Avco Financial Services Ltd v Commissioner of Taxation - [1982] HCA 36 - HCA 1972 case summary — Zoe

CTHHCA

Avco Financial Services Ltd v Commissioner of Taxation

[1982] HCA 36

High Court of Australia|1972-11-30|Before: Wilson JJ, Kearney J, Deane JJ, Fisher J

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At a glance

Source facts

Court

High Court of Australia

Decision date

1972-11-30

Before

Wilson JJ, Kearney J, Deane JJ, Fisher J

Source

Original judgment source is linked above.

Judgment (89 paragraphs)

[1]

High Court of Australia Gibbs C.J. Mason, Murphy, Aickin and Wilson JJ. Avco Financial Services Ltd v Commissioner of Taxation (Cth); Commissioner of Taxation (Cth) v Avco Financial Services Ltd [1982] HCA 36

[2]

ORDER Appeals allowed. Order of the Full Court of the Federal Court set aside, and in lieu thereof order that the appeals to that court be dismissed. Order that the Commissioner of Taxation pay the costs of all appeals to the Federal Court and to this Court.

[3]

Avco Financial Services Ltd. ("the appellant") carries on business in Australia as a finance company. Its business is to provide consumer credit by way of personal loans, hire-purchase transactions and consumer mortgages. It was incorporated in 1964, and since that time its business has been steadily increasing. During the relevant years of income - those which ended on 30 November 1972, 1973, 1974, 1975, 1976 and 1977 - it made loans, each comparatively small in amount, to a large number of customers. To raise money to enable it to have available the funds which it needed to make the loans, and to repay amounts already borrowed, the appellant borrowed large sums of money both in Australia and the United States. Because of fluctuations in the rate of exchange of the Australian dollar, the appellant made exchange losses and gains on the repayment of the sums it had borrowed in the United States. In the years 1972, 1973 and 1974 gains were made. In 1975 and 1976 there were both gains and losses, but in 1975 there was a net gain and in 1976 a net loss. In 1977 there was a substantial loss. The Commissioner of Taxation, by his assessments, included in the assessable income of the appellant the gains in the years 1972 to 1976 inclusive, and disallowed any deduction for the losses in the years 1975, 1976 and 1977. By its objections, the appellant claimed that the gains were not taxable income and the losses were deductible. However, when appeals by the appellant against the assessments came before the Supreme Court of New South Wales, both parties took a more moderate view and agreed that gains and losses must be treated as having the same character, so that both should be either of a capital or of a revenue nature. Kearney J., who heard the matter in the Supreme Court, held that the exchange gains and the exchange losses were on revenue account. He accordingly dismissed the appeals which related to the years 1972, 1973 and 1974, and upheld the appeal for the year 1977 and, in respect of the years 1975 and 1976, upheld the Commissioner's disallowance of the objections to the inclusion of such gains as part of the appellant's assessable income, but allowed the appellant's appeals in relation to the disallowance of objections against the Commissioner's refusal to allow the exchange losses in those years as deductions [1] . From this decision both parties brought appeals to the Federal Court of Australia which, by a majority (Brennan and Deane JJ., Fisher J. dissenting), held that the gains and losses were of a capital nature [2] , with the result that the Commissioner's appeals in respect of the disallowance of the losses succeeded and the appellant's appeals in respect of the inclusion of the gains in its assessable income were also successful. Both parties have now appealed to this Court by special leave. The appellant's appeals are in respect of the years 1975, 1976 and 1977, in which the deductions sought to be made for exchange losses were disallowed. The Commissioner, who seeks to uphold the judgment of the Federal Court, has appealed in respect of the years 1972, 1973, 1974, 1975 and 1976 so that, if the losses are held to be deductible, the gains may be treated as assessable income.

[14]

Similarly, it appears right, in a case such as the present, to regard exchange gains and losses resulting from the repayment of borrowed money as detachable from the borrowed fund, and as not necessarily sharing its character. The difficulty of adhering to the view that exchange gains and losses resulting from the repayment of borrowed money must always be of a capital nature is made manifest by comparing the case in which a taxpayer who regularly buys trading stock has ninety days after each delivery in which to pay the supplier, with the case in which the taxpayer arranges with his bank to pay the supplier each time a delivery is made and has himself ninety days in which to pay the bank. The authorities cited show that a gain or loss resulting from a change in the rate of exchange during the ninety days would be on revenue account in the former case. It would be anomalous if the gain or loss was on capital account in the latter case. In Thiess Toyota Pty. Ltd. v. Federal Commissioner of Taxation [20] , where a company which sold motor vehicles paid for the imported vehicles with moneys advanced by a bank in the form of letters of credit in favour of the exporter in Japan, and the company had ninety days to reimburse the bank, it was held by Meares J. that the arrangements with the bank were all part of a transaction relating directly to, and having the purpose of, the purchase of trading stock and that the exchange gain was on revenue account and assessable income. Meares J. followed the decision of the Supreme Court of Canada in Tip Top Tailors Ltd. v. Minister of National Revenue [21] , where a similar conclusion had been reached, in preference to the decision of Wilson J. of the Supreme Court of New Zealand in Nissan Motor Distributors (New Zealand) Ltd. v. Commissioner of Inland Revenue [22] . In the United States, it has also been held that an exchange gain on payment of a debt due for trading stock was taxable as income: America-Southeast Asia Co. Inc. v. Commissioner of Internal Revenue [23] .

[16]

Where a taxpayer carries on the business of borrowing and lending money, the moneys used for that purpose are analogous to trading stock - the taxpayer in effect deals in the money. Exchange gains and losses, regularly and frequently made and incurred, in the course of making repayments of borrowed money which is used by a taxpayer in making loans in the course of its finance business are outgoings made in the day to day conduct of the business and for the purpose of carrying on the business as a going concern. The first matter to be considered, in deciding whether a payment is of a capital or of a revenue nature, is what was the character of the advantage sought by the payment: Sun Newspapers Ltd. and Associated Newspapers Ltd. v. Federal Commissioner of Taxation [24] . The question has to be considered from a practical and business point of view: see Federal Commissioner of Taxation v. South Australian Battery Makers Pty. Ltd. [25] , and cases there cited. From that point of view, the additional moneys paid as a result of the unfavourable exchange variations - the exchange losses - were part of the price by which the appellant obtained the money which it used to make a profit - part of the process by which the appellant obtained regular returns. The payments were recurrent and frequent, although irregular, and they involved the exercise of judgment by the officers of the appellant who put its borrowing policy into effect as part of the conduct of the business. The exchange losses were in my opinion losses on revenue account, and of course the gains have the same character. The view which I expressed in Commercial and General Acceptance Ltd. v. Federal Commissioner of Taxation [26] , that an exchange gain or loss on the repayment of moneys lent will always be a capital gain or loss, must, on reconsideration, be rejected. In a case such as the present the gains and losses do not have the same character as the repayments that produced them, and, considered separately, but in the light of all the circumstances, are seen to be revenue in character.