Ashton Mining Ltd v Commissioner of Taxation

Introduction 1 The applicant ("Ashton Mining") has appealed to the Court against a decision of the respondent ("the Commissioner") disallowing an objection lodged by Ashton Mining against the assessment issued in respect of the year of income ended 31 December 1992 ("the 1992 year of income"). The objection was in respect of the Commissioner's disallowance of a deduction, in the amount of $11.69 million, claimed by Ashton Mining pursuant to s 70B(2) of the Income Tax Assessment Act 1936 ("the ITAA"). 2 Section 70B(2) provides that the amount of any loss "on the disposal or redemption" of a "traditional security" is an allowable deduction from the assessable income of the taxpayer for the year of income in which the disposal or redemption takes place. Ashton Mining contends that during the 1992 year of income it incurred a loss when it wrote off a debt in the sum of $50 million payable to it ("the Ashton Gold debt") by its wholly owned subsidiary Ashton Gold Limited ("Ashton Gold"). It claims that: · the Ashton Gold debt is a "traditional security"; · the writing off, and the consequential forgiving, of the Ashton Gold debt constituted a "disposal or redemption" of the debt for the purposes of s 70B(2); · pursuant to s 70B(2) it is entitled to an allowable deduction in the amount of $11.69 million. Background 3 Although the background facts were not in dispute, the parties were in disagreement as to the inferences that were to be drawn from those facts. 4 From time to time Ashton Mining made advances of funds to Ashton Gold, which was the vehicle utilised by Ashton Mining for its diversification into the Australian gold industry. The advances were used by Ashton Gold to acquire shares in two gold mining companies which became wholly owned subsidiaries of Ashton Gold. In the result, the advances made by Ashton Mining by way of loans to Ashton Gold to acquire and fund the activities of the subsidiaries totalled the sum of $116.9 million as at 31 December 1991. 5 During 1991 it had become clear that, as a result of a number of factors, it was necessary for Ashton Mining to write down the value in its accounts of Ashton Gold and its subsidiaries in order to reflect their current value. The value was to be reduced from the actual costs incurred of $119.3 million to a current value of $69.3 million, a reduction of $50 million. 6 As the investment of Ashton Gold in its subsidiaries constituted its sole assets, the writing down of those assets by $50 million would have resulted in a significant deficit in its accounts, which could have left it in the position of being unable to repay its outstanding loans of $116.9 million to Ashton Mining, if and when it was called upon to do so. For Ashton Mining, the write down would, inter alia, ensure that it did not have an insolvent subsidiary or a qualified statutory auditor's report. 7 The Finance Committee of Ashton Mining recommended to the board the adoption of a "package" of measures to deal with the situation. The "package" involved, inter alia, Ashton Mining writing down the value of its shareholding investment in Ashton Gold by $50 million by writing off the indebtedness of Ashton Gold to Ashton Mining to the extent of $50 million. After the write off, the amount of the indebtedness of Ashton Gold to Ashton Mining was to be recorded in the accounts for the year ended 31 December 1991 as $66.9 million. 8 After obtaining the approval of the auditors to draft statutory accounts that reflected the measures recommended by the Finance Committee, the accounts were submitted to the board of Ashton Mining. The accounts, which were approved by the board of Ashton Mining on 24 February 1992, recorded an abnormal loss of $50 million which was described as "Debts from subsidiary companies written off". Ashton Gold's statutory accounts, which were approved by its board later on the same day under "Abnormal Items", made provision for the "diminution in value of investments" of $50 million with an off setting "Gain on forgiveness of loan from Holding Company" of $50 million. 9 The consolidated financial statements and statutory information of Ashton Mining prepared for the year ending 31 December 1991 recorded that the debt of $50 million from its subsidiary had been "written off". The write off formed part of a number of "Abnormal" and "Extraordinary" items that resulted in a trading loss for that year. 10 The main witness called by Ashton Mining was Mr Douglas Bailey. Mr Bailey held a number of senior finance positions within the Ashton Group of companies at the time and was familiar with the relevant events. It is clear from his evidence, and from the contemporaneous documentation, that the auditors and directors of Ashton Mining were concerned with the proper accounting treatment of the measures, rather than with their legal effect. Mr Bailey explained that the writing off of $50 million from Ashton Gold's indebtedness to Ashton Mining was based on an accountant's view at the time that it was appropriate to write off the debt because there was a permanent diminution in the value of the debt as it was believed that "it would never be repaid" (T 41). Mr Bailey said that a debt is not written off in the accounts until the view is formed that it will never be recoverable. However he agreed that if at some later stage, for whatever reason, the debt becomes recoverable or is recovered, then it could be reinstated in the books as income (T 45). 