Coles Myer Finance Limited v Commissioner of Taxation [1993] HCA 29; (1993) 176 CLR 640; discussed.

Payne v Federal Commissioner of Taxation [1934] HCA 7; (1933-34) 51 CLR 197, (1936) AC 497; discussed.

Caltex Limited v Federal Commissioner of Taxation [1960] HCA 17; (1959-60) 106 CLR 205; discussed.

Pattison (Inspector of Taxes) v Marine Midland Ltd (1984) AC 362; discussed.

Capcount Trading v Evans (Inspector of Taxes) (1993) STC 11; discussed.

Commercial and General Acceptance Limited v Commissioner of Taxation (1977) 137 CLR 373; applied.

Elmslie v Federal Commissioner of Taxation [1993] FCA 549; (1993) 118 ALR 357; distinguished.

KD Morris and Sons Proprietary Limited (In Liquidation) v Bank of Queensland Limited [1980] HCA 20; (1979-80) 146 CLR 165; applied.

Jolley v Mainka [1933] HCA 43; (1933) 49 CLR 242; applied.

United City Merchants (Investments) Ltd v Glass Fibres and Equipments Ltd

(1983) 1 AC 168; discussed.

"roll-over"

"under a contract"

"cash"

"currency"

Income Tax Assessment Act 1936 (Cth): ss.20(1), 21, Pt.III Div.3B, ss.82Y,

Counsel and Solicitors AH Slater QC with JW Durack

Solicitor

Counsel and Solicitors R Bainton QC with D Hammerschlag

for Respondent: instructed by Corrs Chambers Westgarth

(1) Appeal allowed in part.

(2) Order 2 of the orders of 22 April 1994 be varied by

substituting "A$7,905,110" for "A$11,604,956".

(3) Appeal otherwise dismissed.

(4) Appellant to pay respondent's costs.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

BEAUMONT J This is an appeal from orders of Davies J allowing an appeal from decisions of the Commissioner disallowing objections by the respondent taxpayer, Energy Resources of Australia Limited ("ERA"), to amended assessments of its taxable income for the years ended 30 June 1987 and 30 June 1988 (see the report of Energy Resources of Australia Ltd v Federal Commissioner of Taxation (Davies J) 94 ATC 4225).

2. The background to the appeal is that the Commissioner assessed ERA, which mines uranium at the Ranger mine in the Northern Territory, under Division 3B of Part III of the Income Tax Assessment Act 1936 ("the Act"), which Division deals with "foreign currency exchange gains and losses". The assessment was made on the basis that ERA had realised foreign currency exchange gains and losses under certain Euronote transactions. The notes had been issued by ERA pursuant to a Finance Facility Agreement entered into in January 1986, before the commencement of Division 3B. At first instance, as before us, the Commissioner relied on Division 3B but, in the alternative, contended that, in any event, ERA's gains were assessable under s.25(1) and its losses deductible under s.51(1) of the Act. Although these provisions are familiar and need not be recited, reference should next be made to the provisions of Division 3B.

3. The Division applies to gains and losses only to the extent to which they are of a capital nature (s.82U(1)).

4. (As has been noted, timing is important here. The Division applies, according to its tenor, in relation to gains made and losses incurred before or after the commencement of the Division (i.e. 5 June 1987) (s.82U(4)). However, the interpretation clause, s.82V, refers to the "commencing day" as 19 February 1986 being the time at which the introduction of the Division was foreshadowed (s.82V(1)). There is a transitional provision, s.82W, to which it will be necessary to return later.)

5. The Division does not apply to a loss except to the extent to which a deduction would have been allowed under s.51 if the loss had not been of a capital nature (s.82U(2)). Likewise, the Division does not apply to a gain under a contract except to the extent to which, if a loss that was not of a capital nature had been incurred under the contract, a deduction would have been allowed under s.51 (s.82U(3)). It appears that these provisions were intended to give effect to the announcement made in anticipation of the legislation that foreign exhange gains or losses of a capital nature realised on or after 19 February 1986, to the extent to which money borrowed was used for the purpose of producing assessable income or in carrying on a business for that purpose, would be assessable as income or allowable as deductions.

6. A currency exchange gain or loss is defined to mean, respectively, a gain or loss to the extent to which it is "attributable to currency exchange rate fluctuations" (s.82V(1)).

7. A currency exchange gain made, or loss incurred, in respect of currency purchased under a contract shall be taken to have been made, or incurred, under that contract (s.82V(2)(a)) and to have been made, or incurred, at the time when it was "realised" (s.82V(2)(b)).

8. The assessable income of a taxpayer of a year of income shall include any currency exchange gain made by the taxpayer in the year of income under an "eligible contract" (s.82Y). An "eligible contract" is defined as a contract entered into on or after the "commencing day", 19 February 1986 (s.82V(1)). Subject to notification, a currency exchange loss incurred in a year of income under an eligible contract is an allowable deduction in respect of the year of income (s.82Z(1)).

9. There is a transitional provision, s.82W(1), dealing with a contract of loan to a taxpayer entered into before the commencing day (as here) in these terms:

"82W(1) Where, on or after the commencing day (i.e. 19

February 1986) and under a contract entered into by a

taxpayer before the commencing day, any of the following

happens in relation to the taxpayer (otherwise than pursuant

to a contractual obligation that was binding on the taxpayer

before commencing day):

(a) the taxpayer receives loan money;

(b) a loan made to the taxpayer is wholly or partly rolled

over;

(c) the period for which money has been lent to the

taxpayer is extended,

this Division applies as if --

(d) where paragraph (a) applies -- the loan money had been

received by the taxpayer under a contract entered into

by the taxpayer at the time when loan money was

received;

(e) where paragraph (b) applies -- the loan resulting from

the roll-over had been made to the taxpayer under a

contract entered into by the taxpayer at the time of

the roll-over; and

(f) where paragraph (c) applies -- a new loan of the

amount outstanding immediately before the commencement

of the extension period had been made to the taxpayer

under a contract entered into by the taxpayer at the

commencement of the extension period."

10. In 1980, ERA and an associated company entered into a loan facility agreement with several American banks by which a loan facility, denominated in United States dollars in the maximum sum of $US250 million, was placed at the disposal of the ERA Group for the purpose of enabling ERA to meet the development costs of its mine.

THE 1986 EURONOTE FACILITY AGREEMENT ("the Facility Agreement")

11. The Facility Agreement, dated 22 January 1986 and entitled "USD210,000,000 Facilities Agreement," was made in conjunction with three other agreements - a Euronote Tender Panel Agreement; a Euronote Issue Agency Agreement; and a Euronote Paying Agency Agreement, all of even date. In the Facility Agreement, it was recited that ERA had requested the Commonwealth Bank of Australia ("CBA") as Manager and Credit Suisse First Boston Limited ("Credit Suisse") as the Euronote Tender Panel Agent, to invite a consortium of banks and financial institutions to provide ERA with facilities of up to US$210,000,000; and that, pursuant to the facilities granted under the Agreement, ERA wished to be able to issue Euronotes, to request Letters of Credit and Guarantees to be opened (to support certain existing borrowings and the issue by ERA of other securities, including securities issued in the U.S. commercial paper market) and to obtain certain "short term" and "interim" loans. The Facility Agreement, which was made between ERA and one of its subsidiaries on the one hand, and the CBA (as the Manager), Credit Suisse (as the Euronote Tender Panel Agent), sixteen Banks and six "Specified Facility Banks", on the other, relevantly provided as follows:

(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.)

THE DRAW-DOWNS AND THE ISSUE OF THE EURONOTES UNDER THE FACILITY AGREEMENT

12. All of the notes issued in the years of income under the Facility were in USD, in Schedule One form, and for a term of three months. As has been said, none carried interest. However, they were taken up by the tendering Banks at a discount on their face value. When each note matured, the face value was paid to the noteholder, principally from the proceeds of a new issue, the balance being provided from ERA's other US dollar funds (most of its contracts for the sale of its minerals being written in US dollars); on occasions, ERA purchased or borrowed US dollars for this purpose (per Davies J at 4,227).

13. Funds were drawn down under the Facility Agreement in the following sequence.

(1) On 13 February 1986 notice to draw down US$125 million was given by

ERA pursuant to cl. 4.01 of the Facility Agreement. On 18 February 1986

that amount was made available to ERA and was used to repay the amount

owing under the Schroder Wagg agreement.

(2) On 18 February 1986 ERA gave notice of draw down pursuant to cl.

4.01 of the sum of US$50 million and those funds were made available on

25 February 1986.

(3) On 13 March 1986 ERA gave notice of draw down pursuant to cl. 4.01

of the sum of US$40 million and those funds were made available on 20

March 1986.

(4) On 10 April 1986 ERA gave notice of draw down pursuant to cl. 4.01

of the sum of US$35 million and those funds were made available on 18

March 1986.

(5) On 17 February 1989 ERA gave notice of draw down pursuant to cl.

4.01 of the sum of US$20 million and those funds were made available on

2 March 1989.

THE CLAIM FOR DEDUCTION IN RESPECT OF THE DISCOUNTS ON THE NOTES

14. In its income tax returns for the 1987 and 1988 years of income, ERA claimed deductions, calculated in Australian dollars, in respect of the "discounts" on the Euronotes, namely, the difference between the face values of the notes and the tender prices which actually were received. In his amended assessments, the Commissioner accepted that such deductions were allowable under s.51(1).

THE COMMISSIONER'S ASSESSMENT THAT CURRENCY GAINS WERE ASSESSABLE INCOME AND THAT CURRENCY LOSSES WERE DEDUCTIBLE

15. The issue raised for determination at first instance arose out of the circumstance that the exchange rates between Australian currency and US currency differed between the dates of issue, and the dates of the payment, of each Euronote. With respect to most of the notes issued, the Commissioner calculated a currency gain; but, with some issues, the Commissioner calculated a currency loss. Amended assessments were made accordingly, relying on Division 3B of Part III of the Act, although, as has been said, in these proceedings the Commissioner also sought to rely upon s.25(1) and s.51(1) of the Act. So far as Division 3B was concerned, the Commissioner took the view that each Euronote was an "eligible contract" and that, on its maturity, ERA made a currency exchange gain or loss under that contract for the purposes of s.82Y and s.82Z.

