ENERGY RESOURCES OF AUSTRALIA LTD v FC of T

Members:
Davies J

Tribunal:
Federal Court of Australia

Decision date: Judgment handed down 22 April 1994

Davies J

These are appeals from decisions of the Deputy Commissioner of Taxation which disallowed objections lodged by the applicant, Energy Resources of Australia Ltd (``ERA''), to amended assessments of its taxable income for the years ended 30 June 1987 and 30 June 1988.

ERA was incorporated on 8 February 1980 and, since 12 September of that year, has carried on the business of the mining, treatment and sale of uranium concentrates, centred at the Ranger Mine, Jabiru, in the Northern Territory. ERA has a wholly owned subsidiary, ERA (Canberra) Limited (``ERA (Canberra)'') which was established, inter alia to play a part in the financing of ERA's activities.

On 29 September 1980, an agreement, which I shall call ``the Schroder Wagg facility'', was entered into to provide finance for the establishment and conduct of ERA's business. The parties were the borrower, ERA (Canberra), ERA, which on-borrowed from and which guaranteed the obligations of ERA (Canberra), 21 banks, J Henry Schroder Wagg & Co Ltd and Continental Illinois National Bank & Trust Co of Chicago. The agreement provided for the provision of finance of up to a maximum of US$250m. The loan was raised in conjunction with finance of US$140m provided by Japan Australia Uranium Resources Development Co Ltd. It is not in dispute that the principal purpose of the facility was to enable ERA to meet the capital costs associated with the development of the Ranger Mine. Over the ensuing years, the principal sum due under the Schroder Wagg facility was reduced substantially.

In late 1985, ERA foresaw that it could, by the issue of Euronotes, obtain finance at a cost lower than the interest rates provided for in the Schroder Wagg facility. On 22 January 1986, ERA and ERA (Canberra) entered into an agreement which I shall describe as ``the Euronote facility agreement''. Other parties were the Commonwealth Bank of Australia, Credit Suisse, First Boston Limited, which was the Euronote tender panel agent, and 16 banks. This was a complex agreement which provided for an interim loan facility and for a Euronote underwriting agreement of up to US$140m. Upon the implementation of the Euronote facility agreement, the remaining liability under the Schroder Wagg facility was repaid.

Under the agreement, ERA was entitled to signify its desire to issue notes up to a specified face value in US dollars. On the giving of such notice, the issue agent was to notify the panel members thereof. Some or all of the panel members would then tender for the notes, the highest tenders being accepted. On each occasion, the totality of the notes was taken up. The notes were issued for terms of up to 3 months.

The form of each Euronote to be issued was: 

                          ``Note
               ENERGY RESOURCES OF AUSTRALIA
                            LTD

           A company incorporated in the Australian
           Capital Territory in the Commonwealth of
                         Australia

No.
Principal Amount: USD
[Interest Rate:]
Issue Date:           , 19
Maturity Date:            , 19


For value received, Energy Resources of
Australia Ltd (the `Company') promises to
pay to the bearer on the Maturity Date the
Principal Amount of this Note [together with
the interest thereon as provided below] upon
presentation and surrender of this Note to
[        ], as surrender of this Note to
[        ], as the Principal Paying Agent of
the Company, at [      ] or to [      ] as
a Paying Agent of the Company at [        ].

[Interest will accrue on the Principal Amount of this Note from the Issue Date to the Maturity Date only at the Interest Rate (calculated on the actual number of days elapsed on a 360 day year basis).]

Payments in respect of this Note shall, upon surrender and presentation of this Note, be made by transfer to an account with a Bank outside the United States of America.

Payments in respect of this Note will be made without deduction or withholding for or on account of Australian taxes unless such withholding or deduction is required by law. In such event the Company shall pay such additional amounts as will result in the receipt by the holder of this Note of such amount as would have been received by such holder had no such deduction or withholding been required PROVIDED

ATC 4227

THAT no such additional amount shall be payable if the holder of this Note is connected with Australia other than by reason only of the holding or ownership of this Note or if this Note is presented for payment more than 30 days after the Maturity Date except to the extent that the holder of this Note would have been entitled to such additional amount on presenting this Note for payment on such thirtieth day.

