that the unsecured demand note was satisfied by the endorsement to NPIP of several promissory notes then held by NPL Bermuda. Parts of the evidence suggest that the notes may have been 'transferred'; in addition, two witnesses who were present at the settlement - Mr Zelkha of Ernst & Young and Mr Traill of Arthur Andersen & Co - gave evidence that they saw the endorsements actually occur. Mr Gregg's memorandum uses the expression 'assigned by endorsement'. It seems to me that Mr Gregg's memorandum is the most reliable account of what occurred. To that I would add this: Mr Gregg was cross-examined before me and it would be fair to say that I obtained the impression that detailed, correct and precise terminology was important to him. For example, Mr Gregg was cross-examined by Mr de Wijn about another unsecured demand note in these terms:
Yes. Now, can I then ask you to go to - so can I then ask you to go to the note that's at page 587? --- Yes
Is that a note that you prepared? --- Yes
And that was a note that was issued as the consideration for the assignment of seven promissory notes, was it not? --- It was - I would not express it that way. It was issued as consideration for a loan.
Okay? --- A US dollar loan
Okay. No US dollars were advanced to [NPHP], were they? --- Correct. They were not.
And no Australian dollars were advanced to [NPHP]? --- Correct. They were not.
And the only relevant transaction that moved the issue of the note that you see at page 587 is the transfer to NPHP of a series of promissory notes; is that correct? --- I think you said the only relevant transaction. The parties agreed - these were my instructions and this, I think, I have documented - the parties agreed that there would be a US dollar loan which would be made and evidenced by the endorsement of these loan notes.
So the - so are you saying that the loan was a loan of the notes? --- No, the loan was not a loan of the notes.
66. And then later on the nature of the note:
And the only amount that was - that needed to be - well, it was contemplated as being repaid under this transaction was the $2.8 million by NPHP; is that correct? --- Yes.
And that obligation is governed by the promissory note at 587? --- Well, it's governed by this note at page 587. I don't agree it's a promissory note.
Well, we will just call it a demand note. You say this is not a promissory note? --- Correct.
67. Accordingly, I accept that the notes were endorsed by NPL Bermuda to NPIP. According to Mr Gregg's memorandum the promissory notes were endorsed by Mr Sarazen who was a director of TNCL and who at settlement was authorised to represent, inter alia, NPL Bermuda. There were 16 of these notes. Twelve of them were denominated in US dollars. The issuer of each note, its face value and whether it was interest bearing or not were as follows:
|News Securities BV||US$1,635,507,911||Interest bearing|
|News Limited||US$111,345,000||Not expressed to be interest bearing|
|News Group Holdings Pty Limited||US$500,000,000||Not expressed to be interest bearing|
|News Cayman Holdings Limited (9 notes)||US$100,000||Interest bearing|
68. There were another 4 notes which were not denominated in US dollars. These were as follows:
|News Times Holdings Limited||A$564,859,027||This note is expressed to be payable to the registered holder for the time being.|
|News Group Newspapers Ltd||£10,582,902.55||Interest bearing|
|DM 239,995,527||Interest bearing|
|NPL Investments I (Cayman) Limited||DM 27,577,190||Interest bearing|
69. Because these non-US-dollar promissory notes were being endorsed in satisfaction of a debt denominated in US dollars (that is, the debt of US$3,020,000,000 reflected in the unsecured demand loan note) it was necessary for NPL Bermuda, as the endorser, and NPIP, as the holder of the unsecured demand note, to agree upon a US dollar value for these four notes. Mr Gregg's memorandum records that he (on behalf of NPIP) and Mr Sarazen (on behalf of NPL Bermuda) then agreed the four notes should be valued as follows:
News Times Holdings Limited (A$564,859,027) - US$428,410,335
News Group Newspapers Ltd (£10,582,902.55 and DM 239,995,527) - together US$156,058,898
NPL Investments I (Cayman) Limited (DM 27,577,190) - US$15,758,400
70. The total value of the 16 notes in US dollars was therefore agreed to be US$3,034,026,944. The face value of the unsecured demand note was, by contrast, US$3,020,000,000. The difference of US$14,026,944 was accounted for by NPIP assuming a liability that NPL Bermuda had to another News entity, Festival Books & Associates Limited. Mr Sarazen (on behalf of NPL Bermuda) and Mr Gregg (on behalf of NPIP) agreed that NPIP would assume this liability from NPL Bermuda by means of a novation agreement (or something similar).
71. It was by the above, perhaps somewhat obscure, means that NPL Bermuda redeemed NPIP's shares in it for US$3,020,000,000.
The incurring of a liability by NPHP to NPIP
72. It is the next step which is important. It consisted of NPHP incurring a liability to NPIP. Although NPIP held promissory notes with a total value on 6 June 1991 of US$3,034,026,944, the amount to be loaned to NPHP on that day was somewhat less - US$2,847,080,544. What NPIP did with the balance (which was represented by promissory notes) is not germane to this case.
73. This transaction between NPHP and NPIP had two elements. The first consisted of the endorsement of some (but not all) of the notes endorsed to NPIP by NPL Bermuda. In effect, the advance of these promissory notes was treated as an advance of loan funds. The second step was the issue by NPHP to NPIP of a second unsecured demand note in the amount of US$2,847,080,544. The advance of the promissory notes created, in substance, the debt which was then recognised in the unsecured demand note.
74. Again, the mechanics by which this occurred are of some significance. The settlement of this transaction also occurred on 6 June 1991 in London at the same settlement meeting at which NPIP had redeemed its shareholding in NPL Bermuda. Mr Gregg acted for both NPIP and NPHP. The first step involved NPIP endorsing to NPHP the four foreign currency promissory notes it had received from NPL Bermuda together with three of the US dollar promissory notes it had received at the same time. The notes delivered were as follows:
|News Securities BV||US$1,635,507,911|
|News Times Holdings Ltd||A$564,859,027|
|News Group Newspapers Ltd||£10,582,902.55|
|News Group Newspapers Ltd||DM 239,995,527|
|NPL Investments I (Cayman) Ltd||DM 27,577,190|
|News Group Holdings Pty Ltd||US$500,000,000|
75. It appears that these were valued at US$2,847,080,544. Upon receipt, NPHP then delivered to NPIP, in recognition, an unsecured demand note (this note should not be confused with the earlier unsecured demand note issued to NPIP by NPL Bermuda). There is some debate about the legal characterisation of this instrument so it is useful to set it out in full:
NEWS PUBLISHERS HOLDINGS PTY LIMITED
(Incorporated in the State of New South Wales)
US$ 2,847,080,544 UNSECURED DEMAND NOTE
- (i) In consideration of [NPIP] making a loan of US$2,847,080,544 to [NPHP] on 6th June 1991 by the endorsement and delivery of certain notes to [NPHP], [NPHP] whose registered office at the date of issue is 2 Holt Street, Surry Hills, New South Wales, Australia, promises to pay bearer (the "Holder") on demand the sum of Two Billion, Eight Hundred and Forty Seven Million, Eighty Thousand, Five Hundred and Forty Four US dollars (US$2,847,080,544) on presentation and surrender of this Note at the registered office of [NPHP]. The Holder on the date of the issue of this Note is [NPIP].
- (ii) This Note bears interest on the daily principal amount outstanding at the rate of LIBOR (as determined by [NPIP] from time to time) plus 0.80 per cent, per annum calculated on the basis of a year of 360 days and on the actual number of days elapsed. Interest shall accrue daily and shall be payable on 6th March, 6th June, 6th September and 6th December in every year or the nearest preceding business day.
- (iii) On payment of the amount of this Note it shall be cancelled by [NPIP] and shall not be available for re-issue.
- (iv) This Note may be transferred or assigned (either in whole or in part) without the prior consent of [NPIP], but is not a negotiable instrument.
- (v) This Note shall be governed and construed in accordance with the laws of the State of New South Wales.
Issued in London on 6th June 1991
For and on behalf of
76. The minutes of the meeting of NPHP's directors of 5 June 1991 reflect these events. Because there is some debate about the legal characterisation of these events (in particular, whether what was involved was a loan or a purchase of promissory notes) those minutes should be set out insofar as they are relevant:
PRESENT: Mr. P. G. Chegwyn (Chairman) and Mr. P.J. Macourt
IN ATTENDANCE: Mr. K.J. Brodie (Secretary)
LOAN FACILITY FROM NEWS PUBLISHERS INVESTMENTS PTY. LIMITED:
REDUCTION OF LOANS MADE BY NEWS FINANCE PTY. LIMITED AND NEWS LIMITED
- 1. The Chairman noted that [NPIP], a wholly owned subsidiary of [NPHP], was prepared to lend up to US$2,850,000,000 to [NPHP] and which would be evidenced by [NPHP] issuing to [NPIP] a Demand Promissory Note bearing a market rate of interest.
- 2. The Chairman noted that the loan from [NPIP] to [NPHP] would be effected by the assignment or endorsement by [NPIP] in favour of [NPHP] of certain loan receivables made or issued by News Group Companies and which loan receivables would be beneficially owned by [NPIP].
- 3. The Chairman noted that it had been agreed between [NPHP] and News Finance Pty. Limited that [NPHP] would on or about 6 June 1991 reduce the loan balance including interest thereon owing by [NPHP] to News Finance Pty. Limited by the amount of approximately US$2,740,000,000 or its equivalent in other currencies.
- 4. The Chairman also noted that it had been agreed between [NPHP] and News Limited that [NPHP] would on or about 6 June 1991 reduce the loan balance (including interest) thereon owing by [NPHP] to News Limited by US$111,345,000.
- 5. It was resolved that:
- (a) [NPHP] would borrow from [NPIP] up to the sum of US$2,850,000,000 (or its equivalent) pursuant to and upon the terms of a Demand Promissory Note in the form approved by any Authorised Signatory (as hereinafter defined);
- (b) that such loan be effected by [NPHP] accepting the assignment or endorsement in its favour by [NPIP] of loan receivables made by News Group Companies;
- (c) [NPHP] effect prepayment of the outstanding loan balance plus interest due by [NPHP] to News Limited on or about 6 June 1991 by the sum of US$111,345,000;
- (d) [NPHP] effect prepayment of the outstanding loan balance plus interest due by [NPHP] to News Finance on or about 6 June 1991 in the aggregate amount of the difference between the amount of such loan from [NPIP] and the amount of such prepayment by [NPHP] to News Limited;
- (e) that such prepayments and/or payment of interest be effected by the further assignment or endorsement by [NPHP] in favour of News Finance or News Limited of the loans receivable to be assigned or endorsed in favour of [NPHP] of [NPIP], pursuant to paragraph 5(b) above; and
- (f) that any one of Mr. R. A. Sarazen of The News Corporation Ltd., Mr. P. W. Stehrenberger, Mr. C. G. Reader or Mr. S. J. Brown of News International plc or Mr. A. M. Gregg of Clayton Utz, each an "Authorised Signatory" severally, be authorised to execute all such documents and to do all such acts, matters and things as he may think fit and upon such terms and conditions as he shall determine to give effect to these resolutions.
There being no further business, the Chairman declared the meeting closed.
77. An uncontroversial, or at least minimalist, characterisation of these events would be to say that NPHP incurred a liability of some description to NPIP which was agreed between them to be measured in the amount of US$2,847,080,544. The agreement or acknowledgment is demonstrated by NPHP's issue of the unsecured demand note in that sum and NPIP's willingness to accept that note. What NPHP received for incurring this liability was not, however, US$2,847,080,544. It was instead the endorsement to it of the seven promissory notes denominated in the three currencies set out above.
78. The general ledger for NPHP records four loans each of A$941,494,888.89 which, together, total A$3,765,979,555.56 or US$2,847,080,544 with an exchange rate of 0.7560. This accounting is consistent with the unsecured demand note which treated the liability created by the advance as being denominated in US dollars.
The reduction of NPHP's debt to News Finance and News Limited
79. It now remained for NPHP to reduce the intercompany debt it owed to News Finance and News Limited (which had been incurred in May, June and December 1989). The general ledger for NPHP indicates that it paid interest on its intercompany loans for the period between 1989 and 30 June 1999. The treatment of this interest is relevant to the Commissioner's contention that it was capitalised and therefore not deductible under s 8-1. The manner in which the interest was handled was as follows: in each year the interest which accrued was calculated and recorded in NPHP's general ledger on a quarterly basis which was cumulative. At the end of each financial year the interest which had accrued was reversed out and credited instead to the amount outstanding on the loan (equivalent entries were made in the relevant lender's general ledger). After 1 July 1999 NPHP was not charged interest on its intercompany loans.
80. The charging of interest on intercompany account to NPHP meant that interest had accrued in its general ledger on three liabilities recorded therein; that is, on the sterling, US-dollar and Australian-dollar denominated debts. In the subsequent discharges of NPHP's liabilities to News Finance and News Limited on 6 June 1991 this needs to be kept in mind.
81. The discharges worked as follows. First, NPHP endorsed to News Finance the following promissory notes (which it had received from NPIP):
|News Securities BV||US$1,635,507,911|
|News Times Holdings Ltd||A$564,859,027|
|News Group Newspapers Ltd||£10,582,902.55|
|News Group Newspapers Ltd||DM 239,995,527|
|NPL Investments I (Cayman) Ltd||DM 27,577,190|
|News Group Holdings Pty Ltd||US$500,000,000|
82. NPHP's general ledger entries for the three original loans were in evidence. The general ledger reveals that NPHP treated the delivery of these notes to News Finance as resulting in discharges of the three foreign currency debts in the following sums:
|Australian dollar debt||-||A$866,770,753.72|
|US dollar debt||-||US$1,454,489,697.08|
83. The payments were, in fact, applied first against principal and then, if it were fully repaid, against interest. There is no evidence of an express agreement to that effect but it is what the general ledger records and it is consistent with the presumption that repayments are applied against the oldest debts first:
Deveynes v Noble ('Clayton's Case') (1816) 1 Mer 529 at 608;
35 ER 767 at 792-3;
Texas Co (Australasia) Ltd v Federal Commissioner of Taxation (1940) 63 CLR 382 at 429 per Latham CJ and 467 per Dixon J.