16. In the assessments, and in these proceedings, the Commissioner relied upon the provisions of s.20 of the Act which, relevantly, reads:

"(1) For all the purposes of this Act, income

wherever derived and any expenses wherever incurred shall be

expressed in terms of Australian currency.

(2) Where an amount of income of a taxpayer is

derived during the whole or part of a year of income from

the carrying on of a business in a foreign country -

(a) that amount of income shall be expressed in Australian

currency at a rate equal to the average of the

exchange rates applicable from time to time during the

whole or that part of that year; and

...

(3) Where an amount of foreign income of a taxpayer is

derived during a year of income (not being income to which

subsection(2) or (4) applies), that amount of foreign

income, and any amount of foreign tax paid in respect of

that foreign income, shall be expressed in Australian

currency at the exchange rate applicable -

(a) where the whole amount of that income is

remitted to Australia in that year - on the day

on which it is remitted;

(b) where part of the amount of that income is

remitted to Australia in that year - on the day

on which it is remitted; and

(c) in any other case - at the end of that year."

(In respect of the 1987 year, only the terms of the present sub-section (1) appeared in s.20.)

17. Before us, the Commissioner also sought to rely upon the provisions of s.21 of the Act. It is there provided that where, upon any transaction, any consideration is paid or given otherwise than in cash, the money value of that consideration shall, for the purposes of the Act, be deemed to have been paid or given.

18. Davies J expressed his conclusion that the exchange gains should be excluded from ERA's taxable income as follows (at 4,233):

"In my opinion, ERA's transactions did not involve a

currency exchange, either direct or indirect, nor was

conversion to Australian currency in the manner undertaken

by the Commissioner required by the Act. The exchange gains

and losses as calculated by the Commissioner did not exist

and ERA did not realise or incur them. The relevant

calculation to be made was that of the value in Australian

currency of the tender prices received and of the payments

made under the notes. The difference between these amounts,

being the cost in Australian currency terms of obtaining the

US dollar finance, was deductible under s. 51(1) of the Act.

Division 3B is not concerned with such a matter but only

with gains and losses of a capital nature.

"Mr Durack (for the Commissioner) sought to bring the

assessed gains and losses to account under s. 25(1) and

51(1) of the Act. This contention must be rejected ... .

Moreover, very little evidence went to this aspect of the

matter. Mr Durack relied principally upon the regularity of

the transactions. However, such evidence as there is

supports the view that the Euronote transactions were of a

capital nature, and did not concern working or circulating

capital. The Euronote facility replaced the Schroder Wagg

finance facility, the funds from which had been used in the

development of the Ranger Mine and which therefore had a

capital favour. It would be inconsistent with the

Commissioner's assessments to treat the transactions as

being of a revenue nature because of their regularity. The

Commissioner has separately calculated the discounts as a

cost of capital borrowings."

19. The steps by which his Honour reached these conclusions may be summarised as follows:

(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.

20. The Commissioner relies, in essence, on the following grounds in his Amended Notice of Appeal:

21. The Commissioner contends that, pursuant to Div. 3B, the net exchange gains of $1,136,219 and $11,474,142 were assessable income of ERA in the 1987 and 1988 years of income. The contract evidenced by each note was an "eligible contract" within Div. 3B; and Div. 3B did not require a conversion or a need to convert from one currency to another. For the purposes of Div. 3B, an exchange gain or loss is "realised" upon the discharge of the obligation under each note. Where the AUD equivalent at maturity date of the USD issue proceeds was less than the AUD equivalent of the USD issue proceeds at the date of issue of the note, ERA made a currency exchange gain under an eligible contract which is assessable income under s.82Y.

22. Alternatively, where the AUD equivalent at maturity date of the USD face value of a note was less than the AUD equivalent of the USD face value at the date of issue, ERA made a currency exchange gain under an eligible contract which is assessable income under s.82Y, except to the extent that the gain relates to the discount element of the face value.

23. Likewise, where the AUD equivalent at maturity date of the USD issue proceeds exceeds the AUD equivalent of the USD issue proceeds at issue date, ERA incurred a currency exchange loss under an eligible contract, deductible under S.82Z(1).

24. Alternatively, the Commissioner contends that where the AUD equivalent at maturity date of the USD face value of a note exceeded the AUD equivalent of the USD face value at issue date, ERA made a currency exchange loss under an eligible contract, deductible under s.82Z(1), except to the extent that the loss relates to the discount element of the face value.

25. Alternatively, the Commissioner contends, ERA realised relevant gains on revenue account which are assessable income under s.25(1); and, likewise, the relevant exchange losses were incurred on revenue account and were deductible under s.51(1).

26. In respect of the 1988 year, Davies J ordered that the sum of $11,684,956 be excluded from ERA's taxable income. The Commissioner contends, and ERA now agrees, that even if none of the Commissioner's other grounds of appeal is made out, the amount to be excluded from the assessable income for the 1988 tax year should be $7,905,110 only.

27. (It should be noted at once that the parties are agreed that, whatever the outcome of the appeal in other respects, the orders made by Davies J should be varied in certain respects to be mentioned later.)

28. Since the Facility Agreement under which the Euronotes were issued, and the notes themselves, were international currency contracts, it is necessary to consider the relevant principles of Australian private international law, first, as to the interpretation of the contracts and, secondly, with respect to the determination of the money of account under the contracts.

(a) Interpretation of the contracts under the conflicts rules

29. The initial matter to be considered is the identification of the relevant governing law of the material transactions. As has been seen, the Facility Agreement and associated arrangements involved overseas parties and the receipt and payment of funds in United States dollars. The Facility Agreement was expressed to be governed by the laws of the Australian Capital Territory, although its performance overseas was contemplated. The form of note in Schedule One required payment in United States dollars to an agent in either Luxembourg or London with payment to be made by transfer to an account with a bank outside the U.S.; and the obligations of ERA under the note were expressed to be governed by the laws of England.

30. The general rule of interpretation is that the intention of the parties must be ascertained according to the rules of construction of the proper law of the contract (see Halsbury's Laws of Australia, Vol. 4 (P.E. Nygh) at 85-1260). At the same time, if the language of the document uses foreign legal terms, the meaning of those terms will be ascertained according to the system from which they were taken, whatever may be the proper law (see P.E. Nygh, Conflicts of Laws in Australia, 5th ed. at 286).

31. The proper law of the contract (in the present case, the laws of the A.C.T.) determines the money of account of an international currency contract. Under A.C.T. (Australian) law, there is a presumption that the money of payment (here U.S. currency) is also the money of account (see Halsbury's Laws of Australia, Vol. 4 (P.E. Nygh) at 85-1290).

32. In C.A. Parsons and Co. Ltd. v The Electricity Trust of South Australia (1976) 16 SASR 93, a case concerning a contract for certain works, Bray CJ said (at 100-1):

"Now there is a presumption that, other things being equal,

the money of payment is also the money of account. ... Of

course this is only a presumption. If there is no ambiguity

there is no need to call on it, and even if there is an

ambiguity there may be other circumstances sufficient to

counterbalance it, as where there are alternative places of

payment and it is unlikely that the parties intended that

different values should be received in accordance with the

place of payment chosen ...."

33. An appeal to the High Court (see Electricity Trust of South Australia v C.A. Parsons and Co. Ltd. (1977) 18 ALR 225) was dismissed. Barwick CJ said (at 233):

"The case is one therefore, in my opinion, where a firm lump

sum price expressed in Australian currency was agreed to be

paid in Australia in Australian dollars. No question of any

diversity of currency of obligation and currency of payment

arises in the case. There was at no stage, and certainly

not in the order of December 13 and its incorporated

documents, any agreement to make any payment at any time in

other than Australian dollars or to make any payment

calculated otherwise than in Australian dollars. The only

sterling figure in columns 1, 2 and 3 of Schedule XIV had

become of no more than historical interest once converted to

Australian dollars and 'firmed'."

"Furthermore, the provision in the sub-clause dealing with

the manner in which the amount of the allowance is to be

calculated, that is by ascertaining the difference between

'rates and classifications at the date of tender and those

applying when the various costs are incurred' is singularly

inapposite to fluctuations in the exchange rate. An

alteration in the exchange rate does not result in the

incurring of cost by the respondent; the amount which it is

to be paid at Adelaide in Australian currency under the

contract remains unaffected, though the value of this amount

in terms of English currency would be affected. In no sense

is this a cost incurred within the meaning of the sub-clause."

35. The proper law determines what is the money of payment and in the absence of a contrary or inconsistent indication, the currency of the place of payment will be the money of payment. If, for instance, payment were to be made in Australia, the debtor may elect to pay in the currency of the money of Australia or in Australian currency to its equivalent value (see Halsbury's Laws of Australia (P.E. Nygh) at 85-1305).

(d) The application of the conflicts rules in the present circumstances

36. The relevant relationship between ERA, its associated companies and the institutions providing the facility was, in my view, governed by the terms of the Facility Agreement, the other related agreements of even date, and the terms of the notes issued thereunder. Whilst the law attached particular incidents to the issue of the notes, it is also true that the legal relationship between the parties (including, for instance, ERA's obligations to reduce the accommodation) was established by the Facility Agreement (see Prints for Pleasure Ltd. v Oswald-Sealy (Overseas) Ltd (1968) 88 WN (1) 375; K.D. Morris and Sons Pty Ltd v Bank of Queensland [1980] HCA 20; (1986) 146 CLR 165 at 173-4). Further, in my opinion, those terms should, relevantly, receive their ordinary meaning so that for our purposes, no special meaning should be attributed to the words used in any of these agreements by virtue of any special foreign element.

37. It follows that United States currency was, in my view, both the money of account and the money of payment. Further, in my opinion, under the Facility Agreement and the notes, ERA was bound, and entitled, to make the payments due by the transfer of United States currency to a bank account outside the United States, viz. in Europe.