Payments will be made subject to applicable laws of the place in which the relevant Paying Agent is located or payment is made.

This Note shall not be valid or obligatory for any purpose until it is authenticated by the Euronote Issue Agent of the Company, being at the date hereof [Credit Suisse First Boston Limited].

The obligations of the Company will be solely as provided in this Note and shall be construed under and subject to the laws of England.

IN WITNESS whereof the Company has caused this Note to be duly signed in facsimile on its behalf.

For and on behalf of

ENERGY RESOURCES OF AUSTRALIA LTD

By:..........................

By:.......................... 

   Certificate of Authentication
   Authenticated for and on behalf of
   [CREDIT SUISSE FIRST BOSTON
   LIMITED]
   as Euronote Issue Agent, by two of its
   authorized signatories

By:..........................

By:..........................

Authorized Signatories

(Without recourse, warranty or liability)"

The evidence before the Court does not suggest that the notes were in fact issued at interest, although the Euronote facility agreement made provision for that to occur if ERA so chose.

When each note matured, the face value to the note holder was paid, principally from the proceeds of a new issue, but sometimes in part from ERA's other US dollar funds, or US dollars purchased or borrowed for the purpose. ERA's US dollar revenue at the time was substantial. Its sales were made in US currency. The Australian dollar equivalent, as set out in the 1987 accounts, was A$234m and, as set out in the 1988 accounts, was A$251m. ERA's banker was the Commonwealth Bank of Australia and ERA maintained an account in US dollars at the Bank's New York branch.

In its income tax returns for the 1987 and 1988 years of income, ERA claimed deductions, calculated in Australian dollars, in respect of the discounts on the Euronotes, namely, the difference between the face values of the notes and the tender prices which were actually received.

In amended assessments, the Commissioner of Taxation accepted that such deductions were allowable. The sums allowed by the Commissioner were calculated to accord with the judgment of the High Court of Australia in
Coles Myer Finance Limited v. FC of T 93 ATC 4214; (1992-1993) 176 CLR 640. The discounts in US currency were necessarily expressed in Australian currency, as s. 20 of the Income Tax Assessment Act 1936 (Cth) requires.

Section 20 of the Act reads inter alia:

``(1) For all the purposes of this Act, income wherever derived and any expenses wherever incurred shall be expressed in terms of Australian currency.

(2) Where an amount of income of a taxpayer is derived during the whole or part of a year of income from the carrying on of a business in a foreign country-

  • (a) that amount of income shall be expressed in Australian currency at a rate equal to the average of the exchange rates applicable from time to time during the whole or that part of that year; and
  • (b) any amount of foreign tax paid in respect of that foreign income shall be expressed in Australian currency at the exchange rate applicable at the time when the tax is paid.

(3) Where an amount of foreign income of a taxpayer is derived during a year of income (not being income to which subsection (2) or (4) applies), that amount of foreign income, and any amount of foreign tax paid in respect of that foreign income, shall be expressed in Australian currency at the exchange rate applicable-

  • (a) where the whole amount of that income is remitted to Australia in that

    ATC 4228

    year - on the day on which it is remitted;
  • (b) where part of the amount of that income is remitted to Australia in that year on the day on which it is remitted; or
  • (c) in any other case - at the end of that year.''

In respect of the 1987 year, only the terms of the present sub-section (1) appeared in s. 20.

The present issue arises from the fact that the exchange rates as between Australian currency and US currency differed between the dates of the issue and the payment of each Euronote. The Commissioner made calculations, of which the following details of 4 notes issued on 21 July 1987 serve as an illustration: 

