SUPREME COURT OF NEW ZEALAND
NISSAN MOTORS DISTRIBUTORS (NZ) LTD v INLAND REVENUE COMMISSIONER (NZ)
WILSON J
30 March, 7 April 1976 - Auckland
Wilson J Case stated pursuant to s 32 of the Land and Income Tax Act 1954 (NZ) by way of appeal from the Commissioner's assessment for income tax of the sum of $77,406 said to have been derived by the objector during the year ended on 31 March 1975. The objector claimed that this sum was a capital gain; the Commissioner asserted that it was part of the objector's trading profit for the year in question. It is therefore necessary to ascertain exactly how the undisputed apparent gain of this amount by the objector was achieved.
The case shows that during the year in question the objector purchased trading stock comprising motor vehicles from the Nissan Motor Co Ltd of Japan and that the terms of purchase required that the objector pay the price thereof in Japanese currency to the vendor in Japan before the vehicles were shipped. In order to make this payment the objector borrowed the necessary sum from Marac Finance Ltd which procured it from the Security National Pacific Bank of the United States of America which, in turn, purchased the required amount of Japanese currency and deposited it with the Bank of Tokyo in order to meet the drafts for each shipment presented by the Nissan Motor Co Ltd as seller immediately prior to shipping the vehicles. When the vehicles left Japan, therefore, they had been paid for by the objector with money borrowed from Marac Finance Ltd The terms of the contract of loan were that the moneys borrowed plus interest and brokerage were repayable in United States dollars by means of drafts on the objector for settlement in 180 days, the principal sum borrowed being the US dollar equivalent of the yen paid for the motor vehicles at the time of payment. At the time when such drafts were presented and paid, however, a devaluation of the US dollar resulted in the objector's having to find $77,406 less in New Zealand currency to meet them than it would have had to find if it had itself purchased yen at the time when the vehicles were bought by it. The objector, in its return of income, had shown the cost of the vehicles as the NZ dollar equivalent of the yen paid for the vehicles at the rate of exchange prevailing at the time of payment, whereas the Commissioner considered that the true cost was the sum in NZ currency which the objector had eventually to pay to Marac Finance Ltd
Mr Hutchinson submitted on behalf of the objector that the facts set out in the case disclosed two transactions - one of purchase from the Nissan Motor Co Ltd and the other of borrowing from Marac Finance Ltd - and that, though related, they were quite separate and distinct. He contended that the purchase transaction was the only one of those relevant to the objector's trading profit which produced assessable income; that the price of the motor vehicles to the objector was ascertained and fixed at the time when it was paid; that that price, expressed in its NZ currency equivalent as at that time, was the true cost of the vehicles to the objector and had been correctly shown in its return of income. As to the benefit accruing to the objector from the subsequent alteration of the exchange rate, he contended that it was irrelevant to the objector's trading profit; that the loan raised by the objector to pay for the vehicles was, in its nature, the acquisition of working capital; and that when it was called upon to pay a sum in NZ dollars to repay it less than was represented by the loan at the time when it was raised, at the then current rate of exchange, the resulting advantage was in the nature of a capital gain.
Mr Bridger, on behalf of the Commissioner, contended that, as the loan was raised for the specific purpose of paying for the motor vehicles, it must be treated as part and parcel of the purchase thereof; that the actual price of the vehicles had to be ascertained from the amount eventually paid out by the objector to Marac Finance Ltd which, he emphasized, was the only sum actually expended by the objector for this purpose; and that, when this sum was taken into account as the cost of the vehicles, the resulting net profit from their sale by the objector was $77,406 higher than that returned and the objector's assessable income for the relevant fiscal year was greater than returned by that amount. This, he submitted, justified the Commissioner's assessment which was the subject of this appeal.
Counsel were in agreement that there is no reported decision directly in point, but I was referred to three cases decided in the High Court of Australia which, it was submitted by Mr Bridger, afforded some support for the Commissioner's contentions. I shall discuss these later, but propose to consider the matter in the first place as though there were no relevant decisions.
Untrammelled by authority I should have no hesitation in concluding (as I indicated in the course of the argument)-
(1) That the cost to the objector of the motor vehicles was the sum that it actually paid for them at the time when payment was made to the seller.