(e) The relevant revenue consequences of the transactions

38. It will be necessary to consider in stages the income tax consequences of the entry into and performance of the transactions. In particular, it will be necessary, despite the agreement of the parties on the issue, to revisit, to some extent, the question of the deductibility of the "cost" of the notes, since the Commissioner's submissions on the application of s.25(1) and s.51(1) for present purposes proceed on the footing that if that "cost" is on revenue account, all other aspects of the note transactions must also be on revenue account.

39. It is clear enough that, in general terms (that is, for purposes other than tax), the difference between the amount of the note and the proceeds received was a cost to ERA of raising funds in this way. For instance, in K.D. Morris, above, a bank and its customer agreed upon a "Commercial Bill (Acceptance) Facility" under which, from time to time, the customer drew bills which were accepted by the bank and payable to a merchant bank which bought them at a discount for sale in the market. Stephen and Wilson JJ said (at 170-1) that because, on maturity, the difference between the proceeds and the face value of the retired bills was made good by the customer, the result for the customer, as in the present case, was that it effectively retained the use of the funds, less only the amounts successively lost with each discounting. Those amounts, together with the bank's charges for the facility and for each roll over, "represented the cost to the (customer) of procuring the funds ... which it ... need(ed)."

40. However, even if it be accepted that ERA incurred a "cost" in this sense, the question remains whether, for the purposes of s.25(1) and s.51(1), this was a capital cost or a revenue cost. Although it is now established that in the case of a finance company this "cost" will ordinarily be deductible, the position with respect to manufacturing and trading companies, for example, is different.

41. In Avco Financial Services Ltd. v Federal Commissioner of Taxation [1982] HCA 36; (1982) 150 CLR 510, a finance company borrowed money in the United States to enable it to make loans to its customers in Australia and to repay its existing borrowings. The exchange gains and losses made on repayment of the loans were held to be assessable income and allowable deductions respectively. Mason, Aickin and Wilson JJ said (at 527):

"There is ... an important and material difference between

borrowing by a finance company in the ordinary course of its

business and borrowing by a manufacturing or trading

company. In general the finance company's borrowings

provide money which it turns over at a profit. Borrowing

otherwise than for on-lending or for the repayment of funds

borrowed for on-lending, that is, borrowing undertaken for

capital rather than revenue purposes, as in CAGA is an

exception to the general rule. On the other hand, borrowing

by a manufacturing or trading company is often undertaken to

strengthen the capital or profit-earning structure of the

company. A finance company usually borrows in order to

increase its working capital which is then turned over at a

profit; the manufacturing or trading company frequently

borrows to strengthen its permanent capital."

42. More recently, in Coles Myer Finance Limited v Commissioner of Taxation of the Commonwealth of Australia [1993] HCA 29; (1993) 176 CLR 640, a finance company, in order to raise finance for lending purposes, drew and sold, inter alia, notes at a discount. The High Court held that the discount amounts were losses and outgoings incurred for the purpose of securing working or circulating capital and were deductible under s.51(1).

43. In Coles Myer, pursuant to leave granted during the course of argument on the appeal, the Commissioner submitted a memorandum to the following effect (at 651-2): (a) The gross amounts received and paid were of a capital nature although received and paid for revenue purposes, that is, for the purposes of and in the course of the income-earning business of money-lending. (b) The cost to the finance company of obtaining the gross receipt (i.e. the discount) was deductible, just as the interest earned by it through the use of the proceeds in the business was assessable income. (c) Discount, being the cost of finance, is deductible like interest, as a recurrent expenditure made to secure working capital. It is the discount, the net difference, that is deductible. The gross amounts are neither assessable nor deductible and the reasoning of the High Court in Avco is, upon analysis, is not to the contrary. The amount received from discounting a note is not income. Income connotes a return from capital, assets or labour employed. The money raised was the capital employed to earn income. Although the money stock of a finance company is similar to the trading stock of a trading company, there is this difference, that money is not bought and sold like trading stock; rather, it is borrowed and lent and interest earned by a financier is compensation for the loss of the use of the money, not profit on the sale of the money. (d) Taking the conceptual separation, in a loan context, between principal and interest being respectively the capital and revenue components of the transaction, in the case of a note the proceeds from discounting equate to the principal component and the discount is equivalent to the interest or revenue component.

44. In their essentials, the High Court accepted these submissions.

45. Mason CJ, Brennan, Dawson, Toohey and Gaudron JJ (at 664) explained the ratio in Avco as follows:

"The judgments in this Court in Avco ... contain statements

which either state ... or might be taken, when read in

isolation, to suggest ... that the borrowing of money and

the repayment of loans by a finance company in the ordinary

course of its business may amount to transactions on revenue

account. However, the joint judgment of Mason, Aickin and

Wilson JJ ..., when properly understood, like that of Gibbs

CJ ..., proceeds on the proposition that, although such

transactions by a finance company are properly to be

regarded as transactions on capital account, the relevant

gains and losses are nevertheless to be regarded as revenue

gains and losses. That is because the gains and losses were

incurred in the course of and as an incident of making

repayments of the borrowed money with which the taxpayer

carried on its business as a finance company. The losses or

outgoings were incurred in the day-to-day conduct of the

business and for the purpose of carrying it on as a going

concern. Though the borrowed moneys were capital, it was

working or circulating capital from which the taxpayer

derived its profits by turning the borrowed money to account

at higher rates of interest than those paid to the

taxpayer's lenders. The borrowing, as much as the lending,

was an integral part of the day-to-day conduct of the

taxpayer's profit-earning business."

"'Some kinds of recurrent expenditure made to secure capital

or working capital are clearly deductible', as Dixon J

noted in Texas Co. .... His Honour instanced interest on

moneys borrowed, rent on premises and hire of plant as

examples .... So, in Texas, the increase in expenditure

occasioned by an exchange rise, due to a delay in payment

for petroleum products by the taxpayer, an oil company, when

the delay was designed to create a fund for working capital

by arrangement with the taxpayer's parent company, did not

result in the exchange loss constituting a loss of a capital

nature. The increased outlay was, in the words of Latham

CJ ...: 'a necessary outgoing made in the normal course of

the continuance and maintenance of the business as an

enterprise conducted for the purpose of profit.' And, in

Avco , it was recognized that exchange losses incurred in

the borrowing and repayment of funds to purchase stock in

trade and the deferment of payment to suppliers of such

stock were losses on revenue account ...."

47. Their Honours concluded (at 664-5) that Coles Myer, like Avco, was an illustration of a loss or outgoing incurred for the purpose of securing working or circulating capital which is clearly deductible. The taxpayer issued the bills and notes for the purpose of its business as a finance company, using the moneys raised by discounting the bills and notes for the purpose of providing finance, from which it earned its income. In essence, it derived its income from the profits which it makes from the provision of finance under various classes of transactions, those profits exceeding the cost to the taxpayer of the moneys which it raises from the issue of bills and notes. The taxpayer's business was therefore similar to that of a finance company which borrowed moneys for lending, the rates of interest which it pays being significantly lower than those payable to it by those who have the moneys on loan. In effect, the discount offered by the taxpayer was the "cost of acquiring" the funds which it turned over in its business, "the amount of the discount serving the same purpose as the amount of interest on borrowed moneys"; the amount of the discount was the cost of those moneys. The difference between the amount payable on the bill and note and the amount received when the bill or note was discounted was, their Honours held, a loss or outgoing made "in the ordinary course" of conducting the business for the purpose of profit-making.

48. Deane J was of the same opinion, saying (at 668) that the taxpayer's receipts and payments in respect of the notes and bills "occurred in the ordinary course of its very substantial business as the financier" of the Coles Myer group of companies. The purpose of its dealings with the notes and bills "was to raise circulating capital for use in that business". As with the borrowing and repayment of circulating capital, the gross receipts upon sale and the gross payments upon maturity were receipts and outgoings of capital. The surpluses of the outgoings over receipts, i.e. the discounts on sale of the bills and notes, were, however, "detachable" from the gross receipts and outgoings and constituted losses or outgoings of a revenue nature. Those surpluses were the kind of "recurrent expenditure" incurred in the obtaining of the circulating capital used in a business for the earning or gaining of assessable income which is "clearly deductible" pursuant to s.51(1).

49. Deane J also explained the ratio in Avco in a similar way, saying (at 668-9):

"Careful analysis of the judgment(s) ... discloses that ...

their Honours were careful to confine their conclusion about

deductibility and assessibility to net losses or gains by

reason of the exchange fluctuations. Thus, Mason, Aickin

and Wilson JJ made clear ... their reliance upon quoted

statements from Texas Co. ... which supported the conclusion

that the net exchange losses in Avco ... were, like interest

on 'money borrowed', the kind of 'recurrent expenditure'

made to secure working capital which is 'detachable' and

deductible pursuant to s.51(1). Their Honours went on ...

to identify 'the true principle' as being:

'in the case of a finance company which borrowed

money overseas in the ordinary course of its

business and not for some special purpose, the

added cost of repayment in foreign currency

caused by the devaluation or depreciation of the

Australian dollar is an additional cost of the

borrowing and, like other costs of the

borrowing, is an allowable deduction under

s.51(1). Conversely, a saving in the amount of

foreign currency needed to repay an overseas

loan due to a revaluation or an appreciation in

the value of the Australian dollar is to be

considered as income arising directly out of the

finance company's ordinary business.' (Emphasis

added.)

The real importance of Avco ... for present purposes is that

it provides strong support for the conclusion that the

taxpayer's net losses or outgoings, resulting from the

discount on the face value allowed upon sale, are the kind

of recurrent expenditure which is deductible pursuant to

s.51(1) of the Act as a loss or outgoing incurred in gaining

or producing assessable income."