ISSUE NO: 18
============

------------------------------------------------------------------------------------------
ISSUE   |  TOTAL   |EXCHANGE|  TOTAL     |SUCCESSFUL|  FACE    |MATURITY|EXCHANGE|CURRENCY
DATE    |  FACE    |RATE AT | DISCOUNT   |TENDERERS |  VALUE   |  DATE  | RATE AT|  GAIN
        |  VALUE   | ISSUE  |   ($US)    |          |   OF     |        |MATURITY| (LOSS)
        | OF NOTES |  DATE  |            |          |  NOTES   |        |  DATE  |  ($A)
        |  ($US)   |        |            |          |  ($US)   |        |        |
--------|----------|--------|------------|----------|----------|--------|--------|--------
21.07.87|35,000,000|0.7083  | 616,538.03 |BSFE EBC  |4,000,000 |21.10.87|0.7131  | 332,615
        |          |        |            |AMRO BANK |          |        |        |
        |          |        |            |LTD EBC   |          |        |        |
        |          |        |            |AMRO BANK |          |        |        |
        |          |        |            |LTD EBC   |          |        |        |
        |          |        |            |AMRO BANK |          |        |        |
        |          |        |            |LTD       |          |        |        |
        |          |        |            |          |          |        |        |
------------------------------------------------------------------------------------------

The currency gain of A$332,615 was calculated as follows: US$35m divided by 0.7131 less US$35m divided by 0.7083. The face value of the 4 notes, a total of US$35m, was taken into account both at the date of the issue, 21 July 1987, and on maturity, 21 October 1987. For the purposes of that calculation, the tender prices of the 4 notes and the discounts in US dollars, being the face values of the notes less the tender prices, were irrelevant. With respect to most notes issues, the Commissioner calculated a currency gain, but with some issues, there was a currency loss.

The Commissioner brought to account as ERA's assessable income: A$1,110,859 in respect of the year ended 30 June 1987 and A$11,684,956 in respect of the year ended 30 June 1988. The Commissioner seeks to support the assessment of the alleged overall exchange gains by reference to Division 3B of Part III of the Income Tax Assessment Act 1936 (Cth) (``the Act'') or, alternatively, to s. 25(1) or s. 51(1) of the Act.

Relevant provisions of Division 3B read:

``82U(1) This Division applies in relation to gains and losses only to the extent to which they are of a capital nature.

82V(1) In this Division, unless the contrary intention appears-

...

`commencing day' means 19 February 1986;

...

`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;

...

ATC 4229

82V(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.

...

82Y 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(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.''

I need not set out the well-known provisions of s. 25(1) and s. 51(1) of the Act.

The Commissioner took the view that each Euronote was an eligible contract and that, on the maturity of each Euronote, ERA made a currency exchange gain or loss under that contract for the purposes of ss. 82Y and 82Z.

A contention for ERA, put by Mr Russell Bainton QC with whom Mr D.J. Hammerschlag of counsel appeared, was that there were no relevant currency exchange gains or losses. Mr Bainton submitted that the subject transactions took place entirely in US dollars. The Euronotes were paid with US dollars either from the issue of new Euronotes or, to a limited extent, from US dollars which ERA had obtained from the sale of its products or, to a minor extent, from borrowings in US dollars. Mr Bainton contended that the issue and the payment out of the Euronotes constituted capital transactions representing a replacement of the capital funds which ERA had obtained for the development of the Ranger Mine.

Mr John Durack of counsel, who appeared for the Commissioner, submitted that every contract for the acquisition of foreign currency must be converted into Australian currency and that, when this was done, the Commissioner's calculations showed that ERA had derived exchange gains. He submitted alternatively that the gains and losses constituted assessable income and allowable deductions. Mr Bainton contended in answer that no conversion was required unless there be a relevant gain. He submitted that to issue a Euronote denominated in US dollars at a discount and to pay the face value in US dollars on maturity did not constitute the making of a foreign exchange gain even though the value of the Australian dollar may have varied between the time of issue of the note and the time of its maturity.

A transaction which raises money by means of the issue of a note is different in character from a transaction which raises money by way of a loan. Speaking of commercial bills, which are similar in character to Euronotes, Aickin J., with whom Mason CJ expressed agreement, said in
KD Morris & Sons Pty Ltd (in liq) v Bank of Queensland Ltd (1980) CLC 40-648 at 34,308; (1980) 146 CLR 165 at 193-4:-

``The transactions were of a common commercial kind, taking advantage of the existence of a commercial bill market, in which commercial bills are bought and sold, or, as it is usually described, `discounted'. It is a mistake to treat what was done, as the trial judge did, as if it were the equivalent of a loan of money repayable at the expiration of five years, or in certain events earlier.

