Commissioner of Taxation v Broken Hill Pty Company Ltd

REASONS FOR JUDGMENT HILL J 1 The appellant, the Commissioner of Taxation, appeals to the Court from a decision of a judge of this Court upholding an appeal of the respondent, the Broken Hill Proprietary Company Limited ("BHP"), against objection decisions of the Commissioner disallowing objections lodged by BHP against assessments of income tax in respect of the 1984 and 1985 years of income. Because BHP had adopted a substituted accounting period of 31 May, in lieu of 30 June the assessments relate to the years ending 31 May 1984 ("the 1984 year of income") and 31 May 1985 ("the 1985 year of income") inclusive. 2 At issue in the appeal is the deductibility of an amount of $198,331,374 paid by BHP to General Electric Company ("GE"), a New York corporation, pursuant to an agreement entered into on 15 April 1983. This amount, which was paid in the 1984 year of income was claimed by BHP in its return of income for that year as an allowable deduction under s 51(1) of the Income Tax Assessment Act 1936 (Cth) ("the Act"). The consequence of this view was that in the 1984 year of income BHP claimed to have incurred a loss which was available to be carried forward pursuant to s 80 of the Act to be offset against its assessable income of the 1985 year of income. Hence in the 1985 year of income BHP claimed a deduction for this carry forward loss in its return of income for that year. It thus calculated its taxable income for that year as $835,137,809. In the ordinary course the Commissioner raised an assessment in accordance with the taxable income as returned in this year. 3 Subsequently the Commissioner considered the question of deductibility and decided that the amount paid in the 1984 year was in fact an outgoing of capital or of a capital nature and not deductible under s 51(1) of the Act. If this view were correct, the carry forward loss in the 1984 year of income was converted to a positive taxable income. The Commissioner accordingly, for the first time, issued an assessment of tax for that year: cf Commissioner of Taxation v Ryan (2000) 168 ALR 704. The consequence was that there was no available loss to carry forward into the 1985 year of income. The Commissioner accordingly issued an amended assessment increasing the taxable income and tax payable in that year. In each of these two assessments, the Commissioner purported to include an amount of additional tax. It will be necessary to turn to that matter later. 4 It is these assessments, an original assessment for the 1984 year of income and an amended assessment for the 1985 year of income to which BHP objected. The objection was disallowed by the Commissioner and BHP appealed to the Court from the two objection decisions. A single judge of this Court allowed these appeals, finding that the payment of $198,331,374 was deductible and it is from this decision that the Commissioner now appeals.

The background to the BHP/GE agreement 5 General Electric Company was, prior to the entry into the agreement, the holder of 100% of the shares in Utah International Inc ("UII") and Utah-Marcona Corporation ("UMC"). UII, in turn, owned 89.2% of the shares in Utah Development Corporation ("UDC"), which company was the holding company for various mining companies. The balance of the shares were held by Umal Pty Ltd, a wholly-owned subsidiary of Umal Consolidated Limited ("UCL"), a publicly listed Australian company delisted after April 1984. UDC held significant mining interests in Australia. UII operated mining properties in various countries including Australia and Brazil. 6 Around August of 1982 negotiations commenced for the sale by GE and purchase by BHP of GE's shareholdings in UII and UMC. 7 Early discussions contemplated that GE would retain the profits earned by UII and UMC and related companies up to the completion of the purchase. By the time January 1983 had arrived that had changed. Instead, although the parties spoke in terms of the same purchase price, the profits were to be retained in the relevant companies acquired directly or indirectly to the date the purchase was completed by BHP. On 27 January 1983 the parties signed a memorandum setting out their preliminary understanding of the deal that they had then reached. The memorandum was expressly stated not to be legally binding on the parties. It recorded a proposed purchase price of $US2,330,000,000 plus the consolidated net income of UII, UMC, UDC and their subsidiaries for the period of 30 June to 31 December 1982, subject to some deductions not presently relevant. In the event that the sale was completed, BHP was to pay what the memorandum referred to as "interest" on that purchase price at the rate of 13 per cent per annum from 1 January 1983 to the date of closing but in no event in an amount greater than the consolidated net income of UII, UMC, UDC and their subsidiaries during that period. The memorandum noted that a future agreement would be conditional on a number of factors including the introduction of other participants in the transaction and satisfactory finance arrangements. 8 In order to calculate the purchase price a valuation was made of the underlying assets. The parties agreed for this purpose that the valuation date would be 1 January 1983. Relevant to the selection of that date was that the relevant financial years of UII and UMC concluded on 31 December so that accounts would be audited as at that date. The valuation was made by estimating the present value of future cash flows to be derived from the assets over a twenty-year period, having regard to past performance and future projections. 9 It was not until 15 April 1983 that a binding, albeit conditional, agreement was entered into. It is not necessary to detail the amendments that were made by subsequent agreements on 6 December 1983 and "as at 1 March 1984". A short summary of them is to be found in the judgment appealed from. The description of the agreement as finally entered into, which follows, is a description of it in its finally amended form. In my view nothing turns on the amendments.

The agreement in its amended form 10 The first thing that is to be noted, for considerable emphasis was placed upon it by senior counsel for BHP, is that the agreement is stated to have been "dated as of January 1, 1983", that being the date on which the parties had agreed that the assets to be acquired were to be valued. 11 For present purposes the relevant provisions of the agreement are to be found in clauses 1.1 and 1.3. To the extent that they bear upon the present question these clauses read as follows: "1.1 Purchase and Sale of Shares. Subject to the terms and conditions herein set forth and on the basis of the representations, warranties and agreements herein contained, BHP purchases from GE, and GE sells to BHP, the Shares and any Additional Shares as at and from January 1, 1983 (the 'Sale') for $2,410,149,000. Interest shall be payable on such purchase price for the period from December 31, 1982 through the Closing Date calculated at the rate of 12% per annum but not in excess of the combined net income (excluding amounts received or accrued, if any, from GE and its subsidiaries, other than the Businesses, for foreign tax credits in excess of those which would have been utilizable by the Businesses as an independent company) of the Businesses for such period. Such payment of interest shall be free and clear, and without deduction, of any withholding, or, if any withholding is required, BHP shall pay additional interest so that the net amount actually received by GE shall be equal to the amount provided in the foregoing sentence to be due. 1.2 Assignment by BHP. BHP may, on or prior to the Closing Date, assign its rights and obligations under this Agreement… 1.3 The Closing. The closing of the Sale (the 'Closing') shall occur (a) at the offices of GE…on October 31, 1983, or (b) at such other place or places and time and date as the parties hereto may agree… The actual date on which the Closing shall occur is referred to herein as the 'Closing Date'. At the Closing, GE shall deliver to BHP against receipt of payment in the amount determined as provided in this Section 1.3 certificates representing the Shares and any Additional Shares, in each case in proper form for transfer… The amount to be paid on the Closing Date shall be the amount stated in Section 1.1 hereof plus (a) the amount of interest payable pursuant to Section 1.1 determined by calculating the limitation thereon to combined net income of the Businesses by reference to (i) the then most recent unaudited combined statement of income for the Businesses for the period from December 31, 1982 through the date of such statement of income prepared on a basis consistent with the unaudited pro forma combined financial statements set out in Schedule D-1 and delivered to BHP plus (ii) an estimate prepared by GE, and certified by the principal financial or accounting officer of GE, and accepted by BHP, of such combined net income from the end of the period referred to in clause (i) through the Closing Date, and (b) any amount which is then determined to be payable pursuant to Section 3.2 hereof. The payment of the amount to be paid on the Closing Date shall be effected by credit (or wire transfer) in immediately available funds to a bank account or accounts designated by GE." 12 The clause continued to provide a mechanism for adjustment of the amount owing and interest at the prime rate announced by Morgan Guaranty Trust Company of New York was to be payable on underpayments and overpayments. As it happens, the amount which was ultimately paid by BHP was required to be adjusted and a further payment was subsequently made. Nothing, however, turns upon the adjustment. 13 It may be noted that other provisions of the agreement provided for interest on various amounts, not being the amounts referred to in clause 1.1, ranging from one clause which referred to the rate of 9% and another the rates of 10-11%. The agreement acknowledged that BHP was to put in place a consortium to participate with it in owning and financing the Australian coal properties and was subject to that consortium being put into place. It contained normal representations, warranties and covenants, for example that the businesses, the subject of the agreement would continue, until the date of the closing of the sale, to be run in the ordinary course, with no dividends to be paid or distributions made except as specifically contemplated in the agreement. The agreement could be brought to an end by either party in certain events, or by their joint agreement. 14 The agreement was not completed until 2 April 1984. At least a part of the delay is explicable by the need for BHP to assemble a consortium for ownership and finance. In the result, the adjusted amount of "interest" paid by BHP to GE was $US185,539,000 ($A198,331,374). It is the deductibility of this amount which is at issue between the parties.