50. ERA is not a financier nor a dealer in foreign currency notes, but of course the deductibility of the cost of a note cannot be confined to taxpayers of these classes, as the reasoning in Crawford v Federal Commissioner of Taxation 93 ATC 5234, for instance, demonstrates. There, a deduction was claimed in respect of losses and outgoings in connection with a bill discount facility used by the taxpayer to lend to a trustee at a rate equal to the losses. It was held by the Full Federal Court that it was open to the Administrative Appeals Tribunal to find that a deduction be allowed on the ground that the taxpayer's purpose in incurring charges in respect of the bank bill facility was to gain or produce assessable income by way of interest. Hill J (with the agreement of Gummow and von Doussa JJ) so concluded upon an analysis of the evidence before the AAT. Hill J said (at 5,240):

"...interest incurred on funds borrowed to gain assessable

income will generally be an allowable deduction .... The

fact that no assessable income is ultimately derived will

not necessarily preclude a taxpayer from obtaining a

deduction: .... What is significant, where no income is

derived, is the connection between the loss or outgoing

claimed and the activities which are directed at the gaining

or producing of assessable income. The outgoing for

interest must be incidental and relevant to the end of

gaining or producing assessable income: .... In this and

subsequent discussion where I refer to 'interest', I intend

to include losses and outgoings on a bill acceptance

facility as holding the same commercial substance as

interest for present purposes."

51. On the other hand, in Associated Minerals Consolidated Limited v Commissioner of Taxation (1994) 124 ALR 254, a claim to deduct interest paid by a mining company in respect of a loan in United States dollars was held by the Full Federal Court to have been properly disallowed as an outgoing of a capital nature. The taxpayer had invested in mining operations in America. By 1984 the strengthening US dollar had produced an exchange rate gain for that investment which represented an unrealised capital profit which was credited to a currency exchange reserve. The taxpayer obtained a matching loan in US dollars to "lock in" the current balance. The taxpayer disposed of the amount in Australian dollars, which represented the US dollars borrowed, by lending it to its holding company interest free.

52. Reliance was placed by the taxpayer in Associated Minerals on the joint majority judgment of Bowen CJ and Burchett J in Australian National Hotels Limited v Federal Commissioner of Taxation (1988) 19 FCR 234. In that case, an Australian company borrowed a substantial sum in Saudi Arabian currency to pay for building work in respect of premises in which it carried on its business. It took out insurance against the risk of an adverse movement in the foreign exchange rate. The joint majority judgment, as was later pointed out in Robe River Mining Co Pty Ltd v Federal Commissioner of Taxation (1989) 21 FCR 1 held that the premiums "amounted to a recurrent expenditure to obtain and retain the use of the capital", which should be treated as "analogous to interest". The taxpayer argued that the matching loan was itself a form of insurance against exchange losses, which might have been incurred had the United States dollar lost value, and that the interest payable in respect of that loan was therefore analogous to the premiums paid in Australian National Hotels.

53. In Associated Minerals, Northrop, Spender and Burchett JJ said (at 256-7):

"But there is an insuperable difficulty in the way of this

argument. The learned judge heard oral testimony in support

of the appellant's contention as to the purpose and function

of the loan. Yet it is plain he preferred to rely on the

indications contained in contemporaneous records. Those

records did not give a major place to any perceived need of

a hedge against a possible fall in the value of the United

States dollar. Instead, they emphasised the desirability of

crystallising the unrealised capital profit which was

available to be taken by the creation of the matching loan.

It is true that to do this inevitably involved the creation

of a hedge in respect of the whole investment, at least

temporarily. But the hedge was incidental to the

crystallisation of the profit."

"In the course of his submissions in reply, counsel for the

appellant sought to change tack, in order to argue that the

loan moneys were really used for the purposes of the

appellant's business when they were provided to RGC. The

contention he then sought to put forward was that all

members of the group shared in a group treasury, so that,

although the moneys here in question were lent to RGC free

of interest, the appellant in reality got a commercial

return through the availability of other moneys to it or its

subsidiaries, as and when required. But the maintenance of

this argument would have required an amendment of the notice

of appeal."

55. In Willingale (Inspector of Taxes) v International Commercial Bank Ltd. (1978) AC 834, the practice of the taxpayer, a financier, was to purchase or discount bills. On occasions, it sold them prior to maturity and, since some were payable in foreign currency, the profit would depend, in part, on exchange rates at the time of repayment or sale. It was held that there was no liability for tax on the "accrued discount", being a time-based proportion of the profit made on each bill held until maturity. Lord Salmon and Lord Fraser held that there is an essential difference between interest and discount, that is, interest is earned and accrued from day to day, while discount is not and does not. Lord Salmon said (at 842):

"Although there may be some superficial similarity between

(a) lending pounds 10,000 for 5 years at a rate of interest of X

per cent, per annum on the terms that none of the interest

amounting in all to pounds 5,000 shall be payable until the

principal becomes repayable and (b) buying a foreign bill of

exchange with a face value equivalent to pounds 15,000 for a price

equivalent to pounds 10,000, the two transactions are, in my view,

essentially different from each other in character.

The lender is entitled to be paid pounds 15,000 at the end of five

years; no more and no less. The purchaser of the bill is

entitled to sell the bill when he likes, or keep it until

maturity. The amount he receives for it, translated into

sterling, will depend upon the currency rate of exchange at

the material time."

56. I agree. See also Chow Yoong Hong v Choon FAH Robber Manufactory (1962) AC 209; K.D. Morris, above, at 194-8; Brick and Pipe Industries v Occidental Life Nominees Pty. Ltd. (1990) 3 ACSR 649 at 703.

57. In the present case, as has been seen, in its returns for the 1987 and 1988 years, as Davies J noted (at 4,227), ERA claimed deductions, calculated in Australian dollars, of the discounts on the Euronotes; and, in amended assessments, the Commissioner accepted this in accordance with the reasoning in Coles Myer, but also upon the footing that, by virtue of s.20 of the Act, the discounts in this currency necessarily were expressed in Australian currency. Davies J said (at 4,230):

"The parties are agreed that, in the present case, the

discounts were deductible under s.51(1) of the Act and that

they should be brought to account in Australian currency. I

would not disagree with that approach, though I would

observe, by way of caution, that in Willingale and Coles

Myer the exchange gains and losses fell within the rubric of

the working or circulating capital test to which I have

already referred."

58. On the other hand, as has been earlier noted, his Honour (at 4,233) rejected the application of either s.25(1) or s.51(1), saying that -

"...very little evidence went to this aspect of the matter.

(The Commission) relied principally upon the regularity of

the transaction. However, such evidence as there is

supports the view that the Euronote transactions were of a

capital nature, and did not concern working or circulating

capital. The Euronote facility replaced the Schroder Wagg

finance facility, the funds from which had been used in the

development of the Ranger Mine and which therefore had a

capital flavour. It would be inconsistent with the

Commissioner's assessments to treat the transactions as

being of a revenue nature because of their regularity. The

Commissioner has separately calculated the discounts as a

cost of capital borrowings."

(The agreement of the parties on this aspect of the matter was maintained before us. Neither party sought to argue that the discount was not deductible so that the consequences of this agreement were not explored in argument before us.)

59. However, after referring to Willingale and Coles Myer, Davies J went on to say (at 4,230):

"If a discount is an allowable deduction under s.51(1) of

the Act, then the quantum of it must be calculated in

Australian dollar terms. One means of doing so is to assess

the value of the amount paid on maturity, converted at the

exchange rate at the time of payment, and to deduct the

amount received on the issue of the note, converted at the

exchange rate at that time. See Willingale at 842.

That was not how the discounts were expressed in Australian

currency by the Commissioner in the subject assessments. I

assume that the Commissioner adopted an average rate such as

that of which s.20(2) speaks. Perhaps the Commissioner was

influenced by the principle enunciated in Coles Myer that

the discounts should be brought to account on an accounting

straight-line basis over the terms of the notes. But the

Commissioner was not obliged to take account of exchange

rate variations in that way. The particular that was

calculated was the cost in Australian currency of obtaining

the US dollar funds.

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. When this calculation has been completed, there

should be no further calculation of exchange gain or loss to

be brought to account."

60. In Federal Commissioner of Taxation v Hunter Douglas Ltd. [1983] FCA 229; (1983) 78 FLR 182, it was held by a majority of a Full Federal Court (Fisher and Lockhart JJ, Franki J dissenting) that whether foreign exchange gains or losses made in repaying loans are capital or revenue items must be determined with reference to the purpose of the borrowing which supports them, and that the particular use to which the borrowed money is actually put is merely evidentiary of the purpose of the borrowing and not conclusive of it.

"It is clear that the trial judge concluded that the

exchange losses were on revenue account because of the use

which the taxpayer made from time to time of drawings of the

borrowed funds. He saw them as being applied directly in

the payment of the day-to-day business expenses of the

taxpayer and therefore held that the exchange loss which

occurred when the particular drawing was repaid was

deductible. He did not regard the drawings as a means of

financing the business of the taxpayer but rather that they

were utilised in enabling the profits of the taxpayer to be

earned. He thus saw them as having the same characteristics

as drawings by a finance company as in the Avco case ....

I however regard the purpose of the borrowings as being of

more assistance in establishing the character of the loan

transactions and the exchange losses incurred on repayments

thereunder and in determining whether they are on capital or

revenue account. The use which a borrower in fact makes

from time to time of borrowed funds and the purposes for

which it applies them is not necessarily conclusive of the

purpose or character of the borrowing. This character will

depend upon the purpose for which the borrowing is made, for

example, to strengthen the capital structure of the company

and also the use which the company makes generally of

borrowed funds in its profit-earning activities. The

crucial question will frequently be whether the company uses

the borrowed funds to finance its profit-earning activities

or as an integral part of such activities.:

62. His Honour was of the opinion that two matters supported the finding that the borrowings were on capital account and that the exchange losses were not detachable and thus on revenue account. The purpose of the borrowings was to finance the expansion of the taxpayer's business and to provide the additional working capital which this expansion required. Thus the borrowing transactions themselves were not on a revenue account. Furthermore the funds borrowed were not used in or as an integral part of the profit-making activities of the taxpayer, that is, as part of the process by which it operated to obtain its regular returns, but in the financing of such activities. In particular they were undertaken "with a view to expanding such activities". These borrowings may in fact have been used to pay the day-to-day expenses, or in reimbursing a bank account from which such expenses were paid. However this does not determine conclusively the part that borrowed funds played in the profit-making activities of the taxpayer or "the true character" of the loan transactions.