In my opinion it is clear that the transaction entered into by the Bank and the Company did not involve the borrowing of money repayable on a contingency, or at all, or anything equivalent in law thereto. This view may not necessarily lead to a different ultimate determination of the issues in the appeal, but it does require a different approach to them.''

When moneys are borrowed, the borrower comes under an obligation to repay the loan. In this sense, the moneys lent do not cease to exist, but are represented by the obligation to repay. Interest payable on the loan is a separate obligation. It follows that, when moneys are borrowed, an exchange gain may be calculated, when it is appropriate to do so, by taking the Australian currency value of the moneys when lent and the Australian currency value of the moneys when repaid. If there is a change in the value of the Australian dollar between the time of the borrowing and the time of repayment, a

ATC 4230

gain or a loss may be calculated in Australian dollar terms. The value of that which was borrowed would be different in Australian dollar terms from the value of that which was paid back. And a further calculation in Australian currency would be made for the purpose of calculating the deduction under s. 51(1) of the Act of the interest payment.

With a note transaction, there are usually only two payments. The first payment is by the purchaser of the note who pays a discounted sum for the debt which the note represents. The second is the amount of the face value of the note which must be paid at the stipulated time. There is no underlying concept of a sum paid which has not ceased to exist. The sum paid on maturity is not a repayment of the sum received on the issue of the note plus interest. It is simply the sum which, by the issue of the note, the issuer agreed to pay. See the discussion by Lord Salmon in
Willingale (Inspector of Taxes) v International Commercial Bank Ltd [1978] AC 834 at 842.

In the case of a loan, any exchange gain resulting from the borrowing and lending of money will ordinarily follow the nature of the transaction. If the borrowing is for capital purposes and not of circulating or working capital, the exchange gain or loss will not be deductible:
Commercial and General Acceptance Limited v FC of T 77 ATC 4375; (1977) 137 CLR 373. On the other hand, if the borrowing is of working or circulating capital, that is to say of funds to be used in the ordinary and regular processes by which the money- making activities of the business are carried on, any exchange gain or loss will be assessable or deductible under ss. 25(1) and 51(1) of the Act:
The Texas Company (Australasia) Limited v FC of T (1940) 5 ATD 298; (1939-1940) 63 CLR 382;
AVCO Financial Services Limited v FC of T 82 ATC 4246; (1981-1982) 150 CLR 510. In either case, an interest payment, being a separate obligation, will be brought to account in Australian currency terms under s. 51(1) of the Act.

In a note issue, the discount or cost is the difference between the price paid for the note and its face value. That cost may, in an appropriate case, be deductible under s. 51(1). The parties are agreed that, in the present case, the discounts were deductible under s. 51(1) of the Act and that they should be brought to account in Australian currency. I would not disagree with that approach, though I would observe, by way of caution, that in Willingale and Coles Myer the exchange gains and losses fell within the rubric of the working or circulating capital test to which I have already referred.

If a discount is an allowable deduction under s. 51(1) of the Act, then the quantum of it must be calculated in Australian dollar terms. One means of doing so is to assess the value of the amount paid on maturity, converted at the exchange rate at the time of payment, and to deduct the amount received on the issue of the note, converted at the exchange rate at that time. See Willingale at 842.

That was not how the discounts were expressed in Australian currency by the Commissioner in the subject assessments. I assume that the Commissioner adopted an average rate such as that of which s. 20(2) speaks. Perhaps the Commissioner was influenced by the principle enunciated in Coles Myer that the discounts should be brought to account on an accounting straight-line basis over the terms of the notes. But the Commissioner was not obliged to take account of exchange rate variations in that way. The particular that was calculated was the cost in Australian currency of obtaining the US dollar funds.

The expression in Australian currency of the cost of obtaining finance by note transactions necessarily involves a calculation which takes account of movements in exchange rates. When this calculation has been completed, there should be no further calculation of exchange gain or loss to be brought to account. It was indeed conceded by Mr Durack during the hearing, that some of the exchange gains and losses which are the subject of these appeals must have been taken into account in the calculation of the deductions under s. 51(1). Calculations were produced which purported to show the extent to which this had occurred; but the calculations received little attention as the s. 51(1) deduction was not in issue.