11 In my view the Ashton Gold debt was written off at the time because Ashton Mining regarded it as irrecoverable, or as having no monetary value. The evidence does not establish that the "writing off" of the Ashton Gold debt reflected or resulted from any agreement by Ashton Mining to discharge the liability of Ashton Gold to repay the debt. No formal documentation, other than the relevant accounts, was prepared in respect of the "write off". 12 Ashton Gold treated the writing off of its debt as a forgiveness of payment of it, and therefore a gain to Ashton Gold. Although Ashton Gold's treatment of the Ashton Gold debt is relevant, ultimately the appeal is concerned with Ashton Mining's treatment of that debt. 13 When Ashton Mining lodged its income tax return for the 1992 year of income no claim was made for any deduction in respect of the writing off of the Ashton Gold debt. The claim by Ashton Mining for a deduction under s 70B(2) was not made until the filing in January 1996 of an amended return for the 1992 year of income. 14 During 1993 Ashton Mining decided to sell certain of its gold assets, which included the shares held by it in Ashton Gold. By an agreement ("the share agreement") made on 15 July 1993, Aurora Gold Limited ("Aurora") agreed to purchase all of the issued shares in Ashton Gold from Ashton Mining. The share agreement was drafted on the basis of the current balance sheets of Ashton Mining and Ashton Gold which reflected the consequences of the writing off of the Ashton Gold debt in the accounts of Ashton Mining and the forgiveness of that debt in the accounts of Ashton Gold. 15 The share agreement provided for the repayment of all loans owing by Ashton Gold to Ashton Mining (which were then recorded as totalling $71.6 million) and for a release to be executed under seal by Ashton Mining, to the extent that the loans owed by Aurora or "its subsidiaries" exceeded that amount. The release proved to be ineffective to release the Ashton Gold debt because, at the relevant time, Ashton Gold was not a subsidiary of Aurora. As a consequence, the release did not operate in respect of the Ashton Gold debt. 16 Aurora expressed its concern as to whether the writing off of the Ashton Gold debt discharged Ashton Gold's liability to repay it. In a letter dated 16 September 1993 from Aurora to Ashton Mining, Aurora stated: "It now appears that despite being effective for accounting purposes the reduction in loans was not legally effective due to the failure to execute appropriate supporting documentation." 17 On 8 October 1993, in order to deal with Aurora's concern, a deed of assignment of the Ashton Gold debt was entered into between Ashton Mining and Aurora. The deed recited that the Ashton Gold debt had not been released under the share agreement and that: "[A]n amount of $50,000,000 ('Residual Debt'), previously written down in the books of Ashton Gold but not discharged, which has neither been repaid under the Agreement nor been released under the Release, remains owing by Ashton Gold to Ashton." 18 Clauses 2 and 3 of the Deed provided: "2. ASSIGNMENT Ashton hereby assigns to Aurora absolutely all of Ashton's right, title and interest in the Residual Debt and any other monies owed as at 30 June 1993 by Ashton Gold or any of its present subsidiaries to Ashton which remain outstanding at the date of this deed (together, 'Debts'). 3. WARRANTIES AND UNDERTAKING Ashton warrants to Aurora that: (a) Ashton has full power to assign the Debts to Aurora; (b) the assignment of the Debts under this deed is taken by Aurora free and clear of all mortgages, pledges, liens, charges or other encumbrance or claims or interest of any other person; and (c) Ashton undertakes to Aurora that it will do all acts and things, including with limitation execution of such documents as may be reasonably required by Aurora to give effect to the assignment contemplated by this deed." 19 Aurora's concerns in relation to the Ashton Gold debt were justified. Not only was there no documentation which recorded a discharge of Ashton Gold's liability to repay the Ashton Gold debt, but Ashton Mining had continued to maintain a provision in its trial balances in respect of the debt. When Ashton Mining was called upon to acknowledge the debt, it did so. The legislative scheme 20 At the relevant time s 26BB(2) provided that the amount of any gain on the "disposal or redemption" of "a traditional security" was to be included in the assessable income of the taxpayer in the year of income in which the disposal or redemption takes place. Section 70B(2) provided for the amount of any loss on the "disposal or redemption" of "a traditional security" to be allowable as a deduction from the assessable income of the taxpayer in the year of income in which the disposal or redemption takes place. 