UNILEVER AUSTRALIA SECURITIES LIMITED v FC of TJudges:
Federal Court of Australia
This is a reference pursuant to the then s. 187(b) of the Income Tax Assessment Act 1936 (``the Act'') of the decision by the Commissioner of Taxation to disallow the objection by Unilever Australia Securities Limited (``UAS'') to an assessment of income tax in respect of the year of income ended 30 June 1987. UAS claims that the assessment for that year should be reduced, varied or amended by excluding from its assessable income the amount of $1,083,294.00 described in the adjustment sheet accompanying the Notice of Assessment as ``surplus on assumption of liability included in assessable income''.
The central issue concerns the proper tax treatment of an accounting surplus involving liability pursuant to a debenture defeasance transaction. In very broad summary, at 31 December 1986, UAS had a liability totalling $7.385m in respect of 7.75% debentures which were repayable on 30 June 1987, the principal being $4,310,000.00 and 10.55% debentures repayable on 31 March 1989 when the principal to be repaid was $3,075,000.00, as well as interest on those debentures.
In January 1987, UAS agreed to pay to an arm's length third party, the Local Government Finance Authority of South Australia (LGFA) the sum of $6,301,706.00 in return for LGFA assuming the principal liability to repay the principal sums.
The Commissioner assessed as income of the company in the year the defeasance transactions were made the difference between the total debenture principal liability and the amount paid to LGFA. The Commissioner contends that the $1,083,294.00 is assessable under s. 25(1) of the Act as income in the ordinary sense, or under s. 25A as profit arising from the carrying out of a profit-making scheme or, in the further alternative, under Part IIIA (s. 160M(3)) as a capital gain on the disposal of an asset.
It is to be noted that the amount which the Commissioner seeks to subject to income tax, namely, $1,083,294.00, represents the difference between the face value of the principal secured by the debentures in respect of which LGFA assumed a primary obligation to pay on the respective maturity dates (being the amounts originally borrowed, namely,
ATC 4390$7,385,000.00) and the sum paid by the company to LGFA as consideration for that assumption, namely, the amount of $6,301,706.00. In my opinion, that calculation does not take into account the cost to UAS of the defeasance of its interest obligations under the debentures, the interest it had to pay over and above that cost, nor the legal and banking costs incurred in effecting the defeasance arrangements.
UAS contends that it derived no income as a result of the defeasance arrangements, there being no profit or gain as a consequence of those arrangements, and further that there was no scheme of profit making in respect of the defeasance transaction. Alternatively, if there was any profit or gain, it was on capital account either because any profit or gain did not arise in the course of the company's activities as a finance company given that, by the time the defeasance arrangements were entered into, those activities had ceased; or, if those activities had not ceased, the profit or gain did not arise as an ordinary incident of such activities but constituted a ``one-off extraordinary transaction''. It was further contended on behalf of UAS that any profit or gain for UAS was not realised until LGFA performed its obligations under the liability assumption agreement. It was further contended on behalf of UAS that any profit or gain did not come within s. 160M of the Act.
It is necessary to set out the facts involved in the present application in a little detail.
UAS was incorporated on 22 May 1947 and is a wholly owned subsidiary of Unilever Australia Ltd (``UAL''), which is the principal operating company of the Unilever Australia group of companies. UAL, in turn, is a wholly owned subsidiary of Unilever (Australia) Holdings Pty Limited, which, in turn, is a wholly owned subsidiary of Unilever Plc of the United Kingdom.
Until 1983 UAS was the financing vehicle for Unilever Australia Pty Limited, as UAL was constituted prior to its conversion into a public company on 15 March 1983. UAS also carried on the business of providing loan funds to other companies within the Unilever Australia group. Up until 1986, UAS utilised as its principal sources of external funding the issue of debenture stock and the proceeds of trading in the short term money market. According to the balance sheet of UAS, by 31 December 1986 UAS's sole asset, apart from ``Investments'' of $22,194.00 and a ``Future Income Tax Benefit'' of $23,243.00 was a debt owing to it by UAL in the sum of $7,779,716.00. Apart from a small amount of other liabilities totalling $7,250.00, its liabilities were those represented by the 7.75% debentures repayable on 30 June 1987 and those represented by the 10.55% debentures repayable on 31 March 1989. The former were listed as current liabilities, because as at 31 December 1986, the liability represented by 7.75% debenture stock was due for repayment within twelve months of that date. The latter was listed as non-current liabilities.