The issue for decision 15 Although a great deal of the argument centred around whether the payment to be made by BHP in Clause 1.1 was really "interest", that is not really the true issue in the case. The question to be answered is rather whether the outgoing which BHP ultimately made on the completion of the agreement fell to be deducted under s 51(1) of the Act. That section provides: "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." 16 It is common ground between the parties that the amount paid in accordance with clauses 1.1 and 1.3 and referred to as "interest" satisfied either the first or second limbs of the positive requirements for deductibility. Given that BHP did not end up with 100% of the assets acquired as a result of the consortium which it introduced, it may be doubted whether some apportionment was not necessary assuming otherwise that some part of the amount was deductible. However that was not a matter which the parties put in issue at the hearing. I am satisfied for present purposes to accept the agreement between the parties on this matter without enquiring further into it. The dispute between them is rather whether that "interest" was an outgoing of capital or of a capital nature so as to be excluded from deductibility under the section.

The judgment appealed from 17 The judgment under appeal deals with a variety of matters which were argued at first instance, many of which were no longer in issue, or at least substantially in issue, in the appeal. For example the learned primary Judge had rejected an amount of evidence which went to the course of negotiations between the parties prior to the contract being entered into on the grounds of relevance. In my opinion, her Honour was correct in so doing. The relevance is far from obvious. On the appeal the evidence which was rejected received scant consideration. 18 More importantly, however, the learned primary Judge rejected a submission that the evidence established that the original deal was that GE would receive the Utah profits as a dividend and that the purchase price was to be $2.4 billion with no interest. It was said that the deal changed to one where GE was not to participate in the post contract profits, but the purchase price was to be effectively the same with a purchase price of approximately $2.4 billion together with an amount termed interest equal to the profits not distributed. On this version of the facts, it was submitted to her Honour that the "interest" was the purchase price of the profits that were to be retained and not distributed. 19 The factual basis of this submission was rejected. Her Honour held that there was never an agreement under which GE was to receive the profits in the form of "interest". At best, the matter was the subject of negotiation. Further, her Honour held that the "interest" was not paid as the purchase price for retained profits. An aspect of this submission may be noted here. It was submitted before her Honour that the amount of the payment was always going to equal the profits earned and to be retained. This was denied by a Mr Flew who, in his evidence given on behalf of BHP, rejected the proposition that the "interest" was most unlikely to reach 12%. Indeed it was his evidence that the amount of the profits could well have exceeded 12% in that there was great volatility in the business. Her Honour accepted that evidence. It should be noted here that, before us on appeal, the Commissioner ultimately did not seek to submit that the rate of 12% referred to in the agreement was unreasonable, although through his counsel he did not wish to be heard to accept that it was reasonable. 20 Another submission that the interest mechanism was devised solely to take advantage of a tax deduction was likewise rejected. It was her Honour's view that the evidence (including the material which her Honour ultimately rejected) did not establish that the principal, or even a principal reason for the introduction of the interest provision was to obtain a tax deduction in order to reduce the net cost to BHP of compensating GE for an increase in share value on account of retained profits. This submission was not repeated before us. It may, however, be noted that neither before her Honour, nor before us, did the Commissioner seek to argue that the anti-avoidance provisions of the Act (Part IVA) had any application or that in some way the agreement entered into (or even some part of it) was a sham. 21 On the principal matter in contention between the parties, her Honour accepted the submission of BHP that the "interest" was compensation for the delay between GE's loss of the use and enjoyment of the ownership of its shares and its receipt of the purchase price. In her Honour's view, at least as and from 15 April 1983, GE was deprived of the practical use and enjoyment of the shares in UII and UMC. The payment was in her Honour's view compensation by way of interest or in the nature of interest for the delay in payment of the purchase price until completion. The case was, in her Honour's view, consistent with cases in the equity jurisdiction where, in the absence of agreement, interest is awarded where a purchaser became entitled to or acquired the benefit or enjoyment of what the purchaser became entitled to before payment of the purchase price: cf Harvela Investments Ltd v Royal Trust Company of Canada (CI) Ltd [1986] 1 AC 207. 22 Another submission of the Commissioner, that the existence of the cap on the "interest" payment demonstrated that the payment was to protect the structural integrity of the business carried on by UII and was thus referable to capital account, was likewise rejected by her Honour on the grounds that it was not supported by the evidence. In this regard her Honour said: "… the evidence is that the purchase price of $2.4 billion included a component for the net profits in the 1983 and 1984 income years. It is, it seems to me, inherently unlikely that BHP would pay for those profits twice over, rather than paying for them once by way of the purchase price (of $2.4 billion). This tends to confirm that, practically speaking, the payment of the amount of $198,331,374 was for the delay in payment of that price. That is, the outgoing was payment in the nature of interest." 23 This passage was the subject of some criticism by senior counsel for the Commissioner by reference to the fact that merely because a valuation is done on the basis of a present day value of projected profits over a twenty-year period does not mean that there was a double payment for the profits of the period from the time of valuation to the time of completion. The criticism is undoubtedly correct, but does not resolve the real issue in the case. 24 Further, her Honour expressed the view that the fact that the contractual obligation was contingent would not affect the character of the obligation to pay interest: cf Chevron Petroleum (UK) Ltd v BP Petroleum Ltd (1981) 57 TC 137, Inland Revenue Commissioners v Pullman Car Co Ltd [1954] 1 WLR 1029 at 1037 and Commissioner of Taxation v Midland Railway Co of WA Ltd (1952) 85 CLR 306. Nor in her Honour's view was there any significance in the fact that there was no contractual obligation in existence between 1 January 1983 and 15 April 1983. With respect, both of her Honour's conclusions are correct. 25 In summary, her Honour was of the view that the amount of the "interest" paid by BHP was on revenue account and thus not precluded from deduction under s 51(1). This made two other issues which the parties raised unnecessary to be decided. These were whether in the 1985 year of income there had been a full and true disclosure given by BHP to the Commissioner so that he was precluded from issuing an amended assessment for that year and whether the imposition of penalties in the form of additional tax were justified in each year of income. Her Honour accordingly set aside the objection decisions the subject of the appeals and remitted the objections to the Commissioner to be considered and decided in accordance with law.