21 It is unnecessary to outline in detail the statutory definition of a "traditional security" set out in s 26BB(1) as, subject to the requirement that the security be "acquired after 10 May 1989", it was common ground that the Ashton Gold debt was a traditional security. In s 26BB(1) "acquired" was defined as meaning: "acquire, on issue, purchase, transfer, assignment or otherwise, the security or the right to receive payment of the amount or amounts payable under the security;" 22 The main issue arising on the appeal relates to whether the Ashton Gold debt was disposed of or redeemed. Sections 26BB(1) and 159GP(1) respectively defined those terms as follows: "'dispose', in relation to a security, means sell, transfer, assign or dispose of in any way the security or the right to receive payment of the amount of amounts payable under the security;" [s 26BB(1)] 'redemption', in relation to a security, means the discharging of all liability to pay any amount or amounts under the security representing a return of the issue price of the security;" [s 159GP(1)] 23 Ashton Mining's objection claimed that during the 1992 year of income it had disposed of the Ashton Gold debt by disposing of its right to receive payment of that debt. However, it is more appropriate to describe its claim as a "redemption" of the debt in the sense that it had discharged Ashton Gold from all liability to pay it. Irrespective of whether Ashton Mining's claim is appropriately viewed as a disposition or a redemption, both definitions require that there is no outstanding legal liability on the part of the debtor to pay the amount of the traditional security to the creditor. The definitions of "acquire", "dispose" or "redemption" to which I have referred are concerned with the legal entitlements of the parties in relation to the security. Thus, whether or not the indebtedness, the subject of the security, is recoverable in a practical, rather than a legal, sense is not relevant to the operation of s 70B(2). The contrary view would lead to uncertainty as to whether, and if so when, a particular security had been disposed of or redeemed. 24 I need not pursue this issue further as senior counsel for Ashton Mining presented its case on the basis that, as at 31 December 1992, Ashton Gold was no longer under any legal liability to pay the Ashton Gold debt to Ashton Mining, with the consequence that there had been a disposal or redemption of that debt. Traditional security 25 The Commissioner did not dispute the transactions recorded in the inter-company loan accounts between Ashton Mining and Ashton Gold. Rather, he contended that a running account was established pursuant to a contract between the two companies which came into existence prior to 10 May 1989. Accordingly, it was submitted that, although the advances said to constitute the relevant loans were made after 10 May 1989, they were acquired when the establishment of the running account was agreed to. Thus, so it is said, when each advance was made after 10 May 1989 it resulted in a new balance outstanding, from time to time, in respect of the "security" established by the pre-existing contract. 26 The Commissioner relied on two decisions to support his submission. In Joachimson v Swiss Bank Corporation [1921] 3 KB 110 at 126-127 Atkin LJ observed that the contractual relationship between a banker and customer was governed by the terms of the contract entered into between them in the ordinary course of business when a current account was opened. Accordingly, advances made in the course of that relationship were held not to be simple loans made with each advance but, rather, were advances made pursuant to the terms of the original contract. The second decision was Hart (Inspector of Taxes) v Sangster [1957] 1 Ch 329 at 337 where Lord Goddard CJ agreed that, whether the account established between a banker and a customer is a deposit account or a current account, there is a continuing contract, rather than a new contract, every time money is paid into the account. 