84. Mr Whyte gave evidence about the precise figures involved as a result of that approach which I accept as correct. Mr Macourt summarised that evidence in terms which I accept are correct as follows:
- (a) as to the original principal loans extended by News Finance in May 1989 (see -):
- (i) the whole of the US dollar and sterling components were extinguished;
- (ii) approximately 87% of the Australian dollar loan was extinguished;
- (b) as to the 'capitalised' interest components due as a result of the approach to interest I have described above:
- (i) the whole of the 'capitalised' US dollar interest was extinguished;
- (ii) approximately 75% of the capitalised sterling interest was extinguished.
85. I so find.
86. So much for the debt due to News Finance. It will, no doubt, be recalled that there had also been a liability incurred by NPHP to News Limited in June 1989. For reasons I give this debt was, in fact, denominated in Australian dollars (see above at - and below at -). NPHP, however, treated this debt as a US dollar debt. This makes it difficult to assess its evidence about repayments. On 6 June 1991 NPHP endorsed to News Limited the promissory note issued by News Limited (and thereafter endorsed by NPL Bermuda and NPIP) which was in the sum of US$111,345,000. A discharge of principal to the extent of US$111,345,000 is consistent with the minutes of a meeting of the directors of NPHP held on 5 June 1991 where a resolution to that effect was passed. The difficulty remains, however, that the debt was an Australian dollar debt. The consequences of that conclusion do not need decisively to be determined for present purposes.
87. It is useful to pause at this juncture to record what had been achieved to this point. This may be summarised as follows:
- (a) in May 1989 NPHP incurred liabilities to News Finance denominated in Australian dollars, US dollars and sterling;
- (b) in return it received a cheque from News Finance in Australian dollars which it handed to NPIP without banking;
- (c) by delivering that cheque it had discharged its obligation to pay in Australian dollars the subscription amount for the shares in NPIP;
- (d) in June 1991 NPHP discharged all of its US dollar liabilities, most of its sterling liabilities and a good portion of its Australian dollar liabilities to News Finance by endorsing to it promissory notes which had been endorsed to NPHP by NPIP;
- (e) at the same time it discharged some of the liability it had to News Limited by presenting a promissory note in the sum of US$111,345,000 to News Limited (assuming that the repayment could be applied against the Australian dollar debt);
- (f) it obtained all of these promissory notes by endorsement from NPIP in return for which it gave NPIP the unsecured demand note with a face value of US$2,847,080,544.
88. It follows that at the end of this process NPHP had extinguished some of its prior liabilities in several currencies to News Finance and News Limited and replaced them with a liability in US dollars to NPIP. It might be noted for completeness that whilst the initial 1989 debts to News Finance and News Limited had been used to acquire the shares in NPIP the converse was not true in the 1991 restructuring. Although the debts incurred by NPL Bermuda to NPIP arose from a redemption this was not so in the case of NPIP and NPHP.
(c) The alleged advance of 28 June 1991 and the advance of 8 July 1992
(i) The alleged advance of 28 June 1991
89. There is some confusion as to what happened next. The taxpayers submit that NPIP advanced a further amount of US$56,191,657 to NPHP on 28 June 1991 and that this was used to reduce NPHP's antecedent Australian dollar debt to News Finance. The first part of the confusion arises from the taxpayers' written submissions which contend at  that these funds were used to reduce antecedent Australian dollar debt to NPIP (not News Finance). In the schedule to the submissions the position is taken that it was used to retire Australian dollar debt owed to News Finance (and not NPIP). This was also the position taken by Mr Macourt in his evidence. In light of that which follows, I believe that the taxpayers intended to submit it was the Australian dollar debt to News Finance which was paid down.
90. The second part of the confusion arises from the fact that as a matter of historical reality nothing happened on 28 June 1991 at all. It is true that there are two journal entries which are both dated 28 June 1991 but these reflect matters which the evidence shows did not occur on that day. In the general ledger for NPHP, the folio for account 711-195-712-003 records a US dollar loan by NPIP to NPHP in the sum of US$56,191,657 dated 28 June 1991. There is a corresponding entry in the general ledger for account 711-195-745-002 which records a repayment of A$73,405,169.17 on NPHP's Australian dollar liability to News Finance. It should be noted that at this time the sum of A$73,405,169.17 was equivalent to US$56,191,657.
91. The general ledger is contradicted, however, by other documents. It is clear that there was a meeting of the directors of NPHP on 30 January 1992. The minutes of that meeting recorded that the accounts for the group for the year ended 30 June 1991 suggested that on 29 June 1991 NPHP had purchased from NPIP six promissory notes (all denominated in Deutschmarks) for A$73,405,169 by issuing its own promissory note to NPIP with a face amount of A$73,405,169. The minutes went on to record, however, that NPIP had never endorsed the notes and that NPHP had never issued its note. The directors resolved accordingly that the endorsement of the notes should now be accepted, that the promissory note for A$73,405,169 should be issued to NPIP and that NPHP should deliver the six notes to News Finance in reduction of its debt. The acceptance by NPHP of the promissory notes was to be done 'with effect' from 29 June 1991. The issue of the note to NPIP was not said in the minutes to be effective retrospectively to 29 June 1991 although, as will be seen below, it was treated that way.
92. Before the Court, the six Deutschmark promissory notes were in evidence. They appeared to have been endorsed to NPIP on 29 June 1991 but, from the minute, I infer that what has occurred is backdating. In addition, none of the notes has been endorsed to NPHP. This may be able to be accounted for by the fact that the notes were payable to bearer and may have been negotiated by delivery. In the same vein there is no direct evidence that they were negotiated to News Finance although given the minutes I accept that they were. There is also in evidence the promissory note issued by NPHP to NPIP for A$73,405,169. It is dated 12 March 1992 'with effect from 29 June 1991'. I infer that the endorsement of the other six notes happened on 12 March 1992. Mr Macourt's evidence was that the reference in the minutes of 30 January 1992 to the promissory note issued by NPHP having a face value of A$73,405,169 was an error and that the minutes should read US$56,191,657 (the equivalent US dollar sum). The difficulty with that submission, as the Commissioner pointed out, was that the promissory note actually issued was for A$73,405,169 and not US$56,191,657. The fact is that what was delivered to NPIP by NPHP was a promissory note which was not denominated in US dollars. Further, this act of delivery did not occur on 29 June 1991 but instead on or about 12 March 1992.
93. I conclude therefore as a matter of fact that the following occurred:
- (a) NPHP intended to increase its US dollar liability to NPIP by US$56,191,657 on 29 June 1991 by issuing a promissory note having that value and to receive in return the six Deutschmark promissory notes;
- (b) NPHP intended to use the proceeds of (a) to reduce its Australian dollar liability to News Finance on 29 June 1991;
- (c) Ledger entries to that effect were effected on or around 28 June 1991;
- (d) On 12 March 1992 NPIP endorsed six promissory notes denominated in Deutschmarks to NPHP in return for a promissory note issued by NPHP in the sum of A$73,405,169 all of which were backdated to 29 June 1991.
94. It will follow from what I have just said that I do not think that backdating could alter, at least for revenue purposes, the historical reality of what occurred.
95. In any event, I do not think that the confusion about the denomination of the NPHP promissory note gives rise to a contradiction with the NPHP general ledger (subject to one matter to which I return). It is true that it records an increase in NPHP's US dollar debt to NPIP of US$56,191,657 and a reduction in its Australian dollar debt to News Finance of A$73,405,169.17. But if one accepts (and I do) that the two amounts are equivalent then both of these events could be achieved by the delivery of a promissory note in either currency so long as the values were equivalent. Put another way, the ledgers may have been adjusted in particular units of account but the currency of the instrument is immaterial save to the extent that it corresponds to the values in question (which this note does). Of course, the question of whether the promissory note was in Australian or US dollars may be relevant to the question of whether there was an advance of foreign currency.
96. The consequence is that I accept that NPHP increased its US dollar indebtedness to NPIP by decreasing its Australian dollar debt to News Finance. For completeness, there is no evidence that any of the promissory notes were presented for payment or that any cash payments were made in consequence.
(ii) The advance of 8 July 1992
97. The taxpayers submit that there was a further advance to NPHP by NPIP probably on 8 July 1992 and that it was in the amount of US$32,120,958. The evidence that this occurred came from two sources. The first consisted of board minutes of NPHP and NPIP dated 7 July 1992. These both contemplate that NPIP would transfer to NPHP a promissory note issued by News Datacom Limited with a face value of US$32,120,958. The purchase price was to be its face value and was to be left outstanding and added to the intercompany account. The resolutions did not make clear whether it would be the Australian or US dollar account which would be increased. The minutes also contemplated that NPHP would then transfer the note to News Limited in reduction of its loan.
98. The second source was the general ledger of NPHP which recorded an entry in the folio for a loan from NPIP made on 27 September 1992 as follows:
99. The promissory note issued by News Datacom was not in evidence. It is true that the evidence in this case gives some credence to the notion that the general ledger of NPHP may not always correspond with historical reality - the backdating issue above is a case in point. But I do not think that it is inherently unreliable. In light of its entries and the evidence in the minutes I am satisfied that the note was delivered and that this transaction did, in fact, occur.
100. It should be noted that both the advance of 28 June 1991 (more accurately the advance of 12 March 1992) and the advance of 8 July 1992 share a common feature: neither was utilised to acquire further shares of NPIP.
(d) The discharge of NPHP's liabilities to NPIP in 2001 and 2002
101. Before moving to the details of the discharge process it is convenient to note at the outset two matters:
- (a) the taxpayers say that on 8 June 2001 by means of promissory notes NPHP paid to NPIP US$1,023,453,698 which resulted in a reduction in its US dollar liability to NPIP of US$1,015,000,000 together with accrued interest of US$8,453,698. This was a partial discharge only;
- (b) the taxpayers say that on 28 June 2002 NPHP discharged the remaining balance of its US dollar liability to NPIP together with interest which was then US$3,481,527,042. It did this by delivering a promissory note to NPIP with a face value of US$3,481,527,042.
102. The two critical dates are, therefore, 8 June 2001 and 28 June 2002. The complexity which arises concerns the circumstances in which the notes came to be issued.
The 8 June 2001 repayment
103. On 8 June 2001 the directors of NPHP resolved to purchase from TNCL two promissory notes which had, respectively, face values of US$750 million and US$265 million. The notes were interest bearing at 8%. The purchase price was to be in Australian dollars and this would be satisfied by NPHP's Australian dollar debt to TNCL being increased on the inter-company account. The recited purpose was to permit NPHP partially to pay down its US dollar debt to NPIP. Both notes were in evidence as were TNCL's endorsements to NPHP on 8 June 2001. The relevant Australian dollar value was A$1,983,453,267. The general ledger for NPHP reveals, as the board minutes contemplated, a debit entry of A$1,983,453,267 on the NPHP intercompany loan from TNCL. The entry is dated 8 June 2001 and is described as '08/6 Purchasing NPAL Promissory notes from TNCL'. The evidence includes NPHP's endorsements of the notes to NPIP also dated 8 June 2001. Consistently, the general ledger for NPHP records a repayment to NPIP of the US dollar loan of A$1,983,453,267 (that is, the Australian dollar equivalent to US$1,023,453,698). The entry is described as 'Entries for the repayment of US$ loan with NPIP $265M'. I am not able to account for the reference to '$265M'. It is true that this is the value (in US dollars) of one of the two promissory notes presently of concern, but this observation does not really assist. (It was submitted to me, and I accept, that the difference between the face value of the notes and the amount of US dollar debt they discharged is attributable to 'accrued interest'.)
104. The News Group's Finance Manager at the time was Mr Stephen Rue. He gave evidence, over objection, that the amount of US$1,023,453,698 had been applied to reduce the US dollar liabilities of NPHP to NPIP. I accept this. He also gave evidence that this repayment of principal together with those other principal payments had been done on a 'first in first out' basis. This requires some expansion. In their written submissions the taxpayers submitted that the discharge by NPHP of its US dollar indebtedness had been done on the basis that the loan account was a running account and that the repayments which were made were treated as discharging the oldest debts first 'whether of principal or capitalised interest': cf. Clayton's Case at 608 (Mer); 792-793 (ER). This principle operates as a presumption. The general ledger does not provide evidence one way or the other on this matter. There is also no other evidence (apart from Mr Rue's) about it. In those circumstances, I accept that the presumption should apply. I would have done so even without Mr Rue's evidence.
105. In that circumstance, I conclude that NPHP's US dollar liability to NPIP was reduced by US$1,023,453,698 and that this was done by the delivery of two promissory notes.
The final phase in the discharge on 28 June 2002
106. By reference to the general ledger Mr Rue has been able to determine that the total amount of the US dollar debt owed by NPHP to NPIP on 28 June 2002 was US$3,481,527,042.08.
107. On 28 June 2002 NPIP issued to NPHP two interest-free demand promissory notes of US$3,481,527,042 and A$1,230,504,859. It did so in satisfaction of antecedent Australian dollar liabilities to NPHP which were on that day of an extent of A$7,403,425,151. The origins of those Australian dollar liabilities spring largely from the fact that although NPHP has thus far principally been portrayed as NPIP's debtor it was also its parent. A large part of this Australian dollar debt arose when NPIP declared a dividend in favour of NPHP and also redeemed preference shares held by NPHP. There were other matters too but a grasp of them would not increase the clarity of this account.