Counsel put their submissions as if the discount was to be treated as an item separate from the moneys received on the issue of the notes and paid on maturity, separate in the sense that interest is separate. Interest, however, necessarily becomes the subject of a separate computation, for the obligation to pay interest is different from the obligation to repay the capital

ATC 4231

of the loan. In the case of the Euronotes, there was no obligation to pay interest, at least no obligation with which we are presently concerned. The discounts were merely a calculable cost of obtaining the finance which had to be brought to account in Australian currency in accordance with s. 20.

In my opinion, the Commissioner's calculations were in error in that they commenced with the exchange rate of the face value of the notes at the time of their issue. No loan of money having that nominal value was received at that time and there was no obligation to repay a sum received at that time. The obligation was to pay the face value of the notes on their maturity and the relevant exchange rate was the rate of exchange prevailing at the time of payment. There was no warrant to bring to account in Australian dollars the face value of the notes as at the dates of issue, for the amount of each note was not then due. Coles Myer did not suggest the contrary. Coles Myer enunciated the principles upon which the discount, as calculated, should be brought to account.

The Commissioner may have been influenced by s. 82V(2), which uses the terms ``under that contract'' and ``under a contract''. But these provisions do not require that obligations contained in a contract, such as a Euronote, will be valued in Australian currency both at the commencement and at the end of the contract. The provisions relate to other matters such as the ``commencing day'' for Division 3B. At this point, it is convenient to observe that Mr Durack did not rely upon any of the detailed provisions of the Euronote facility agreement, presumably because it was executed before the ``commencing day'', 19 February 1986.

The concepts of ``currency exchange'', ``currency exchange gain'' and ``currency exchange loss'' involve the notion of a conversion from one currency to another. This ordinarily occurs when there is a difference between the ``money of account'' and the ``money of payment''. See Mann on ``The Legal Aspect of Money'', 4th Ed. at 199-210. But the conversion may be more indirect than that. Many Australian businessmen, including farmers and graziers, have borrowed moneys from an Australian bank on terms which require a foreign currency transaction. The results of the foreign currency transaction may ultimately find its way into an obligation as between the businessman and bank which is expressed in Australian dollars. The time at which conversion is required may depend upon the agreement between the parties. On other occasions, a notional conversion may be required because of the requirements of the Act, including the provisions of s. 20.

All the provisions of Division 3B emphasise the requirement that there be a conversion or a need to convert from one currency into another. Section 82V(2)(b) provides that a gain shall be taken to have been made or a loss to have been incurred at the time when it was realised. The concept of realising a gain or realising a loss imports a real gain or loss and not merely an artificial or figured gain or loss.

Mr Durack submitted that every transaction in a foreign currency was required to be converted into Australian dollars in accordance with s. 20 of the Act. However, s. 20 does not so provide. Unless there is a transaction or a series of transactions which should be converted into Australian dollars for the purposes of the Act, no conversion is required by s. 20. A contention similar to that advanced by Mr Durack was rejected in
Pattison (Inspector of Taxes) v. Marine Midland Limited [1984] AC 362. In that case, a taxpayer company issued subordinated unsecured loan stock to two US subsidiaries of the group's parent company, an American bank. The US$15m received was used in making US dollar loans and deposits in the ordinary course of the company's business, without being converted into sterling. The company appealed against assessments of corporation tax on notional profits from exchange gains. It was held that the taxpayer company realised no actual exchange profit since it made no relevant currency conversions. Lord Templeman, with whom Lords Fraser, Keith, Roskill & Brandon agreed, said at 373:-

``But as between the company and the holders of the unsecured loan stock and as between the company and its customers, there was and never could be any profit and loss to the lender or borrower except for interest paid and received. The revenue argument that the company made a capital loss on its unsecured loan stock and an income profit on its customers' borrowing is misconceived. There never was any loss or profit from the lending and borrowing and

ATC 4232

there never was any exchange profit because the company did not make any relevant currency conversions.''