"The fact that a finance company may in respect of its

borrowings be in a different position from a manufacturing

or trading company is made very clear by the high Court in

C.A.G.A.'s case and Avco's case. In C.A.G.A.'s case because

the principal purpose of the borrowings was to strengthen

the taxpayer's business structure and was not part of the

process by which it operated to obtain regular returns the

High Court held that the borrowings were on capital and the

exchange gain was assessable. By way of contract in Avco's

case the borrowings in question were held to have been

undertaken in the ordinary course of the taxpayer's

income-earning business and the resultant exchange losses or gains

were deductible or assessable. In that case the High Court

went to lengths to indicate the special position of a

finance company borrowing as part of its day-to-day

operations for the purpose of re-lending."

64. Fisher J added (at 195-6) that the position is different where the company is not a finance company but a trading or manufacturing company which incurs exchange losses or gains otherwise than through the purchase of trading stock. Here the losses or gains will, in the ordinary course, be on capital account. For them to be on revenue account it is necessary for the taxpayer to establish that the additional expenditure to meet exchange losses was expenditure incurred in the process of producing its income, and, in the words of Mason, Aickin and Wilson JJ in Avco, "as an integral part of that process". It is not sufficient to rely upon the finding that in fact the borrowed moneys were used to satisfy day-to-day outgoings. The borrowings in such a case "are prima facie an addition to the capital employed in the business."

65. Lockhart J expressed a similar view (at 197-200), concluding (at 201):

"The principal purpose of the borrowing in this case was to

strengthen the business structure or organisation of the

taxpayer to enable it to provide a stronger base or entity

with which to carry on its business and earn profit. The

nature of the borrowings determines the nature of the

foreign exchange losses for fiscal purposes. As the former

were capital items so were the latter."

66. See also the discussion by R.W. Parsons, Income Taxation in Australia at 6.329, 6.330 and 12.193 and 12.208-9.

67. In the present case, as we have seen, Davies J found (at 4,233) that the Euronote transactions were "of a capital nature and did not concern working or circulating capital". As his Honour then said, the Euronote facility replaced the Schroder Wagg finance facility, funds from which had been used in the development of the Ranger mine. Davies J concluded that the Euronote facility "had a capital flavour". With respect, I agree (cf. Commissioner of Taxation v Raymor (NSW) Pty Ltd (1990) 24 FCR 90 at 99-100; and on the question whether the development costs of a mine are on capital or revenue account, see the cases cited in Federal Commissioner of Taxation v Ampol Exploration Ltd. (1986) 69 ALR 289 at 313-4). If it were necessary or appropriate for me to express a view on the question, it would seem to follow that, in the absence of some special consideration, the "cost" of the notes was not deductible. But since the parties have elected, no doubt for good reason, to agree to accept its deductibility, it is not open to the Court to pursue that particular matter further.

(ii) Could s.25(1) or s.51(1) apply in the present case?

68. Although it is not possible for the Court to re-open the settled issue of the deductibility of the notes, the private agreement of the parties on that particular question cannot dictate or even influence the outcome of the issues that now arise for determination (cf. Commissioner of Taxation v Australia and New Zealand Savings Bank Limited, High Court, 16 November 1994, unreported, at 5-6). I already have expressed my concurrence with the conclusion of Davies J that the present transactions were of a capital, rather than a revenue, character. Moreover, I would regard the decision and reasoning in this area in Hunter Douglas as indistinguishable for present purposes (see also Robe River Mining Co. Pty. Ltd. v Commissioner of Taxation (1989) 21 FCR 1 at 15). It follows, in my view, that neither s.25(1) nor s.51(1) could have any application in the present case. I would dismiss the appeal to this extent.

69. I have come to the conclusion that this Division could not apply to the present circumstances.

70. In my opinion, it was not open to the Commissioner to reconstruct, as it were, the events which actually happened by making a notional conversion into Australian currency of amounts received and paid in U.S. currency in the note transactions when that notional conversion was neither required nor contemplated by the parties in their agreement and where there was no evidence that the taxpayer adverted to an exchange or loss as an object or outcome of entry into the facility arrangement.

71. As has been noted, what is deemed by s.82Y to be included in the assessable income of a taxpayer is "any currency exchange gain made by the taxpayer in the year of income under an eligible contract".

72. It is true that the meaning of this provision has not previously been considered. But, on its face, putting aside for the moment present complications in terms of timing (as we know, the Facility Agreement preceded the commencing day, 19 February 1986), it is not at all apparent how s.82Y could have any operation in the instant case, even if it be accepted that the Euronote facility was clearly an international transaction. The circumstance that an agreement has international aspects, in terms of the places where its parties carry on business and in terms of where the funds are raised and where payments are made is one thing. Yet it is another thing to say that the arrangement required, or even contemplated, a conversion of currency for any purpose.

73. It is significant that the funds raised by the 1986 arrangement were used, as contemplated, to discharge a previous facility, itself denominated in U.S. dollars. Moreover, the Euronote facility was, in all respects and at all times, denominated in U.S. dollars. It appears that none of the parties contemplated that any other currency would be used. Nor, in fact, was any other currency used. There was never any occasion to convert from one currency to another, so that the facility could not be described as an exchange contract in the sense of a contract to exchange one currency for another. Nor is it a hedging contract, looked at both as a matter of substance and of form.

74. It may be accepted that Division 3B should not be limited to hedging contracts or to contracts which either require or contemplate a conversion of currency. That is to say, there could conceivably be circumstances where a taxpayer so planned its affairs that the object or consequence of its entry into a contract of another kind was the realisation of an exchange gain or a loss by reason of its entry into the contract. But in the present case, there is no evidence that ERA had this in mind, as an object or a consequence, in entering into the Euronote facility. Although, as Davies J observed (at 4,233), "very little evidence" went to such matters, it appears to be clear on the evidentiary material available that the question of an exchange gain or loss was not adverted to by ERA at the time of its entry into the Facility Agreement. The evidence shows no more than an intention on the part of ERA to procure funds in the form of US dollars for the purpose of discharging an earlier facility, also available in US dollars, the purpose of the latter facility being to provide for the costs of development of the Ranger mine.

75. For completeness, I should add that, in my view, neither s.20 nor s.21 can have any relevance to the present question, which is whether a currency exchange gain or loss was made under a contract. That is, this is not a matter going to the way in which profits may be computed where it may be appropriate that s.20 or s.21 apply (see Pattison (Inspector of Taxes) v Marine Midland Ltd. (1984) 1 AC 362 at 367, 372-3; Capcount Trading v Evans (Inspector of Taxes) (1992) STC 11).

76. Nor, since no "loan" is involved, could the transitional provisions of s.82W(1), which deal with the "roll-over", or extension, of loans made under a contract entered into before the commencing day, apply here in my opinion. As has been seen, we are concerned here with the issue of notes at a discount, a transaction both in form and in substance different from a loan.

77. It follows that I would dismiss the appeal in this respect also.

78. As has been noted, the parties have agreed that, even if the appeal were otherwise to be dismissed, the orders made by Davies J should be varied in one respect. With regard to the 1988 year, his Honour made an order directing that the sum of $11,684,956 should be excluded from ERA's taxable assessable income. The parties are agreed that the figure $7,905,110 should be substituted for the figure $11,684,956.

1. Vary the orders made by Davies J by substituting $7,905,110 for

$11,684,956 in the direction given in respect of the assessment

for the year ended 30 June 1988.

2. Otherwise the appeal is dismissed with costs.

GUMMOW J A Judge of the Court (Davies J) held that the appellant ("the Commissioner") had wrongly included certain amounts in his assessments of the taxable income of the respondent ("the taxpayer" or "ERA") for the years ended 30 June 1987 and 30 June 1988.

2. I agree with Hill J, and for the reasons he gives, that ss. 20 and 21 of the Income Tax Assessment Act 1936 ("the Act") do not assist the Commissioner in this case.

3. I agree also with what his Honour says as to the inapplicability of s. 25. However, I would say nothing as to any possible application of Part IIIA of the Act. That was not in issue before us.

4. It also should be noted that the appeal proceeded on the footing that there was no issue in this case concerning the allowance by the Commissioner of the deduction under s. 51 (1) of the Act claimed by the taxpayer as the cost to it of the financing and representing the sum in Australian dollars of the difference between the face value, in United States dollars, of the bills and the discounted amount received in United States dollars. The argument was conducted on the footing that the difference did not represent an outgoing on capital account.

5. Section 20 of the Act requires expression of income and expenditure "in terms of" Australian currency. Division 3B of Part III of the Act (ss. 82U-82ZB) is headed "Foreign Currency Exchange Gains and Losses". The legislation with which this appeal is concerned thus assumes and operates upon some basic concepts. One of these is the term "currency".

6. The term "currency" includes "coinage" but also includes much else: Watson v Lee [1979] HCA 53; (1979) 144 CLR 374 at 398. This is illustrated by the terms of sub-s. 8 (1) of the Currency Act 1965, that the dollar is "the monetary unit, or unit of currency, of Australia", and of s. 9 which requires transactions to be "made, executed, entered into or done" according to "the currency of Australia" or that of some other country. In this sense currency is a universal means of exchange, designated by a particular unit of account; Jolley v Mainka [1933] HCA 43; (1933) 49 CLR 242 at 259-261, 266-269.

7. The distinction between money of account and money of payment is relevant to several aspects of this appeal. The money of account is that currency in which, as a matter of substance, an obligation is measured whilst the money of payment is the currency in which tender is to be made as proper performance of an obligation to effect payment. The money of account and of payment may or may not be the one currency.

8. The money of account is the means of measuring the obligation to pay, the money of payment is the means of discharge of the obligation. The contrast is between the substance of the obligation and the mode of performance: Woodhouse AC Israel Cocoa Ltd S.A. v Nigerian Produce Marketing Co. Ltd (1971) 2 QB 23 at 54. I agree with Beaumont J that, in respect of the obligations with which this appeal is concerned, the money of account and the money of payment was United States currency, subject to the qualification that payments in respect of the promissory notes were to be made to an account outside the United States of America.

9. The distinction between money of account and of payment lay at the root of the decision of the House of Lords in Adelaide Electric Supply Company, Limited v Prudential Assurance Company, Limited (1934) AC 122.

