evidentiary issues
41 As may be seen from the above discussion, BHP challenged the admissibility of a large number of the documents tendered by the Commissioner, and the documents were admitted subject to BHP's objections. BHP's primary objection rested on the statement of principle contained in the reasons for judgment of Mason J in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 352, which is to the following effect:
The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although, as we have seen, if the facts are notorious knowledge of them will be presumed.
It is here that a difficulty arises with respect to the evidence of prior negotiations. Obviously the prior negotiations will tend to establish objective background facts which were known to both parties and the subject matter of the contract. To the extent to which they have this tendency there are admissible. But in so far as they consist of statements and actions of the parties which are reflective of their actual intentions and expectations they are not receivable. The point is that such statements and actions reveal the terms of the contract which the parties intended or hoped to make. They are superseded by, and merged in, the contract itself. The object of the parol evidence rule is to exclude them, the prior oral agreement of the parties being inadmissible in aid of construction, though admissible in an action for rectification.
Consequently when the issue is which of two or more possible meanings is to be given to a contractual provision we look, not to the actual intentions, aspirations or expectations of the parties before or at the time of the contract, except in so far as they are expressed in the contract, but to the objective framework of facts within which the contract came into existence, and to the parties' presumed intention in this setting. We do not take into account the actual intentions of the parties and for the very good reason that an investigation of those matters would not only be time consuming but it would also be unrewarding as it would tend to give too much weight to these factors at the expense of the actual language of the written contract.
Mason J was, of course, primarily concerned with an evidentiary rule governing the construction of written contracts. There was, in this case, no relevant uncertainty about the meaning of the purchase agreement. What was uncertain was the character, for income tax purposes, of the payment made pursuant to s 1.1 of the purchase agreement, the meaning of which was plain enough. Evidence of the surrounding circumstances, including the prior negotiations, was not rendered admissible by reason of an ambiguity of the kind to which Mason J referred. To the extent that the Commissioner sought to rely on the documentary record as evidence of prior negotiations to assist in construing the purchase agreement, that evidence was inadmissible. I accept, however, that this was not the only purpose for which the Commissioner sought to adduce the documentary record of the surrounding circumstances, including negotiations relating to the purchase agreement.
42 It seems to me, however, that little of the evidence relating to the contractual negotiations is relevant to the Court's inquiry on these appeals. As Hill J said in JB Chandler Investment Company Ltd (in liq) v Commissioner of Taxation (1993) 47 FCR 588 at 598:
[T]o accept that the circumstances in which a payment is made will be relevant to a determination of the character of that payment in the hands of a recipient is not to say that surrounding circumstances can be used to contradict the words of an agreement reached between parties bargaining at arm's length as to what the consideration for a particular payment is to be, except in a case (and the present is not such a case) where it is claimed that the agreement is a sham and does not represent the true intention of the parties to it.
Having regard to that observation (with which I agree) the evidence of contractual negotiations was of limited, if any, relevance to the question of deductibility. That is not to say that other evidence, of an objective kind, about the character of the payment made pursuant to s 1.1 of the purchase agreement, as, for example, the basis of valuation, was not relevant: it plainly was.
43 Besides objecting to the admissibility of almost all the documents tendered by the Commissioner on the grounds of relevance, BHP made specific objections to a comparatively small group of particular documents. Included in that group were documents (discovered by the Commissioner and to which O 18 r 3 of the Federal Court Rules applied) that had been provided to the Commissioner by the Internal Revenue Service of the US Department of Treasury ("the IRS documents").
44 The IRS documents may be identified as SB113, 118, 123, 124 and 125 (together with SB5). SB113 is a copy of a letter dated 18 July 1984 from the IRS written by Mr John W Hott, Director, Corporation Tax Division, to Messrs Willard B Taylor and M Bernard Aidinoff, both of Sullivan and Cromwell, relating to a request for a ruling for GE. SB118 is a copy of a letter dated 5 November 1984 from the IRS, also written by Mr Hott, and addressed to Mr Taylor of Sullivan and Cromwell, relating to a request for a supplementary ruling. SB123, headed "Department of Treasury - IRS - Notice of Proposed Adjustment" is addressed to GE and GEH and its contents indicate that it was intended to notify those companies of an IRS decision with respect to their taxation liability for the interest payment. SB124 headed "Form 886A - Explanation of Items", does not record its author, although its contents and that of SB123 indicate that it was written by an officer of the IRS. SB125, headed "Reply to NPA I.E. - 3", does not record its author. Perusal of the contents of SB125 suggest, however, that he or she might have been an employee of GE but that is by no means clear. SB5 was, it seems, an attachment to SB125.
45 The Commissioner submitted that the IRS documents fell within s 69 of the Evidence Act 1995 (Cth) and, in consequence, the hearsay rule did not apply to them. Relying on Compafina Bank v Australian and New Zealand Banking Group Ltd [1982] 1 NSWLR 409 ("Compafina"), the Commissioner submitted that the Court should infer from the contents of the IRS documents that their authors might reasonably be supposed to have had personal knowledge of the facts stated in the documents, and that the Court should infer that the statements were made in the course of and for the purposes of the business of GE and the IRS. In the latter connection, the Commissioner referred to Ritz Hotel Ltd v Charles of the Ritz Ltd (1987) 14 NSWLR 116.