In the Court of Appeal,
Pattison (Inspector of Taxes) v Marine Midland Limited [1983] Ch 205, Dillon LJ said at 210:-

``The issue between the parties arises from the contention of the Crown that as the company is an English company it is constrained to translate all its transactions in foreign currencies, including those that are fully matched and including in particular U.S. dollar transactions which are fully matched into sterling at the end of each accounting period. Thus, as over the relevant periods, sterling depreciated as against the dollar, the dollar loans, repayable in dollars, which the company made to its customers, are to be treated as having become more valuable year by year (although dollar for dollar they remained the same in capital amount) because by the fall in the value of sterling the sterling equivalent of the same number of dollars became greater. Thus it is said that the company made taxable profits on its dollar loans, and its profit and loss accounts should be adjusted to show those profits even though they are not commercial profits.''

At 212, Dillon LJ said:-

``It is a wholly unreal conception, in this day and age, that an English company can only carry on its business in sterling. Of course, an English company must convert into sterling the actual profits of its business activities carried on in other currencies, and where there are actual currency switches the profits or losses occasioned by these actual conversions must be brought into its accounts. But I see nothing to constrain it to translate its foreign currency activities step by step, or year by year, into sterling so as to throw up wholly notional profits by reference to the hypothetical sterling equivalents of assets or liabilities which are in fact never payable in sterling at all and are never expected to be payable in sterling at all.''

At 214, Sir John Donaldson MR said:-

``Prior to 1976, the English courts adopted an attitude which is analogous to that of the revenue in the instant case. Foreign currencies did indeed exist as a fact of life and they had a distressing habit of changing their exchange values, but it was their value and not that of sterling which changed. All transactions must therefore be converted into sterling and, when this was done, justice would prevail. In
Miliangos v. George Frank (Textiles) Ltd [1976] A.C. 443, the House of Lords recognised that this was far too insular a view and that treating sterling as the only true money of account was in some circumstances to work very grave injustice. And so a new rule was introduced which allowed other currencies to be used as the money of account and, where that was done, brought in sterling purely as a money of payment of last resort.''

On the other hand, if there is a currency exchange or currency conversion in fact, or if the provisions of the Act require an exchange calculation to be made, then the calculation must be made and given effect:
Capcount Trading v Evans (Inspector of Taxes) [1993] STC 11.

An example of a situation in which exchange gains or losses may be held to be realised is seen in AVCO Financial Services Ltd v FC of T 79 ATC 4560; (1979) 39 FLR 414. Kearney J., who accepted that the gains were taxable and the losses deductible in that case, described [at ATC 4564; FLR 421] the manner in which the exchange gains and losses were calculated:-

``The taxpayer has not treated any foreign exchange discrepancy at the point of time of roll over as constituting a realisation of any exchange gain or loss. Such realisation has occurred on final discharge of the debt owing to the lender, whether by a cash payment by the taxpayer or by a repayment through an advance by another lender, or by a combination of both.''

His Honour's judgment was upheld in the High Court of Australia, 82 ATC 4246; (1981-1982) 150 CLR 510. At ATC 4252; CLR 519, Mason, Aickin and Wilson JJ. described the gains and losses in this way:-

``These gains and losses were realized upon repayment of foreign currency borrowings by the taxpayer.''

This approach of examining the situation at the final payment out of a loan and to ignore roll- overs is consistent with the provisions of Division 3B, particularly s. 82W.

ATC 4233

There are cases in which it has been held, on the particular facts, that transactions in a foreign currency had no relevant effect for taxation purposes. Pattison (Inspector of Taxes) v Marine Midland Limited is such a case. In
Caltex v FC of T (1960) 12 ATD 170; (1959-1960) 106 CLR 205, it was held that no exchange loss or outgoing had been incurred for the purposes of s. 51(1) of the Act for the appellant had not discharged its US dollar indebtedness, but had merely substituted one creditor for another, and had not suffered any loss in Australian currency. At ATD 177; CLR 227-8, Fullagar J. said:-

``But the question whether an exchange loss arose from it cannot depend on the form which the transaction took. That question must depend on the substantial effect of what was done on the financial position of the company, and the essential facts are that the company's American indebtedness was not discharged but remained unchanged, and the real financial effect on the company of exchange variations was not, in respect of the goods remaining to be paid for, definitively fixed and ascertained by payment and as at the date of payment.''

