Commissioner of Taxation v Energy Resources of Australia Limited [1994] FCA 1521;

Commissioner of Taxation v Energy Resources of Australia Limited [1994] FCA 1521; - FCA 1994 case summary — Zoe

[34]

(1) Purpose

The purpose of the facility was stated to be to enable ERA to

prepay certain borrowings and to provide it with accommodation for

its general operations (cl.2.01).

(2) Form

The form of the facility (for an amount not to exceed

USD210,000,000 or its equivalent in a currency other than USD) was

that ERA could request -

(a) the Euronote Tender Panel Agent ("the Panel Agent") to

invite the Euronote Tender Panel Members ("the Panel

Members") to bid for Euronotes, as provided in cl.5.01,

having an aggregate amount outstanding up to USD140,000,000,

or, if some or all of the Euronotes were issued in

currencies other than USD, the amount of USD up to

USD140,000,000 equivalent to the face amount of such

Euronotes converted into USD at the Manager's spot rate of

exchange two business days before the issue of the note

(cl.2.02(a); cl.1.01).

(b) the Banks to purchase any unsold Euronotes, as

provided in cl. 2.03(a) and cl. 5.01, up to USD

140,000,000 or its equivalent in other currencies

(cl.2.02(b)).

(c) Letters of Credit or guarantees, as provided in cl.5.02, to

be opened, up to USD210,000,000 (cl.2.02(c));

(d) CBA to provide short term funding, ("Swingline/short term

cash funding facility") as provided in cl.5.03, up to

USD50,000,000 (cl.2.02(d));

(e) CBA to make Interim Loans, as provided in cl.5.04, up to

USD140,000,000 (cl.2.02(e)).

(3) Request Notices

Under the procedure for a request notice by ERA to effect a

Utilization under a Facility, ERA was to specify the Facility it

wished to utilize (cl. 4.01). In utilizing the Underwriting

Facility, ERA was to specify -

(i) the proposed issue date (cl.4.02(b));

(ii) the desired currency denomination of the notes provided that

a currency other than USD (and not AUD in any event) would

be specified only in certain events (cl.4.02(d)(i)(aa));

(In fact, for present purposes USD was the only currency

used.)

(iii) the amount, being not less than USD10,000,000 and not

more than USD50,000,000 (cl.4.02(d)(i)(bb));

(iv) the desired term of each note, either one, two, three or six

months (cl.4.02(d)(i)(cc)); and

(v) whether or not the notes were to bear interest

(cl.4.02(d)(i)(dd)).

(4) The Facilities

As was provided in cl.2., there were four Facilities in place. We

are concerned with Euronotes issued pursuant to the first, the

Euronote Underwriting Facility, which was expressed to be

available upon these terms:

(i) Panel Agreements. It was the declared intention of ERA,

the Manager, and the Panel Agent to enter into Euronote

Tender Panel Agreements with financial institutions dealing

in Euronotes (cl.5.01(a)).

(ii) Tender Procedure. Upon submission of tenders, the Panel

Agent and ERA were to consult with a view to agreeing on the

Euronote Issue Amount for each proposed Tranche

(cl.5.01(b)(iv)).

(iii) Acceptance of Tenders. ERA was to request the Panel Agent

to accept all tenders at a rate less than or equal to the

underwritten rate, in order of effective yield

(cl.5.01(c)(i)).

(iv) Purchase by Banks. If the aggregate face amount of

Euronotes to be issued in respect of a particular proposed

Tranche for which purchasers procured by the Panel Agent was

less than the proposed Issue Amount, and certain other

conditions were satisfied, including the giving of notice by

ERA, the Banks were obliged to purchase the Euronotes at the

prescribed subscription price (cl.5.02(e)(i)).

(v) Payment to ERA. The Panel Agent was to pay the aggregate

Euronote purchase and subscription prices to the bank or

other account specified by ERA (cl.5.01(g)).