Under a trust deed dated 24 April 1967 (``the trust deed'') between UAS, National Mutual Life Nominees Limited as Trustee and twelve other Unilever group companies acting as guarantors, a series of debenture stocks were issued. The trust deed provided for constraints on the ratio of liabilities to assets of both UAS and the Unilever group, a floating charge over UAS assets, joint and several guarantees of UAS's obligations by the twelve other group companies, the provision of information and reports to the Trustee by UAS and various rights of the Trustee in respect of defaults by UAS.
The liability in respect of the 7.75% debentures repayable on 30 June 1987 was incurred pursuant to a resolution of the Board of UAS on 24 April 1967. The moneys raised by that debenture issue were borrowed for a twenty year period. The liability in respect of the 10.55% debentures, repayable on 31 March 1989, was incurred pursuant to resolution of the Board of UAS on 7 March 1979. The moneys raised by that debenture issue were borrowed for a ten year period. The total of the liabilities under these two debenture issues was the total principal sum of $7,385,000.00 plus interest. It is clear that the defeasance arrangements were not in contemplation at the time of the original borrowings, and form no part of any scheme dating from then: cf
FC of T v. The Myer Emporium Ltd 87 ATC 4363; (1986-1987) 163 CLR 199.
By 1983 the Unilever Australia group was finding difficulties in raising finance. In 1983 UAL became a public company and from that time UAL was used as the vehicle for raising finance for the group. UAS ceased trading on the short term money market in April 1983 and from that time its activities were effectively
ATC 4391confined to the maintenance of existing loans which the company had made to UAL in earlier years. In mid-1986, UAS still faced the administration costs, including reporting requirements, relating to the debentures and was meeting problems with respect to the financial ratio constraints imposed by clause 7 of the trust deed, particularly the 60% ratio of adjusted liabilities to adjusted tangible assets. In December 1986, UAS had to obtain a waiver from the Trustee in relation to the liabilities to assets ratio conditions. By the end of 1986, UAS had determined to remove the debenture liability from its balance sheet and, accordingly, in January 1987 entered into the defeasance arrangements. I am satisfied that the defeasance arrangements were entered into for the purpose of securing relief from the onerous reporting conditions and financial ratio constraints imposed by the trust deed.
The proposal was that UAS would take no further part as the financing vehicle for UAL and the Unilever group of companies. Borrowing would continue to be conducted principally through UAL and the Australian group would seek to establish a more cost- effective financial structure.
By a series of related documented transactions carried out in or about January 1987, UAS entered into arrangements by way of ``defeasance'' of certain of its obligations contained in the trust deed and by way of liability assumption. The term ``defeasance'' is ordinarily used to refer to a condition relating to a deed, but contained in a separate instrument, on which being performed the deed is made void. The term is not strictly apt to describe the arrangements of January 1987, which did not defeat or bring to an end the legal liability of UAS to the debenture holders. The arrangements were effected by several agreements as follows:
Liability assumption agreement
This agreement was made between UAS, the Trustee and LGFA. In consideration of the payment by UAS to LGFA of $6,301,706.00, LGFA agreed to meet UAS's obligations under the trust deed to redeem, make payment, or otherwise satisfy the principal amounts (and premium, if any, but excluding interest) payable to debenture holders, indemnify UAS in respect of payments of such amounts, form and observe the covenants on the part of UAS under the trust deed relating directly or indirectly to the payment of such amounts from time to time payable (cl. 4(a)). UAS was still liable to pay interest on the debentures. The liability of LGFA under the liability assumption agreement was that of principal obligor (cl. 5).
The agreement provided that UAS would not issue any further debenture stock under or pursuant to the trust deed (cl. 7(e)); UAS would continue to observe and perform the terms of the trust deed and duly and punctually pay interest due and payable on debenture stock (cl. 7(h)); LGFA would not be liable to the Trustee or debenture stockholders for payment of interest or any other obligation of UAS except to settle (cl. 7(i)); the Trustee should have primary recourse to LGFA in satisfaction of the amounts of debenture stock issued by UAS under the trust deed, and was required to accept due and punctual payment by LGFA of such amounts in satisfaction and extinguishment of UAS's obligation to make such payments pursuant to the trust deed (cl. 9(a)); and that nothing contained in the agreement should abrogate, prejudice, affect, or otherwise limit the rights or duties, powers or obligations of the Trustee under the trust deed and, in particular, nothing should limit the Trustee's powers under the trust deed (cl. 9(b)). Clause 4(a) dealing with the Assumption of the Principal Money Obligations concluded:
``AND nothing in this Agreement shall require [LGFA] to make any payments whatsoever to [UAS] in connection with the assumption or payment by LGFA of the Principal Money obligations.''