The tests to be applied 26 There was no real dispute about the tests to be applied in this case. The debate between the parties centred upon the application of those tests to the particular circumstances of this case and, in particular, the terms of the agreement between BHP and GE. 27 In determining whether an outgoing falls for deductibility under s 51(1), it will be critical to determine what the outgoing is paid for. The significance of that question, which is directed to ascertaining the advantage sought to be obtained, is essential to the determination of the true characterisation of an outgoing. That this was so was first expressed by Fullagar J (with whom Kitto and Taylor JJ agreed) in Colonial Mutual Life Assurance Society Ltd v Federal Commissioner of Taxation (1953) 89 CLR 428 at 454. In that case, a vendor had agreed to transfer land to the appellant society in consideration of a promise by the appellant to pay to them for a period of 50 years an amount equal to 90% of the rents as and when received. The obligation was secured by a rent charge. The society sought to deduct the amounts paid. It failed as the amounts were held to be of a capital nature and this was so notwithstanding that in the hands of the vendor the payments were income. Fullagar J said at 454: "The questions which commonly arise in this type of case are (1) What is the money really paid for? - and (2) Is what it is really paid for, in truth and in substance, a capital asset?" 28 There, the periodical payments were the price for which the land was being bought and this conclusion stemmed from the terms of the documents entered into between the parties bargaining at arms-length. The fact that the transaction might have been treated between the parties in some other way in the agreement was irrelevant. Part of the payment, for example, might have, his Honour suggested, taken the form of interest on deferred payments of the purchase price when, presumably, they may have been deductible. However as his Honour observed in concluding the judgment (at 459): "As matters stand, the total of the payments is simply the total price of the land." 29 The test suggested in this case might be thought to have undergone some transformation, or at least qualification, in the well-known judgment of Dixon J in Hallstroms Pty Ltd v Commissioner of Taxation (1946) 72 CLR 634 at 648 where his Honour said: "What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view, rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process." 30 Later, in Commissioner of Taxation v South Australian Battery Makers (1978) 140 CLR 645 at 659, Gibbs CJ pointed out that two different questions were involved: the first, as in Colonial Mutual, was what the expenditure was for; the second, as in Hallstroms, once the first question had been answered, was whether the advantage sought by the expenditure was of a revenue nature. In the resolution of this second question, regard is often had to the oft-cited tests of Dixon J in Sun Newspapers Ltd & Associated Newspapers Ltd v Commissioner of Taxation (1938) 61 CLR 337. 31 There are cases, and the present in my opinion is such a case, where the question what the payment was for falls to be determined by reference to the legal obligations or rights for which it is paid, that is to say, the question can be answered by reference to the agreement which operates to create the obligation to pay. The decision of the Privy Council in BP Australia Ltd v Commissioner of Taxation (1965) 112 CLR 386 may have been another. There may be other cases where it is necessary to go outside the contractual rights and obligations acquired to find the true character of the outgoing. So in South Australian Battery Makers at 659, Gibbs CJ, commenting on the two Europa cases (Inland Revenue Commissioner v Europa Oil (NZ) Ltd [1971] AC 760 and Europa Oil (NZ) Ltd v Inland Revenue Commissioners (No. 2) [1976] 1 All ER 503) said at 659: "The words of the judgments in the Europa Cases, like those of any judgment, must be understood in the light of the issues that fell to be decided. Their Lordships could not have meant to suggest that in every case the character of an outgoing must be determined by having regard only to the contractual or other legal rights that the taxpayer acquired in return for it. That would indeed have been inconsistent with the principles stated by Dixon J in Hallstroms' Case, and with cases too numerous to mention in which payments made 'voluntarily and on the grounds of commercial expediency' ... have been held deductible as outgoings of a revenue kind although the taxpayer obtained no legally enforceable rights in return for them." 32 One may add in the light of more recent authority that there will be cases, and "interest" in the usual sense is an obvious example, where it will often be necessary to go outside the legal rights and obligations of the loan agreement to determine the advantage sought and, in some cases, the question of subjective motivation may have relevance: cf Fletcher v Commissioner of Taxation (1991) 173 CLR 1. 33 We have dwelt more than may be necessary on this question because, while I accept that mere reference to legal rights may be inappropriate in a particular case, the present is not such a case. The question of what the payment is for and the question of the advantage sought, are both matters that do not give rise to a need to go outside the legally binding agreement reached at arms-length between BHP and GE. And, having looked at the pre-contractual negotiation material which her Honour, in my view, rightly rejected, there is nothing in it which gives me reason to go beyond the contractual terms of the agreement between the parties. 34 It would, however, be unfair at this point not to mention the evidence of Mr Flew upon which the Commissioner sought to place considerable reliance. In his affidavit, Mr Flew referred to the fact that the initial negotiations had been on the basis that GE, as vendor, would retain the profits earned by UII and UMC prior to completion. He noted that it had been agreed to change the proposal so that BHP was to be entitled to the profits and GE was to be entitled to "interest" on the purchase price during that period. He continued: "This outcome was consistent with the position adopted by BHP in relation to this issue. That is, that neither party's actions should be able to create a benefit for it to the detriment of the other party. In order to give effect to this principle it was agreed: (a) to include a number of clauses in the [memorandum of intention] dealing with the way in which the businesses should be run during the period before closing; (b) that the amount of interest should be capped by profit earned during the period (but only if the profits was less than the amount of interest that would otherwise apply) and (c) that income derived between 1 January 1983 and completion would not be distributed out of the Utah Companies to GE. For BHP this meant that GE would not benefit by delaying the process in the event that interest was higher than profit. Also, GE would have an incentive to manage the businesses normally. It would not be in GE's interest to run the businesses down as a low profit would mean a low interest payment. Furthermore, by BHP agreeing to pay no more than interest calculated at 12 per cent, it meant that GE had no incentive to take any number of actions (eg skimp on maintenance, suspend exploration, increase production and inventories) to obtain short term profits in excess of interest. To align the amount of interest payable with the net income of the businesses may have materially impacted the value of the investment and long term profit earning capability. The combination of these arrangements afforded BHP practical surety that the businesses would be in good condition after closing …" 35 No doubt this evidence, which was accepted by the learned primary Judge, discloses the commercial motivation for BHP wanting to ensure that the business was not to be run down, a matter that is dealt with in the usual covenants to this effect in the agreement. It tells little, however, about what the payment was for in the context of the present commercial agreement, save that it discloses that the agreement to pay "interest" had nothing to do, either objectively or subjectively, with any extension of credit on the part of GE to BHP in payment of the purchase price. 36 The next matter which requires some comment is the use of "labels" in the process of characterisation. Again, there is no dispute as to principle between the parties. The true position is that the label that a party uses to characterise a payment, in the present case the word "interest", will not be determinative, although it may have some relevance: cf NM Superannuation Pty Ltd v Young (1993) 41 FCR 182 at 198-9, referred to by the learned trial Judge in this context. What that relevance may be will depend on the particular circumstances of the case. A licence does not become a lease because the parties chose to call it one, if it is in truth a licence: Radaich v Smith (1959) 101 CLR 209. A person does not cease to be an employee and become an independent contractor because the parties use the latter description: Hannan & Allen v Australian Mutual Provident Society (unreported, Supreme Court of Victoria, 15 November 1996). So, it may be said that an amount payable does not become interest, if the parties chose to adopt that word, if in law it is not. What then is interest? 37 The significance of the question stems from the fact that generally at least, interest, like other recurrent expenses, such as rent, is on revenue account: Texas Co (Australasia) Ltd v Commissioner of Taxation (1940) 63 CLR 382 at 468-9 per Dixon J and Steele v Deputy Commissioner of Taxation (1999) 197 CLR 459 at 469-70. Generally, although recurrence is a relevant consideration, it would not alter the situation if the parties chose to have interest paid in a lump sum on repayment of the debt obligation which gives rise to it, cf National Australia Bank v Commissioner of Taxation (1997) 151 ALR 225 at 237. 