P Gerber SM
KL Beddoe SM
Administrative Appeals Tribunal
Dr P. Gerber and K.L. Beddoe (Senior Members)
The applicant in this case - Roma Pastoral Company Pty. Ltd. (``Roma'') - is a family company owned by the Black family and controlled by Mr G.H. Black by virtue of its share structure. Roma has a subsidiary - Shelf Investments Pty. Ltd. (``Shelf'') - whose involvement in these proceedings will appear shortly. The Tribunal was taken through a welter of evidence, much of it irrelevant, an irrelevance, due not so much to over-zealous counsel - indeed the Tribunal is grateful for the able assistance it received from all counsel concerned - but attributable to the fact that the documentary evidence was in disarray and few of the contents purporting to relate to facts and figures bore much relation to reality. The Tribunal will only refer to so much of the history as is considered relevant for purposes of this application in the order in which the events occurred.
2. At all relevant times, Roma owned and operated a city motel - The Plaza - run by Mr and Mrs Black. In or about the early part of 1980, Roma decided to sell the motel and to enlarge its interests in industrial properties, which were to be acquired and held for income-earning purposes. To give effect to this intention, the motel was listed for sale with an agent and a number of industrial properties were acquired. These properties were, in the main, obtained with the aid of bridging finance, secured by way of first mortgages at high rates of interest. In order to obtain finance at a more modest rate of interest, Roma sought and obtained - after much toing and froing - a loan of $A1.8 million from the European Bank (``European''), which had its main office in Geneva. The issue we have to decide is whether this overseas borrowing qualifies for exemption from withholding tax, or is excluded by the exceptions contained in the Tax Act in the particular circumstances of this case. This is what occurred.
3(i) In or about April 1980, Mr and Mrs Black purchased a strata title unit, identified as Unit 456 Lagoon (``Lagoon'') for $117,500. This unit was mortgaged to Australian Guarantee Corporation (``AGC'') for $93,400. The mortgage was in due course discharged and a new mortgage registered, the mortgagee being European. It was readily conceded that this unit was acquired for the personal use of Mr and Mrs Black.
(ii) In or about August 1980, Black acquired an industrial property - 34 Smith Street, Coopers Plains - for $691,000 - and executed a first mortgage in favour of Tricontinental Corporation Ltd. (``Tricontinental''). On 23 July 1982, this mortgage was discharged and a new mortgage executed in favour of European.
(iii) In or about September 1980, Roma acquired an industrial property - Brown Street, Sumner Park - for $315,000. This property does not seem to have been encumbered until July 1981 when it was mortgaged to European.
(iv) In or about September 1980, Shelf acquired an industrial property at Everton Park on two separate titles for $437,500. One of these two properties was mortgaged to Tricontinental. The mortgage was discharged in due course and a fresh mortgage executed in favour of European.
(v) In March 1981, Mr Black acquired an industrial property in Green Street, Rocklea from the Australian Mutual Provident Society (``AMP'') for $450,000 and mortgaged it to European on 23 July 1981. For reasons which do not affect the outcome of this application, this property was not transferred to Roma at any relevant time.
(vi) On 31 December 1982 the respondent Commissioner of Taxation refused an application for a certificate that the loan of $A1.8 million, granted to Black, be exempt from withholding tax.
4. The Tribunal does not consider it necessary to set out the lengthy and inaccurate correspondence between Roma and its finance broker, the respondent, or the lending bank. Suffice it to state that its successful application to European for a loan for $A1.8 million resulted in Mr Anthony Kootsookos, the local solicitor for European, receiving by way of telegraphic transfer, an amount of $A1,780,759 on 23 July 1981. The discrepancy between the amount received and the amount applied for is attributable to the fluctuating exchange rate which moved against the applicant (and, in the end, compelled it to seek a further loan of $20,000 from European and $200,000 from Pan Australian Credits Ltd. to make up the resultant shortfall). This is how Mr Kootsookos, as agent for the lender, dealt with
ATC 1151the loan funds, albeit on advice from the various mortgagees.
- (i) $432,195 paid to AMP, being the balance of the purchase money owing on the Rocklea property;
- (ii) $94,896 paid to AGC to discharge the amount owing on the mortgage of Lagoon, the unit, it will be recalled, which was owned by Mr and Mrs Black and acquired for their private use;
- (iii) $1,244,346 paid to Tricontinental to discharge the mortgages held by that lender over the Coopers Plains property owned by Roma and the Everton Park property owned by Shelf;
- (iv) the balance ($13,921) was transferred to Mr Kootsookos for his costs and disbursements. This left a nil balance and resulted in a further request for a loan from European in the amount of $20,000. In due course an amount of some $19,987 was received by Mr Kootsookos and paid to Roma to finalise all outstanding matters. Although not strictly relevant, it should be mentioned that the initial attempt to sell The Plaza Motel came ``unstuck'', which in turn resulted in substantially larger borrowings than had been originally anticipated. The Tribunal states this merely because much was made of this during the hearing.
5. Turning to the law. Section 128A(5) states:
``For the purposes of this Division -
- (c) the moneys received by the raising of a loan, less the expenses of borrowing, shall be deemed to be the loan moneys in respect of the loan.''