Deed of charge
This deed was made between UAS, the Trustee and LGFA. LGFA issued UAS with various promissory notes (called ``Zero Coupon Securities''). These coupons were charged by UAS in favour of the Trustee as security for payment by UAS of interest on the debentures. The Trustee could sell, assign or dispose of the securities where UAS failed to meet the obligations secured.
Paying agent agreement
This was made between LGFA and Bankers Trust Australia Limited (``BT''). Under this agreement, BT was appointed as LGFA's agent to make the payments to debenture holders once LGFA had put BT in funds.
The principal compensation agreement
This agreement was made between UAL, the Trustee, and LGFA. In certain circumstances of default by UAS, the Trustee would be required to give notice to UAL, BT and LGFA. UAL would then be required within one hour of notice to deposit with LGFA an amount equal to the amounts due to debenture holders, this deposit to be interest free and to be paid in accordance with the liability assumption agreement.
Deed of 9 January 1987
A deed made between BT and LGFA providing that if UAL failed to deposit the cash as required by the principal compensation agreement, BT would make the deposit.
Deed of amendment
This deed was made between UAS, the Trustee and the other companies in the Unilever group who were guarantors under the trust deed. The Trustee released the Group guarantors from their obligations under the trust deed and discharged the relevant securities. The Trustee released UAS from a charge under the trust deed. Several provisions in the trust deed were deleted, including definitions relating to UAS and group assets and liabilities. It was agreed that no debenture stock would be issued after 9 January 1987 and a new clause replaced the former provision relating to moneys which were secured becoming due and payable where there was default by UAS on payment of interest or principal amounts.
The transactions contemplated by these arrangements were completed. The amount of $6,301,706.00 paid by UAS to LGFA came from an increase in the capital of UAS from 150,000.00 to 3,750,000 shares of $2.00 each. The newly issued shares in UAS were subscribed for by UAL. The various defeasance transactions were completed. LGFA paid the principal amounts to debenture holders. UAS paid interest amounts when due, these amounts being matched by receipts from redemption of the Zero Coupon Securities issued by LGFA. As UAS made the required interest payments, the Trustee released the appropriate securities permitting redemption by UAS to offset the interest payments made.
UAS then ceased to carry on any active business. Later, UAS was used by the Unilever group to hold shares in Bushells Holdings Limited as the offeror company in the Unilever group to make a public offer for the balance of shares not held by the group in Bushells Holdings Limited. UAS continues to hold these shares, and has shares in no other company.
In its tax return for the year ended 30 June 1987, UAS claimed that the amount of $1,083,294.00 (``the assumption gain''), being the difference between the amount of the principal moneys owed to the debenture stockholders ($7,385,000.00) and the consideration paid to LGFA in relation to the assumption of liability ($6,301,706.00) was not assessable income. By a notice of assessment dated 25 March 1988, the Commissioner assessed this amount as income derived in the 1987 income year.
It is accepted that in certain circumstances a reduction in the amount of a liability can give rise to a profit or gain for accounting purposes. And further, that in certain circumstances the profit or gain will be assessable income. Thus, in
International Nickel Australia Ltd v FC of T 77 ATC 4383; (1976-1977) 137 CLR 347, the taxpayer carried on business as an importer of nickel products from England for sale in Australia, the price of which was payable in sterling. When sterling was devalued in 1967, the amount payable in respect of goods delivered was reduced in terms of Australian dollars. The High Court concluded that the taxpayers net exchange gain as a result of the devaluation was part of its assessable income within s. 25(1) of the Act. Mason J, in respect of an argument on behalf of the taxpayer that proper accounting or bookkeeping practice would require the establishment of a special capital account or reserve into which losses or gains on exchange variations would be carried, removing them from the sphere of revenue and stamping them with the character of windfall losses or gains, said at ATC 4394-4395; CLR 367:
``That there is something to be said for this view I would concede, but to my mind it more accords with the legal conception of income and with sound book-keeping practice to treat gains and losses arising from fluctuations in the exchange rate as revenue items, at least when the gains and losses arise from liabilities for the payment of trading stock purchases in a continuing business, exchange fluctuations being a common hazard of international trade
ATC 4393frequently and ordinarily encountered by businesses engaged in that trade.''