108. The two key things to observe are that, first, one of those promissory notes - that valued at US$3,481,527,042 - was worth the same as that which was perceived to be NPHP's liability to NPIP in US dollars; secondly, that A$6,172,920,292 of NPIP's antecedent Australian dollar debt was used to acquire the US dollar promissory note (i.e. the difference between A$7,403,425,151 and the face value of the Australian dollar promissory note, A$1,230,504,859). On 28 June 2002 NPHP handed the US dollar note to NPIP in satisfaction of the whole US dollar debt. The promissory note was then discharged by operation of law without funds changing hands (NPIP being both its issuer and holder).
109. Thus were the events which occurred.
(e) Summary of relevant transactions
110. As has been seen above, a full appreciation of the facts of this case requires an examination of many transactions that do not directly concern the company whose taxable income is in question, NPHP. For that reason, it is perhaps helpful to summarise the transactions involving NPHP as follows:
|Date & Event||Description||Relevant Paragraph/s|
|(a)||31 May 1989||News Finance hands cheque 272461 for A$2,974,708,426 to NPHP which is accounted for as loans of:||-|
|Incurs multi-currency liability to News Finance||•||A$1 billion;|
|NPHP uses this cheque to subscribe for ordinary and preference shares in NPIP.|
|(b)||28 June 1989||News Limited pays delivers an unidentified instrument to NPIP in satisfaction of NPHP's obligation to pay an amount of A$226,571,621 to NPIP for a further allotment of shares. This results in an increase in NPHP's indebtedness to News Limited. Although the taxpayers content that this liability was denominated in US dollars, I conclude below at - that it was denominated in Australian dollars.||-|
|Incurs Australian dollar liability to News Limited|
|(c)||28 December 1989||News Finance loans a further US$204,000,000 (equivalent to A$256,120,527) to NPHP, which NPHP uses to acquire further shares in NPIP.||-|
|Incurs further US dollar liability News Finance|
|(d)||6 June 1991||NPIP endorses seven promissory notes worth US$2,847,080,544 (equivalent to A$3,765,979,555.56) to NPHP. In return, NPHP issues an unsecured demand note for the same US dollar amount.||-|
|Incurs US dollar liability to NPIP|
|(e)||6 June 1991||NPHP endorses six of the seven promissory notes referred to at (d) to News Finance. This is treated as being a discharge of the debts owed by NPHP to News Finance in the order of:||-|
|Reduces multi-currency liability to News Finance||•||A$866,770,753.72 (i.e. approximately 87% of the principal);|
|•||US$1,454,489,697.08 (i.e. all of the principal and all of the 'capitalised' interest); and|
|•||£370,833,623.88 (i.e. all of the principal and approximately 75% of the 'capitalised' interest).|
|(f)||6 June 1991||NPHP endorses the seventh promissory note referred to at (d), worth US$111,345,000, to News Limited.|||
|Reduces Australian dollar liability to News Limited|
|(g)||12 March 1992 (the taxpayers claimed 28 June 1991)||NPHP receives six promissory notes (denominated in Deutschmarks) from NPIP and, in return, issues a promissory note to NPIP for A$73,405,169. This Australian dollar sum was equivalent to US$56,191,657 and was accounted for as an increase in NPHP's US dollar liability in that amount.||-|
|Incurs further US dollar liability to NPIP|
|(h)||12 March 1992 (the taxpayers claimed 28 June 1991)||NPHP negotiates the six Deutschmark promissory notes referred to at (g) to News Finance in exchange for a reduction in its Australian dollar debt by A$73,405,169.17.|||
|Reduces Australian dollar liability to News Finance|
|(i)||8 July 1992||NPIP advances a further US$32,120,958 to NPHP by transferring a promissory note having that value.||-|
|Incurs further US dollar liability to NPIP|
|(j)||8 June 2001||NPHP purchases two promissory notes (denominated in US dollars) from TNCL by increasing its liability to TNCL by A$1,983,453,267.|||
|Incurs Australian dollar liability to TNCL|
|(k)||8 June 2001||NPHP endorses the notes referred to at (j) to NPIP to reduce its US dollar liability by US$1,023,453,698.||-|
|Reduces US dollar liability to NPIP|
|(l)||Year ended 30 June 2001||NPHP claims a deduction of A$629,662,666 in respect of currency exchange losses.|||
|(m)||28 June 2002||NPHP receives from NPIP two interest free demand promissory notes worth US$3,481,527,042 and A$1,230,504,859 in satisfaction of an antecedent liability owed by NPIP to NPHP. NPHP hands the US dollar note back to NPIP and thus extinguishes its US dollar debt to NPIP.||-|
|Extinguishes US dollar liability to NPIP|
|(n)||Year ended 30 June 2002||NPHP claims a deduction of A$1,419,051,871 in respect of currency exchange losses.|||
111. Most of the issues in this case turn on Division 3B of Part III of the Income Tax Assessment Act 1936 (Cth) ('the 1936 Act'). The parties agree that the Court should apply Division 3B as it existed in the years ended 30 June 2001 and 30 June 2002 (i.e. the financial years in which NPHP discharged its liabilities to NPIP). During that time, the relevant portions of Division 3B were as follows:
- 82U APPLICATION
- (1) This Division applies in relation to gains and losses only to the extent to which they are of a capital nature.
- (2) This Division does not apply to a loss incurred by a taxpayer except to the extent to which, if the loss were not of a capital nature, a deduction would be allowable to the taxpayer under section 8-1 of the Income Tax Assessment Act 1997 in respect of the loss.
- (3) This Division does not apply to gain made by a taxpayer under a contract except to the extent to which, if the taxpayer had incurred a loss under the contract and that loss had not been of a capital nature, a deduction would have been allowable to the taxpayer under s 8-1 of the Income Tax Assessment Act 1997 in respect of the loss.
- (4) This Division applies according to its tenor in relation to gains made and losses incurred before or after the commencement of this Division.
- 82V INTERPRETATION
- (1) In this Division, unless the contrary intention appears -
currency exchange gain means a gain to the extent to which it is attributable to currency exchange rate fluctuations;
currency exchange loss means a loss to the extent to which it is attributable to currency exchange rate fluctuations;
eligible contract , in relation to a taxpayer, means
- (a) a contract entered into by the taxpayer on or after the commencing day, other than a hedging contract; or
- (b) a hedging contract entered into by the taxpayer, on or after the commencing day, in relation to a contract to which paragraph (a) applies;
hedging contract , in relation to a taxpayer, means a contract that is entered into by the taxpayer for the sole purpose of eliminating or reducing the risk of adverse financial consequences that might result for the taxpayer or an associate of the taxpayer, under another contract, from currency exchange rate fluctuations.
- (2) For the purposes of this Division -
- (a) a currency exchange gain made, or a currency exchange loss incurred, in respect of currency purchased under a contract shall be taken to have been made or incurred under that contract;
- (b) a gain shall be taken to have been made, or a loss to have been incurred, at the time when it was realised; and
- (c) a reference to a person acquiring rights or obligations arising under a contract is a reference to the person acquiring such rights or obligations otherwise than by reason of having entered into the contract.
- (1) In this Division, unless the contrary intention appears -
- 82W APPLICATION OF DIVISION TO CERTAIN PRE-COMMENCEMENT CONTRACTS
- (1) Where, on or after the commencing day and under a contract entered into by a taxpayer before the commencing day, any of the following happens in relation to the taxpayer (otherwise than pursuant to a contractual obligation that was binding on the taxpayer before the commencing day):
- (a) the taxpayer receives loan money;
- (b) a loan made to the taxpayer is wholly or partly rolled over;
- (c) the period for which money has been lent to the taxpayer is extended;
this Division applies as if -
- (d) where paragraph (a) applies - the loan money had been received by the taxpayer under a contract entered into by the taxpayer at the time when the loan money was received;
- (e) where paragraph (b) applies - the loan resulting from the roll-over had been made to the taxpayer under a contract entered into the by the taxpayer at the time of the roll over; and
- (f) where paragraph (c) applies - a new loan of the amount outstanding immediately before the commencement of the extension period had been made to the taxpayer under a contract entered into by the taxpayer at the commencement of the extension period.
- (2) Where, on or after the commencing day and under a contract entered into by a taxpayer before the commencing day, any of the following happens in relation to the taxpayer (otherwise than pursuant to a contractual obligation that was binding on the taxpayer before the commencing day):
- (a) the taxpayer lends money;
- (b) a loan made by the taxpayer is wholly or partly rolled over; or
- (c) the period for which money has been lent by the taxpayer is extended,
this Division applies as if -
- (d) where paragraph (a) applies - the loan money had been lent by the taxpayer under a contract entered into by the taxpayer at the time when the money was lent;
- (e) where paragraph (b) applies - the loan resulting from the roll-over had been made by the taxpayer under a contract entered into by the taxpayer at the time of the roll-over; and
- (f) where paragraph (c) applies - a new loan of the amount outstanding immediately before the commencement of the extension period had been made by the taxpayer under a contract entered into by the taxpayer at the commencement of the extension period.
- (1) Where, on or after the commencing day and under a contract entered into by a taxpayer before the commencing day, any of the following happens in relation to the taxpayer (otherwise than pursuant to a contractual obligation that was binding on the taxpayer before the commencing day):
- 82X PAYMENTS IN RESPECT OF UNEXERCISED OPTIONS
- (1) For the purposes of this Division, where -
- (a) a taxpayer has an option to purchase currency under an eligible contract that is a hedging contract; and
- (b) the option expires without having been exercised, or is cancelled, released or abandoned,
the following provisions apply:
- (c) the amount (if any) paid by the taxpayer in respect of the option shall be taken to be a currency exchange loss realised by the taxpayer under the contract at the time when the option expired, or was cancelled, released or abandoned, as the case may by;
- (d) that loss shall be taken to have accrued during the period from the time when the taxpayer acquired the option to the time when the option expired, or was cancelled, released or abandoned, as the case may be.
- (2) For the purposes of sub-section (1), where a taxpayer forfeits a deposit paid in respect of a prospective purchase of currency, being a prospective purchase that is cancelled or otherwise abandoned -
- (a) the deposit shall be deemed to have been paid in respect of the grant to the taxpayer of an option to purchase that currency; and
- (b) the option shall be deemed to have expired, without having been exercised, at the time when the deposit was forfeited.
- (1) For the purposes of this Division, where -
- 82Y GAINS TO BE INCLUDED IN ASSESSABLE INCOME
The assessable income of a taxpayer of a year of income shall include any currency exchange gain made by the taxpayer in the year of income under an eligible contract
- 82Z LOSSES TO BE ALLOWABLE DEDUCTIONS
- (1) Subject to this section, a currency exchange loss incurred by a taxpayer in a year of income under an eligible contract is an allowable deduction in respect of the year of income.
112. In order for NPHP (and hence derivatively the taxpayers) to be entitled to claim its losses as deductions it needs to establish that it has - to use the language of s 82Z(1) - incurred 'a currency exchange loss' in a year of income and that that loss was incurred under an 'eligible contract'. If those conditions are met the loss will be an allowable deduction: s 82Z(1).
113. Division 3B applies only to losses and gains 'to the extent to which they are of a capital nature': s 82U(1). Hence the currency exchange losses made deductible by s 82Z(1) must be on capital account. Even so, a deduction will not arise unless the currency exchange loss would have been an allowable deduction had it not been of a capital nature: s 82U(2).
114. Section 82Z(1) operates on 'a currency exchange loss' which is defined (in s 82V(1)) to mean a loss 'to the extent to which it is attributable to currency exchange rate fluctuations'. There is no attempt in Division 3B to say what a 'loss' is, to define what a 'currency exchange' rate might be or indeed to provide guidance as to what a 'currency' is. It does, however, define an 'eligible contract'. A non-hedging contract will be eligible if entered into after the 'commencing day' (which was 19 February 1986): s 82V(1). For the deduction to be claimable there must therefore be a loss on capital account; that loss must be 'attributable to currency exchange rate fluctuations' and it must arise under a contract entered into by the taxpayer after 19 February 1986.
115. There are, in effect, four clusters of issues calling for resolution.
116. The first of these concerns the correct characterisation of the events which occurred. For example, did NPHP exchange a liability in Australian dollars for a liability in US dollars and pounds sterling on 31 May 1989? Did it do so on 8 July 1992 or was that merely a further loan in US dollars disconnected from any exchange? Likewise, was there some form of exchange in 2001 and 2002?
117. The second cluster of issues is concerned with the losses claimed by the taxpayers insofar as they do not include those arising from the debiting of interest to NPHP. These are the central issues in the case. They are: is Division 3B limited in its operation to losses which arise from exchanges of foreign and Australian 'money' or is it sufficiently broad to encompass losses arising from exchanges of liabilities denominated in foreign currency and Australian dollars; did NPHP suffer traditional exchange losses; and is Division 3B, in any event, limited to traditional exchange losses? Allied to a number of these questions is a broader issue as to the extent to which expert accounting evidence on the treatment of foreign currency losses is a useful or permissible material to consider.
118. The third cluster of issues concerns the requirement of s 82Z that the loss claimed be 'incurred...under an eligible contract'. The taxpayers nominated the unsecured demand note issued by NPHP to NPIP on 6 June 1991 for US$2,847,080,544 as either being a contract under which it owed money to NPIP or as evidencing the terms of an agreement between NPIP and NPHP under which the latter would borrow. The first set of issues was concerned with whether there was any such contract. The second set was whether any of the losses claimed by NPHP could be said to 'arise' under the contract even if it existed. Here the basic point was that the posited agreement did not authorise exchanges of currency.
119. The fourth cluster of issues concerned the position of the interest which had been recorded as falling due under the facilities. In each case at the end of each accounting period the interest entries had been reversed and credited to the loan principal. Division 3B, of course, could only apply to losses on capital account. Here the issue was whether the process of crediting the interest to the balance of the loan account had had the effect of capitalising it so as to deprive it of its quality as income. A related issue, which arose if the interest maintained its character as income, was whether the taxpayers were entitled to deduct the interest under s 8-1 of the 1997 Act or s 51 of the 1936 Act.