38 In Steele, Gleeson CJ, Gaudron, and Gummow JJ, in a joint judgment said at 470: "As was explained in Australian National Hotels Ltd v Commissioner of Taxation, interest is ordinarily a recurrent or periodic payment which secures, not an enduring advantage, but, rather, the use of borrowed money during the term of the loan. According to the criteria noted by Dixon J in Sun Newspapers Ltd v Federal Commissioner of Taxation it is therefore ordinarily a revenue item. This is not to deny the possibility that there may be particular circumstances where it is proper to regard the purpose of interest payments as something other than the raising or maintenance of the borrowing and thus potentially as of a capital nature. However, in the usual case, of which the present is an example, where interest is a recurrent payment to secure the use for a limited term of loan funds, then it is proper to regard the purpose of interest payments as something other than the raising or maintenance of the borrowing and thus, potentially, of a capital nature. However, in the usual case, of which the present is an example where interest is a recurrent payment to secure the use for a limited term of loan funds, then it is proper to regard the interest as a revenue item, and its character is not altered by reason of the fact that the borrowed funds are used to purchase a capital asset." 39 Hence, it is possible that in a particular case an amount which is legally interest might be regarded as being on capital account. However it is not necessary in the present case to consider what are the necessary prerequisites for this to happen for in my view the present obligation on the part of BHP was not interest in the real sense of the word. 40 As her Honour pointed out, the description of "interest" as given in Re: Farm Security Act 1944 (Sask) [1947] SCR 394 at 411-412, aff'd [1949] AC 110 (PC) has been repeated in a number of cases. Rand J there said at 411-12: "Interest is, in general terms, the return or consideration or compensation for the use or retention by one person of a sum of money belonging to, in a colloquial sense, or owed to another ... But the definition, as well as the obligation, assumes that interest is referable to a principal in money or an obligation to pay money. Without that relational structure in fact and whatever the basis of calculating or determining the amount, no obligation to pay money or property can be deemed an obligation to pay interest." 41 While, ordinarily, interest will be the consideration for a loan of money, that would be an incomplete description of the use of the word, at least in ordinary parlance. An amount may be called interest notwithstanding that no money has been advanced, as is the case where an amount may be payable in respect of a facility whether or not it is used and an amount may be called interest where money is not lent but rather there is payable to a person purchase money and the interest is the price of the credit given. Perhaps it is the wide connotation given to the word in ordinary speech that exacerbates the problem of defining the concept. Money-lending legislation, designed to regulate loans of money at interest, expand the concept of loan very widely cf: Moneylending Act 1941 (NSW) (now repealed). 42 As Rand J observed in the passage cited above, it will generally be a necessary factor that there be money payable, whether by reason of a loan or credit, before what is paid will be called interest. There can be no doubt that if, on the date scheduled for completion of a contract of sale, the vendor agreed to extend the time in which the purchaser is to pay the purchase price for a period, conditionally on the purchaser paying interest, that that amount could properly be called interest. There is no need for completion to take place, and the vendor make a loan back to the purchaser at interest for this outcome to follow. 43 Likewise, where under a contract of sale a purchaser is allowed into possession as at the date of the contract and becomes entitled to receive the benefits and bear the burdens of the property as at that date, it is not unusual for there to be an undertaking to pay money on the outstanding purchase price, or for that obligation to speak in terms of the purchaser paying "interest". And, as her Honour pointed out in the judgment appealed from, equity would intervene, even where the terms of the agreement were silent, to impose an obligation of interest. International Railway Company v Niagara Parks Commission [1941] AC 328 at 345, Public Trustee v Schulz (1964) 111 CLR 482 at 498 and Harvela are all examples of the equitable doctrine that it would be unconscionable for the purchaser to have the use of both the purchase price, and the benefit of profits in the meantime, while the price remains unpaid. It is noteworthy, however, that there is no case where an amount has been held in equity to be payable to the vendor as a percentage of the unpaid purchase price, calculated from the date of contract, unless the purchaser has gone into possession. Something more would seem to be necessary (for example, the giving of extended credit on settlement) before the required payment would be referred to as interest. 44 On the facts of the present case, there is no loan that has been made by GE to BHP. An unpaid purchase price is not a loan: cf Duggan & Ryall v Commissioner of Taxation (1972) 129 CLR 365. The purchaser has not entered into "possession" of that which was sold - essentially the shares. There has been no suggestion that the parties have agreed to defer the completion of the agreement. It was originally contemplated that the agreement was to be completed in October, some six months from the date of contract. In the circumstances which happened, completion took somewhat longer but that, of itself, would not suggest any giving of credit. All that happened here is that the vendor agreed to pay two sums of money on completion. One was called the purchase price and was a fixed sum based on valuation made as at 1 January 1983. The other was a sum, capped by the amount of the underlying retained profits or 12% of the fixed amount should that turn out to be less. The fact that the second amount payable was expressed (subject to the cap as to retained profits) as a percentage does not suffice, in my opinion, to give the amount payable the true character of interest. However, to say that the amount was not interest is not to answer the question for decision, any more than to say that it is would. What has to be decided, at least initially, is what the payment called "interest" was for. It is useful in considering this question to ask what the outcome would be if the label which the parties attached to the payment had not been used. 45 First, it is not at all obvious, indeed the indications are to the contrary, that the so-called interest payment was for some extended credit that was to be given to BHP. The agreement entered into in April 1983 provided for completion to take place on 31 October 1983, albeit that this time could be extended by agreement, and was. Of necessity, some period of time had to elapse between contract and completion and the more so as BHP had to organise a consortium of financiers and participants. 46 Secondly, while the parties spoke of the arrangement as being "as at and from January 1, 1983",this was part of the mechanism which the parties adopted to deal with the calculation of purchase price. As I have already said, it is simply not the case that BHP was put into possession on that date or for that matter on the date of the contract, when it might more readily have been obvious that the amount in question had the character of interest. It is relevant here to note that between 1 January 1983 and 15 April of that year there was no binding agreement between the parties at all and nothing in the agreement purported, at least, to undo anything which GE may have done in that period. Further, the agreement was conditional upon BHP putting into place its financing and consortium arrangement. Had this not happened, the agreement would have been terminated and BHP would never have been in possession of the shares it contracted to purchase or the underlying assets reflected in those shares. 47 Thirdly, the contract provided that the whole of the monies payable, both the "purchase price" and the "interest" was payable on completion in exchange for the shares which were to be purchased. The consideration for the shares was a payment comprising two components, the so-called purchase price on the one hand and the so-called interest payment on the other. The former component was capable of being fixed and was, by reference to a valuation as at 1 January 1982. The latter component, which had regard to what happened thereafter was not capable of being fixed. While I would accept the submission of senior counsel for BHP that the so-called "interest" was not solely payment for the profits which were to accrue to BHP from the date of valuation, and for that reason capital, that is not the end of the matter. The so-called interest was merely part of the overall consideration pursuant to which, on completion, BHP would acquire the shares, there being covenants that would ensure that dividends not be paid in the period from contract to completion. 48 Fourthly, there is no reason why parties cannot fix a price, or part of a price, as an agreed percentage of some stipulated figure which will only become known at a future date. Such a figure could be receipts or earnings of an entity for a period ending on a particular date or the happening of a stipulated event. The latter was chosen in the present case. 49 It follows, in my view, that once it is accepted that the so-called interest payment was but part of the total consideration to be paid for the shares, it had the character of capital, just as the fixed purchase price did. To say that GE received compensation for standing out of the profits of UII and UMC is to ignore the mandate that what must be looked at is the advantage or benefit to the taxpayer not what the payee received. 50 Before turning to the remaining issues to be decided, I would wish to say something about the issue of substance and form. While, no doubt, questions such as whether a covenanted payment is an annuity will, having regard to historical matters, depend to some, perhaps a considerable, extent on the form which the parties have adopted: Australia and New Zealand Savings Bank Ltd v Commissioner of Taxation (1993) 42 FCR 535, referred to with approval on this point on appeal in Australia and New Zealand Savings Bank Ltd v Commissioner of Taxation (1994) 181 CLR 466 and Commissioner of Taxation v Australia and New Zealand Savings Bank Ltd (1998) 194 CLR 328; it is not to be assumed that form must always prevail over substance. The law has moved somewhat from the rather rigid adherence to form to be found in cases such as Inland Revenue Commissioners v Duke of Westminster [1936] AC 1. This is not to say that legal rights are not important or even, in a case such as the present, determinative. It is merely to emphasise that the Courts will always consider the substance of a transaction in characterising the character of the advantage which is sought to be obtained in determining whether an outgoing is on revenue account or whether, as here, on capital account and thus excluded from deductibility.