In the International Nickel Case, Mason J, at ATC 4395; CLR 368 noted that the liability in that case was reduced ``by supervening circumstances ordinarily encountered in trade''. This he contrasted with the situation where the reduction or elimination was in consequence of ``an unusual transaction''. Such a case was
British Mexican Petroleum Co. Ltd v. Inland Revenue Commrs (1932) 16 TC 570, where a liability was extinguished by a release on the part of the creditor.
In the present case, UAS was not released from its liability under the trust deed; the Trustee merely agreed to have primary recourse to LGFA to satisfy that liability, but there was no reduction or extinguishment of the company's legal liability. It appears that accounting standards apparently permitted the liability to be removed from UAS's balance sheet as if the ``defeasance arrangements'' did work a novation of UAS's liability. The position as to UAS's liability, nonetheless, is that the defeasance arrangements did not alter UAS's ultimate liability to the debenture holders and that that liability remained on foot at least until it was paid out by LGFA, as to $4.31m on 30 June 1987 and as to $3.075m on 31 March 1989.
The 1987 income tax return for UAS contains a document as Schedule 2 headed ``Profit & Loss Account'' which shows as an ordinary item ``Surplus on Assumption of Liability $1,083,294.00''. This item is highlighted in the Commissioner's submission as indicating that in a business and accounting sense, that amount was treated as income. Schedule C to the same return is headed ``Statement of Taxable Income''. It adds to the net profit before tax as arrived at from the trading profit and loss account, by adding the Division 16E Income, Loss on Sale of Investments and provision for various fees and interest, and deducting from that figure items including Trustee's fees, expenses of borrowing, and the item ``Surplus on Assumption of Liability'', again in the amount of $1,083,294.00.
Arthur Murray (N.S.W.) Pty Ltd v. FC of T (1965) 14 ATD 98; (1965) 114 CLR 314, Barwick CJ, Kitto and Taylor JJ said at ATD 99-100; CLR 318:
``As Dixon, J observed in
Carden's Case (1938) 63 C.L.R. 108, at p. 155; 5 A.T.D. 98, at p. 132: `Speaking generally, in the assessment of income the object is to discover what gains have during the period of account come home to the taxpayer in a realized or immediately realizable form'. The word `gains'... refers to amounts which have not only been received but have `come home' to the taxpayer; and that must surely involve, if the word `income' is to convey the notion it expresses in the practical affairs of business life, not only that the amounts received are unaffected by legal restrictions, as by reason of a trust or charge in favour of the payer - not only that they have been received beneficially - but that the situation has been reached in which they may properly be counted as gains completely made, so that there is neither legal nor business unsoundness in regarding them without qualification as income derived.
The ultimate inquiry in either kind of case, of course, must be whether that which has taken place, be it the earning or the receipt, is enough by itself to satisfy the general understanding among practical business people of what constitutes a derivation of income.... A judicial decision as to whether an amount received but not yet earned or an amount earned but not yet received is income must depend basically upon the judicial understanding of the meaning which the word conveys to those whose concern it is to observe the distinctions it implies. What ultimately matters is the concept; book-keeping methods are but evidence of the concept.''
The liability assumption agreement did not effect a novation of the liability. Looking at the transactions in a practical rather than a legal way, UAS arranged for LGFA to undertake the payments of principal required to be made to the debenture holders on 30 June 1987 and on 31 March 1989. LGFA agreed to make those payments of principal totalling $7.385m when payment was required to be made, in exchange for the present payment to it of $6,301,706.00. The dealings between UAS and LGFA were between independent parties at arm's length and the sum paid by UAS to LGFA represented the present value as at the date of the payment of the obligations assumed by LGFA, which of
ATC 4394course required their performance some time in the future. In my opinion, the value to UAS of the assumption by LGFA of the primary liability to the debenture holders equalled the amount of $6,301,706.00 paid by UAS to LGFA. In my opinion, there was no profit or gain that came home to UAS as a result of the ``defeasance'' agreements.
Section 25(1) of the Act relevantly provides that the assessable income of a taxpayer shall include, where the taxpayer is a resident, the gross income derived directly or indirectly from all sources whether in or out of Australia. Section 25A(1) provides:
``The assessable income of a taxpayer shall include profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making undertaking or scheme.''