120. It is useful to deal with these matters in the above order.
(a) Characterising the events which occurred
121. There are four sets of events:
- (i) The advances and discharges of 31 May 1989, 28 June 1989 and 28 December 1989;
- (ii) The advances and discharges of 6 June 1991;
- (iii) The advances and discharges of 12 March 1992, which were backdated to 28 June 1991, and the advance of 8 July 1992; and
- (iv) The advances and discharges of 8 June 2001 and 28 June 2002.
122. Dealing with each in turn:
(i) The advances and discharges of 31 May 1989, 28 June 1989 and 28 December 1989
123. The Commissioner submitted that I should conclude that what had occurred on 31 May 1989 was that NPHP had received A$2,974,708,426 and that it had used these Australian dollars to purchase Australian dollar assets, namely, the shares in NPIP. The taxpayers were content to assume that this might be correct but they left open, as an alternate case, the possibility that what might have occurred was the advance by News Finance of three distinct loans:
- (i) a A$1 billion loan;
- (ii) a US$1,033,643,102 loan; and
- (iii) a £292,971,509 loan.
124. The reason the taxpayers left this open is easily surmised. If the debt in May 1989 was in Australian dollars then the refinancing in 1991 into US dollars plainly involved a conversion event. If, on the other hand, it was a multi-currency loan then the clarity of that position was reduced. In relation to the initial US dollar component there would be no conversion event at all and, whilst there would be a conversion event in respect of the Australian dollar component, the position of the pounds sterling component was less than clear.
125. Despite the taxpayers' agnosticism on this issue I do not accept the Commissioner's submission that News Finance advanced solely a sum of Australian dollars to NPHP. It is true that NPHP did receive from News Finance an Australian dollar cheque in the sum of A$2,974,708,426. It is also true that this was in discharge of a prior obligation on News Finance's part to lend NPHP certain monies. But an analysis of those antecedent rights shows that the obligation to lend which rested upon News Finance was a multicurrency one. If NPHP had had a bank account it might have been possible for it to present the cheque for payment. Under that hypothetical scenario a question may have arisen as to whether News Finance's monetary obligation to lend the funds to NPHP was to be discharged on delivery of the cheque to NPHP or only later when the proceeds of the cheque were cleared into its account through the banking system. The resolution of that question would have been a factual one dependent upon the intention of the parties. On the present facts, the outcome of that hypothetical inquiry would have determined whether News Finance paid to NPHP Australian dollars or the multicurrency sums: in one case there would have been a discharge of a pre-existing monetary obligation by an act accepted as a tender of performance (delivery of the cheque) and, in the other, a discharge by payment (once the funds had cleared).
126. The latter case would have highlighted the difference between the money of account and the money of payment: cf.
Commissioner of Taxation v Energy Resources of Australia Ltd (1994) 54 FCR 25 ('Energy Resources (Full Federal Court)') at 49E per Gummow J. But where the monetary obligations were discharged by tender other than payment (as here) then there is payment of the underlying monetary obligation. In such as case, the money of account is the same as the money of payment.
127. More precisely there were three matters in play. The first was cl 2.1 of the revolving standby credit facility which contractually obliged News Finance to provide NPHP, at its discretion, advances of up to US$4 billion or its equivalent in other currencies acceptable to News Finance.
128. The second was News Finance's decision to exercise that discretion in NPHP's favour thereby triggering the obligation to lend. It was not suggested to me that the obligations of News Finance under the credit facility were wholly discretionary and therefore neither binding contractual promises nor good consideration: see
Placer Development Limited v Commonwealth (1969) 121 CLR 353 at 359-361 per Taylor and Owen JJ; see also
Bailes v Modern Amusements Pty Ltd  VR 436, where Sholl J held that the debtor's promise to repay a loan when it considered itself in a position to do so was illusory. The submissions of the parties proceeded on the basis that the facility was a binding contract and that the amount advanced to NPHP was loaned 'pursuant to' that contract. I will also adopt that assumption. Even if that were not so, for the reasons given at  NPHP would have become indebted to News Finance under a common law money count. News Finance's decision to lend is evidenced by the minutes of a directors' meeting on 26 May 1989 which make clear that News Finance was aware that it might be called on to lend in foreign currencies.
129. The third is the decision which I infer was made by Mr Macourt in consultation with Mr Sarazen that what should be advanced by News Finance was the three sums of A$1 billion, US$1,033,643,102 and £292,971,509. It was, as I have already found above at , for that purpose that Mr Macourt had spoken with Mr Sarazen. Although there is no direct evidence I infer that those figures appeared on the cheque voucher and subsequently in the general ledger at the instigation or direction of Mr Macourt. I do this because of his significant role in the transaction; because he had spoken to Mr Sarazen on the very issue on or about 31 May 1989 and because it is implausible that such significant obligations would be inserted randomly onto the cheque requisition voucher by persons not acting under Mr Macourt's direction.
130. The contractual analysis therefore supports the existence of a contractual obligation owed by News Finance to lend to NPHP the three sums of A$1 billion, US$1,033,643,102 and £292,971,509. It is evident, too, that this is what the parties had understood themselves to have done. The general ledger for NPHP established three loan accounts in these three currencies which suggests that it understood itself to have debt obligations to News Finance denominated in three currencies.
131. It was open to NPHP, however, on settlement to accept some other act in discharge of News Finance's monetary obligation to lend it the three amounts. What occurred is that News Finance tendered in performance of its obligation to lend the three multi-currency sums a personal cheque for A$2,974,708,426 and this was accepted as a discharge of that obligation by NPHP's receipt of the cheque. The effect of this was to discharge News Finance's monetary obligation to pay (by way of loan) NPHP the amount in the three currencies.
132. I reject the submission that News Finance paid NPHP A$2,974,708,426. There was no literal payment of this sum to NPHP because the cheque was never presented by NPHP for payment and none of the monies in News Finance's Martin Place Commonwealth Bank account ever found their way into an account maintained by NPHP. On the other hand, there is no doubt that payment may be constituted by an act tendered and accepted in the performance of a monetary obligation: see Goode on Payment Obligations in Commercial and Financial Transactions (Thompson Reuters, 2nd Ed, 2009) at [1-09]. Here there was an act of tender but the monetary obligation it discharged and in respect of which there was a payment was the multi-currency obligation that News Finance had to NPHP. Put another way, News Finance had no obligation to pay A$2,974,706,426. What it was obliged to do was to pay three sums by way of loan in three currencies. It did an act (physical delivery of the chattel constituting the cheque) which was accepted as a performance of that obligation so that what was paid was the subject matter of the monetary obligation rather than the face value of the chattel tendered as performance. The matter may be tested by asking whether a payment would have occurred if News Finance had instead tendered bullion. In both cases in my opinion there is a payment in respect of the anterior monetary obligation.
133. It follows that News Finance paid NPHP the three amounts recorded in its general ledger in the three distinct currencies and not one sum in Australian dollars.
134. What then of the other half of the transaction? The shares in NPIP which were to be allotted to NPHP were themselves denominated in Australian dollars in the sense that the capital of NPIP was divided into shares so denominated. No doubt that fact lies behind the taxpayers' description of the shares as Australian dollar assets. It does not, however, follow merely from the fact that the capital of the company was divided into units measured in Australian dollars that the consideration required, or demanded, for their allotment should also be so denominated. The answer to that issue is to be discerned not by contemplation of the nature of the asset acquired (here a class of security) but, instead, by an analysis of the allotment agreement under which they were to be acquired. That contract could have provided for an allotment consideration in Australian dollars or any other asset whether monetary or not. That the thing purchased represented a collection of choses in action making up part of the capital of the company and that that capital was divided into units with a nominated face value of A$1 does not necessarily alter that.
135. In this case, it is tolerably clear that the allotment consideration was to be a payment made in Australian dollars. There are three items of evidence bearing on the issue. The first is the minutes of a directors meeting of NPHP held on 26 May 1989. These minutes do not make clear, however, what the allotment consideration was to be and, indeed, on one view are contradictory. The directors contemplated a subscription of shares in which the par value and premiums were denominated in Australian dollars. The minutes record:
IT WAS RESOLVED to subscribe in the capital of [NPIP], [NPHP's] wholly owned subsidiary:
- (i) 50,000 ordinary shares each of par value $1.00 at a premium of $9,999 each; and
- (ii) such number of redeemable preference shares of par value $1.00 at such premium as would (together with such additional ordinary share capital) enable [NPIP] to acquire on 31 May next, the 48% shareholding of News Limited in [NPL Bermuda] for US$2,270,000,000.
136. The fact that the shares had a par value provides some, but not very much, support for the notion that the consideration might be in Australian dollars. On the other hand, paragraph (ii) suggests an ultimate consideration in US dollars. In the end, I do not think that these minutes take the matter very far one way or the other.
137. The second piece of evidence is the minutes of a meeting of directors of NPIP held on 26 May 1989. These expressly contemplated that the money which would be used by NPIP to purchase the 48% interest in NPL would be denominated in Australian dollars:
- 3. THE CHAIRMAN THEN NOTED that [NPHP], the immediate holding company of [NPIP], was prepared to inject additional ordinary capital up to A$500,000,000 and such preference share capital as would be needed by [NPIP] to purchase for cash payable in Australian Dollars the 48% shareholding of News Limited in [NPL Bermuda].
- 4. IT WAS RESOLVED to acquire from News Limited its 48% shareholding in [NPL Bermuda] for a cash consideration of US$2,270 million and that such purchase be effected without formal agreement and by payment on 31 May next of a cheque for the Australian dollar equivalent of US$2,270 million in exchange for duly executed forms of share transfer.
138. The third piece of evidence is NPHP's application for the allotment of the shares. Relevantly it applies for the shares and then says that it:
3. attaches a cheque for A$2,974,708,426 in payment of the total par value and premium thereon
139. To my mind this suggests that there would be a payment of the par value. In light of these three matters I conclude that the agreement between NPHP and NPIP was that NPHP would pay NPIP A$2,974,708,426.
140. That obligation to pay was a monetary obligation denominated in Australian dollars. This was discharged by the tender by NPHP of a cheque nominally in that amount and by NPIP's acceptance of that tender in discharge of the obligation to pay. That the cheque was itself denominated in Australian dollars is, in a sense, irrelevant. The reason there was a payment of Australian dollars was because the underlying monetary obligation which was discharged was denominated in Australian dollars.
141. Keeping in mind the mechanics of payment by tendering performance in discharge of a pre-existing monetary obligation what happened at settlement was this: News Finance paid NPHP three multicurrency sums by tendering a chattel in discharge of an obligation to make those payments; NPHP then paid an equivalent Australian dollar sum to NPIP by tendering the same chattel in discharge of its obligation to pay an Australian dollar sum. At the moment of completion NPHP's liability to pay Australian dollars to NPIP was transformed into a debt obligation to News Finance denominated in three currencies. This was a conversion of a liability denominated in one currency to one party into a liability denominated in three currencies to another. The event which triggered the conversion was the receipt and instantaneous delivery of the cheque.
142. I accept therefore that what occurred was a conversion between liabilities denominated in various currencies. There was not, however, an exchange of cash or coin nor of deposit funds held with banks.
143. The issues attending the advance of 28 June 1989 by News Limited (see -) are more complex and were not really the subject of any substantial attention by the parties. As at 28 June 1989 there is no evidence that News Limited had a contractual obligation to pay by way of loan US$168,456,000 to NPHP. A contractual framework would not be provided for that loan until the execution by the parties of the facility deed of 13 May 1991 which retroactively purported to regulate the transaction. There is no doubt, as the minutes of the NPIP directors' meeting of 28 June 1989 show, that there was an anticipation that News Limited would lend money to NPHP to permit it to acquire shares in NPIP but I can see no evidence, at least as at 28 June 1989, that News Limited was contractually bound to NPHP to lend it $US168,456,000.
144. As I have indicated above at  the transaction (that is the loan to NPHP and the acquisition by it of shares in NPIP) was settled by News Limited delivering to NPIP an unidentified payment instrument. Whilst I accept that this could be an act of tender as between NPHP and News Limited, I am not able to identify any antecedent obligation (monetary or otherwise) to which the act of (accepted) tender can be seen as operating in discharge thereof. For reasons I explain below, the consequence of this is that News Limited did not pay NPHP anything. The analysis would be different if the facility deed of 13 May 1991 had been in place at the time of settlement. Had that been the case the act of tender constituted by handing the payment instrument to NPIP would have operated as a discharge of the pre-existing monetary obligation resting upon News Limited to lend and this, in turn, would have constituted a payment of that pre-existing monetary obligation by discharge.
145. The later execution of the deed of 13 May 1991 cannot erase the historical reality that what occurred was not a payment in that sense as at 28 June 1989.
146. The conclusion that News Limited did not pay NPHP any money does not entail denying that NPHP became indebted to News Limited but rather merely emphasises the need to be precise about the source of that indebtedness. The discharge by News Limited of NPHP's obligation to pay NPIP the subscription monies created a debt in NPHP to News Limited. Had it been necessary News Limited could have sued NPHP on a common money count for 'money payable by the defendant to the plaintiff for money paid by the plaintiff for the defendant at his request': see Mason & Carter's Restitution Law in Australia (LexisNexis Butterworths, 2nd Ed, 2008) at .
147. That liability cannot have been denominated in US dollars because neither NPHP nor NPIP received US dollars and because there was no antecedent obligation on News Limited to pay US dollars. The only antecedent obligation discharged on 28 June 1989 was NPHP's obligation to pay the Australian-dollar-denominated subscription fees to NPIP. That the obligation to pay NPIP was denominated in Australian dollars appears from the minutes of 21 June 1989 (referred to at ), which spoke of the total consideration for the allotment as being 'the Australian dollar equivalent...on 28 June 1989 of US$168,456,000'. Whatever News Limited did at the request of NPHP to discharge that obligation was an act tendered in discharge of the Australian dollar liability. It created a debt, therefore, owed by NPHP to News Limited and denominated in Australian dollars. Once that is understood it will be seen that NPHP exchanged its obligation to pay NPIP the subscription monies in Australian dollars for a debt obligation, arising from the operation of the common law, to News Limited denominated in Australian dollars. This was not an exchange transaction.