Was there full and true disclosure in the 1985 year of income? 51 As is noted earlier in these reasons, the 1984 year of income was initially treated by BHP, and accepted by the Commissioner, as a year in which BHP had made a loss, available to it to carry forward into the 1985 year of income, and thus had no taxable income. The assessment, now the subject of the objection decision under appeal, which was thereafter made was, it is now accepted by BHP, an original and not an amended assessment as a consequence of the decision of the High Court in Commissioner of Taxation v Ryan (2000) 168 ALR 704. The same is not true of the 1985 year of income. The assessment the subject of the objection decision was an amended assessment, there having been an earlier assessment of tax in respect of the positive taxable income that had been returned by BHP in that year. 52 The Commissioner's power to amend an assessment under ss 170(2) of the Act, as it stood at the relevant time, depends (and this is common ground) upon whether BHP has made: "a full and true disclosure of all the material facts necessary for his assessment." 53 The parties accept the test, originating with the judgment of Menzies J in Austin Distributors Pty Ltd v Commissioner of Taxation (1964) 13 ATD 429 at 432-3, followed by a full Court of this Court in MIM Holdings Ltd v Commissioner of Taxation (1997) 36 ATR 108 as to what is meant by a full disclosure. His Honour said: "The requirement of s 170 of the Income Tax and Social Services Contribution Assessment Act 1936 (Cth) is not met by anything less than full disclosure of all the material facts, and a disclosure which leaves the Commissioner to speculate as to some of the material facts is not sufficient … The matter can be tested in this way. If advice were to have been sought by the taxpayer whether or not the sum in question was a taxable premium, would the person from whom the advice was sought have required more information than this return disclosed to the Commissioner." 54 The above comment is subject, however, to two qualifications. The first, as noted by Sheppard J in Stapleton v Commissioner of Taxation (1989) 20 ATR 996 at 1008-9 is the possibility that a prudent adviser might require further information, but receipt of that information might prove immaterial. The second is that while Menzies J referred to the return as the source of disclosure, the disclosure might arise in other ways, such as correspondence with the Commissioner or even, as suggested in Foster v Commissioner of Taxation (1951) 82 CLR 606 and Commissioner of Taxation v Levy (1961) 106 CLR 448, in a different return, perhaps even of a different taxpayer, lodged in a different office of the Commissioner from that in which the assessment was actually made. The taxpayer is not required to disclose that which is already known to the Commissioner. 55 A disclosure will be true if it meets the test laid down by Dixon CJ in Levy, where his Honour said at 464: " 'True' in this phrase appears to me to refer simply to the correctness of the material facts disclosed and to imply nothing as to the taxpayer's knowledge of the erroneous character of any incorrect fact he may state." 56 In Levy, an employee of the taxpayer had, unknown to the taxpayer, misappropriated monies from a bank account. A consequence was that the returns of the partnership and the partners in years prior to the 1955 year of income understated the taxable income. However, in the 1955 year of income there was shown in the partnership return the correct income and there was a claim made for a deduction under the heading "forgery defalcations" in a nominated amount. What actually happened, apparently, was that an accountant of the firm (not an employee) drew cheques on the firm's accounts in his own favour, forged the signature and recorded the cheques in the books as being for supplies purchased for the business. The assessor accepted the return as correct, and the "forgery defalcation" to be deductible. Assessment accordingly issued to the partners in respect of their share of the net partnership income. 57 A deduction was available for embezzlement or larceny by an employee under s 71 of the Act as it then stood. No deduction was in fact available under this section for the loss which the taxpayer suffered for the forger was not an employee. Had the accountant been an employee the position might have been different. At best, the description "forgery defalcation" was ambiguous. Indeed, it might be thought to have been misleading. However, what was meant by "forgery defalcations" was made clear in that the actual facts had been orally disclosed before an assessment was made of the partner's taxable income for the 1955 year. In other words, the oral disclosure made it clear what was meant by the label "forgery defalcations" before the assessments issued in the year of income. For completeness it should be said that no deduction was available in assessing the partnership returns for the loss under s 51(1) of the Act, the case not falling within the principles stated by the High Court in Charles Moore & Co (WA) Pty Ltd v Commissioner of Taxation (1956) 95 CLR 344. 58 Although there had been no full and true disclosure in the years of income prior to the 1955 year, it was held by Kitto J, whose decision was affirmed on appeal that there was a full and true disclosure in the 1955 year. As Kitto J said at first instance in that case at 456 (the judgment was affirmed on appeal), there would be no full and true disclosure where a taxpayer has left the Commissioner uninformed or incorrectly informed up to the time of assessment of a material fact. However, once the true facts had been made known to the Commissioner, there was a full and true disclosure. As Kitto J put it at 457, the oral disclosure was sufficient "to enable the item 'forgery defalcations' to be fully understood." 59 It may be accepted that a disclosure will not be full and true if it is misleading in a material respect: W Thomas & Co Pty Ltd v Commissioner of Taxation (1965) 115 CLR 58 at 74. In that case the taxpayer had in correspondence asserted that certain repairs for which a deduction had been claimed had been carried out because of an "overhall" of a building arising from the acquisition of a business. This assertion was disavowed by the taxpayer at the hearing. The taxpayer's purpose was not really relevant to the question of the deductibility of the repairs. Although Windeyer J expressed some disquiet it was found that there was a full and true disclosure, presumably because the incorrect, or perhaps misleading statement was not material. 60 In the light of those principles, it is now necessary to set out what BHP disclosed. In its accounts accompanying its return of income for the 1984 year of income BHP claimed a deduction of $198,331,374 which it referred to as "interest paid to General Electric Company on purchase of Utah Group of Companies". The particular schedule referred to an exemption from withholding tax in respect of the interest paid having been granted by the Commissioner on 27 August 1984. As already indicated, the allowance of a deduction in the amount claimed, resulted in a loss carry forward in that year of income and, initially, no assessment of taxable income or tax payable thereon. The return for the 1985 year of income claimed the loss, said to carry forward to that year. The initial assessment for the 1985 year of income issued on 4 April 1986 allowing the loss carry forward as a deduction. The amended assessment in that year did not issue disallowing that loss until 21 February 1992. 61 From as early as 29 March 1983 there was correspondence between BHP and the Commissioner on various tax aspects of the agreed purchase from GE of that company's share interests in the Utah group. This correspondence was not directly related to the question of deduction presently under consideration. That correspondence did, however, refer to the purchase price to be paid as "approximately US$2.4 billion". There were a number of meetings held directly with the First Assistant Commissioner of Taxation, Mr Hoctor and much correspondence. Copies of the proposed purchase agreement in draft form were forwarded to the Commissioner. 62 On 27 March 1984, BHP wrote to the Commissioner making application, purportedly under s 128H, for the issue of a Certificate of Exemption (from interest withholding tax) "in respect of interest payable to the General Electric Company (GE) under the terms of the Purchase Agreement dated 1st January, 1983, between GE and this Company (copy attached)." That letter envisaged that there could be some amendments to the agreement enclosed. The letter said: "This company will pay the interest due under Article 1.1 to GE on the closing date which is now anticipated to be 2nd April, 1984. The amount of the interest is to be calculated at the rate of 12% per annum but is limited to the combined net income of the Businesses and GE/UDC Businesses as defined. It is anticipated that the amount of interest payable will be of the order of US$190 million." The purpose for which the loan was raised was for the purchase on terms of the UI, UMC and UDC shares by an Australian entity (BHP) and is a qualifying use for purposes of Division 11A. BHP was an Australian entity at all times prior to and throughout the period of the loan. … Under Article 1.2 of the Purchase Agreement the Company may assign its rights and obligations under the Agreement, including the right to take all or a portion of the shares, to any direct or indirect wholly owned subsidiary… However for the period from 1t January, 1983 to closing, 2nd April 1984, this Company will be the purchaser of the shares responsible for the payment of the interest. It is requested that a Certificate of Exemption under section 128H be issued to this Company in relation to the interest payable under the Purchase Agreement. … As the interest is due for payment on 2nd April, 1984, it is requested than an early reply be given to this letter." 63 By letter dated 11 May 1984, BHP wrote again to the Commissioner, referring to the previous letter "in relation to the certificate of exemption sought in respect of the interest payable to the General Electric Company ('GE') by this company" and enclosed a final copy of the purchase agreement as amended. It was noted that the final interest paid over (but still subject to audit and adjustment) was $US135,539,000. Apparently there was some mistake in the document forwarded (it was in fact in the form as at 6 December 1983). In the result, on 6 July 1984, the correct document was forwarded. 64 On 27 August 1984, the Commissioner issued a Certificate of Exemption which he noted was given in respect of the "loan described in the Certificate". The actual Certificate referred to a loan from GEC of $US2,410,194 less adjustments from 31 December 1982 to 2 April 1984. There can be little doubt that in issuing the Certificate the Commissioner was under no uncertainty that it was issued in relation to the amount referred to as interest in Clause 1.1 of the purchase agreement and, indeed, the reference to the period of the loan as being from 31 December 1982 to 2 April 1984 is intelligible only by reference to the purchase agreement and the fact that it purported to be dated as at 1 January 1993 and settlement of it was to take place on 2 April 1984. 65 The Commissioner relies upon the description of the amount claimed, both in the accounts accompanying the return and in the correspondence to which reference is made above as "interest" and the reference in the letter of 27 March 1984 to "loan" in submitting that the disclosure made to the Commissioner was "not a true disclosure". He relies upon the lack of disclosure of the precontractual details to which reference was earlier made and in particular the evidence of Mr Flew referred to in para 34 of these reasons to submit that the disclosure made by BHP was "not full". 66 In my opinion while the disclosure in the return could hardly be said to be either "full" or "true", it became "full" when the copy of the purchase agreement in completed form between BHP and GE was produced to the Commissioner. As the above reasons demonstrate, the question of the deduction of the so-called interest, and in particular the question of what the payment was for was to be ascertained from the purchase and sale agreement. There was no need for the other information to which the Commissioner referred. That information added nothing to the purchase and sale agreement. 67 The only issue upon which minds may differ is whether it is correct to say that BHP made, at least, ultimately, a disclosure that was "true". There is no doubt, for the reasons which I have already given, that the payment in question was not interest. So far as the letter of 27 March 1984 is concerned, it is abundantly clear that there never was any loan made by GE to BHP. A part of the difficulty is that while s 128H refers to "loan" (an undefined expression) and "interest", the withholding tax and certificate of exemption can apply not only to "interest" but also to amounts "in the nature of interest" (see definition in s 128A(1)). Just how broad that latter concept is is far from clear. The broader the concept of interest, the more it could impact on the meaning of the word "loan" as used in s 128H. At the time the interest withholding tax provisions were introduced, the then Treasurer indicated that it was intended to include discounts on bills of exchange within the concept of "interest", yet such discount is clearly not interest, nor is there in any technical sense any "loan" in the case of a bill discount facility:cf Willingale (HM Inspector of Taxes) v International Commercial Bank Ltd [1978] AC834. 68 Against this background it is to be noted that the correspondence made it clear beyond doubt what BHP was talking about. It had agreed to purchase the relevant shares from GE under an agreement which it forwarded to the Commissioner. That agreement referred to the relevant payment as "interest". The Commissioner could, in my view, have been in no doubt upon reading the correspondence together with the purchase and sale agreement that there was no loan in the sense of monies in fact advanced by BHP to GE. What was being referred to was the payment identified in the correspondence as that to be made "under Article 1.1 of the agreement calculated as set out in that clause". While I accept that a disclosure that is but a half truth is not a true disclosure or, for that matter, that a misleading disclosure is not a true disclosure, the present disclosure has to be seen in the context of the correspondence which I have summarised. Notwithstanding the misuse of labels, it is hard, finally, to conclude that a disclosure that the amount claimed to be deductible as "interest" was the amount payable under Article 1.1 of the agreement was other than both a full and a true disclosure once the agreement itself was produced. To paraphrase what Kitto J said in Levy, BHP's reference to the interest as being that payable under Article 1.1 of the agreement enabled the claim for interest "to be fully understood". This is particularly so when it is appreciated that, as noted earlier, from shortly after the public announcement of the proposed transaction, BHP had been having discussions with the First Assistant Commissioner of Taxation concerning the proposed purchase under which BHP was to pay "approximately US 2.4 billion for the purchase of certain share interests" and steps that were proposed to be taken after the purchase was completed. It is inconceivable in the light of the correspondence and the discussions which representatives of BHP had with officers of the Australian Tax Office details of which were not given in evidence that the Commissioner was in any doubt as to what BHP meant by either the reference to either the reference to "interest" or the reference to "loan" in the correspondence. 69 It follows in my view that the Commissioner was not authorised to amend the assessment for the 1985 year of income and in consequence that the objection decision of the Commissioner in respect of that year of income should be set aside.