10. As Hill J explains in his reasons for judgment, the litigation culminating in Payne v Deputy Federal Commissioner of Taxation (1936) AC 497 appears to have led to the introduction of what is now sub-s. 20 (1) of the Act. This required, for all the purposes of the Act, the expression in terms of Australian currency of income wherever derived and of expenses wherever incurred.

11. In Payne, the appellant had included in his return for the purposes of the Income Tax Assessment Act 1922 ("the 1992 Act") pounds 5,671 stg., being the number of pounds which had been paid into his bank account in London and which never had been transmitted to Australia. The taxpayer unsuccessfully challenged the ruling that, by reason of the difference in the rate of exchange between the United Kingdom and Australia at the time of the payment of the moneys into his account, if pounds 5,671 stg. had been transmitted to Australia the sum of pounds 6,768 would have been realised and it was this latter sum which was to be brought to account under the 1922 Act. The taxpayer submitted that, having regard to the Adelaide Electric case, the money of account was British currency and Australian currency was merely the currency of payment, in discharge of the tax liability which was assessed by reference to the currency in which the payment had been received by the taxpayer. Their Lordships held (at 508-509) that as a matter of construction of the 1922 Act the income of the taxpayer was to be stated by the taxpayer and dealt with by the Commissioner solely in terms of Australian currency.

12. This appeal principally turns upon the construction of Division 3B of Part III of the Act.

13. Division 3B was inserted in the Act by s. 9 of the Taxation Laws Amendment Act 1987. This statute came into operation on the day it received the Royal Assent, 5 June 1987, although it applies to certain contracts entered into on or after the prior "commencing day" of 19 February 1986 (sub-s. 82V (1)). In certain circumstances where there is a "roll-over" (an undefined term) of a loan made to the taxpayer under a pre-commencing day contract, Division 3B applies as if the loan resulting from the roll-over had been made to the taxpayer under a contract made at that later date (sub-s. 82W (1)). The present case does not concern any loan of money to the taxpayer. As Beaumont J explains in his reasons for judgment, the issue of notes at a discount differs in form and substance from a loan.

14. As I have indicated, Division 3B comprises ss. 82U-82ZB and is headed "Foreign Currency Exchange Gains and Losses". Reference is made throughout the Division to "currency exchange" gains and losses, rather than to "foreign currency exchange" gains and losses. What is not made clear is whether the currency exchange in question involves the exchange of Australian currency for a foreign currency, or whether it extends also to the exchange of one foreign currency for another foreign currency. In the end, nothing for the purposes of the present appeal appears to turn upon the latter question. The taxpayer says that the relevant dealings were all in the one foreign currency, whilst the Commissioner looks to exchange between that currency and Australian currency.

15. Some assistance, by way of analogy, in dealing with the issues of construction which arise in the present case, is provided by the following passage in the speech of Lord Radcliffe in Tomkinson v First Pennsylvania Banking and Trust Co. (1961) AC 1007 at 1059. (The immediate issue concerned entry of judgments in foreign currency, the law as to which changed with Miliangos v George Frank (Textiles) Ltd (1976) AC 443, but nothing turns on this for present purposes.) After pointing out that in this area English law lacks a well-settled nomenclature for its terms, his Lordship continued:

"I take it myself that any contract to settle a debt

in the currency of the country in which the settlement

is to be made is a contract for the payment of money

in the eyes of our law, and this notwithstanding the

fact that, if action is taken in England for breach of

the contract, the remedy sought must be damages, not

debt, and those damages expressed in sterling for the

purposes of judgment. To speak of such contracts as

being in English law contracts for the delivery of a

commodity seems to me to be merely to confuse the

issue, and needlessly to suggest that for some reason

best known to itself our law regards a contract for

the payment of debt in foreign money as if it were of

a nature different from that which it obviously

possessed. Also, again, I think, needlessly, such a

description suggests that we admit of no distinction

between a contract to pay money abroad in satisfaction

of a debt on the one hand and a contract to deliver

foreign currency in this country or abroad or a true

exchange contract, which is a contract to exchange the

currency of one country for the currency of another,

on the other."

(Emphasis supplied)

Lord Radcliffe's criticism of the proposition that foreign currency is to be treated as a commodity may be compared with what was said by Dixon CJ in Caltex Ltd v Federal Commissioner of Taxation [1960] HCA 17; (1960) 106 CLR 205 at 220:

"In many respects the money of another country must be

treated in point of law like goods. It is not

currency of this country and it is not a measure of

value in this country."

In the same case (at 238) Taylor J described the expression "exchange loss" as:

"(N)o more than a commercial term conveniently used to

denote some of the effects which fluctuating rates of

exchange may produce in trading transactions . . ."

16. Brief mention also should be made of decisions construing the term "exchange contracts" as it appears in Article VIII s. 2 (b) of the Bretton Woods Agreement. This states:

"Exchange contracts which involve the currency of any

member and which are contrary to the exchange control

regulations of that member maintained or imposed

consistently with this Agreement shall be

unenforceable in the territories of any member."

In many countries, excluding Australia, this has been adopted as a rule of positive domestic law: Mann "The Legal Aspect of Money", 5th ed., 1992, p. 364; cf T.M. Duche and Sons (U.K.) Ltd v Walworth Industries (Aust.) Pty Ltd (1958) 62 SR (NSW) 165.

17. The provision has been given force of law in the United Kingdom and was interpreted by the House of Lords in United City Merchants (Investments) Ltd v Glass Fibres and Equipments Ltd (1983) 1 AC 168. Lord Diplock said (at 188):

"My Lords, I accept as correct the narrow

interpretation that was placed upon the expression

'exchange contracts' in this provision of the Bretton

Woods Agreement by the Court of Appeal in Wilson,

Smithett and Cope Ltd v Terruzzi (1976) QB 683. It is

confined to contracts to exchange the currency of one

country for the currency of another; it does not

include contracts entered into in connection with

sales of goods which require the conversion by the

buyer of one currency into another in order to enable

him to pay the purchase price. As was said by Lord

Denning MR in his judgment in the Terruzzi case at

p. 714, the court in considering the application of

the provision should look at the substance of the

contracts and not at the form. It should not enforce

a contract that is a mere 'monetary transaction in

disguise'."

The proposition in the last two sentences of that passage, as to disguised monetary transactions, is criticised by Dr Mann (supra at 379-380). The learned author would prefer what had been said by Lord Denning MR in Sharif v Azad (1967) 1 QB 605 at 613-614, namely that "exchange contracts" are contracts which in any way affect the exchange resources of a country so as to be liable to reduce them.

18. It is against this background that one turns to the particular context provided by Division 3B.

19. The Division applies in relation to gains and losses only to the extent to which they are of a capital nature (sub-s. 82U (1)). The crucial provision upon which the Commissioner relies is s. 82Y. It states:

"82Y The assessable income of a taxpayer of a year of

income shall include any currency exchange gain made

by the taxpayer in the year of income under an

eligible contract."

20. The text of the section gains its full content only after breaking it into various components, each of which is dealt with elsewhere in the Division. Thus there must be (i) a currency exchange gain (ii) made (iii) under (iv) an eligible contract.

21. I turn first to consider (i), (ii) and (iv), before returning to (iii). As to (i), a currency exchange gain means "a gain to the extent to which it is attributable to currency exchange rate fluctuations" (sub-s. 82V (1)). This gain shall be taken to have been made "when it was realised" (para. 82V (2) (b)).

22. An "eligible contract" must have been entered into by the taxpayer on or after the commencing day of 19 February 1986 (sub-s. 82V (1)). An eligible contract may be a "hedging contract". This, in relation to a taxpayer, means a contract entered into by the taxpayer with a particular "sole purpose". This is the elimination or reduction in the risk of adverse financial consequences that might result for the taxpayer (or an "associate" of the taxpayer) under another contract, from currency exchange rate fluctuations. This follows from the definition of "hedging contract" in sub-s. 82V (1). The term "associate" has the same meaning as in Part IIIA.

23. A "hedging contract" will be an eligible contract if entered into by the taxpayer in relation to another eligible contract, not being a hedging contract.

24. It is appropriate to set out the full text of the two definitions in sub-s. 82V (1), from which these results follow.

"'eligible contract', in relation to a taxpayer, means -

(a) a contract entered into by the taxpayer on or

after the commencing day, other than a hedging

contract; or

(b) a hedging contract entered into by the taxpayer,

on or after the commencing day, in relation to a

contract to which paragraph (a) applies;

'hedging contract', in relation to a taxpayer, means a

contract that is entered into by the taxpayer for the

sole purpose of eliminating or reducing the risk of

adverse financial consequences that might result for

the taxpayer or an associate of the taxpayer, under

another contract, from currency exchange rate

fluctuations."

The interaction between these definitions has several consequences of relevance to this appeal. First, in order to determine whether there is an "eligible contract" it may be necessary to look to more than one contract. Several instruments, taken together, may comprise the "eligible contract". Secondly, if there are related contracts each of which is an eligible contract, both must post-date 19 February 1986. Thirdly, the singling out of hedging contracts indicates that eligible contracts need not be what Lord Radcliffe and Lord Diplock treated, in the respective contexts with which they were concerned, as true exchange contracts.

25. I return to (iii), and the term "under" an eligible contract in s. 82Y.

26. In ordinary parlance, to speak of a gain being made "under" an eligible contract suggests that the gain was made in exercise of a right or discharge of an obligation conferred or imposed, as the case may be, by the terms of the eligible contract. Such a use is apt where, as in the present case, the eligible contract in question is identified by the statute as having been entered into by the party said to have made the gain. Thus, gain as a sub-contractor would not suffice as a gain under the head contract; cf Marrow v Flimby and Broughton Moor Coal and Fire Brick Company, Limited (1898) 2 QB 588 at 597, Fitzpatrick v Evans and Co. (1902) 1 KB 505 at 509.

27. More loosely, a gain may be made under a contract where this has come about by reason of the existence of the contract or the performance of the contract, whether or not the gain was made in exercise of a right or discharge of an obligation conferred or imposed upon the party or some other person. In that sense, it is enough that the contract is, in a broad sense, a source of the gain made by the party in question; cf Mercantile Mutual Life Insurance Co. Ltd v Australian Securities Commission (1993) 40 FCR 409 at 442, General Newspapers Pty Ltd v Telstra Corporation [1993] FCA 473; (1993) 45 FCR 164 at 170-173. The narrower construction is to be preferred to the looser construction.