27 Neither decision assists the Commissioner in the present case. The inter-company loans made by Ashton Mining to Ashton Gold were not governed by the terms of any initial contract entered into between them. Rather, Ashton Mining retained a discretion to make loans to its subsidiary upon such terms as it saw fit when each loan was made. Although Ashton Mining may have intended to make the loans interest free and repayable on demand, it was open to it to determine whether those terms, or any other terms, were to govern each particular advance. In the present case, unlike the situation with banker and customer, there was no pre-existing agreement establishing the inter-company loan account and the terms upon which advances to or from that account were to be made. Accordingly, there was a new unsecured loan made each time an advance was made by Ashton Mining to Ashton Gold. 28 Furthermore, a "traditional security" was limited to a security "acquired after 10 May 1989". Relevantly for present purposes, the definition of "acquire" in s 26BB(1) results in the relevant date of acquisition of an unsecured loan being the date on which the acquirer acquired the security or was entitled to receive payment of the amount or amounts payable under the security. In the present case Ashton Mining's acquisition of the security or of the right to receive payment did not, and could not, arise in respect of the unsecured loans made to its subsidiary prior to the loans being made. 29 It follows that the Ashton Gold debt, which is constituted by advances made since 10 May 1989, is a traditional security as defined in s 26BB(1). Agreement 30 Ashton Mining's argument that there was a disposal or redemption of the Ashton Gold debt as a traditional security was put on two bases. The first was that there was a binding agreement by Ashton Mining to discharge all liability to repay the debt. The second was that Ashton Mining was estopped from denying that the debt was discharged. 31 There are substantial difficulties confronting the argument that Ashton Mining agreed to discharge the Ashton Gold debt. First, I have found that in "writing off" the Ashton Gold debt Ashton Mining did not agree to discharge Ashton Gold's liability to repay the debt. 32 Secondly, Ashton Mining's subsequent conduct confirms that conclusion. As was said by Brooking J in FAI Traders Insurance Company Ltd v Savoy Plaza Pty Ltd [1993] 2 VR 343 at 351, while the law in Australia does not permit the post contractual conduct of the parties to be used to assist in interpreting the contract, the subsequent conduct of a party to the contract may constitute an admission by words or conduct which can be used against that party. 33 The transactions of Ashton Mining, subsequent to the writing off of the Ashton Gold debt, constitute admissions of the debt: see Bucknell v Commercial Banking Co of Sydney Ltd (1937) 58 CLR 155 at 164 per Dixon J. Initially, Ashton Mining purported to release the Ashton Gold debt but, when it failed to do so, it acknowledged the debt and then agreed to assign it. That conduct is inconsistent with any prior agreement to discharge the Ashton Gold debt. As explained above, during 1992 the board of Ashton Mining decided that its accounting treatment of the debt, which was approved by its auditors, was the appropriate way to "write off" the Ashton Gold debt. 34 Thirdly if, contrary to my view, there was such an agreement, it was not enforceable as it was made without consideration and was not executed under seal. 35 Senior counsel for Ashton Mining submitted that consideration did in fact move from the directors of Ashton Gold and the auditors of Ashton Gold and Ashton Mining. It is contended that the directors and auditors were only prepared to approve of the measures and sign the relevant statutory accounts on the basis that the Ashton Gold debt had been forgiven and that that approval constituted valuable consideration. 36 I do not accept that any such agreement has been established. No director or auditor gave evidence to the effect contended for and I am not prepared to imply any such agreement. In any event, even if such an agreement was made and did result in contractual rights and obligations arising between Ashton Mining and its directors or auditors, it does not follow that those rights and obligations resulted in the discharge of the Ashton Gold debt. That question involves the legal and equitable rights and obligations operative between Ashton Mining and Ashton Gold, rather than between Ashton Mining and its directors or auditors. Thus, if Ashton Mining acted in breach of any agreement by recovering the debt, the directors and auditors might recover damages, in the unlikely event that they suffered any, by reason of the breach of the agreement. 37 A number of authorities were relied upon by Ashton Mining to supports its contention that a legally enforceable agreement to discharge a debt can arise from a forgiving of the debt notwithstanding the absence of contractual documentation recording the forgiveness or "promissory" statements to that effect. 38 In Lonsdale Sand and Metal Pty Ltd v Commissioner of Taxation (1998) 81 FCR 419 the Court upheld a claim by the Commissioner that loan forgiveness in respect of the debts of subsidiaries in a group constituted a payment to or a credit in favour of an "associated person" within the meaning of s 108 of the ITA. Consequently, the forgiveness constituted the payment of a dividend to, and assessable income of, the taxpayer company. Mansfield J rejected the taxpayer company's contention that the debt forgiveness was not binding in the absence of consideration or a deed. In substance, his Honour found that the debt forgiveness, which was achieved by journal entries and was to operate as a permanent forgiveness of the debt, formed part of a wider set of commercial transactions, all of which were intended to have legal efficacy. As his Honour pointed out (at 429), the forgiveness that arose was not simply by reason of the accounting entries, such as where a debt was not recoverable. Mansfield J further observed (at 430-431) that, although no consideration was specifically expressed for the release of the debts, consideration could be found from the wider set of transactions. 