Additional tax in the 1984 year of income 70 It is common ground that in the assessment for the 1984 year of income the Commissioner imposed additional tax under s 226(2) of the Act, remitting the tax in part under s 226(3). It is also common ground that s 226 of the Act was repealed with effect from 14 December 1984. It was replaced with a totally different provision inserted as Part VII by Act No 123 of 1984, s 152. The 1985 assessment, on the other hand, and correctly so, imposed additional tax by reference to s 223 of the Act, which had been inserted by the 1984 legislation. 71 The difference between the two provisions is considerable. The relevant part of s 226(2) operated to impose additional tax on a taxpayer who: "includes in his return as a deduction for … expenditure incurred by him an amount in excess of the expenditure actually incurred by him." Section 223(1) on the other hand imposes a penalty where - "(a) a taxpayer (i) makes a statement to a taxation officer, or to a person other than a taxation officer for a purpose in connection with the operation of this Act or the regulations, that is false or misleading in a material particular; or (ii) omits from a statement made to a taxation officer, or to a person other than a taxation officer, or to a person other than a taxation officer for a purpose in connection with the operation of this Act or the regulations, any matter or thing without which the statement is misleading in a material particular; and (b) the tax properly payable by a taxpayer exceeds the tax that would have been payable by the taxpayer if it were assessed on the basis that the statement were not false or misleading, as the case may be." A reference in this provision to a statement to a taxation officer extends, by force of s 223(8), to a statement in a return. 72 The amendment was, it would seem, precipitated by cases such as Commissioner of Taxation v Rabinov (1983) 50 ALR 541, which made it clear that the language of s 226(2) was not apt to impose additional tax where a taxpayer claimed an amount in a return which was not an allowable deduction but nevertheless had indeed been incurred by the taxpayer. 73 Following upon the repeal of s 226 and its replacement, inter alia, by s 223 of the Act, while it can be said that it is the Act itself, and not the Commissioner, which imposes the additional (or penalty) tax, that additional tax was required by s 227 of the Act to be assessed by the Commissioner. In this process of assessment the Commissioner was empowered by s 227(3) to remit the whole or any part of the additional tax payable. While, contrary to the submissions of BHP, the Commissioner in considering the remission could (had he acted under s 227(3), rather than purporting to act under s 226(3)) properly take into account the amount of time the Commissioner had been out of the tax properly payable, whether with or without any culpability factor (that could not be said to be an irrelevant consideration in the sense those words are used in Minister for Aboriginal Affairs v Peko Wallsend Ltd (1986) 162 CLR 24), it is obvious enough that the Commissioner could not be said to be validly exercising the power of remission under s 227(3) when he acted under s 226(3). The offences, if that word can be used, which attract additional tax and thus the power of remission in each case are completely different. The considerations which would need to be considered in remitting under one section must include the circumstances which themselves are said to give rise to the additional tax. So, for example, the power of remission under s 227(3) of necessity involves, as a starting point, the making of a misleading statement. The power of remission under s 226(3), on the other hand, involved the non-incurring of an amount claimed to have been incurred: cf Cohen v Commissioner of Taxation [2000] FCA 833. 74 It follows that, to the extent that the Commissioner notified additional tax in the assessment payable under the repealed s 226, the assessment was excessive and the objection to that effect must be allowed. Whether the Commissioner can now amend the assessment by notifying a penalty imposed under s 223 of the Act and in so doing exercise the power of remission conferred under s 227(3) will depend upon the provisions of s 170 of the Act and, in particular, s 170(7). Given that this matter was not the subject of real argument in the appeal it is preferable that I refrain from expressing an opinion on the matter.