(5) Accommodation Limit Reductions and Cancellations

On the reduction dates specified in Schedule 2, the Total

Commitment was to be reduced each year to a prescribed amount

(cl.10.01). For instance, by 30 June 1987, the prescribed amount

was 92% of the Total Commitment. By 30 June 1993, it was 18%. By

30 June 1994, at the expiration of the term of the Facility, it

was to be zero (Sch.2). (In the events which happened, ERA's

obligations under the Facility were fully discharged by 9 October

1990.) Further, ERA could, on notice, declare (within limits)

that a part of the Total Commitment be deemed unavailable

(cl.10.02). ERA could, on notice, cancel the whole, or a part

(within limits) of the Total Commitment (cl.10.03).

(6) Payments

ERA was to make all payments, if in USD, on the due date in same

day funds, unless otherwise specified (cl. 12.01(a)). (In fact,

relevantly, none other was specified.) If made in any other

currency, the payment was to be made on the due date in lawful

money of that country and in immediately available funds which

were freely transferable and convertible into USD (cl. 12.01(b)).

(7) Governing law

The agreement was governed by the laws of the Australian Capital

Territory (cl.22.11).

(8) The form of the Euronotes

A form of Euronote Tender Panel Agreement was annexed to the

agreement. It provided for the issue of notes in the form of

Schedule One either in USD or such other currency as each Bank may

approve. The form in Schedule One (subject to a statement that

amendments will be required if the note is denominated in a

currency other than USD) is, relevantly, as follows:

"For value received, ERA promises to pay to the bearer on

the Maturity Date the Principal Amount upon surrender of the

Note to the Principal or other Paying Agent of ERA.

(In a specimen note in evidence, the Principal Agent was

described as Kredietbank S.A. at an address in Luxembourg.

Alternatively, surrender could be made to Kredietbank N.V.,

as a Paying Agent, at a London address.)

Payment is to be made by transfer to an account with a bank

outside the USA. The obligations of ERA are subject to the

laws of England."

(There is a provision for interest, if applicable, but this

was not made applicable in the case of the subject notes.)

[50]

(a) Division 3B

(i) For present purposes, a note or bill transaction, as here,

should be distinguished from a loan.

(ii) When moneys are borrowed, "the moneys lent do not cease to

exist, but are represented by the obligation to repay" (at

4,229), the payment of interest being a separate obligation.

On a loan, if appropriate, an exchange gain may be

calculated in Australian dollar terms, by comparing the

Australian currency value of the moneys when lent and their

value when repaid. Further, a deduction for the interest

would be calculated in Australian currency.

(iv) In a note transaction, "(t)here is no underlying concept of

a sum paid which has not ceased to exist. The sum paid on

maturity is not a repayment of the sum received on the issue

of the note plus interest. It is simply the sum which, by

the issue of the note, the issuer agreed to pay" (at 4,230).

(iv) The concepts "currency exchange," "currency exchange gain"

and "currency exchange loss," which are used in Division 3B,

"involve the notion of a conversion from one currency to

another" (at 4,231), ordinarily when there is a difference

between the money of account and that of payment. In

referring to the concept of the realisation of a gain or a

loss, s.82V(2)(b) describes "a real gain or loss and not

merely an artificial or figured gain or loss" (at 4,231).

(v) Section 20 does not require that every transaction in a

foreign currency be converted into Australian dollars.

That provision will apply only where a transaction should be

converted into Australian dollars for the purposes of the

Act. But here, there was no relevant occasion, in fact, for

any conversion; nor did any provision of the Act require

that any currency be converted. There was no occasion to

calculate in Australian currency the face value of the notes

as at the dates of their issue. The date of maturity was

the relevant date on which to calculate the value in

Australian currency of the payment then made. But because,

as at that date, there was no material variation in the

exchange rate, there could be no exchange gain or loss.

(vi) In any event, it appears that there would be no

"realisation" of any gain or loss for the purposes of s.82W

until the final discharge of the facility arrangement.