148. The advance of 28 December 1989 is simpler. It was made by News Finance pursuant to the standby credit facility of 31 May 1989. Whatever the mechanism by which the transaction was settled (most likely the delivery of some form of payment instrument) the effect of the settlement was to discharge NPHP's Australian dollar liability to NPIP by replacing it with a US dollar liability to News Finance. In other words: an exchange of liabilities denominated in different currencies.
(ii) The advances and discharges of 6 June 1991
149. What occurred is precisely known. Mr Gregg, acting for NPIP, endorsed seven promissory notes it held to NPHP. Mr Gregg then acting for NPHP agreed with himself, acting for NPIP, that the seven promissory notes were worth US$2,847,080,544 and acknowledged the existence of an interest bearing debt in that amount owed by NPHP to NPIP by delivering the unsecured demand note that has been reproduced at .
150. The Commissioner contended that the unsecured demand note had been issued by NPHP as the consideration for the purchase by it of the seven promissory notes from NPIP. So viewed the transaction was not one of loan but rather one of purchase. For that reason, so it was said, there had been no receipt of US dollar funds. The taxpayers, on the other hand, pointed to the terms of the unsecured demand note, cl (i) of which was expressed so that the promise to pay its holder US$2,847,080,544 was said to have been in 'consideration of [NPIP] making a loan of US$2,847,080,544 to [NPHP] on 6th June 1991 by the endorsement and delivery of certain notes to [NPHP]'.
151. The proposition that what took place was a sale of notes is contradicted by the terms of the unsecured demand note and cannot be correct. It is also contradicted by the minutes of the directors' meeting of 5 June 1991 (reproduced above at ) which are explicit in their description of the transaction as a loan 'effected by [NPHP] accepting the assignment or endorsement in its favour by [NPIP] of loan receivables made by News Group Companies'.
152. On the other hand, whilst I would accept that as a result of the transaction NPHP incurred a liability to NPIP of US$2,847,080,544 this debt did not arise from a transfer of funds to NPHP (if that be what the word 'loan' connotes) but rather by the creation of a debt.
153. Above at - I have found that six of the seven promissory notes NPHP had received from NPIP were then given to News Finance and the remaining note to News Limited to discharge the equivalent of US$2,847,080,544 of multicurrency debt owed to News Finance and an Australian dollar debt to News Limited.
154. The correct legal characterisation of these events begins with the observation that NPHP received from NPIP the seven endorsed promissory notes and NPIP received from NPHP the unsecured demand note. As I later discuss, the unsecured demand note was physical evidence of NPHP's promise to pay, on demand, the sum of US$2,847,080,544 together with interest at a specified rate. This promise was consideration provided by NPHP to NPIP. The question, however, is consideration for what? The minutes of the meeting of 5 June 1991 paint the transaction as a loan of a sum in US dollars and from this I infer that the agreement was that NPIP would lend NPHP US$2,847,080,544 in return for NPHP's promise to repay the loan on the terms of the unsecured demand note. There is no written agreement to this effect but such an agreement must be implicit in what the parties did. So viewed, the delivery by NPIP of the seven promissory notes is to be seen as the performance of an act tendered (by NPIP) and accepted (by NPHP) as a discharge of NPIP's monetary obligation to advance US$2,847,080,544. Such an event is a 'payment': Goode on Payment Obligations in Commercial and Financial Transactions at [1-09]. I therefore conclude that NPIP paid NPHP US$2,847,080,544. The same analysis supports the conclusion that NPHP then paid to News Finance the sums of A$866,770,753.72, US$1,454,489,697.08 and £370,833,623.88 and to News Limited the Australian dollar equivalent as at that date of US$111,345,000. These payments were used to reduce elements of the pre-existing debts in those currencies. At the risk of repetition, the promissory notes were tendered and accepted as a discharge of NPHP's monetary obligations arising directly from the antecedent multicurrency debts.
155. The effect then is that a portion of NPHP's antecedent debts to News Finance and News Limited were converted into a new debt to NPIP denominated in US dollars. Contrary to the submissions of the Commissioner this conversion was achieved by means of acts which, in law, constituted payments On the other hand, the Commissioner is correct to submit that no 'currency' changed hands. The exchange which occurred was an exchange of liabilities or, more precisely, an exchange of monetary obligations. It was not an exchange of 'money'. As I discuss below, regardless of where the difficult boundary is to be drawn between that which is money in law and that which is not, intra-group book debts and promissory notes issued by non-banks are not money.
(iii) The advances and discharges of 12 March 1992 and the advance of 8 July 1992
156. The later advances of 12 March 1992 (which was backdated to 28 June 1991) and 8 July 1992 are to be analysed along similar lines - that is, as loans to NPHP of further US dollar amounts where NPIP's promise to lend (a monetary obligation) was discharged by its tender of payment by means of the delivery of promissory notes which was accepted by NPHP. This was a payment by NPIP to NPHP although it did not involve a payment of actual currency; it was instead the discharge of a monetary obligation denominated in US dollars (an obligation to lend) by the endorsement of promissory notes in exchange for another monetary obligation, namely, the promise to repay. NPHP then used some of the promissory notes to discharge its antecedent Australian dollar debts to News Finance and its antecedent Australian dollar debt to News Limited. In its accounts, NPHP treated the debt to News Limited as a US dollar debt but, for reasons I have already given, this was in error.
(iv) The advances and discharges of 8 June 2001 and 28 June 2002
157. As to the events of 8 June 2001: NPHP acquired 2 promissory notes with face values of US$750 million and US$265 million from TNCL but it did so by increasing its liability in Australian dollars to TNCL. Those promissory notes were then used by it to discharge partially its antecedent US dollar debt to NPIP. These events occurred simultaneously through the negotiation of the two promissory notes. That process transformed a liability in US dollars to NPIP into a liability in Australian dollars to TNCL. What occurred was an exchange of liabilities denominated in different currencies. There was, however, no exchange of actual cash or of liabilities otherwise exhibiting the qualities of money.
158. As to the events of 28 June 2002: NPHP acquired from NPIP two promissory notes for US$3,481,527,042 and A$1,230,504,859 in return for a discharge of NPIP's Australian dollar debt of A$7,403,425,121. It then handed the promissory note for US$3,481,527,042 (then equivalent to A$6,172,920,292) back to NPIP in return for a discharge of its US dollar debt to NPIP. In substance, NPHP converted A$6,172,920,292 of debt owed by NPIP to it into a US$3,481,527,042 discharge of its US dollar debt to NPIP.
159. Again this is a conversion of a liability in one currency into a liability in another. It did not involve an exchange of actual cash or money in the sense described above.
(b) Exchange loss issues
160. The Commissioner and the taxpayers were in disagreement as to whether the latter had suffered any losses which were claimable under Division 3B. Because Division 3B applies only to gains and losses on capital account the position of the interest liabilities incurred by NPHP to NPIP, News Finance and News Limited may be put temporarily aside.
161. For the purposes of the present discussion it is convenient to proceed on the basis that all of the losses around which debate is joined arise from the effect of currency fluctuations on amounts of principal.
162. That being so, the issues at hand are concerned with the meaning of the word 'loss' in s 82Z (and the related concept of 'gain' in s 82Y). In essence there are three primary questions. These are:
- (i) whether Division 3B applies to losses arising from exchanges in liabilities denominated in foreign currency for liabilities denominated in Australian dollars where neither set of liabilities otherwise qualifies as 'money';
- (ii) whether the scope of the phrase 'currency exchange loss' in Division 3B limits its operation to the traditional conception of an exchange loss - that is a loss arising from the execution at different times of two opposite exchange transactions where there has been an adverse movement in the exchange rate in the intervening period - or whether it can encompass other losses which relate to exchange rate fluctuations;
- (iii) the nature of the losses claimed by NPHP and whether, in light of the answer to (ii), they may be claimed under Division 3B.
163. In addition to these three questions there is a fourth question about the relevancy of accounting evidence to the resolution of (i) and (ii). It is convenient to begin with that question first.
The relevance of accounting evidence
164. The taxpayers submitted that whether there had been a loss for income tax purposes was a question of fact and the tests applied in the business and commercial worlds could be relevant to its resolution. Expert accounting evidence led by the taxpayers suggested that, as a matter of accounting principle, NPHP had suffered foreign exchange losses. The Commissioner, on the other hand, submitted that the issues at hand were legal questions upon which accounting principles could throw no light.
165. The taxpayers adduced opinion evidence from Mr Eddie Wilkie, who is an accountant and a partner of Pricewaterhouse Coopers. In the broad he was asked to express an expert opinion on two issues. First, whether Australian Accounting Standard ASRB 1012 Foreign Currency Translation (1988, as later amended by AASB 1025 (1991)) ('the Standard') was applicable to the foreign currency components of the original 1989 restructuring transactions (and the subsequent additional advances on those debts) and, if it was, what that Standard would have required in NPHP's profit and loss account over the period 31 May 1989 to 6 June 1991. Secondly, whether the Standard would have applied to the US dollar debt put in place in 1991 and to its eventual discharge in 2001 and 2002.
166. Mr Wilkie considered that the standard did apply and he would have required in both cases the recording of very substantial losses in NPHP's profit and loss account. He also expressed opinions about the quantification of those losses but quantum may, for now, be put to one side.
167. The taxpayers additionally adduced opinion evidence from Mr Michael Whyte, who is an accountant and was a partner of Ernst & Young. Ernst & Young are the tax agents for the taxpayers and Mr Whyte had formerly been in charge of the preparation of the taxpayers' returns. I did not apprehend Mr Whyte's evidence to do more than assess numerically the magnitude of the losses (if they existed).
168. For his part, the Commissioner adduced opinion evidence from Professor Robert Walker who is a Professor of Accounting at the University of Sydney. Professor Walker differed from Mr Wilkie on some minor matters of detail which are not presently material. More importantly, he did explain, however, the purposes of accounting standards in these terms:
[A]ccounting standards are concerned to ensure that shareholders and certain other stakeholders who rely on 'general purpose financial reports' to make certain judgments are adequately informed (or not misled).
169. I did not apprehend from Mr Wilkie's evidence in reply that he dissented from this view.
170. The parties' submissions were developed at a high level of generality. It is useful, however, to ask in the first instance what it is that the Standard provided for. Clauses.10-.12 provided:
- .10 Each asset, liability, revenue or expense arising from entering into a foreign currency transaction shall initially be measured and brought to account in the domestic currency using the exchange rate in effect at the date of the transaction.
- .11 Foreign currency monetary items outstanding at balance date shall be translated at the spot rate current at balance date.
- .12 Exchange differences relating to monetary items shall be brought to account in the profit and loss account in the financial year in which the exchange rates change, as exchange gains or losses, except where clause.13 or clause.34 applies.
171. Clauses.13 and.34 are not relevant and the reference to them in cl.12 may be put to one side. It was not disputed that the domestic currency, for the purposes of NPHP, was the Australian dollar. The expression 'monetary items' which appears in cl.11 is not defined in the Standard but the commentary which accompanies it suggests that it means receivables or payables. So much appears from cl (iii) of that commentary:
(iii) Accounting for foreign currency transactions will involve one or more of the following stages -
- (a) translation to record the transaction as at the transaction date;
- (b) adjustments to monetary items (receivables or payables) resulting from the transaction to record the effect of the movements in exchange rates subsequent to the transaction date; and
- (c) recording the settlement of those monetary items.
172. AASB 1012 (2000) (the successor to the Standard) defines 'monetary items' to mean 'money held and assets and liabilities to be received or paid in fixed or determinable amounts of money' (emphasis in original).
173. Mr Wilkie was content to assume that the expression 'monetary items' could be interpreted in the light of the commentary. It was not suggested to him (or to me) that this should not be so. I conclude therefore that clause.11 of the Standard required each of NPHP's foreign currency assets and liabilities to be translated at the spot rate current as at the balance date.
174. The overall operation of cll.10-.12 was, therefore, to require each foreign liability to be brought to account in Australian dollars as at the date of its incurring and to require thereafter, on an annual basis at the balance date, a revaluation of the liability at the prevailing spot rate.
175. One can understand why this is a sensible way to approach a company's profit and loss accounts particularly in light of Professor Walker's evidence about the need for accounts to permit informed decision making. However, the Standard does not require the losses to be realised and here it differs markedly from Division 3B. Section 82V(2)(b) (set out above at ) posits that a gain shall be taken to have been made, or a loss to have been incurred, at the time when it is realised. At least in that regard to seek to apply the Standard to Division 3B would be contrary to the terms of s 82V(2)(b).
176. Of course, that is not quite the issue upon which the parties disagree. Their debate, instead, is upon whether an exchange of 'currencies' is necessary under Division 3B. At least on the basis of what Mr Wilkie says it is clear that the Standard has no such requirement. This rather suggests that 'the ordinary usages and practices of businessmen, of whom accountants represent an informed subset' (
Commissioner of Taxation v Citibank Ltd (1997) 44 FCR 434 at 445 per Hill J) are inclined to treat all losses and gains arising from currency fluctuations as matters which should be reflected in the profit and loss account.
177. Sections 82Y and 82Z make respectively assessable as income or deductable against income 'currency exchange' gains and losses. Each of those concepts is defined in s 82V to mean, as already noted, a loss (or a gain) 'to the extent to which it is attributable to currency exchange rate fluctuations'. This must be read, however, with s 82U(1), which limits what would otherwise be its width to gains and losses of a capital nature. It is important to understand that these provisions feed directly into the general deductibility provisions (now s 8-1 of the 1997 Act; formerly, s 51 of the 1936 Act).