The submissions by Mr B. Shaw, Q.C., senior counsel for the Commissioner, in respect of ss. 25 and 25A were beguilingly simple. Lord Green M.R. in
Lomax (Inspector of Taxes) v. Peter Dixon & Son Ltd  1 K.B. 671 said at 675:
``If A. lends B. 100 1. on the terms that B. will pay him 110 1. at the expiration of two years, interpretation of the contract tells us that B.'s obligation is to make this payment. It tells us nothing more. The contract does not explain the nature of the 10 1., yet who could doubt that the 10 1. represented interest for the two years? The justification for reaching this conclusion may well be that, as the transaction is obviously a commercial one, the lender must be presumed to have acted on ordinary commercial lines and to have stipulated for interest on his money. In the case supposed, the 10 1., if regarded as interest, is obviously interest at a reasonable commercial rate, a circumstance which helps to stamp it as interest.''
Mr Shaw submitted:
``If I have got $5 million and I outlay it on terms that in a year there will be returned to me $5,500,000, in other words, the same sum as you would get if you called it interest, it will remain interest, although it has not been called that...''
Where here the defeasance arrangements were with the Local Government Finance Authority of South Australia, there was no real question of capital risk so that there was no question of a premium or a discount. Mr Shaw then submitted:
``If I had $6,301,706, and I said to somebody, `Well, if I pay you this money now will you pay me in six months $4-million, and in another 18 months $3-odd million', together making up a total of $7,385,000, there would be little difficulty, it is submitted, in saying that, that having been agreed to, I had derived income. I had made profit, and the profit and income were taxable.''
``... all that has happened here is that instead of saying, `here I am going to pay you $6,301,706, in such a period you pay that back to me with that amount of, what I shall call, interest; do not pay it back to me, you pay one of my debts which totals that amount.' And the suggestion is that somehow or other by saying you will discharge my debt, instead of, you will pay direct to me and I will discharge my debt, the amount of the difference is not assessable.... What has happened is, Unilever Australia has an asset; $6 million odd and it used it to make a profit and it employed the whole lot to pay off one of its debts.''
The ``scheme'' relied on for the argument under s. 25A(1) is the scheme Mr Shaw described:
``... namely, that you had $6 million and you laid it out to get $7 million in effect.''
Beguiling though the formulation of the Commissioners case may be, I do not accept it.
If, as the Commissioner contends, UAS makes a profit of $1,083,294.00 when it executes the legal assumption agreement, because it pays $6,301,706.00 in consideration of LGFA undertaking to discharge liabilities of UAS to its debenture holders totalling $7,385,000.00, is it not also the case that when LGFA undertakes to discharge liabilities of $7,385,000.00 in exchange for $6,301,706.00, it then incurs a loss of $1,083,294.00? In my opinion, that cannot be.
In my view, the conclusion I have reached is consistent with and supported by the reasoning of the Full High Court in Myer, particularly ATC pages 4370-4371; CLR pages 216-217.
ATC 4395All of that is relevant and important. As part of that passage makes plain, the accounting basis that has been employed in calculating profits and losses for the purposes of the Act is historical cost, not economic equivalence.
As Hill J noted in
SP Investments Pty Ltd v. FC of T 93 ATC 4170 at 4177:
``The property which generated the profit or gain in Myer was the loan agreement between the taxpayer and Myer Finance Pty Ltd. It was that loan agreement which contained the covenant to pay interest. That loan agreement, which clearly came into being in the course of a business operation or commercial transaction, was entered into for the specific purpose of the assignment of the interest to Citicorp. So much was, on the facts of Myer, obvious because on the day the loan was made, the taxpayer assigned to Citicorp `absolutely the moneys due or to become due as the interest payment and interest thereon... pursuant to' the loan agreement.''
As the Full High Court in Myer made plain at ATC 4370; CLR 216, the two transactions were interdependent and Myer would not have entered into the loan agreement unless it knew that Citicorp would shortly thereafter take an assignment of the moneys due or to become due for a sum approximating the amount payable in consideration of the assignment. Their Honours said at ATC 4370; CLR 216:
``If the two transactions, namely the loan agreement and the assignment, are considered as separate and independent transactions, Myer's argument that no relevant profit arose from the assignment has compelling force. The consideration payable for the assignment reflected the true value of the chose in action which Myer assigned. But once the two transactions are seen as integral elements in one profit- making scheme, it is apparent that Myer made a relevant profit, that profit being the amount payable on the assignment.''
In this case, there is only one relevant transaction based on the liability assumption agreement.
I do not accept the submission on behalf of the Commissioner that because the amount paid by UAS to LGFA to secure its agreement to pay the principal was less than the amount UAS was bound to pay to the debenture holders, UAS made a profit of $1,083,294.00. The fact that the present value of a future obligation is less than the amount of that future obligation is hardly surprising and accords with practical business reality. It does not in my opinion constitute a derivation of income.