Section 128A(7) provides:
``A reference in this Division to the use of moneys for the purposes of an enterprise shall be read as not including use of those moneys in the course of carrying on an enterprise -
- (a) by way of providing capital for another enterprise; or
- (b) by way of the making of loans.''
Section 128A(8)(a) states:
``For the purposes of this Division -
- (a) a reference to a qualifying use, in relation to loan moneys, shall be read as a reference to use of those moneys for the purposes of an enterprise at a time when the enterprise is or was (whether by reason of the transaction by which those moneys became available for that use or otherwise) an enterprise owned by an Australian entity or an enterprise in which there is substantial Australian participation.''
Finally, sec. 128H states:
``(1) An entity that has raised a loan the interest on which could, subject to the issue of a certificate under sub-section (2) in respect of the loan, be interest referred to in section 128G may apply to the Commissioner in writing for the issue of such a certificate.
(2) Where an application is made in accordance with sub-section (1) and the Commissioner is satisfied that -
- (b) the loan moneys have been employed, and are intended to be employed, only for a qualifying use or for making moneys available for a qualifying use;
the Commissioner shall issue to the applicant a certificate containing particulars of the loan and stating that the loan complies with this sub-section, but otherwise he shall refuse the application.''
6. This transaction, when looked at in slow motion, comes to this: The lender insists on first mortgages, inter alia, over Lagoon. In order to achieve this, the borrower - which does not own the unit - persuades the owners, Mr and Mrs Black, to allow their unit to be used as part security for the loan. Mr and Mrs Black are willing to co-operate. This, of course, necessitates the discharge of the AGC mortgage. In the result, the lender's solicitor is instructed to use sufficient of the loan funds to discharge the existing mortgage and thence to use the now unencumbered unit as part security
ATC 1152for the loan from European. In effect, part of the loan funds have been used to lend Mr and Mrs Black sufficient moneys to discharge the mortgage over their unit. This process is repeated with respect to the Rocklea property which is registered in the name of Mr Black, and the Everton Park property which is owned by Shelf. The result is that the major part of the loan funds have been used to make loans to Mr and Mrs Black and to Shelf. At first blush, this would seem to introduce the exclusionary provision of sec. 128A(7), which provides that the use of moneys for the purposes of an enterprise ``shall be read as not including use of those moneys in the course of carrying on an enterprise - (a) by way of providing capital for another enterprise; or (b) by way of the making of loans''. ``Loan moneys'' are defined for purposes of the section as ``the moneys received by the raising of a loan, less the expenses of borrowing...'' (cf. sec. 128A(5)(c)). Section 128H enables an entity, which has raised a loan and desires to be exempt from withholding tax of the interest of said loan, to apply to the Commissioner of Taxation for the issue of such a certificate, and such certificate may issue if the Commissioner is satisfied, inter alia, ``(that) the loan moneys have been employed... only for a qualifying use''. In Case T15,
86 ATC 200, Board of Review No. 3 had occasion to consider this section. The Board concluded that:
``It seems to us that it is a basic requirement of the section [i.e. sec. 128H] that the borrowed funds have been employed or are intended to be employed only for a qualifying use, which is defined in sec. 128A(8)(a) as the use of those moneys for the purposes of `a business or other industrial or commercial undertaking', and that any other user operates as a disqualification. Where, as here, it is common ground that part of the funds were used to discharge a loan, utilized to build a private residence and swimming pool, it cannot, in our view, be said that the funds were used `only' for a qualifying use. An `only' purpose connotes a singular purpose to the exclusion of all others''
The Tribunal has concluded that the above is a correct exposition of the law and is satisfied that a like consideration applies to this case, with an equally fatal outcome. The bulk of the borrowed funds were used either to make loans to directors of the borrower or to another entity (albeit a subsidiary of the borrower), and thus not used for the purpose of ``a business or other industrial or commercial undertaking''. The Tribunal respectfully rejects Mr Harrison's persuasive argument that the relevant section permits a ``dual'' use. The business of the borrower at the relevant time involved the acquisition of industrial properties for their earning potential, not to discharge mortgages and/or to lend funds to directors or a subsidiary, activities which, in any event, are excluded from exemption from withholding tax by sec. 128A(7). While a dual use may be sufficient to qualify for rate exemption, cf.
Ryde Municipal Council v. Macquarie University (1978) 139 C.L.R. 633, a case relied on by Mr Harrison, the Tribunal finds it has no application to this case. Nor is it possible to separate the loan funds into ``qualifying'' and ``non-qualifying'' uses. The loan moneys are one and indivisible, being ``the moneys received by the raising of a loan, less the expenses of borrowing...'', (cf. sec. 128A(5)) and which, furthermore, may be employed ``only for a qualifying use or for making moneys available for a qualifying use'' (cf. sec. 128H(2)(b)). In any event, in the instant application, the only unencumbered property was the Sumner Park estate, the purchase price of which was $315,000, so that it is only with respect to mortgaging that property that the use of the loan moneys could be said to constitute a ``qualifying use''.