28. Some assistance in construction is given by other provisions of the Division. Paragraph 82V (2) (a) states:

"For the purposes of this Division -

(a) a currency exchange gain made, or a currency

exchange loss incurred, in respect of currency

purchased under a contract shall be taken to

have been made or incurred under that contract."

(Emphasis supplied)

Further, sub-s. 82V (3) deals with the situation where the taxpayer did not enter into the contract in question and subsequently has taken rights or assumed obligations. It operates to put the taxpayer in the same position as if the taxpayer had entered into the relevant contract. But the sub-section does so by fixing upon what it identifies as the acquisition of "rights or obligations arising under" the contract. Sub-section 82V (4) then removes in certain circumstances what would otherwise be the application of sub-s. 82V (3). It does so again by adopting as criteria the acquisition of rights or obligations.

29. Before proceeding further, I should set out the text of sub-ss. 82V (3) and (4):

"82V (3) Subject to sub-section (4), where a taxpayer

acquires rights or obligations arising under a

contract, this Division applies in relation to

the taxpayer as if the contract had been entered

into by the taxpayer at the time when, and for

the purposes for which, the taxpayer acquired

the rights or obligations.

(4) Where -

(a) a taxpayer acquires rights or obligations

arising under a contract that was (apart

from sub-section (3)) entered into before

the commencing day; and

(b) the Commissioner is satisfied that the

rights or obligations were acquired under

or as a result of an arrangement that was

entered into or carried out by any person

(whether before or after the commencement

of this Division) for the purpose, or for

purposes that included the purpose, of

ensuring that a deduction would be

allowable under this Division in respect

of a currency exchange loss incurred under

the contract,

sub-section (3) does not apply to the

acquisition by the taxpayer of the rights or

obligations and, if the rights or obligations

were acquired by the taxpayer under another

contract, that other contract shall be deemed

for the purposes of this Division to have been

entered into by the taxpayer before the

commencing day."

30. It would be an odd result if the standing of an assignee were dependent upon criteria which differed from those governing the standing of the original contracting party.

31. In my view, a currency exchange gain, for the purposes of the Division, shall be taken to have been made or incurred under an eligible contract when realised in respect of currency purchased in the exercise of rights or the performance of obligations arising under the terms of the eligible contract.

32. One such example would be a contract for the sale of goods by an Australian buyer or seller where the money of account and of payment, or the money of payment, was not Australian currency. Another would be a hedging contract entered into in relation to the primary contract.

33. The question in the present case then becomes whether a gain attributable to currency exchange rate fluctuations was made, in the sense of realised, by the taxpayer in the year of income in respect of currency purchased in the exercise of a right or the discharge of an obligation created by a contract entered into by the taxpayer after 19 February 1986, or a hedging contract entered into by the taxpayer on or after that date in relation to that other contract.

34. The lengthy document identified in the evidence as the Euronote Facility was dated 22 January 1986. A Euronote Tender Panel Agreement, Euronote Issue Agency Agreement and a Euronote Paying Agency Agreement were annexed to the Euronote Facility and this provided in the relevant definitions in cl. 1.01 a mechanism for their amendment. All these instruments commenced at a date too early to render any of them an eligible contract for the purposes of Division 3B. The relevant provisions of these instruments are analysed by Beaumont J in his judgment. It should be observed that the form of the relevant Euronotes was set out in a Schedule to each of the Euronote Paying Agency Agreement, The Euronote Tender Panel Agreement and the Euronote Issue Agency Agreement. All of the notes issued under the facility were in that form. Minor changes may have been made, but these were not of any significance.

35. The Euronote Facility was designed to provide the taxpayer, the respondent, with funds to prepay existing indebtedness and to provide it with funds and accommodation in a sum which, in the aggregate, was not at any time to exceed $US210m (cl. 2.02). The total commitment to the respondent under the facility was to be reduced year by year, ending with an exhaustion of the facility on 30 June 1994 (cl. 10.01 and Schedule 2). This meant that the amount of any impending reduction in the facility had a vital significance for the periodic roll-overs. Further, there was a mechanism in cl. 10.03 for the cancellation on notice by the respondent, ERA, of the whole of the then total commitment. The evidence is that by 9 October 1990 the obligations under the Euronote Facility had been fully discharged.

36. The parties to the Euronote Facility were ERA, a related corporation E.R.A. (Canberra) Limited, the Commonwealth Bank of Australia, Singapore office (which was the Manager), Credit Suisse First Boston Limited of London (the Euronote Tender Panel Agent), sixteen Banks (including the Manager) and six institutions identified as Specified Facility Banks.

37. As I have indicated, the Euronote Facility, as a means for giving effect to its terms, provided for the coming into existence of other written contracts; cf K.D. Morris and Sons Pty Ltd (In Liq.) v Bank of Queensland Limited [1980] HCA 20; (1980) 146 CLR 165 at 174-175, 178-179, 199-200; New Zealand Shipping Co. Ltd v A.M. Satterthwaite and Co. Ltd [1974] UKPC 1; (1975) AC 154 at 167-168. Some of these were to be in or to the effect of the three instruments set out in Annexures to the Euronote Facility. The parties to those instruments would not necessarily correspond with the parties to the Euronote Facility itself. Clause 2.02 identified the forms the facility might take. It provided for the issue or making of Euronotes, letters of credit and guarantees, short term loans, and interim loans.

38. The facility was to be activated by the giving by the respondent of a Request Notice to the Manager (cls. 4.01, 4.02); this would, for example, provide details of the use sought to be made of the Euronote component. In that case, the Request Notice would be supplied also to the Euronote Tender Panel Agent (cl. 4.02 (f)). The use of the Euronote component of the facility was dealt with at length in cl. 5.01. With the associated documentation, it required the taking of various steps including the issue by ERA of promissory notes to be governed by English law, but for a principal amount designated in United States dollars. If the Euronote Tender Panel Agent procured purchasers for some only of the notes, the respondent might require the Banks to purchase the balance of the issue (cls. 2.03 (a), 5.01 (e)).

39. As the case was presented on the appeal, the Commissioner did not rely upon any note as itself constituting an eligible contract for the purposes of Division 3B. Rather, he relied upon the particular contracts brought about by telex communications under the procedures laid down in cl. 4.02 and cl. 5.01 which led to the issue of the notes and the payment to the taxpayer of the discount proceeds. The payment of what was defined as the "Euronote Purchase Price" was made pursuant to the contractual right conferred upon the taxpayer (para. 5.01 (g) of the Euronote Facility). The telex communications leading to the issue of the notes had in each case recited the request by the taxpayer to utilise the facility, pursuant to cl. 4.02 of the Euronote Facility, and had designated the term of the Euronotes, a face value in United States dollars, and the payment of the proceeds in United States dollars into a bank account outside Australia.

40. The particular contracts in immediate performance of which the notes were issued and dealt with had United States dollars as the money of obligation and money of payment. The difference between the face value of the notes payable on maturity, and the proceeds earlier received from the taxpayer in United States dollars might be seen as the cost of finance. That cost in United States currency might then attract the operation of s. 20 of the Act.

41. The substance of what the Commissioner sought to do was to construct notional transactions in which proceeds of issue of the notes were given a value in Australian dollars, by exchanges which never occurred, and the sums of face value payable on maturity likewise were treated as having been exchanged for Australian dollars at maturity.

42. In my view, there was, within the meaning of Division 3B, no gain attributable to currency exchange rate fluctuations which was realised by the taxpayer in respect of currency purchased in the exercise of a right or the discharge of an obligation created by any contract entered into by the taxpayer after 19 February 1986. Nor was any hedging contract entered into by the taxpayer on or after that date in relation to any other eligible contract.

43. That conclusion is sufficient to dispose of the present appeal.

44. It is unnecessary to determine whether, if a contrary construction were placed upon each of the contracts put forward by the Commissioner, the taxpayer ought nevertheless to succeed because of the "umbrella" effect of the Euronote Facility on all that was done in providing finance to the taxpayer. In particular, as I have indicated, the Euronote Facility provided for a reduction on 30 June of each year until 1994 in the amount of the total commitment. It also conferred upon the taxpayer, as between it and the parties to the Euronote Facility, a right to payment of the proceeds of the notes.

45. However, the better view is that the gain in question is not made under an "eligible contract" unless substantially all of the rights and obligations in question are found in the contract or contracts (and I have indicated there may be more than one) which together make up the "eligible contract". Here the "eligible contract" embraced not only the immediate transaction pursuant to which the individual notes were issued and dealt with, but the Euronote Facility and the contracts in the forms of the annexures to the Euronote Facility. The terms of these instruments provided the source of what one might call those secondary contracts. But the Euronote Facility and associated contracts were made at too early a date to qualify collectively as an "eligible contract" within the meaning of Division 3B.

46. I should add that upon this hypothesis, there is no issue in the present case as to what might be the liability of the taxpayer upon discharge of any of the total commitment under the Euronote Facility. In particular, cl. 12.01 thereof contemplated payment being made other than in United States dollars, in immediately available funds freely transferable and convertible into United States dollars.

47. The appeal should be disposed of by orders in the terms proposed by Beaumont J.

HILL J The appellant Commissioner of Taxation appeals against the judgment of a judge of this court (Davies J), allowing the appeals of Energy Resources of Australia Limited ("ERA") against objection decisions relating to the assessment of income tax of ERA in the years of income ended 30 June 1987 and 30 June 1988 respectively. That judgment is reported as Energy Resources of Australia Ltd v FCT (1994) 94 ATC 4225.

2. ERA has, since 1980, carried on the business of mining, treatment and sale of uranium concentrate from the Ranger mine at Jabiru in the Northern Territory. To finance the mine and its operations a facility ("the Schroder Wagg facility") was arranged by J Henry Schroder Wagg and Co Limited, with various banks, under which a wholly owned subsidiary, ERA (Canberra) Limited ("ERA Canberra"), borrowed and on lent to ERA. The facility was guaranteed by ERA and was for the provision of finance up to a maximum of US$250 million. Additional finance of US$140 million was obtained from Japan Australia Uranium Resources Development Co Limited.