178. Much has been written as to the relevance of commercial and accounting practice to the operation of those provisions. The present approach is that laid down in
Federal Commissioner of Taxation v James Flood Pty Ltd (1953) 88 CLR 492 at 506-507 per curiam:
Commercial and accountancy practice may assist in ascertaining the true nature and incidence of the item as a step towards determining whether it answers the test laid down by s.51(1) but it cannot be substituted for the test.
179. This is the 'legal or jurisprudential' view of ss 51 and 8-1:
Coles Myer Finance Ltd v Federal Commissioner of Taxation (1993) 176 CLR 640 at 662-663; see also
Arthur Murray (NSW) Pty Ltd v Commissioner of Taxation (1965) 114 CLR 314 at 320. That does not deny the relevance of commercial or accounting principle for it will determine the selection of a method of accounting that gives a substantially correct reflex of the income derived:
Commissioner of Taxes (SA) v Executive Trustee and Agency Co of South Australia Limited (1938) 63 CLR 108 ('Carden's Case') at 152-154 per Dixon J (with whom Rich and McTiernan JJ agreed). In that case accounting principles determined whether Dr Carden's income - which had been earned but not yet received - was to be accounted for on a cash receipts or accruals basis. In Arthur Murray the converse issue - whether money received but not yet earned was income - was determined, in part, by reference to an agreed fact about 'established accountancy and commercial principles' (at 320).
180. The question in this case relates to the meaning of 'loss' in ss 82V(1) and 82Z. Given that s 82Z is a deeming provision which feeds directly into the general deductibility provisions in s 8-1 (and formerly s 51) it would be anomalous to approach the question of loss on a different basis to that articulated in James Flood. In particular, whilst one must proceed ultimately by reference to the concept of 'loss' specified in s 82Z, commercial and accountancy practice may assist in ascertaining the incidence of the suggested items as a step towards ascertaining the answers to the questions posed by s 82Z.
181. In this case the issue which divides the parties is whether the losses with which s 82Z is concerned are sufficiently broad to encompass losses arising from exchanges of liabilities or whether they are confined instead to exchanges of currencies in the sense of money. The Standard plainly proceeds on the basis that such losses arising from the exchange of liabilities are to be treated as losses for accounting purposes. I take this therefore to be relevant to the task at hand although not determinative. I also take to be relevant the difference between the Standard and Division 3B on the question of whether there needs to be a realisation of losses.
(i) Exchange of 'money' or exchange of liabilities?
182. The Commissioner submitted that Division 3B was concerned with gains or losses arising from exchanges of foreign currency and that this, in effect, required NPHP to have exchanged a quantity of Australian money for a quantity of foreign money. Whatever was involved in the notion of an exchange of foreign currency, however, it did not include the situation which occurred when a pre-existing book debt denominated in Australian dollars was discharged by the delivery of promissory notes denominated in one or more foreign currencies which were never presented for payment, or the corresponding reverse transaction.
183. In effect, the Commissioner's submission entails a limited operation for Division 3B in which what is brought to tax (or correspondingly permitted to be deducted) are gains and losses arising directly from conversions of quantities of money between currencies.
184. The question at hand is a question of the proper construction of Division 3B. Section 82U(1) makes Division 3B applicable to 'gains and losses...to the extent to which they are of a capital nature'. Section 82Z(1) permits deduction of 'a currency exchange loss incurred by a taxpayer in a year of income under an eligible contract'. The expression 'currency exchange loss' is defined in s 82V(1) to mean 'a loss to the extent to which it is attributable to currency exchange rate fluctuations'.
185. Those provisions provide little support for the idea that the losses contemplated by Division 3B do not extend to encompass losses arising out of exchanges between liabilities denominated in foreign currency and liabilities denominated in Australian currency. Indeed, the word 'loss' in s 82U(1) would, as a matter of ordinary English, encompass losses arising from such an exchange. Because the question at hand is the proper construction of Division 3B it is not necessary, at this juncture, to seek to confine more precisely what is meant by concepts such as 'Australian money' and 'foreign currency'. The question rather is whether there is anything in Division 3B which might require a narrower reading of the words 'loss' and 'gain'. The only constraint which emerges from s 82V is the necessity for the loss to be 'attributable to currency exchange rate fluctuations'. That limitation, however, would cover losses arising from an exchange of liabilities just as much as it covers losses arising from an exchange of actual currency. This is because requiring losses to arise from fluctuations says nothing about the manner of their incurring. Fluctuations in exchange rates will cause losses not only to those involved in actual exchanges of currency but also to those who have exchanged monies held on deposit with one bank where the bank's debt is denominated in one currency for monies held on deposit with another bank where that debt is denominated in another currency. Indeed, it will cover many other situations too, including those where the 'money' or 'currency' exists as a debt owed by an entity other than a bank.
186. There are, it is true, some references in Division 3B to concepts relating to money. For example, s 82V(2) deems a loss or gain incurred in respect of 'currency purchased under a contract' to have been incurred under that contract. But this does not by any means have the effect that Division 3B is limited in its operation to such purchases - the provision is merely facultative.
187. The provisions of s 82W and 82X are set out above at . Three things should be observed about these provisions. First, they are, like s 82V(2)(c), facultative. As such their capacity to operate as a general constraint on the nature of the losses referred to in s 82V is likely to be limited. Secondly, in the Commissioner's favour, parts of those provisions do seem to contemplate 'money' transactions, that is, transactions involving flows of money: cf. s 82W(1)(a). Thirdly, however, this is not always so. For example, s 82W(1)(c) picks up transactions in which, plainly enough, there is no flow of currency. There may be an answer to that last observation: s 82W(1)(f) deems a fresh loan to occur when the event in s 82W(1)(c) occurs. This might be thought to show the existence of an assumption that Division 3B applies to money - otherwise the deeming in s 82W(1)(f) would be unnecessary.
188. On balance, I consider that not too much can be obtained from these provisions. This is principally for the first reason given above (that is, the facultative nature of the provisions). So far as the last point in the preceding paragraph is concerned, whatever force it might have is lessened by a comparison between the language of s 82W(1)(f) ('new loan of the amount outstanding') and s 82W(1)(a) ('receives loan money') which suggest that even this provision may not be steadfastly focussed on monetary transactions.
189. So much for the text. I was also referred to three sets of secondary materials. These were: a press release issued by the then Treasurer, Mr Keating, announcing the legislation; the explanatory memorandum accompanying the introduction of the original bill; and the second reading speech. None of these provides any assistance in the resolution of the question at hand.
190. In the end, the determinative matter is the breadth of the definition of 'currency exchange loss' in s 82V(1). All that it requires is a loss attributable to a fluctuation in a rate. It does not require an exchange of anything. The expression 'currency exchange' qualifies the word 'rate' ('currency exchange rate fluctuations') but does not import any requirement, of itself, about the necessity or otherwise for an exchange of anything. Its language is too broad to be consistent with the Commissioner's submission. Approached purely as a question of statutory construction I conclude that Division 3B will be satisfied so long as there has been a loss attributable to exchange rate fluctuations. I see no reason why a loss arising from an exchange of liabilities will not satisfy the requirements of Division 3B. It is not limited in its operation to exchanges of foreign currency and Australian money.
191. Against this conclusion the Commissioner submitted that the contrary was required by the High Court's decision in
Commissioner of Taxation v Energy Resources of Australia Limited (1996) 185 CLR 66 ('Energy Resources (High Court)'). I do not accept this submission. There was no occasion in that case to consider whether Division 3B was satisfied by exchanges of liabilities or only by exchanges of currency. Of Division 3B the Court said this (at 81): 'Furthermore, for the reasons that we have already given, the taxpayer made no currency exchange gain or loss'. The reasons referred to were those at 79:
Another answer is that, since the taxpayer dealt only in US dollars, any loss or gain could only be in US dollars, and it was that loss or gain that the  Act required to be converted into Australian dollars, not some hypothetical loss or gain arising from fluctuations in the US/Australia exchange rate. The taxpayer received US dollars, paid in US dollars, and did not convert the US dollars into Australian dollars. Where a taxpayer borrows money on capital account in US dollars and repays the loan in US dollars, it makes no revenue profit or loss from the borrowing even though the exchange rate may be different at each date. Indeed, arguably it makes no profit or loss. If it converts the US dollars that it receives into Australian dollars and then converts Australian dollars into US dollars to repay the loan, it may make a profit or loss on the transaction. But the profit or loss results from the exchange transaction and not from the borrowing. Where there is no exchange transaction and the loan is on capital account, the taxpayer makes no loss or gain for the purpose of s 25 or 51 of the  Act simply because the rate of exchange has changed between the date of borrowing and the date of repayment. There was, therefore, no revenue loss or gain to the taxpayer from fluctuations in the rate of exchange during the ninety day periods. For income tax purposes, the fluctuations of the US/Australia exchange rate were as irrelevant to the taxpayer's transactions as the fluctuations in the Japan/Australia exchange rate.
192. The focus of this passage is on the need for a loss to be realised and on the necessity, therefore, for an exchange transaction. What it does not say - and what there was no issue before the Court about in Energy Resources - is whether the exchange had to be one of currencies or whether an exchange of liabilities would suffice.
193. In those circumstances, Division 3B will be satisfied where there is an exchange of a liability denominated in foreign currency for an Australian dollar liability. It will also, obviously enough, be satisfied where actual 'currency' is exchanged but this is not a necessary feature.
194. That makes it unnecessary to determine whether, as here, the delivery of a promissory note denominated in foreign currency in exchange for a release of a book debt denominated in Australian dollars is an exchange of foreign 'currency', for it is certainly an exchange of liabilities.
195. Lest I be wrong about that I should record my view that these concepts, at least for legal purposes, are not money. In this area difficult issues about the nature of Australian money and foreign money may arise. In
Moss v Hancock  2 QB 111, Darling J approved at 116 the definition of FA Walker in Money, Trade and Industry (London, 1882) that money is
that which passes freely from hand to hand throughout the community in final discharge of debts and full payment for commodities, being accepted equally without reference to the character or credit of the person who offers it and without the intention of the person who receives it to consume it or apply it to any other use than in turn to tender it to others in discharge of debts or payment for commodities.
196. No doubt, this definition has its limitations: C. Proctor, Mann on the Legal Aspects of Money (Oxford University Press, 6th Ed, 2005) at [1.07]-[1.14]. It was adopted by Emmett J of this Court in
Travelex Ltd v Federal Commissioner of Taxation (2008) 71 ATR 216;  FCA 1961 at . The definition suffers from the obvious defect that it does not include the exchange settlement funds held by banks with a central bank. Such funds are not available to the community at all, passing only between banks. They nevertheless constitute the monetary base of the payments system. Regardless of where the lines might be drawn I do not think, however, that promissory notes or book debts where the party liable is not a bank or deposit-taking institution can constitute 'money'. There was no evidence that the promissory notes had taken on the quality of being able to be used throughout the community for the discharge of debts and, if they did have that quality, any reasonable person would certainly make inquiries as to the 'character or credit' of the issuer before accepting such a note. There was no evidence that the promissory notes were an integer in some payment system. Nor, where the promissory notes were not presented for payment, is it possible to identify another flow of funds which might usefully be seen as 'money' (i.e. that which might have occurred if a bank account had been credited on presentation of each note). In any event, it is not necessary to pursue these matters further.
197. Also rendered irrelevant in those circumstances is the question of whether what had been advanced to NPHP were loans or merely the creation of debts. That submission only has relevance if: (a) a loan is something involving a transfer of money and (b) that Division 3B requires such a transfer. Because I do not accept (b) I do not have to consider the correctness of (a).
(ii) Is Division 3B limited to exchange losses?
198. Both parties devoted considerable attention in their submissions to the Commissioner's contention that Division 3B could be enlivened only if there were 'two conversions'. This expression was a shorthand for suggesting that there needed to be an initial conversion from Australian dollars to a foreign currency (or, as I have held, a conversion from a liability denominated in Australian dollars to a liability denominated in a foreign currency) and, at some later time when the exchange rate had moved, a second exchange in the opposite direction. This is the classic form of an exchange loss. I do not doubt that the word 'loss' in Division 3B embraces losses and gains of that character.
199. For the reasons I give below I generally accept that the losses claimed by the taxpayers were exchange losses arising from two conversion events. The difficulties associated with this issue do not therefore arise. Had it been necessary to decide the issue a number of difficulties would have confronted the Commissioner's position. The first problem is that there is no textual foundation in Division 3B for any prescription on the number of conversions there needs to be. The only concept it utilises is the necessity that there be a loss or gain on capital account arising from fluctuations in currency exchange rates. No doubt the classic kind of exchange loss where there are two conversions will be such a loss. But it does not follow that all the losses contemplated by Division 3B need to be exchange losses of that kind. In that regard it is to be noted that what Division 3B calls for are losses arising from exchange rate fluctuations rather than exchanges.
200. The second problem is that the House of Lords' decision in
Pattinson v Marine Midland Ltd  AC 362 at 372 appears, at least in part, to be against the proposition as are, I think, the reasons of Hill J in Energy Resources (Full Federal Court) at 72-73.
201. The third problem is that, contrary to the Commissioner's submissions, it is unlikely that the High Court's decision in Energy Resources says much about the matter at all. The passage upon which the Commissioner sought to rely (at 79, set out above at ) says nothing about a single conversion situation. Had the Court addressed that issue in Energy Resources it might have needed to confront the question of where the funds were coming from to fund the difference between the face value of the Euronotes and the proceeds of each new tranche (a matter dealt with both by Hill J in the Full Court at 57-58 and by Davies J at trial:
Federal Commissioner of Taxation v Energy Resources of Australia Ltd (1994) 28 ATR 67 at 71). See also: M Ferrier, 'Hedging of Foreign Currency' (1997) 26 Australian Tax Review 83 at 86 ('It is a pity that the High Court did not focus...').