Orders 75 The parties requested that they be permitted to argue the question of costs after reasons had been delivered on the substantive matters in the appeal. Having regard to the request of the parties, I would order that they each file, within 14 days of the delivery of these reasons, written submissions on the question of costs. Subject to the question of costs I would propose the following orders:

1. In respect of the 1984 year of income: (a) the appeal be allowed in part. (b) the objection decision be set aside and in lieu thereof it be ordered that the objection of the appellant be allowed in part so far as it related to the imposition and remission of penalties. (c) the orders and declaration made by the learned primary Judge be set aside and in lieu thereof it be ordered that the matter be remitted to the respondent Commissioner of Taxation to be dealt with in accordance with law. 2. In respect of the 1985 year of income: (a) the appeal be allowed in part. (b) the orders and declaration made by the learned primary Judge be set aside and in lieu thereof it be ordered that the matter be remitted to the respondent Commissioner of Taxation to be dealt with in accordance with law.

I certify that the preceding seventy-five (75) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Hill.

BETWEEN: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

AND: THE BROKEN HILL PROPRIETARY COMPANY LIMITED

REASONS FOR JUDGMENT HEEREY AND MERKEL JJ: 76 We have had the advantage of reading the draft reasons for judgment of Hill J. We agree that the amount of $198,331,374.00 paid by Broken Hill Proprietary Company Limited ("BHP") to General Electric Company ("GE") pursuant to an agreement entered into on 15 April 1983 is not an allowable deduction under s 51(1) of the Income Tax Assessment Act 1936 (Cth) ("the Act") for the reasons given by his Honour. However, we have arrived at a different conclusion to that arrived at by Hill J in relation to the Commissioner's power to amend the assessment of tax payable by BHP in respect of the year of income ended 31 May 1985 ("the 1985 year of income"). 77 In our view BHP did not make a full and true disclosure of all the material facts necessary for its assessment in respect of that year of income. In order to explain why we have arrived at that conclusion it is necessary to briefly summarise the matters that have led us to conclude that the amount paid by BHP in respect of the interest was a component of the purchase price payable by BHP to acquire GE's shareholding in the Utah group of companies and, therefore, was an outgoing of capital or of a capital nature. 78 In the present case the questions of what the payment of interest was for, and what was the advantage sought to be achieved by that payment, are able to be answered without going outside the agreement between BHP and GE. The agreement was an arms length sale by GE to BHP of GE's shareholdings in the Utah group of companies. Under the terms of the agreement the consideration payable on completion was a payment comprising two components: the so-called purchase price and the so-called interest payment. The purchase price was a fixed sum based on a valuation of the underlying assets of the Utah group of companies made as at 1 January 1983. The interest was a sum, capped by the amount of the underlying retained profits between 1 January 1983 and completion, or 12% of the fixed amount should that turn out to be less. It was only upon completion that BHP acquired title to the shares. As the interest payment was merely part of the overall consideration payable by BHP on completion in order to acquire the shares the interest was not payable in respect of any loan made, or any credit given, by GE to BHP in respect of any part of the purchase price payable on completion. 79 We now turn to consider the disclosures made by BHP to the Commissioner in respect of the interest paid by it to GE and the context in which those disclosures were made. 80 Under cl 1.1 of the agreement BHP was obliged to pay the interest to GE "free and clear" of any withholding tax. It would appear that, in an endeavour to avoid the potential burden imposed upon it by cl 1.1, BHP applied to the Commissioner for the issue of a Certificate of Exemption from withholding tax under s 128H of the Act in respect of the interest. 81 The application was made by BHP by a letter to the Commissioner, enclosing the agreement, dated 27 March 1984. After outlining details of the agreement, BHP stated: "… This Company will pay the interest due under Article 1.1 to GE on the closing date which is now anticipated to be 2nd April, 1984. The amount of the interest is to be calculated at the rate of 12% per annum but is limited to the combined net income of the Businesses and GE/UDC Businesses as defined. It is anticipated that the amount of interest payable will be of the order of US$190 million. The purpose for which the loan was raised was for the purchase on terms of the UI, UMC and UDC shares by an Australian entity (BHP) and is a qualifying use for purposes of Division 11A. BHP was an Australian entity at all times prior to and throughout the period of the loan. In this regard please refer to file WT 10 001 in relation to the Company's status as an Australian entity. … It is requested that a Certificate of Exemption under Section 128H be issued to this Company in relation to the interest payable under the Purchase Agreement. The agreement was signed on 15th April, 1983 and is dated 'as of 1st January, 1983' and supersedes the Memorandum of Intention dated 27th January, 1983, between the parties. As the interest is due for payment on 2nd April, 1984, it is requested that an early reply be given to this letter. If there is any further information you require please contact Mr. F.A. Kenna on 609 3150." 82 By a further letter dated 11 May 1984 BHP forwarded to the Commissioner a copy of certain amendments made to the agreement and stated: "The amount of interest paid over on 2nd April, 1984 by BHP to GE was US$135,539,000. This amount is subject to audit and could change when the result of the audit is known." 83 Finally, on 6 July 1984 BHP wrote a further letter to the Commissioner stating that the amendments sent on 11 May 1984 were not accurate and enclosed a correct copy of the amendments. 84 On 27 August 1984 the Commissioner informed BHP that it had been granted a Certificate of Exemption under s 128H of the Act "in respect of the loan described in the Certificate". The Certificate, which was enclosed with the letter and was dated 27 August 1984, provided: "CERTIFICATE UNDER SECTION 128H(2.) OF THE INCOME TAX ASSESSMENT ACT 1936, AS AMENDED The loan, the details of which are shown below, raised by you complies with the requirements of subsection (2.) of section 128H of the Income Tax Assessment Act 1936, as amended. Particulars of the loan: (a) The amount of the loan: US$2,410,194,000 less adjustments (b) The period of the loan: 31 December 1982 to 2 April 1984 (c) Rate of interest: 12% per annum (d) Terms on which interest is payable: On maturity (e) The use(s) to which the loan is to be put: Purchase of shares in Utah, UMC and UDC (f) The name of the lender(s): General Electric Company" 85 In BHP's tax return for the year ending 31 May 1984 the interest paid was disclosed by BHP as follows: "EXTRAORDINARY ITEM Interest paid to General Electric Company on purchase of Utah Group of companies $198,331,374 Less: Income Tax 91,232,000 Extraordinary item net of income tax $107,099,374 Exemption from withholding tax in respect of the interest paid to General Electric was granted in your letter of 27th August 1984, reference W 10,001." 86 The disclosure made in BHP's return is to be understood in the context of s 128H(1) which provides: "An entity that has raised a loan the interest on which could, subject to the issue of a certificate under subsection (2) in respect of the loan, be interest referred to in section 128G may apply to the Commissioner in writing for the issue of such a certificate." 