(2) That for this purpose it is immaterial that the price was paid from moneys borrowed by the objector from Marac Finance Ltd and not from its own funds. When that money was borrowed for this purpose it became part of the objector's working capital. Accordingly, it was the objector's own money that was used in payment of the price of the vehicles, notwithstanding that the objector then became liable to pay, not that money but an equivalent sum plus interest and commission, to the lender at a later date.
(3) That for the purpose of calculating the objector's trading profit in respect of the purchase and sale of the motor vehicles it had no alternative to converting the purchase price in yen into New Zealand currency at the exchange rate prevailing at the time when the price was paid to the seller. This in effect was what the objecter did in the accounts upon which its return of income was based.
(4) That when the objector borrowed US dollars to buy the yen required to pay for the motor vehicles it assumed a liability to repay the same number of dollars (plus interest and commission) 180 days later. I would uphold Mr Hutchinson's submission that this was a separate and independent transaction entered into for the purpose of raising working capital for the objector company. It was a capital transaction in so far as the capital sum borrowed was concerned, and any reduction in the amount required to repay the amount borrowed when it became due was a capital, not an income, gain. As such it did not form part of the objector's assessable income for the relevant fiscal year.
It is now necessary to consider to what extent (if any) these tentative conclusions require to be reversed or modified in the light of the Australian decisions to which I have referred.
The first two of these decisions, Texas Company (Australasia) Ltd v FC of T (1940) 2 AITR 4; 63 CLR 382 and Armco (Australia) Pty Ltd v FC of T (1948) 4 AITR 116; 76 CLR 584 clearly do not affect my tentative conclusions. So far as they are at all relevant thereto, they support my conclusion in para 1 above. In both cases the taxpayer had bought trading stock on credit from overseas suppliers and when they came to pay for them they were obliged (because of the depreciated value of the Australian currency in relation to that of the country in which payment had to be made) to find a greater sum in Australian currency than would have been the case if they had paid cash at the time of supply. In both cases the High Court of Australia held that the true cost of the trading stock was the sum in Australian currency which was eventually paid for the trading stock and that sum was properly debited in the taxpayer's accounts in arriving at their assessable incomes. In neither of these cases was the money borrowed from a third party to effect payment to the seller.
In the third case, Caltex Ltd v FC of T (1960) 8 AITR 25; 106 CLR 205, there was (at least ostensibly) a borrowing of money in order to pay for trading stock which had been purchased on credit several years earlier. The facts, so far as they are relevant to the question in the instant case, were these:
Over many years the appellant had purchased its trading stock of oil and petrol from an American corporation, the Texas Company Inc; which had a controlling interest in the appellant and which allowed it very liberal credit terms. In 1936 the Texas Company Inc and the Standard Oil Co of California formed a new company, called California Texas Oil Co Ltd It was arranged, with the concurrence of the appellant (which seems to have had no option in the matter), that, as from a specified date, all supplies to the appellant would be made by the new company. The new company lent to the appellant a sufficient sum in United States dollars to pay off the appellant's debt to the Texas Company Inc for supplies up to that date. This last transaction was carried out by California Texas Oil Co Ltd paying to the appellant's credit in an American bank sums of money sufficient to discharge the appellant's debt to the Texas Company Inc and by the appellant's using this credit to pay the debt owing to that company. These financial transactions were carried out in United States dollars, being the currency in which payment for the appellant's stock was required to be made. At the time relevant to the appeal the debt thus owed to California Texas Oil Co Ltd had not been paid, but over the years since the original debts had been incurred the Australian pound had steadily depreciated in relation to the United States dollar, so that the amount in Australian pounds which would have been necessary to purchase the United States dollars advanced by California Texas Oil Co Ltd and paid to the Texas Company Inc would have been considerably greater than would have been necessary to pay for the trading stock at the time of supply. Relying on the two earlier cases the appellant sought to re-open its earlier tax assessments (which had been based on the exchange rate at the time of purchase) and to substitute as the cost of the trading stock which it had bought from the Texas Company Inc the Australian pound equivalent of the total calculated at the exchange rate prevailing at the time when the Texas Company Inc had been paid, as above described.
Taylor J held (106 CLR at 236-7; AITR at 51-2) that the true cost of the trading stock to Caltex Ltd was the Australian currency equivalent of the dollars actually used to pay for it at the time of payment and that the dollar loan from the new supplier was on capital account and was irrelevant to the question of the income earned by Caltex Ltd for the relevant fiscal year. These conclusions are similar to my tentative conclusions in the instant case. A like view was taken by Menzies JJ, ibid, at 250-1; 61-2.