202. The fourth problem is that it is not difficult to imagine circumstances in which a single conversion may generate losses. A US dollar loan used by a taxpayer to acquire a capital asset in the United States but serviced from a supply of Australian dollars converted at the time of each repayment to US dollars will generate losses if there is an adverse shift in the exchange rate. In this context an increased expense is a loss.
(iii) The nature of the losses claimed by NPHP
203. The taxpayers submitted that the losses claimed by them involved two conversion events, that is, that they were classic exchange losses. (I leave to one side the position of interest and the position of the 1992 advances.) This required the identification by them of outward exchange transactions followed by a set of countervailing inward ones.
204. They submitted that were three outward conversion events:
- (i) The incurring by NPHP on 31 May 1989, 28 June 1989 and 28 December 1989 of debts to News Finance and News Limited denominated in US dollars, pounds sterling and Australian dollars which secured discharges of its obligations denominated in Australian dollars to pay subscription moneys to NPIP;
- (ii) the incurring by NPHP on 6 June 1991 and 12 March 1992 (the taxpayers claimed 28 June 1991) of US dollar liabilities to NPIP in return for securing a partial discharge of NPHP's antecedent Australian dollar, US dollar and sterling debts to News Limited and News Finance; and
- (iii) on each of the dates upon which interest was debited in Australian dollars to NPHP's general ledger on its US dollar indebtedness to NPIP by virtue of s 20 of the 1936 Act.
205. There were then said to be two inward conversion events when NPHP successively discharged its US dollar liabilities to NPIP on 8 June 2001 and 28 June 2002 in Australian dollar resources.
206. In relation to the events described in (i) I accept that the events of 31 May and 28 December 1989 involved conversion of Australian dollar liabilities into liabilities denominated, in part, in foreign currencies. On each occasion NPHP's liability to pay NPIP an Australian dollar sum was acquitted by acts of tender for which it was required to incur liabilities in foreign currency. For the reasons given above at -, however, the events of 28 June 1989 did not involve the conversion of differently denominated liabilities - an Australian-dollar-denominated liability to NPIP was exchanged for a liability to News Limited that was also denominated in Australian dollars.
207. As to (ii): the events of 6 June 1991 are more complex. There is no doubt that NPHP discharged 87% of its Australian dollar indebtedness to News Finance and that to do so it incurred a US dollar liability to NPIP. I accept that this was an initial conversion event. It is equally clear that there was no conversion event when NPHP discharged its US dollar debt to News Finance, as it did so by incurring a liability that was similarly denominated. Given that I have found that there was no conversion event on 28 June 1989, it will follow that there was a conversion event on 6 June 1991 when NPHP reduced its Australian dollar liability to News Limited by increasing its US dollar indebtedness to NPIP.
208. The taxpayers submitted that there had also been an initial conversion when NPHP incurred a liability to NPIP denominated in US dollars which it had used to discharge its debt to News Finance which had been denominated in sterling. In Energy Resources (Full Federal Court), Gummow J said (at 50):
As I have indicated, Div 3B comprises ss 82U-82ZB and is headed "Foreign Currency Exchange Gains and Losses". Reference is made throughout the Division to "currency exchange" gains and losses, rather than to "foreign currency exchange" gains and losses. What is not made clear is whether the currency exchange in question involves the exchange of Australian currency for a foreign currency, or whether it extends also to the exchange of one foreign currency for another foreign currency. In the end, nothing for the purposes of the present appeal appears to turn upon the latter question. The taxpayer says that the relevant dealings were all in the one foreign currency, whilst the Commissioner looks to exchange between that currency and Australian currency.
209. This is, perhaps, a rather interesting question. It may also be that more focus is needed on the critical word in the statute, which is 'fluctuations'. But, in any event, it does not arise on the manner in which the taxpayers put their case. The loss they claimed on this basis was explained in their written submission as follows (at ):
If that is correct, then the measure of this part of the currency exchange losses realised on 8 June 2001 and 28 June 2002 respectively is the difference between:
- (a) the [Australian dollar] equivalent of the proceeds of the [US dollar] loan used to discharge the antecedent [pound sterling] debt on 6 June 1991; and
- (b) the [Australian dollar] equivalent of the [US dollar] amounts paid to discharge the antecedent [pound sterling] debt referred to in (a) on 8 June 2001 and 28 June 2002 respectively.
210. That approach effectively treats the event as if the sterling debt had been an Australian dollar debt. That, however, is not the consequence of the principle being discussed by Gummow J. That question might arise if a Euro sum was converted into US dollars and then later converted back into Euros after a decline in the value of the US dollar. In such a situation there would be a loss in Euros and the issue mentioned by Gummow J would arise. But I do not see that that issue justifies the proposition which the taxpayers advance above.
211. It may be that the taxpayers' submission is really addressed to the issue of quantification. But even so, I do not think it matters. The initial conversion of Australian dollars into pounds sterling was certainly a conversion event. Once that conversion had occurred NPHP was exposed to the potential of fluctuations in the value of the Australian dollar. The exchange rate in which that fluctuation risk initially arose was the Australian dollar - pound sterling rate. The exchange by NPHP of its liability in pounds sterling for a liability in US dollars simply changed the exchange rate in which the fluctuation risk existed to another exchange rate (the US dollar - Australian dollar exchange rate).
212. Against this the Commissioner submitted that what had occurred was not a refinancing and that the loan to NPIP was a fresh loan disconnected from the antecedent transactions. I reject this: one liability was used to extinguish the other. It was a refinancing.
213. As to the events of 28 June 1991: first, as explained above this transaction actually occurred on 12 March 1992. Secondly, despite that, the effect of the transaction was that NPHP reduced its antecedent Australian dollar debt to News Finance by incurring a US dollar liability to NPIP. It was, therefore, a conversion event. The fact that the incorrect promissory note was used has no consequence: in both cases its delivery was treated as a discharge of the underlying monetary obligation.
214. The taxpayers did not rely on the transaction of 8 July 1992 as a conversion event (and it was not, in any event, such a transaction).
215. As to (iii): s 20(1) of the 1936 Act provided at the relevant time:
For all the purposes of this Act, income wherever derived and any expenses wherever incurred shall be expressed in terms of Australian currency.
216. This had the effect of requiring NPHP to express its interest obligations to NPIP in Australian dollars (which it did in each income year). It is not controversial that, in some circumstances, the operation of s 20(1) can bring about an event which may give rise to an exchange loss or gain where the expenses involved are paid at a later time and when the exchange rate has shifted in the intervening period:
Texas Co (Australasia) Ltd v Federal Commissioner of Taxation. It was for that reason that the taxpayers submitted that the expression by it of the interest due to NPIP on the US dollar facility in Australian dollars was an initial conversion event.
217. The Commissioner did not really doubt that proposition. Instead he submitted that the interest had been capitalised by being added to the loan principal and had thereby lost its character as income. This mattered because it is established that s 20 does not apply on capital account: Energy Resources (High Court) at 77.
218. Below at - I reject the proposition that the interest lost its quality as income. It follows that I accept that s 20(1) operated and that each debiting of interest was a conversion event.
219. I turn then to the outward events. In the case of the 8 June 2001 event NPHP converted a US dollar liability to NPIP into an Australian dollar liability to TNCL. This was a conversion for the purposes of Division 3B. In the case of the 28 June 2002 event NPHP effectively discharged the remaining US dollar debt to NPIP using an Australian dollar debt owed by NPIP to it. In other words, it discharged a US dollar liability with an Australian dollar debt. This was a conversion event.
220. For those reasons I accept the taxpayers' case on conversion events save for three matters:
- (a) I find that there was no exchange of currencies on 28 June 1989, but that there was a conversion event in respect of the liability incurred on that day on 6 June 1991;
- (b) I do not accept that the sterling - US dollar conversion was relevantly a conversion event; and
- (c) whilst I accept that the 28 June 1991 event was a conversion event I find that it occurred on 12 March 1992.
221. It follows, subject to those matters, that I accept that the losses claimed were losses within the meaning of Division 3B.
(c) Did the losses arise under an eligible contract?
222. The two basic questions which arise here are whether the taxpayers can identify an eligible contract and then whether they can prove that the above losses arose under it.
223. The taxpayers submitted that the exchange losses had been incurred 'under' the unsecured demand note of 6 June 1991 for US$2,847,080,544. This was because they had been incurred in the process of discharging NPHP's obligations to NPIP under that note. The necessity for the losses to arise 'under' the note arose from the language of s 82Z(1) which permitted deduction of exchange losses only so long as they were 'incurred by a taxpayer in a year of income under an eligible contract'. An eligible contract was defined in s 82V(1) to mean a contract entered into after 19 February 1986.
224. The Commissioner's response to this was twofold: the unsecured demand note was not a contract; the losses did not arise under its terms.
(i) Was there an eligible contract?
225. The Commissioner's first contention requires analysis of the nature of the unsecured demand note and the circumstances surrounding its creation. The Commissioner's initial contention was that the note was a promissory note and that a promissory note was not a contract, being a creature of the law merchant. The taxpayers parried this thrust with an emphatic denial that a promissory note could not be a contract. Further, perhaps spurred on by Mr Gregg's confident evidence under cross-examination that the unsecured demand note was not a promissory note at all (see, for example, - above), the taxpayers then put that, in truth, it was a debenture. So viewed it was to be seen as a non-negotiable security for a loan transaction. The taxpayers thereafter maintained their argument about the contractual nature of promissory notes as a backstop to be called up only if the debenture argument fell over. During the taxpayers' address in reply a variant on these arguments was developed: immediately preceding the 1991 transaction there had been an agreement between the parties that NPHP would borrow, and NPIP would lend, the money the subject of the demand note. Viewed from that perspective the demand note was evidence of the terms of an antecedent agreement and it was the agreement which was the eligible contract.
226. This last version of the arguments was, in fact, the one originally advanced by the taxpayers in their Further Amended Appeal Statement. There it was said that the losses had been suffered under an eligible contract consisting of 'the contract of loan evidenced by the Unsecured Demand Note'.
227. In my opinion it is the final (and first) argument of the taxpayers which is sound. One begins with the physical reality of what occurred on 6 June 1991 in London. By the time the settlement meeting had arrived at this transaction Mr Gregg was acting for both NPIP and NPHP. Wearing his hat as NPIP's attorney he delivered to NPHP the seven promissory notes referred to above at . In return, wearing his hat as NPHP's attorney, he delivered the unsecured demand note. This was a process of exchange and it was simultaneous. Such a process of exchange is consistent both with the existence of an anterior contract and with the inconsistent proposition that the terms of the loan were to be sourced exclusively in the unsecured demand note itself. Put another way, the exchange event may reflect the playing out of events ordained in a pre-existing agreement. On the other hand, the parties may have had no pre-existing agreement contenting themselves instead that the money would be advanced simultaneously with the delivery of a note both acknowledging and regulating the debt which then arose. It is necessary, therefore, to look further afield and beyond the exchange event itself to determine what the parties intended.
228. The language of clause (i) of the note (which is set out above at ) is consistent, in part, with the concept of an antecedent contract: 'In consideration of [NPIP] making a loan of US$ 2,847,080,544 to [NPHP] on 6th June 1991 by the endorsement and delivery of certain notes to [NPHP],...[NPHP]...promises to pay bearer (the "Holder") on demand the sum of...US$2,847,080,544'. This is consistent with the existence of a pre-existing contract because the words 'In consideration of...' do not reflect the reality of the exchange situation. The loan could not be the consideration for the promise to pay (evidenced by the note) because at delivery it was already past consideration. Those words are apt to suggest that the note was documenting something which had already occurred. Only by locating the agreement between the parties before the legal moment of exchange perfected by Mr Gregg can the words 'In consideration of...' be rescued from legal meaninglessness and only then by reading them as historical.
229. Other aspects of the note perhaps point in other directions. For example, clause (iv) specified that the note might be transferred or assigned with NPHP's prior consent but that it was not a negotiable instrument. It may be that clause (iv) lends some support to the idea that there was no antecedent contract because it suggests, perhaps obliquely, an anticipation that the parties might look to the instrument alone for their rights (it may also be that it has the precisely opposite effect).
230. I do not think that it would be easy to resolve what NPHP and NPIP intended if recourse were to be had merely to the terms of the note and the exchange event. Fortunately, this is not necessary. The documentation preceding settlement on 6 June 1991 shows, to a tolerable degree of clarity, that the parties had intended there to be a loan agreement. This material is as follows:
231. The minutes of a meeting of the board of directors of NPIP dated 31 May 1991. These recorded, inter alia, that 'The Chairman also noted that it was proposed that [NPIP] would apply the balance of the loan receivables referred to...above by interest bearing, on demand, loan to [NPHP], its immediate holding company, and that such loan be effected by [NPIP] in favour of [NPHP] of the balance of such loan receivable distributed to [NPIP] by NPL [Bermuda]'.
232. The minutes of a meeting of the directors of NPHP held on 5 June 1991. These minutes are set out above at . Important factors include the reference at [5(a)] to a decision to borrow the money on the terms of a note to be determined and the statement at  that the loan 'would be evidenced by [NPHP] issuing to [NPIP] a Demand Promissory Note bearing a market rate of interest' (emphasis added).
233. From these minutes I would infer: the existence of an antecedent agreement that NPHP would borrow from NPIP the sum of US$2,847,080,544; that the loan would be at a market rate; and that the final terms would be evidenced in the terms of the unsecured demand note to be drafted by others. On this topic, I was also referred to two memoranda prepared after the settlement occurred which recorded the settlement procedure. Beyond establishing the physical events which I have described above, I do not think that they advance matters. The existence of an antecedent agreement was, however, supported by a facsimile from Mr Traill to Mr Macourt dated 6 June 1991. It stated that 'Today, the following transactions will occur...The remaining notes will be assigned [by NPIP] to NPHP by way of loan to NPHP for US$2,847,080,544'.