39 In any event, the criterion applied by Mansfield J in relation to whether the release was caught by s 108 was not concerned with the legal efficacy of the forgiveness. Mansfield J said (at 428) that is was sufficient for the purposes of s 108 if the credit of a loan account "in substance constitutes an appropriation of the profits of the company for the benefit of the shareholder (or associate)" with the consequence that the commercial circumstances in which the transaction occurs will be relevant. Thus, his Honour said, "the formalities" required by law may not be determinative (see at 433-434). 40 Unlike the situation with which Mansfield J was concerned, the present case involves: · accounting entries made as a result of a debt not being recoverable and not as part of a wider set of commercial transactions; · the debt forgiveness occurred without consideration; · "disposal" or "redemption" of a debt which, for the purposes of s 70B(2), requires the discharge of any obligation on the part of the debtor to repay the debt; · a situation where the parties were not concerned with whether the forgiveness was to have legal efficacy or was to operate as a permanent discharge of liability in respect of the debt. 41 Accordingly, Lonsdale Sand and Metal is distinguishable from the present case. 42 Ashton Mining also relied upon Creamoata Limited v The Rice Equalization Association Limited (1953) 89 CLR 286 and Snelling v John G Snelling Ltd [1973] 1 QB 87 as examples of cases where the courts have held as legally binding upon the parties conduct which, in the circumstances of the particular case, was said to have lacked the requisite legal formalities. Neither case was concerned with forgiveness of a debt without consideration or a deed. In any event, as is clear from the particular facts of each of the cases, the legal efficacy of particular conduct will often turn on the particular facts of the case with the consequence that argument by way of analogy may be of limited utility. Estoppel 43 The real issue arising on Ashton Mining's appeal relates to whether, as at 31 December 1992, Ashton Mining, by its conduct, was estopped from claiming that the Ashton Gold debt had not been discharged and, if so, whether that constituted a "disposal or redemption" of the debt for the purposes of s 70B(2). Ashton Mining submitted that: · it induced its subsidiary, Ashton Gold, to adopt and act on the assumption that the Ashton Gold debt had been forgiven in the sense that Ashton Gold was discharged from legal liability to repay the debt; · it has since been estopped from denying that the debt was forgiven; · the estoppel has resulted in the discharge of all liability on the part of Ashton Gold to repay the debt. 44 While I accept that Ashton Gold assumed that the debt had been forgiven, I do not accept that it was induced by Ashton Mining to assume that it had been permanently discharged from liability to repay the debt. The representation made by Ashton Mining, and acted upon by Ashton Gold, was that the debt had been written off by Ashton Mining as it regarded it as not being recoverable and as having no value. Further, I have found that, at the time, the parties were only concerned with the proper accounting, rather than the legal, treatment of the relevant transactions. In those circumstances, I do not accept that Ashton Gold adopted or acted upon an assumption that it had been discharged from all legal liability to repay the debt. Therefore, the basis required for the estoppel or any waiver alleged by Ashton Mining does not exist in fact. 45 In any event, there is an additional difficulty with the estoppel case. To succeed in its objection, Ashton Mining must establish that the liability of Ashton Gold to repay the debt had been discharged by the end of the year of income, being 31 December 1992. 46 In Commonwealth of Australia v Verwayen (1990) 170 CLR 394 at 501 McHugh J explained: "The purpose of both the common law and equitable doctrines is 'to avoid or prevent a detriment to the party asserting the estoppel by compelling the opposite party to adhere to the assumption upon which the former acted or abstained from acting': Grundt. But because the common law doctrine of estoppel in pais is a rule of evidence, it operates to preclude the party estopped from denying the assumption of fact whenever it is necessary to do so for the purpose of determining the rights of the parties. On the other hand, because the equitable doctrines create rights, they preclude the party estopped from denying the assumption of fact (or law) only as long as the equitable right exists. Once the detriment has ceased or been paid for, there is nothing unconscionable in a party insisting on reverting to his or her former relationship with the other party and enforcing his or her strict legal rights." 