87 A Certificate of Exemption can only be issued in respect of a "loan" which has been employed, or is intended to be employed, for a qualifying use (ss 128H(2) and 128A(8)) which includes the purchase of shares. While the definition of a "loan" for the purposes of s 128H(1) must take into account the extended definition of interest in s 128A(1), which included amounts "in the nature of interest", it is clear that the payment of the consideration payable by BHP on completion did not involve, directly or indirectly, any loan from GE to BHP. 88 It is significant that the disclosure in the return refers to the Commissioner's letter of 27 August 1984, which enclosed the Certificate of Exemption. Relevantly, the Certificate stated that: · it was in respect of "the loan" of US$2,410,194,000, less adjustments, made by GE from 31 December 1982 to 2 April 1984; · the "use" to which the loan was to be put was "Purchase of shares in Utah, UMC and UDC". 89 We accept the summary at [53] to [59] in the reasons of Hill J of the general principles to be applied in determining whether there was a "true and full disclosure" for the purpose of s 170(2) of the Act. The observations of Windeyer J in W Thomas & Co Pty Ltd v The Commissioner of Taxation of the Commonwealth of Australia (1965) 115 CLR 58 at 74 are of particular relevance in the present case. His Honour said that a taxpayer that unsuccessfully claimed an allowable deduction under s 51(1) on the basis that certain expenditures were on revenue account, could succeed on the question of true and full disclosure: "…if it appears that without any accompanying misrepresentation it had made known to the Commissioner all that, properly considered, would lead to the conclusion that the expenditure was of a capital nature." [Emphasis added] 90 In our view it is of the essence of a "full and true" disclosure that it be made without any accompanying material misrepresentation. Thus, where the disclosure includes the material facts necessary to enable the assessment, but also includes an accompanying material misrepresentation in relation to those facts, it is unlikely that there will have been a full and true disclosure for the purposes of s 170(2). 91 In the present case the Commissioner was informed by BHP in its tax return for the 1984 year of income that: · it was claiming, as an allowable deduction, interest paid to GE on the purchase of the Utah group of companies; and · an exemption from withholding tax in respect of that interest had been granted by the Commissioner as set out in his letter of 27 August 1984. 92 The letter of 27 August 1984, when read together with the enclosed Certificate, is to the effect that the interest in question had been paid on a loan from GE to BHP for the period from 31 December 1982 to 2 April 1984 and that the use to which the loan was put was the purchase of shares in Utah, UNC and UDC. 93 If BHP's disclosure had been that the payment of interest on the purchase price was made pursuant to cl 1.1 and 1.3 of the agreement we would accept that that disclosure, without more, would have been a full and true disclosure. However, there was more. The disclosure in the return, by incorporating the Commissioner's letter of 27 August 1984, was to the effect that the interest being claimed was an allowable deduction as it was paid on a loan made by GE to BHP in respect of the purchase by BHP of the Utah group of companies. As there was no such loan the disclosure was false. 94 Of course, there was also the earlier disclosure in the letter of 27 March 1984 but, in our view, that disclosure was ambivalent. The letter stated that the "loan", which was the subject of the application for a Certificate of Exemption, was raised for the "purchase on terms" of the shares. The context of the letter does not suggest that "loan" was being used in any extended or unusual sense. Thus the disclosure was to the effect that, as the loan had been raised to enable payment of the purchase price, a Certificate of Exemption under s 128H could be granted. In making that disclosure BHP made substantially the same misrepresentation in the letter as it made in its return. The Commissioner had also been informed in the letter that the interest was due under cl 1.1 as interest payable on the purchase price for the shares. Although the latter statement was correct it does not follow that there was full and true disclosure for the purposes of s 170(2) because that statement was followed by the statement regarding the loan. The existence of the inconsistent statements would have caused the Commissioner to speculate as to the true facts and would have led him to require more information: cf Austin Distributors Pty Ltd v Commissioner of Taxation (1964) 13 ATD 429 at 432-433 per Menzies J. Thus, even on the most favourable view for BHP, the material statements made in its letter of 27 March 1984 were inconsistent and therefore not a full or true disclosure. 95 It appears that BHP, in order to ensure that it did not bear the burden of withholding tax, selected "facts" that disclosed to the Commissioner that interest was payable, and had been paid, on a loan that had been made by GE to BHP where no such loan had in fact been made: cf Tapp v Lee (1803) 3 Bos and Pul 367 at 371 and Krakowski v Eurolynx Properties Limited (1995) 183 CLR 563 at 575. BHP contends that, as the agreement had been produced to the Commissioner there was therefore a full and true disclosure as, on examining the agreement, the Commissioner would have realised that there had been no loan. We are unable to accept BHP's contention. Implicitly, if not explicitly, the contention is that BHP made a full and true disclosure as the Commissioner ought to have disregarded BHP's false and misleading statement concerning the loan notwithstanding that, as requested by BHP, the Commissioner had acted on that statement in giving a withholding tax exemption. If that contention were to be accepted BHP would be taken to have made a true and full disclosure notwithstanding that it had also made an accompanying false and misleading statement as to a matter that was material to its assessment. 96 In our view the disclosures made to the Commissioner by BHP were misleading as they included an "accompanying misrepresentation" as to a material fact. Accordingly, BHP has not established that it made a true and full disclosure for the purposes of s 170(2). 97 For the above reasons the Commissioner was authorised to amend his assessment in respect of the 1985 year of income and the objection decision of the Commissioner in respect of that year of income was valid and should not be set aside. Thus, we would also allow the Commissioner's appeal in respect of the objection decision for the 1985 year of income. It follows that we also do not accept BHP's contention that it did not make a statement that is false and misleading in a material particular for the purposes of the penalty provisions. 98 As to additional tax, we agree with Hill J that there was, for the reasons his Honour gives, an incorrect assessment for the 1984 year. The appeal should be disposed of as his Honour proposes. 99 It remains to consider the question of additional tax for the 1985 year. In our view, BHP has not established that the Commissioner erred in adopting a 14.026 per cent per annum component to calculate the amount of tax which would not be remitted. The power to remit is a wide discretionary power, unfettered by express limitations. The use of the underpaid tax by BHP, and compensation for the Commissioner by way of interest, were considerations to which he was entitled to have regard. 100 In respect of the 1985 year the Commissioner's appeal should be wholly allowed. 101 As to costs, the Commissioner has only failed on additional tax for the 1984 year. This issue occupied very little time at the hearing of the appeal, probably less than five per cent. Re-assessment may well not result in any practical benefit for BHP. In the circumstances, we do not think the Commissioner should be deprived of an order for full costs.

I certify that the preceding twenty-six (26) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Heerey and Merkel.

Counsel for the Applicant: G T Pagone QC, M M Gordon

Solicitor for the Applicant: Australian Government Solicitor

Counsel for the Respondent: B J Shaw QC, D H Bloom QC, J W de Wijn QC

Solicitor for the Respondent: Arthur Robinson & Hedderwicks