(b) Sections 25(1) and 51(1)

(i) In the case of a loan, any exchange gain resulting from the

borrowing and lending of money ordinarily will follow the

nature of the transaction, so that, e.g. in a borrowing for

capital purposes, an exchange gain or loss will not fall

within s.25(1) or s.51(1); on the other hand, in a loan to

provide "funds to be used in the ordinary and regular

processes by which the money-making activities of the

business are carried on, any exchange gain or loss will be

assessable or deductible under ss.25(1) and 51(1) ... ." (at

4,230). In either case, an interest payment, being a

separate obligation, will be brought to account, in

Australian currency terms, under s.51(1).

(ii) The parties were agreed that in the case of a note issue,

the discount or cost, being the difference between the price

paid for the note and its face value, was deductible under

s.51(1) and should be brought to account in Australian

currency. His Honour said that he did not disagree with

this, provided the exchange gains and losses fell within the

test for working or circulating capital. "The expression in

Australian currency of the cost of obtaining finance by note

transactions necessarily involves a calculation which takes

account of movements in exchange rates" (at 4,230). But

when this calculation has been completed, there should be no

further calculation of exchange gain or loss to be brought

to account.

[240]

"I accept the submission put forward on behalf

of the company by Mr. Heyworth Talbot with his

customary clarity that the revenue's contentions

are fundamentally unsound. The company did not

make any capital or other loss when it repaid

with $15m. loan stock of $15m. issued at par.

The company did not make any income or other

profit when it lent $15m. to its customers and

was repaid $15m. Between 12 October 1971 and 15

June 1976 the company made a profit which

consisted of the difference between the interest

paid to the loan stock holders and the interest

received by the bank from its customers. This

profit was brought into account in the

computation of the profits upon which the

company paid corporation tax.

My Lords, a profit or loss may be earned or

suffered if a borrower changes the currency he

borrows but that profit or loss arises from the

exchange transaction and not from the borrowing.

For example, the company could have borrowed

pounds 6m. sterling by means of unsecured loan stock.

The company could have changed the pounds 6m. thus

raised into U.S. $15m. in 1971 and lent those

dollars to its customers. If then the customers

had finally repaid their loans of $15m. in 1976

and the company had converted those dollars into

sterling, realising pounds 8m. available to redeem the

loan stock of pounds 6m. the bank would have made an

exchange profit of pounds 2m. That profit would have

been made by converting sterling into dollars in

1971 and reconverting dollars into sterling in

1976. The company would have gambled and won on

an increase in value of the dollar vis-a-vis

sterling between 1971 and 1976. Similarly, if

the company, having in fact borrowed $15m. worth

pounds 6m. by the issue of unsecured loan stock at par

in 1971, and having lent those $15m. to its

customers, had called in the loans of its

customers in 1973, received back $15m. and

converted those dollars into sterling, producing

say pounds 7m. at that stage, then the company would

have made an exchange profit of pounds 1m. by

acquiring dollars in 1971 and selling dollars in

1973. The bank would have gambled and won on an

increase in value of the dollar vis-a-vis

sterling between 1971 and 1973. If then in 1976

the bank had been obliged to purchase $15m. at

the then current sterling cost of pounds 8m. in order

to repay the $15m. owing under the unsecured

loan stock, the company would have made an

exchange loss of pounds 2m. by converting dollars into

sterling. The bank would have gambled and lost

on an increase in value of sterling vis-a-vis

the dollar between 1971 and 1976. ... There

never was any loss or profit from the lending

and borrowing and there never was any exchange

profit because the company did not make any

relevant currency conversions."

At a glance

Court

Decision date

Before

Source

Judgment (289 paragraphs)

Commissioner of Taxation v Energy Resources of Australia Limited [1994] FCA 1521; (1994) 29 Atr 563 (1994) 54 FCR 25 (30 November 1994)

Parties

Legislation Cited (4)

Cases Cited (24)