The conclusion I have reached is inconsistent with Income Tax ruling IT2495 dated 15 September 1988. That ruling, so far as timing is concerned, is inconsistent with the primary submission of the Commissioner in the present case in that it says in paragraph 6 of the ruling:
``The gain is in the nature of discount income realised by the borrower when the borrower's liability to repay the loan is discharged.''
If, contrary to my view, a profit or gain did come home to the taxpayer as a result of the defeasance arrangements, in my opinion, that did not occur until the liability to the debenture holders was discharged by payment by LGFA as to the 7.75% debentures on 30 June 1987 and as to the 10.55% debentures on 31 March 1989.
Further, on ordinary principles the costs or outlays incurred or expended in making that profit or gain are properly to be taken into account in determining the taxable income of UAS. Should it be necessary to do so, I am confident that the question of quantum can be resolved by the parties.
In my view, the time when a profit or loss will be struck in relation to liability is the occasion when the liability is discharged. In
Caltex v. FC of T (1960) 12 ATD 170; (1959-1960) 106 CLR 205, there had been an attempted discharge of a debt in foreign currency using moneys borrowed in the same currency from a related company. As Parsons noted in his work ``Income Taxation in Australia'' (1985) Law Book Company at 749, the majority of the High Court in that case took a view of the matter that looked to ``reality'' and ``substance'', in holding that there had not been a discharge so as to generate a deductible exchange loss.
If, contrary to my view, there arose profit or gain, was it on revenue or capital account? Contrary to the submissions on behalf of the taxpayer, in my view the liabilities the subject of the defeasance arrangements were on revenue account. UAS was a finance company, and notwithstanding there had been a decision
ATC 4396made that it would not undertake new financing activities in future, the defeasance arrangements were part of the steps taken in connection with its business as a finance company. After the defeasance arrangements were entered into, UAS remained obliged to repay the principal of the debentures, but also was obliged to make the payments of interest falling due from time to time, which it did in 1987, 1988 and 1989. Those payments and the cost of the defeasance arrangements it deducted for tax purposes from its income, which was a course of conduct consistent with the continuation of its business activities after the defeasance arrangements were in place. The fact that UAS was winding down its borrowing activities did not mean that the servicing of such borrowings as remained, including making arrangements for the payment to debenture holders, were not part of its ordinary business.
It was submitted on behalf of the Commissioner that the present case was one parallel to
Mutual Acceptance Limited v. FC of T 84 ATC 4831. There the taxpayer had issued debenture stock to gain funds for use in carrying on its business as a finance company. In 1975, four of its debenture holders requested the company redeem the debentures prior to maturity so they could reinvest their funds elsewhere at a higher rate of interest. The taxpayer redeemed the debentures early at a discounted price, although it was under no obligation to do so, and the amount repaid to the debenture holders was less than the face value of the debentures. The Commissioner treated the gain as assessable income, and the taxpayer appealed, claiming that it was a capital receipt.
The issues in that case do not seem to me to be the same as in the present. In that case, the taxpayer's taxation return for 1975 showed a sum of $115,251.00 as having been ``gained'' in the sense that the amount paid out to the debenture holders was less than the face value of the debentures. This sum was described by the taxpayer in its return as ``capital profit as per detailed profit and loss account''. The Commissioner treated the sum as ``profit considered to be assessable income - redemptions of debentures''. At 4832, Enderby J posed the question for his determination in the following way:
``It was this treatment of the $115,251 as `profit' and as assessable income that was objected to and which is the subject of this appeal. The basic question is - was the $115,251 in the nature of a capital gain or a gain in the nature of income.''
At 4834, Enderby J said that counsel who appeared for the taxpayer accepted that a gain or profit had occurred. The question in that case was essentially one of characterisation. That is not the case in the present matter, where the primary question is whether as a result of the defeasance arrangements, UAS derived income.
If there was a profit or gain, contrary to my view, that arose in the course of the company's activities as a finance company, in my view it is not correct to characterise the result as a ``one- off extraordinary transaction'', being one designed to put an end to the company's obligations under the trust deed, so as properly to be characterised as an ``unusual'' transaction in the sense referred to by Mason J in International Nickel (supra), with the consequence that the profit or gain would be on capital account.
As for the first limb of s. 25A, there is nothing in the evidence to suggest that the liability to the debenture holders was brought into existence for the purpose of selling it or part of it at some later time. There was, in my view, no profit-making purpose either at the time of the entry into the original loans or at the time of the defeasance arrangements. As to the second limb of s. 25A, for the reasons I have already given, I do not regard the defeasance arrangements into which UAS entered as the carrying on or carrying out of any profit- making undertaking or scheme.