The majority of the Court, however, held that no loss had been sustained by Caltex Ltd as the result of repaying the Texas Company Inc with dollars borrowed from California Texas Oil Co Ltd and Mr Bridger submitted that this view supported the Commissioner's contention in the instant case. If these learned judges did in fact hold that a debt incurred for trading stock supplied is never discharged until the loan raised to discharge it is repaid I should find great difficulty in adhering to my tentative conclusions, but in my opinion they did not.
Dixon CJ at 220; 40 said: "In the present case it appears to me that nothing had happened but the novation of a dollar indebtedness, or something equivalent or akin to a novation."
I take this as meaning that the new supplier had, in effect, acquired the debt owing to the old supplier for trading stock supplied by the latter. On that basis it is clear that that debt had not been discharged so that it had not been proved that the trading stock had cost Caltex Ltd more because of exchange fluctuations against it and that whether or not that was the case would not be ascertained until payment had been made. I do not think that this view is inconsistent with my tentative conclusions. It is also clear that, in the instant case, there was neither novation or anything equivalent to novation of the debt which had been incurred to the Nissan Motor Co Ltd of Japan.
Fullagar J did not accept that there had been a novation. He held, ibid, at 227; 45 that "The substance and reality of what happened was simply that one creditor was substituted for another" and he held it irrelevant that (if it were so-which he doubted) a debt on capital account was substituted for one on revenue account. See at 228; 46. I accept that this conclusion is not consistent with my tentative conclusions, but distinguish it on the ground that in the Caltex case all three companies concerned were closely related, whereas the transactions between the appellant and the Japanese vendor, on the one hand, and that between the objector and Marac Finance Ltd, on the other, were separate and distinct, the only connection being that the latter transaction was entered into to facilitate the former.
This distinction is well illustrated in the judgment of Kitto J, at 231; 48 where he said: "If the case told us nothing more about the transaction than that the new supplier lent sufficient dollars to the appellant and the appellant used them to pay its debt to the old supplier, the answer would no doubt be that the dollars paid to the old supplier were the appellant's, so that the second of the propositions I have taken from the Texas Case (1940) 63 CLR 382; 2 AITR 4 would apply. But the case stated does tell us more. It shows that the lending by the new supplier was a step in an agreed process…. When the appellant performed its part of the agreement, as it did on the same day, what was it doing but completing the process by which the parties had agreed that dollars of the new supplier should be used for the purpose of getting the new supplier into the shoes of the old supplier so far as the appellant's outstanding indebtedness was concerned? The process must be regarded as an entirety, for it was devised as an entirety."
In the instant case, of course, there was no suggestion (let alone arrangement) that Marac Finance Ltd should acquire the debt owing to the Nissan Motor Co Ltd of Japan or replace that company as the supplier of motor vehicles to the appellant.
In my opinion the conclusions of the majority of the Court in the Caltex Case depended on the particular facts of the case and did not lay down any rule which would require me, on the facts of this case, to revise my tentative conclusions. I therefore confirm them.
The case stated poses the questions: "Whether the Commissioner, in making the assessment for the year ended on the 31st day of March 1973 referred to in paragraph 3 hereof, acted correctly in including in the objector's assessable income the said amount of $77,406, and, if not, in what respect should such assessment be amended."
For the reasons that I have given I answer these questions thus:-
The Commissioner did not act correctly in including that amount in the objector's assessable income for the year ended 31 March 1973. His assessment should be amended by excluding that sum from the objector's assessable income.
I may add that I am by no means satisfied that any profit was made by the objector arising from the fact that between the date of raising its loan from Marac Finance Ltd and the date of repayment the US dollar was devalued. The same number of dollars was repaid and as repayment could not be compelled before the agreed date the cost of repayment in NZ dollars could not be ascertained until that day arrived. That was the real cost. The exchange equivalent at the time when the US dollars were borrowed was merely an estimate of the cost of repayment made for accounting purposes.
The objector, having succeeded in this appeal, is allowed $500 costs, plus disbursements against the Commissioner.
© Thomson Legal & Regulatory Limited ABN 64 058 914 668 trading as Australian Tax Practice