234. I conclude, therefore, that there was a contract between NPIP and NPHP on, or perhaps shortly before, 6 June 1991 and that under the agreement NPHP incurred a liability to NPIP for an on-demand US-dollar-denominated interest bearing debt. The terms of this agreement were reflected in the unsecured demand note which was delivered.
235. It follows that I reject the Commissioner's primary contention that there was no eligible contract because there was no contract at all. Strictly that makes it unnecessary to enter the fray as to whether the unsecured demand note was a promissory note. Whether it was a promissory note or not had no impact on the antecedent contract whose terms it evidenced. In
Emu Brewery Mezzanine Ltd (in liq) v Australian Securities and Investments Commission (2006) 32 WAR 204 the appellant issued an information memorandum inviting investors to participate in a fundraising proposal under which it would issue promissory notes. To obtain a note an investor had to fill out an application form which was expressed to be executed as a deed. Although there was some disagreement between McLure JA, on the one hand, and Pullin and Buss JJA, on the other, about some aspects of the characterisation of the transaction in question, all proceeded on the basis that there was an agreement for loan separate from the promissory notes by which the loan was carried into effect. Indeed, McLure JA said (at 209 ): 'It is not unusual for a promissory note to co-exit with another underlying agreement.'
236. It is not necessary, therefore, for me to reach a concluded view on whether the unsecured demand note was a promissory note so that it could not also be a contract.
(ii) Did the losses arise 'under' the contract?
237. Here the argument of the Commissioner was that that the loan agreement evidenced by the unsecured demand note did not contain any term requiring, or authorising, NPHP to convert currency.
238. This result can be achieved only if the language of ss 82Y and 82Z that the losses or gains should occur 'under an eligible contract' requires it. This in turn directs attention to the word 'under' and the nouns which are governed by it. These are, respectively, 'gain' (s 82Y) and 'loss' (s 82Z). If the words 'under an eligible contract' invoke notions of authorisation and permission then they must do so in respect of gains and losses and not in respect of the exchange transactions which conceptually prefigure them. It is, however, unwarranted to suggest that the words 'under an eligible contract' require the gain or loss claimed itself to be authorised by the contract. If that were a correct reading it would make very problematic the references to loans and options in ss 82W and 82X.
239. A safer approach in my opinion is to adopt the approach of Gummow J in Energy Resources (Full Federal Court) where his Honour said this of the provisions (at 53B & 54D):
In ordinary parlance, to speak of a gain being made "under" an eligible contract suggests that the gain was made in exercise of a right or discharge of an obligation conferred or imposed, as the case may be, by the terms of the eligible contract.
In my view, a currency exchange gain, for the purposes of the Division, shall be taken to have been made or incurred under an eligible contract when realised in respect of currency purchased in the exercise of rights or the performance of obligations arising under the terms of the eligible contract.
One such example would be a contract for the sale of goods by an Australian buyer or seller where the money of account and of payment, or the money of payment, was not Australian currency. Another would be a hedging contract entered into in relation to the primary contract.
240. This is inconsistent with the Commissioner's approach as is, I think, the acceptance by Hill J in the same case that the repayment of a loan could generate a loss under an eligible contract (at 72G-73B). The Commissioner pointed to other cases where the expression 'under a contract' had been interpreted usually to require the location of the right in question from amongst the fabric of a particular contract's terms. Reference was made in particular to
Federal Commissioner of Taxation v Sara Lea Household & Body Care (Australia) Pty Ltd (2000) 201 CLR 520 and
Chan v Cresdon Pty Ltd (1989) 168 CLR 242 at 249. I do not think, however, that these assist. In both cases what was involved was the question of rights and obligations and their relation to the contract in question. In this case ss 82Y and 82Z search not for a right but instead for a loss or gain 'under an eligible contract'. Those words are apt to provide good reason to distinguish those authorities.
241. The Commissioner also relied on a passage in the High Court's decision in Energy Resources (at 79):
Where a taxpayer borrows money on capital account in US dollars and repays the loan in US dollars, it makes no revenue profit or loss from the borrowing even though the exchange rate may be different at each date. Indeed, arguably it makes no profit or loss. If it converts the US dollars that it receives into Australian dollars and then converts Australian dollars into US dollars to repay the loan, it may make a profit or loss on the transaction. But the profit or loss results from the exchange transaction and not from the borrowing.
(Emphasis added; references omitted.)
242. This provides, on its face, some support for the Commissioner's position. However, the statement appears in a section of the judgment which was not concerned with Division 3B. The argument which was being addressed was whether any loss had been suffered at all. On the other hand the Court dealt with the Division 3B issue this way (at 81):
Division 3B has no application to the present case. In so far as the cost of the discount represents a loss to the taxpayer, it was a revenue loss. Consequently, Div 3B has no application (s 82U(1)). Furthermore, for the reasons that we have already given, the taxpayer made no currency exchange gain or loss. The unit of account and the unit of payment under the contract or contracts involved in this case were US dollars. The taxpayer made no gain or loss under those contracts that was "attributable to currency exchange rate fluctuations".
243. The emphasised words refer back to the passage relied upon by the Commissioner but only in regard to the question of whether the loss had occurred. I do not read the Court as giving any consideration to the meaning of the expression 'loss...under an eligible contract'.
244. For those reasons I accept that it is sufficient for the purposes of Division 3B for a loss to result from the repayment, as here, of a foreign currency loan when there has been a decline in the value of the Australian dollar. In such cases the loss arises under the loan agreement.
245. That conclusion is sufficient to entitle the taxpayers to the losses claimed resulting from the decline in the comparative value of the Australian dollar from 6 June 1991 to June 2002, that is the losses arising from its loans from NPIP. It does not explain quite so readily how it is entitled to the losses arising from the original advance in US dollars and pounds sterling in 1989 from News Finance. This is because, on one view, those transactions had run their course by 6 June 1991 by the partial refinancing by NPIP.
246. On balance I do not consider this is a problem. The first reason this is so relates to an obvious avoidance issue. Bearing in mind the fact that the present debate applies equally to gains as well as losses, the scheme of Division 3B could be defeated if a substantial proportion of the loss could be confined to a different eligible contract to the one under which the final realisation event occurs. For example, if A borrows US dollars from Bank X and uses this to buy Australian dollars and there is thereafter a substantial increase in the Australian dollar then the ensuing gain which would be made on reconversion and repayment may be evaded, on the Commissioner's arguments, by refinancing the debt with a new bank, Bank Y, just before repayment.
247. The second reason relates to the first and that is, as the taxpayers correctly submit, the reference to 'eligible contract' in ss 82Y and 82Z includes a reference to the plural: s 23(b) Acts Interpretation Act 1901 (Cth). It is possible therefore for there to be more than one eligible contract under which the gains or losses arise. Here this would include the 1989 facility agreement between NPHP and News Finance under which the May 1989 advances occurred.
248. Since the advance of 28 June 1989 did not involve a conversion event the question of an eligible contract does not arise.
249. In the case of the advance of 28 December 1989 by News Finance, the eligible contract is provided by the original standby credit facility of 26 May 1989 which was to govern future loans as well as well of those of 26 May 1989.
250. The Commissioner's next response to this was to submit that the events of 6 June 1991 operated as a complete severance from the events of 1989. They were not to be seen as a refinancing of the same obligation. As I have said above at , I do not accept this. What was involved was, in my opinion, a refinancing of Australian dollar and pound sterling debt into US dollar debt alone.
251. The taxpayers are therefore entitled to succeed in respect of the conversion events they nominate, subject to what I have said at . It is not necessary to deal with the taxpayer's argument that they suffered a loss on the conversion of the sterling debt into the US dollar debt. Had it been necessary I would have considered that the losses contemplated by Division 3B are Australian dollar losses.
(d) The position of the interest liabilities
252. Section 20 of the 1936 Act required the US dollar interest debited to NPHP to be converted to Australian dollars as it was incurred. Its operation was that the Australian dollar value of the interest was determined as the loan progressed and recorded as such. On the other hand, NPHP did not use an Australian dollar resource to repay the principal until 2001 and 2002.
253. The first question which arises concerns the losses arising as a result of the interest charges. The taxpayers' and the Commissioner's primary submission was that the interest had been 'capitalised' and therefore was not a revenue account. This position appears to have been taken, as a matter of fact, in NPHP's returns for the years ending 30 June 2001 and 2002. Then, drawing on the principle that foreign currency gains or losses realised on the discharge of a liability take their character from the liability discharged, it was submitted that the losses arising from the devaluation in the Australian dollar were also on capital account. Consequently, they were claimable under Division 3B.
254. Why had the interest been capitalised? The only substantive answer to this question proffered by either party was that there had been an account stated whereby the pre-existing debts (consisting one assumes of both principal and interest) had been converted into a new fresh debt in which the principal/interest components had merged and had no longer maintained an independent existence.
255. There is no doubt that an account stated has that effect. 'If the debt is discharged, whether by account stated, by payment or by other means, a liability which takes its place will be of a different character':
Bank of New South Wales v Brown (1983) 151 CLR 514 at 546 per Brennan J.
256. However, in this case the evidence for an account stated falls well short of the mark. It rests on Mr Macourt's claim that at the end of each year the accrued interest was added to the principal. The adding of interest to a principal sum in a set of accounts occurs in every case in which compound interest is charged. The mere fact that interest is added to principal and interest charged thereon does not create, in an ordinary case, an entirely new debt. This, in fact, was the very question decided in Brown. Gibbs CJ put it this way (at 523):
When, in accordance with normal banking practice, accrued interest is debited to a customer's current account, and itself bears interest, it may be convenient to say that, as between the banker and the customer, and those who stand in their shoes, the interest is treated as capital. In truth, however, the interest is not converted into capital, and the rights of third parties must be determined on the footing that the interest retains its character as such.
257. Brennan J (at 545-546) made the same point, as did Dawson J (at 555). The reasons for judgment of Mason and Wilson JJ avoided precisely answering the question but they provide very little comfort for it (at 531-532).
258. There are cases where the arrangement between the parties can have a different effect. Gordon J's recent decision in
BHP Billiton Finance Ltd v Federal Commissioner of Taxation (2009) 72 ATR 746;  FCA 276 is an example. There the agreement included cll (b) and (g) whose effect was that at the end of each period the total of the then existing principal and interest was rolled over into a new loan: see . Applying Brown her Honour concluded that the interest had been truly capitalised: . Those facts are far from the facts of this case. On no view was a new loan involved. Accordingly, I do not accept that the interest was 'capitalised'; it was merely added to the principal. 'The total sum may appropriately be described as "principal", but capitalization in this sense is no legal alchemy for changing the character of a debt for interest': Brown at 546 per Brennan J.
259. It seems to me, therefore, that the taxpayers' primary case on this point fails. However, sensibly enough, they put an alternative argument that they were entitled to claim the losses on revenue account. Having referred to Mr Macourt's evidence on the capitalisation of interest, the taxpayers' written submission continued:
If this does not amount to an account stated, and it is submitted that it does not, the accrued interest liability would remain as a liability on revenue account until it was discharged on 28 June 2002. It follows that the currency exchange loss realised on the discharge of that liability would also be on revenue account and, accordingly, that the currency exchange loss would be deductible under s8-1 in the year of income ending 30 June 2002.
260. I accept this submission.
261. The Commissioner's submissions on the taxpayers' arguments about interest were as follows:
- (a) the interest had been capitalised and was no longer on the revenue account;
- (b) in any event, the terms of the demand note did not permit the charging of interest on unpaid interest. It followed that the charging of the interest had to have occurred under a separate contract and the terms of that contract had not been sufficiently proved;
- (c) there was no actual expenditure or disbursement in 2002 'involving a conversion of currency'.
262. I do not accept any of these arguments. As to (a), for the reasons already given the capitalised interest did not lose its character as income. In any event, the taxpayers' case on this point was an alternate argument which only arises on the hypothesis that Division 3B does not apply, i.e. that the interest charges are not on capital account.
263. As to (b), I agree that the terms of the unsecured demand note did not provide for the charging of interest on unpaid interest. But, contrary to the balance of the submission, the terms of the agreement under which interest was charged are perfectly plain. Both NPIP and NPHP assented to an arrangement under which interest was charged on interest on the same terms as specified in the unsecured demand notes.
264. As to (c), it is true that Dixon J spoke in
Armco (Australia) Pty Ltd v Federal Commissioner of Taxation (1947) 76 CLR 584 at 618 of foreign currency losses arising from the operation of accruals accounting on a transaction denominated in foreign currency when 'actual' expenditure occurred at a later date and the exchange rate had moved. It is implicit in this submission that the discharge which occurred was not actual. In light of the Commissioner's acceptance that the transactions were real ones it is difficult to accept this submission. A variant of it was to insist that there needed to be an 'actual' 'conversion of currency'. In that form, the argument was a rebadged version of the Commissioner's argument under Division 3B. But there is nothing in Armco which requires actual currency to change hands.
265. In those circumstances, I reject the Commissioner's arguments. The interest was on revenue account and was deductible under s 8-1 and s 51.
IV. RESIDUAL MATTERS
266. There was an issue between the parties as to whether the exchange rates which were to be used were the internal rates used by the News Group or the published spot rates. What the taxpayers are entitled to claim is the losses arising from fluctuations in currency exchange rates. The Act does not specify spot rates. So long as the rates used are bona fide (and there is no suggestion in this case they were not), I do not see why the spot rate must be used.
267. The taxpayers have succeeded in showing that the assessments are excessive. I do not think, at least at this stage, that I should attempt to assess the taxpayers' liability myself. This is because my conclusions that there was no conversion event on 28 June 1989 and that the promissory note apparently issued on 29 June 1991 was in fact delivered on 12 March 1992 may affect the calculations.
268. The appropriate course in each mater is to set aside the objection decision and to order the Commissioner to determine the taxpayer's objection in accordance with this Court's reasons. The Commissioner must pay the taxpayers' costs. Given the number of matters I will direct the parties to bring in short minutes reflecting these conclusions by 31 July 2012.