Commercial & General Acceptance Ltd v. FC of T 77 ATC 4375; (1977) 137 CLR 373, the taxpayer, which had liquidity problems, borrowed money in the United States of America, the main purpose of the borrowing being to strengthen the company's financial standing. The terms of the loan precluded the taxpayer from using 65% of the borrowed money in the ordinary course of its business. After making the loan, the Australian dollar appreciated against the United States dollar and the amount required to repay the loan was accordingly reduced. It was held that because the principal purpose of the borrowing had been to strengthen the company's business entity, structure or organisation, the foreign exchange gain was not income within s. 25 of the Act. At
ATC 4397ATC 4382; CLR 385, Jacobs J said of the exchange profit:
``It is certainly not a profit arising from the carrying out of a profit making scheme under the second limb of sec. 26(a). There was no scheme of profit making in respect of the relevant loan.''
I turn now to the question of capital gain pursuant to s. 160M of the Act.
In the context of the formulation of the Commissioner's case for the purpose of illustrating the Commissioner's primary contentions under ss. 25 and 25A, it was suggested that what occurred in 1987 was analogous to a loan by UAS to LGFA on terms that at some time in the future LGFA would discharge obligations then falling to be met by UAS, and that the difference in the amount paid to LGFA and the liabilities ultimately discharged was analogous to interest that might be earned on the moneys lent to LGFA. There is a passage in the judgment of the Full High Court in Myer (supra) which is apposite. Their Honours said at ATC 4371; CLR 217:
``The making of a loan does not immediately produce a capital gain equal to the present value of the interest to be paid. The right to interest is not a capital asset which is progressively transformed into income as and when the interest is received.''
Section 160M(1) of the Act provides:
``Subject to this Part, where a change has occurred in the ownership of an asset, the change shall be deemed, for the purposes of this Part, to have effected a disposal of the asset by the person who owned it immediately before the change and an acquisition of the asset by the person who owned it immediately after the change.''
Section 160M(3) relevantly provides:
``... a change shall be taken to have occurred in the ownership of an asset by-
- (b) in the case of an asset being a debt, a chose in action or any other right, or an interest or right in or over property - the... discharge,... at law or in equity, of the asset;''
The Commissioner's further and better particulars of his amended statement of facts, contentions and issues dated 15 July 1992, identifies the rights alleged to have been acquired under the liability assumption agreement as being the rights constituted by the agreement of LGFA to assume the principal money obligations on all issued debenture stock maturing after the date of the liability assumption agreement. It is said that those rights were acquired on the date on which the liability assumption agreement was made, namely, 9 January 1987. The consideration for the acquisition of such rights was $6,301,706.00, and that the acts of disposal was the action of LGFA performing its obligations under the liability assumption agreement. It was particularised that the time of that disposal was, alternatively, the time of the making of the liability assumption agreement or the time of the performance of LGFA of its obligations under that agreement. It was said the amount of consideration received in respect of the alleged disposal was the amount of the principal money obligations, namely, $7,385,000.00. The alternative calculations of the capital gain contended for by the Commissioner are included in those particulars.
In my opinion, pursuant to the liability assumption agreement, UAS acquired the right to compel LGFA to perform its obligations under cl. 4(a) of that agreement.
Coulls v. Bagot's Executor and Trustee Co. Ltd & Ors (1966-1967) 119 CLR 460, Windeyer J said at 503:
``It seems to me that contracts to pay money or transfer property to a third person are always, or at all events very often, contracts for breach of which damages would be an inadequate remedy - all the more so if it be right (I do not think it is) that damages recoverable by the promisee are only nominal. Nominal or substantial, the question seems to be the same, for when specific relief is given in lieu of damages it is because the remedy, damages, cannot satisfy the demands of justice.
I see no reason why specific performance should not be had in such cases...''
I do not think that UAS's right to sue in the event of breach on the part of LGFA is limited to a claim for unliquidated damages. The right to compel LGFA to perform its obligations is a right which can be assigned pursuant to cl. 1(a) of the agreement only with the consent of all
ATC 4398the parties to the liability assumption agreement. It seems to me the right is properly to be regarded as a proprietary right. The fact that it is assignable only with the consent of all other parties does not mean that it is not a right ``capable in its nature'' of assumption by third parties.
