KL Beddoe Ch
P Gerber M
GW Beck M
No. 3 Board of Review
K.L. Beddoe (Chairman), Drs P. Gerber and G.W. Beck (Members)
In this case, the taxpayer is a public accountant and primary producer. The relevant events which gave rise to this review occurred in the following sequence:
- (i) On 30 November 1982 the taxpayer applied (successfully) for a loan of $A500,000 from the H'ing Bank in Singapore.
- (ii) On 30 March 1983 the taxpayer applied to the Commissioner for an exemption certificate pursuant to sec. 128H (exemption from liability to withholding tax on interest paid on overseas borrowings). The
ATC 201application stated (omitting formal requirements) that:
- ``A loan of $A500,000 in U.S. dollars was drawn from the H'ing Bank in Singapore on 21st March 1983. The U.S. dollars equivalent is $437,150. Interest rate is 11.5625 payable 21st September 1983.
- Copy of the loan agreement from the H'ing Bank and conditions is attached, together with a copy of the approval from the Reserve Bank of Australia.
- The purpose of the loan was to refinance existing borrowings and provide funds to further develop a stud property at Westmead and an agricultural and grazing property at Northmead.''
- (iii) On 26 April 1983 the Commissioner sought further and better particulars:
- ``Under `Purpose of the Loan' you have stated it was in part `to refinance existing borrowings'. Full details relating to the previous loan and its use are required.''
- (iv) The taxpayer replied on 12 May 1983 stating:
- ``In reply to your letter of 26th April 1983, I advise that the existing borrowings refinanced were as follows:1. City Permanent Building Society $53,958 Part of the cost of building a house at Westmead 2. Union Bank -- Commercial Bills $355,000
- a. Used to develop Westmead property as a deer stud, including construction of stables, feed and machinery sheds, fencing and acquisition of stock.
- b. Acquisition and development of agricultural and grazing property of farm machinery, irrigation equipment, acquisition of deer and general improvements to buildings and fencing.
In the main, the total funds were used in primary production, as well as additional funds from the H'ing Bank.''
- (v) On 3 June 1983 the Commissioner issued a notice to the effect that the application had been refused, setting out as his reason that he was not satisfied ``that the loan moneys were employed only for a qualifying use''.
- (vi) On 29 June 1983 the taxpayer objected against the Commissioner's refusal, including as ``additional information'' that:
- ``1. The Westmead property was acquired in 1959 for the purpose of carrying out an enterprise of primary production. This will be borne out from the Income Tax returns over the years which indicated this type of activity was carried out on the property in the form of small crop growing, citrus and avocado trees and deer breeding.
- 2. In 1959, a house was acquired for removal, moved to the Westmead property and residency taken up, the house itself being a timber dwelling, very old and very small.
- 3. In December 1969, the old home was demolished because of its age, and with the assistance of a loan of $30,000 from the City Permanent Building Society over a 25 year period, a new home was constructed, and at all times the enterprise of primary production was conducted in some form or other. In succeeding years, a considerable amount of money was expended in improvements to the property, including construction of a machinery and hay shed, stable complexes and yards, some of the money for this purpose being supplied by the Union Bank.
- 4. On 7th August 1980, in order to reduce some of this indebtedness to the Union Bank, at their request the City Permanent Building Society was again approached as they held first mortgage, for a further loan of $30, 157. This was granted and a reduction in various overdrafts in associated with this enterprise resulted.
- 5. In further promotion of the primary production enterprise, another property at Northmead was acquired for agricultural and grazing purposes.
- 6. At all times the activities of primary production have been carried out, and it is believed that the fact that the City Permanent Building Society was used in the first instance to assist in building a new home on acreage, used for primary production, should not have been a reason for non-issue of the exemption certificate under Section 128H. More particularly when considering the balance of the original loan when paid out by the overseas borrowings would have been less than 5% of the total borrowings, all of which have been utilized in the enterprise of primary production.''
2. In due course, the matter was referred to the Board at the taxpayer's request, pursuant to sec. 128P, a section which confers ``Jurisdiction'' on Boards of Review to determine whether the Commissioner's refusal to issue the relevant certificate was unjustified.
3. At the outset, it is common ground that some part of the funds originally borrowed from the City Permanent Building Society was used to erect the domestic homestead on the Westmead property, as well as constructing a swimming pool. Those funds could, therefore, in no sense be said to have been fully expended in a business or commercial undertaking; a fortiori, the repayment of such loan funds from the overseas borrowings cannot be said to have been used for such a purpose. We consider this to be fatal to the success of the taxpayer's appeal.
4. Section 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.''
5. It seems to us that it is a basic requirement of the section 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. When Bassanio refuses to give Portia the ring, she declaims: ``I will have nothing else but only this'' (Merchant of Venice, Act IV, Sc. I, 433). The meaning is clear. Indeed, in the context of the reply, ``only'' is really surplusage. Applying what may be called the Portia approach to the section, it does indeed provide for a pound of flesh, ``but, in the cutting it, if thou dost shed one drop of Christian blood, thy lands and goods are, by the laws of Venice, confiscate unto the State of Venice''. Like Shylock, this taxpayer was unable to adhere strictly to his bond, and likewise must pay the price.
6. In the circumstances, we see no need to canvass the other issues which were the subject of careful examination and address by counsel for the Commissioner concerning the identity of the borrower and/or the complex movements of the loan funds between the taxpayer and various family companies as detailed in the various partnership returns. We find that the Commissioner's refusal to issue the relevant certificate was not unjustified.
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