46 I reject these submissions. At best, the evidence establishes that the documents formed part of the records of the Commonwealth (s 182). Even if I were to accept that they formed records of the IRS and GE for the purpose of a business (as defined in the Evidence Act), the Commissioner made little attempt to identify the representations recorded in the documents (some of which were lengthy) which were, on his submission, to be excepted from the hearsay rule. In so far as the Commissioner did so, I am unable to draw the inferences upon which the Commissioner relies to satisfy s 69(2) of the Evidence Act. In any event, were there any doubt about the matter, I would hold that the documents in question were either inadmissible on the grounds of relevance; or should not be admitted on the grounds referred to in s 135(a) and (b) of the Evidence Act: cf Compafina at 412.
47 Besides the IRS documents, there were a number of other specific documents, to the tender of which BHP objected. As it turned out, not much turned on those documents. For the reasons advanced by BHP at the hearing, I would uphold the objections.
question one: the application of s 51(1)
(a) General observations
48 At the relevant times, s 51(1) of the Income Tax Assessment Act 1936 (Cth) ("the Act") provided:
All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income.
It was not in dispute that the outgoing of $198,331,374 satisfied both of the positive limbs of s 51(1). That is, it was not in dispute that the outgoing was incurred: (a) in gaining or producing assessable income; and (b) in carrying on BHP's business, being a business which was carried on for the purpose of gaining or producing assessable income. As we have seen, BHP carried on businesses which included holding shares in and managing its subsidiaries. The holding of shares in subsidiaries can of itself constitute the carrying on of a business for the purposes of s 51(1) of the Act: cf Esquire Nominees Ltd v Commissioner of Taxation (1973) 129 CLR 177 at 221 per Menzies J and Brookton Co-operative Society Limited v Commissioner of Taxation (1981) 147 CLR 441 at 469 per Aickin J. The principal issue in this case is whether the outgoing of $198,331,374 is an outgoing of a capital nature as the Commissioner contended, or on revenue account as BHP would have it.
49 On the one hand, the Commissioner's case was that the payment of $198,331,374 was made to secure the increased value of the shares between 1 January 1983 and the closing on 2 April 1984. The shares were, so the Commissioner submitted, necessarily worth more in April 1984 than in January 1983 because of the profits earned by and retained in UII and UMC during that period. The Commissioner relied upon the facts that (1) initial negotiations proceeded on the basis that GE would take the profits earned by UII and UMC from 1 January 1983 until the closing; and (2) although it was ultimately agreed that those profits would remain in UII and UMC until the closing, the purchase price did not alter in consequence, rather the price attracted an additional payment called "interest". The Commissioner submitted that none of the amount of $198,331,374 was paid by BHP for the delay in the payment of the purchase price of $2.4 billion.
50 The case for BHP, on the other hand, was that the payment of $198,331,374 was made on account of the fact that the shares in UII and UMC were sold to BHP (or its assignee) as from 1 January 1983, but GE (or its assignee) was not to receive the purchase money until the closing, which turned out to be in April 1984. In substance, what had been agreed by the purchase agreement was, so BHP submitted, that (1) if the sale were completed, then BHP would purchase the businesses and assets of UII and UMC, through the share acquisition, as from 1 January 1983, by payment of a purchase price calculated by reference to valuations and accounts as at 31 December 1982; (2) after that date, GE would lose the benefit of the income attributable to the shares arising from the businesses conducted by UII and UMC (which BHP would acquire on the closing); and (3) BHP would pay interest on the purchase price (capped by reference to UII and UMC profits) to GE (or its assignee) from 31 December 1982 to the closing date. Properly understood, so BHP submitted, the interest was compensation for the delay between GE's loss of the use and enjoyment of its shares and its receipt of the purchase price.
51 Plainly enough, the difficulty in the present case is to determine the character of the advantage sought by BHP in paying the amount of $198,331,374 to GE: cf Colonial Mutual Life Assurance Society Ltd v Federal Commissioner of Taxation (1953) 89 CLR 428 at 454 per Fullagar J (with whom Kitto and Taylor JJ agreed) and Commissioner of Taxation v South Australian Battery Makers Pty Ltd (1978) 140 CLR 645 ("Battery Makers") at 656 per Gibbs ACJ (with whom Stephen and Aickin JJ concurred). The fact that the payment is called "interest" in the purchase agreement is not determinative of its character which may, on examination, turn out not to be interest in the true sense at all: cf Battery Makers at 655; Cliffs International Inc v Commissioner of Taxation (1979) 142 CLR 140 ("Cliffs") at 148; and NM Superannuation Pty Ltd v Young (1993) 41 FCR 182 at 198-9. Nor is the payment necessarily of a capital nature simply because it is made in the performance of a promise given as part of the consideration for the acquisition of a capital asset. If, however, the payment is made as part of the purchase price of an asset forming part of the fixed capital of a company, then the payment is an outgoing of capital or of a capital nature: cf Cliffs at 148.
52 The characterisation of the payment of $198,331,374 turns on the question, what was the payment for? What was the character of the obligation which the payment discharged? The answer depends very largely, although not entirely, on the effect of the purchase agreement. It does not, of course, depend on "what other transactions the taxpayer might have made to achieve a commercial result substantially the same" as that said to flow from the agreement: cf Commissioner of Taxation v Orica Ltd (1998) 194 CLR 500 at par 70 per Gaudron, McHugh, Kirby and Hayne JJ. The Commissioner does not allege sham. Nor does he rely on Part IVA of the Act. The focus in this case is, therefore, on the effect of the purchase agreement made between the parties, although there are some other matters besides the terms of the agreement which are relevant to the inquiry: cf Australian and New Zealand Savings Bank Ltd v Commissioner of Taxation (1993) 42 FCR 535 at 560; reversed on other grounds (1994) 181 CLR 466.