Mr Bainton relied upon cases such as Caltex. He submitted that ERA made sales in US currency and did not encounter the need to convert. He pointed to the fact that the original loan made under the Schroder Wagg agreement was a loan in US dollars and that the Euronote facility was designed to pay out that loan and provided for the obtaining of finance in US dollars. ERA's indebtedness, so far as the Euronote transactions were concerned, was not expressed in Australian currency. As ERA's sales were made in US currency and the Commonwealth Bank's branch in New York conducted transactions with ERA in US dollars, conversion to Australian dollars did not occur either directly or indirectly.

I reject the broadest of Mr Bainton's submissions as being inconsistent with cases such as AVCO and Capcount. The facts of the present case were not special as were those of Marine Midland and Caltex.

Nevertheless, I agree with Mr Bainton that there was no occasion to calculate in Australian currency the face value of the notes as at the dates of their issue. Each note provided for only one payment, and that payment was made on maturity. The date of maturity was the relevant date on which to calculate the value in Australian currency of the payment then made. But the exchange rate as at that date did not relevantly vary. There was no exchange gain or loss.

The present case must be contrasted with that of a loan under which a sum borrowed on one day must be repaid on another. Similarly, if a note is given as payment for stock in trade which is received, any variations in exchange rates between the date of purchase and the date of payment become relevant.
International Nickel Australia Limited v FC of T 77 ATC 4383; (1976-1977) 137 CLR 347. But in the present case there was no such underlying transaction.

In my opinion, ERA's transactions did not involve a currency exchange, either direct or indirect, nor was conversion to Australian currency in the manner undertaken by the Commissioner required by the Act. The exchange gains and losses as calculated by the Commissioner did not exist and ERA did not realise or incur them. The relevant calculation to be made was that of the value in Australian currency of the tender prices received and of the payments made under the notes. The difference between these amounts, being the cost in Australian currency terms of obtaining the US dollar finance, was deductible under s. 51(1) of the Act. Division 3B is not concerned with such a matter but only with gains and losses of a capital nature.

Mr Durack sought to bring the assessed gains and losses to account under s. 25(1) and 51(1) of the Act. This contention must be rejected for the reasons I have already given. Moreover, very little evidence went to this aspect of the matter. Mr Durack relied principally upon the regularity of the transactions. However, such evidence as there is supports the view that the Euronote transactions were of a capital nature, and did not concern working or circulating capital. The Euronote facility replaced the Schroder Wagg finance facility, the funds from which had been used in the development of the Ranger Mine and which therefore had a capital favour. It would be inconsistent with the Commissioner's assessments to treat the transactions as being of a revenue nature because of their regularity. The Commissioner has separately calculated the discounts as a cost of capital borrowings.

ATC 4234

I am therefore of the view that the sums of A$1,110,859 and A$11,684,956, which were included in ERA's taxable assessable incomes for the income years ended 30 June 1987 and 30 June 1988 income were incorrectly included, that the appeals against the objection decisions should be allowed and that the matter should be remitted to the Commissioner with the direction that the assessments be further amended accordingly. The Commissioner should pay the costs of the proceedings.

 

Disclaimer and notice of copyright applicable to materials provided by CCH Australia Limited

CCH Australia Limited ("CCH") believes that all information which it has provided in this site is accurate and reliable, but gives no warranty of accuracy or reliability of such information to the reader or any third party. The information provided by CCH is not legal or professional advice. To the extent permitted by law, no responsibility for damages or loss arising in any way out of or in connection with or incidental to any errors or omissions in any information provided is accepted by CCH or by persons involved in the preparation and provision of the information, whether arising from negligence or otherwise, from the use of or results obtained from information supplied by CCH.

The information provided by CCH includes history notes and other value-added features which are subject to CCH copyright. No CCH material may be copied, reproduced, republished, uploaded, posted, transmitted, or distributed in any way, except that you may download one copy for your personal use only, provided you keep intact all copyright and other proprietary notices. In particular, the reproduction of any part of the information for sale or incorporation in any product intended for sale is prohibited without CCH's prior consent.