R v. Toohey & Anor; Ex parte Meneling Station Pty Ltd & Ors (1982) 158 CLR 327, Mason J said at 342-3:
``Assignability is not in all circumstances an essential characteristic of a right of property. By statute some forms of property are expressed to be inalienable. Nonetheless, it is generally correct to say, as Lord Wilberforce said, that a proprietary right must be `capable in its nature of assumption by third parties'.''
It seems to me that UAS, pursuant to the agreement, acquired a proprietary right and therefore an asset for the purposes of Part IIIA of the Act. However, in my opinion, that right was not disposed of by LGFA's performance of its obligations under that agreement. It seems impossible to contend, as the primary formulation of the Commissioner on capital gain seeks to do, that any disposal occurred at the time of the making of the liability assumption agreement.
The Commissioner contends that the performance by LGFA of its obligations under the agreement constitutes the ``discharge'' of the right in UAS to compel LGFA to perform its agreement, and by s. 160M(3) a change shall have been taken to have occurred in the ownership of that right.
It seems to me that such a contention would mean that each time an executory contract was performed in accordance with the terms, there would be the disposal of an asset for the purposes of Part IIIA of the Act.
In my opinion, ``discharge'' in relation to debts, choses in action and other rights in or over property should be construed so as not to extend to the performance of obligations giving rise to the rights in accordance with the terms of the contract. Such a construction would be consistent with the notion that a disposal requires some dealing with or turning to account of the rights by the person owning them rather than the mere performance of the obligations giving rise to the rights by the other party to the contract, and is consistent, in my view, with the context in which the words appear, namely, with the words such as ``cancellation, release and surrender''.
It seems to me there is much force in the submissions on behalf of UAS, that if the legislature had intended the performance of a contract in accordance with the terms to constitute a disposal by the party to whom the contractual obligations were owed of the rights constituted by those obligations, then it would have been a relatively easy matter for the legislature to have done so.
According to Halsbury's Laws of England 4th ed. Vol. 9, para. 585, the concept of satisfaction in the principle of ``accord and satisfaction'' is the release from an obligation by means of any valuable consideration, not being the actual performance of the obligation itself [my emphasis].
The statement in Halsbury's derives from the observations of Scrutton LJ in
British Russian Gazette and Trade Outlook Ltd v. Associated Newspapers Ltd  2 K.B. 616 at 643-4.
If the performance of LGFA of its obligations under the agreement constitutes disposal by UAS of proprietary rights acquired by UAS under that agreement, then in my view there is no disposal until performance of the obligations which took place on 30 June 1987 and 31 March 1989.
If performance by LGFA discharges the right of UAS to compel LGFA to perform its obligations to UAS under the liability assumption agreement, s. 160M(3) deems a change of ownership to have taken place. Contrary to the primary submission of the Commissioner, such change will have taken place when performance occurs. There is, however, no party who is entitled to the right to compel LGFA to perform, after LGFA has performed: vide s. 160M(1).
In my opinion, it cannot be said that on performance, a capital gain of $1,083,294.00, or of any amount, has been made. On performance, the asset alleged by the Commissioner, namely the right to compel performance is no longer owned by anyone. It ceases to exist: cf s. 160N.
There is no entitlement under the liability assumption agreement in UAS to receive money or other consideration on the performance of LGFA of its obligations under that agreement: cf s. 160M(7). There is no
ATC 4399basis, in my view for concluding that the $7,385,000.00 paid by LGFA is the consideration that UAS receives or is entitled to receive on the ``disposal'' of the right in UAS to compel LGFA to perform its obligations under the liability assumption agreement.
The precise quantum of any capital gain was left unresolved by counsel at the trial, the Commissioner's further and better particulars specifying particular figures, the taxpayer asserting that there should be in that event a further reduction recognising the costs incidental to its acquisition of those rights which had properly formed part of their cost base in terms of s. 160ZH(1)(b) and 160ZH(5) of the Act, namely the legal and banking costs of $84,710.00.
Counsel for the Commissioner submitted, however, that the accounting records of UAS indicated that these sums had already been taken into account in the financial records of UAS.
In the event I should be wrong on the question of there being a capital gain, I do not anticipate difficulty between counsel in determining the appropriate figure.
For the reasons I have expressed, the decision of the respondent to disallow the applicant's objection to an assessment for income tax in respect of the year ended 30 June 1987 should be set aside and in lieu thereof the objection be allowed. The assessment for the year of income ended 30 June 1987 is remitted to the Commissioner for reassessment in accordance with law. The respondent should pay the applicant's costs of the application, to be taxed if not agreed.
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