47 Gaudron J in Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 at 458 stated the requirements for an equitable estoppel: "The object of an estoppel, whether a common law estoppel or an equitable estoppel, is as was explained by Dixon J in relation to estoppel in pais in Thomspon v Palmer 'to prevent an unjust departure by one person from an assumption adopted by another as the basis of some act or omission which, unless the assumption be adhered to, would operate to that other's detriment'." 48 Brennan J (at 419) pointed out that "[t]he element which both attracts the jurisdiction of a court of equity and shapes the remedy to be given is unconscionable conduct on the part of the person bound by the equity, and the remedy required to satisfy an equity varies according to the circumstances of the case". 49 The requirements which are to be met to avoid or prevent an unjust or unconscionable departure from an assumption for the purposes of an equitable estoppel were stated by Brennan J (at 428-429): "…to establish an equitable estoppel, it is necessary for a plaintiff to prove that (1) the plaintiff assumed that a particular legal relationship then existed between the plaintiff and the defendant or expected that a particular legal relationship would exist between them and, in the latter case, that the defendant would not be free to withdraw from the expected legal relationship; (2) the defendant has induced the plaintiff to adopt that assumption or expectation; (3) the plaintiff acts or abstains from acting in reliance on the assumption or expectation; (4) the defendant knew or intended him to do so; (5) the plaintiff's action or inaction will occasion detriment if the assumption or expectation is not fulfilled and (6) the defendant has failed to act to avoid that detriment whether by fulfilling the assumption or expectation or otherwise." 50 As the above passages demonstrate, the rights created by an equitable estoppel cannot arise until there has been an unjust or unconscionable departure or threat to depart from the assumption adopted and acted upon by the party seeking to assert the estoppel. See also Verwayen at 409 per Mason CJ, at 444 per Deane J, at 453-454 per Dawson J and at 500 per McHugh J. For example, the sixth requirement stated by Brennan J can only be met after the defendant "has failed to act" to avoid the detriment to the plaintiff. 51 No departure from any assumption adopted by Ashton Gold has occurred, or was threatened, during the year of income or at any other time. Indeed, when the issue of the forgiveness of the debt arose in 1993, Ashton Mining not only did not depart from the assumption but agreed to release the debt. Ironically, when the release failed, Ashton Mining was requested by Aurora to assign the debt to Aurora in order to avoid an unjust or unconscionable outcome. The requisite element of a departure, on the part of Ashton Mining, from the assumption said to found the estoppel, is absent. 52 The facts of the present case demonstrate that the question of whether such a departure is unjust or unconscionable, and will therefore found an equitable estoppel and create equitable rights, depends on the circumstances existing at the date of the departure, rather than at the date on which the assumption has been adopted. 53 One example, referred to in argument, will suffice. A allows B to build a house on A's land on the assumption that A's ownership rights will not be asserted to prevent occupancy of the house by B. The issue of whether the assumption can be departed from will depend on the circumstances existing at the date of the actual or threatened departure. While B's occupancy continues, a departure from the assumption by A asserting ownership rights that are inconsistent with B's occupancy, may be unjust or unconscionable. However, if the house is destroyed by fire and B receives insurance for its value, the assertion by A of the same ownership rights would no longer be unjust or unconscionable. 54 There was no departure, or threatened departure, by Ashton Mining from any assumption adopted by Ashton Gold during the 1992 year of income. Therefore no equitable estoppel arose, and no equitable rights were created or acquired, during that year. 55 For the above reasons the case of Ashton Mining, based on estoppel, fails. Conclusion 56 The appeal is to be dismissed with costs. The appeal only relates to the claim for an allowable deduction for the 1992 year of income. Consequently, the present case does not concern the legal consequences of the assignment of the Ashton Gold debt which occurred during 1993. The tax consequences of that transaction will depend upon the relevant provisions of the ITAA at that time.