3. In late 1985 ERA negotiated a new financing facility for up to US$210 million (the "Euronote facility"), the purpose of which was to retire the Schroder Wagg facility. The interest or discount rates payable under the Euronote facility were lower than those applicable to the Schroder Wagg facility. On 22 January 1986 ERA entered into a number of agreements to implement the Euronote facility, being agreements the parties to which included ERA, ERA Canberra, Commonwealth Bank of Australia as manager, Credit Suisse First Boston Limited as the Euronote tender panel agent and various Australian and overseas banks and financial institutions. A US$210 million Facilities Agreement ("the facilities agreement") and related agreements entered into at the same time, constitute the background to the dispute between the parties and are summarised in the judgment of Beaumont J. That summary relieves me of a detailed analysis.

4. Suffice it to say here that the facilities agreement provided, inter alia, for the issue by ERA of 90 day promissory notes which would be sold at a discount to members of the banking consortium who were successful in tendering for the purchase of notes to be issued. The contemplation was, it would seem, that the Schroder Wagg facility would be discharged, that an interim loan would be made (presumably at least in part repayment of the Schroder Wagg facility) and that notes would be issued each 90 days, subject to the Euronote facility being reduced over time in accordance with a schedule. Each note was in fact issued in United States dollars for a denominated face value without interest, although the agreement provided for notes to be issued in currencies other than United States dollars and for notes to bear interest. The successful tenderer or tenderers at the time of issue of the first series of notes paid cash representing a discount from the face value of the notes issued by ERA. At the expiration of the term of those notes the successful tenderers for the next series of notes paid a discounted amount to the holders of the first series of notes to enable ERA to meet its obligation to pay the face value of the first series of notes on the due date and the next series of notes, in turn, were paid out by the successful tenderers for the issue of the third series of notes and so on.

5. Each payment by the successful tenderers was thus made in United States dollars and the successful tenderers, as purchasers of the notes, received United States dollars in payment on the maturity of the notes. Since the notes were issued at a discount from face value, it was necessary for ERA to pay from its own funds a United States dollar amount representing the difference between the amount to be received from the successful tenderers for the next note and the face value of the note maturing. ERA met the cash component of its obligations either by purchasing United States dollars on the day the notes matured, paying for them with Australian dollars, borrowing United States dollars, or using United States dollar funds in its bank account arising from the sale in United States dollars of uranium produced.

6. Where the facility was required to be reduced or ERA determined to reduce the amount of its indebtedness under the facility, ERA did so by retiring notes not from the proceeds of further note issues but from United States dollars, in the same way as it made up the difference between funds received on notes issued and the amount payable on the notes on maturity.

7. The way in which the dispute between the parties arises can best be understood by way of an example used in the judgment below and much discussed in argument. The example, as expressed in tabular form, is as follows:

Notes Maturity Proceeds Maturity Proceeds

Numbers Amount of Issue Amount of Issue

($US) ($US) ($A) ($A)

1252-1279
1281-1322

8. On 21 July 1987, ERA drew promissory notes (identified as notes 1252-1279 and 1281-1322) having a face value in total of US$35 million. These notes were acquired by the successful tenderers at a discount, as a result of which US$34,383,461.97 was available to be drawn down by ERA. That sum of United States dollars, together with other United States dollars owned by ERA, were used to retire previous notes having a face value in total of US$35 million which matured on 21 July 1987. By the notes drawn on 21 July 1987, ERA engaged to pay the face value on maturity on 21 October 1987. On 21 October 1987 ERA drew a further series of notes having a face value of US$35 million, which were discounted to the successful tenderers for US$34,180,887.02. This last mentioned amount, together with other United States dollars purchased by ERA using Australian dollars, were used to retire the previous notes maturing on 21 October 1987.

9. Looked at as a United States dollar transaction, ERA had, as on 21 July 1987, a liability of US$35 million which, in substance, although perhaps not in form, continued notwithstanding that on that day notes previously issued having a face value of US$35 million matured and new notes were drawn providing ERA with the United States dollar funds to discharge the earlier notes (subject to the discount amount). It continued to have a United States dollar liability of $35 million and the cost to it in United States dollars of the proceeds of discount of the notes being available to it for the 90 day period was the discount amount, being the difference between the face value of the bills (US$35 million) and the discounted amount received (US$34,383,461.97). Rounded up in United States dollars, the discount amount was US$616,538.

10. ERA sought a deduction under s.51(1) of the Income Tax Assessment Act 1936 (Cth) ("the Act") of the cost to it of the financing in the amount of US$616,538 converted to Australian dollars at the rate of exchange prevailing when the discounted amount became payable, that is to say, upon the maturity of the note. So converted, the amount claimed as a deduction by ERA was A$864,588. In ERA's submission that was the end of the tax consequences of that transaction.

11. The Commissioner, on the other hand, was of the view that rather than calculating the cost of finance in United States dollars and then converting it to Australian dollars, the proper treatment for the purposes of the Act was to calculate first, in Australian dollars at the time of issue of the note, the proceeds of issue, namely, US$34,383,462. The rate of exchange prevailing at the time of issue was US$0.7083 = A$1.00. So converted, the Commissioner says, ERA received the United States dollar equivalent of A$48,543,643. On maturity ERA was obliged to pay US$35 million. The rate of exchange prevailing at the date of maturity of the bill, 21 October 1987, was US$0.7131 = A$1.00. Thus the amount the taxpayer was obliged to pay on maturity was A$49,081,475. On this basis the actual loss deductible to ERA was, in the Commissioner's view, A$537,832. This was the only amount which was deductible.

12. ERA's returns, as originally assessed, showed the discount amount claimed (in relation to the particular transaction $864,588) as being "interest". The returns had been assessed as lodged. The Commissioner issued an amended assessment in effect adding back into taxable income, inter alia, A$326,756 and it is the correctness of that adjustment which was at issue between the parties.

13. In the example so far discussed the movement of the Australian dollar as against the United States dollar was not so great as to render there to be, in Australian dollars, no cost to ERA of the Euronote financing transaction. However, in other cases the currency movement brought about the result, according to the Commissioner, that if the computation were made in Australian dollars there would be, even after the discounting of the note, a profit emerging. This profit, counsel for the Commissioner referred to as "the negative cost of funds" and was said to be assessable income. An example is shown in the following table.

Notes

Numbers Maturity

Amount

($US)Proceeds

of Issue

($US) Maturity

Amount

(A$) Proceeds

of Issue

(A$) Profit/(Loss)

(A$)485-568 42,000,000 41,352,041 64,655,172 67,968,509 3,313,337

14. In the above example ERA claimed a deduction for the difference between the proceeds of issue, US$41,352,041, and the maturity amount US$42 million converting that at the rate of exchange at the maturity of the notes. The Commissioner's submission is that not only was there no loss when the transaction is considered in Australian dollars but there was a profit and that this profit was assessable income under s.25(1) of the Act or alternatively under the provisions of Pt.III Div.3B of the Act dealing with foreign currency exchange gains and losses. It is convenient to consider the competing submissions by reference initially to ss.25 and 51(1) of the Act and then to consider separately whether the provisions of Div.3B apply to the present circumstances.

The operation of s.51(1) in foreign currency note transactions

15. The decision of the High Court in Coles Myer Finance Limited v Commissioner of Taxation [1993] HCA 29; (1993) 176 CLR 640 authoritatively determined that, at least in the case of a finance company which in order to raise finance for lending purposes drew bills of exchange and promissory notes which it then sold at a discount, a deduction was available under s.51(1) of the Act for the discount loss incurred by it. Such loss was not on capital account. The Court said (at 665):

"In effect, the discount offered by the taxpayer

is the cost of acquiring the funds which it

turns over in its business, the amount of the

discount serving the same purpose as the amount

of interest on borrowed moneys; the amount of

the discount is the cost of those moneys. The

difference between the amount payable on the

bill and note and the amount received when the

bill or note is discounted is a loss or outgoing

made in the ordinary course of conducting the

business for the purpose of profit-making."

16. Although the present taxpayer is not a finance company using the funds acquired in the discounting process as part of its circulating capital, there is no dispute between the parties that the discount in the present case is on revenue account, in the same way as interest on funds borrowed by ERA for the same purpose would be. The matter not having been argued I accept the way the parties have approached the case.

17. Not surprisingly, the income tax legislation in force before the 1936 Act contained no specific provision recognising the possibility that the affairs of a taxpayer might be conducted other than in Australian currency.

18. In 1933 the High Court commenced hearing the case of Payne v Federal Commissioner of Taxation [1934] HCA 7; (1933-34) 51 CLR 197, where the question at issue was how an Australian resident taxpayer should account for interest paid in sterling to a London bank account and not remitted to Australia. The Commissioner contended that the amount should be brought to account for income tax purposes in Australian currency, representing the Australian pound value of the pound sterling received. The taxpayer contended that the credit should appear in his Australian tax return as the number of pounds sterling received. The High Court was split in its view of the matter. Gavan Duffy CJ, Evatt and McTiernan JJ were of the view that the taxpayer should account for the interest income by including in his return its value at the time of receipt, thus expressing a true relationship between that item of income and all other items of Australian receipt and Australian expenditure. Rich, Starke and Dixon JJ were of a contrary view. While accepting that the Income Tax Assessment Act 1922-31 (Cth) required the income of a resident, where received abroad in foreign currency, to be converted at a commercial rate of exchange prevailing at the time of derivation, their Honours thought this to be unnecessary in the case of sterling for, at least prior to 1932, the ultimate currency of Australia was the British sovereign. On appeal to the Privy Council their Lordships were of the view that the whole context of the income tax legislation, including the requirement that tax be payable at a number of pence applied to taxable income, required the conclusion that, to enable the calculation of tax to be made, assessable income of a taxpayer had to be expressed in terms of Australian currency whatever the currency might be in which the taxpayer derived that assessable income: Payne v Deputy Federal Commissioner of Taxation (1936) AC 497.

19. It was presumably this division in the High Court which led the Royal Commission on Taxation 1932-1934 (The Ferguson Committee) to incorporate in the draft legislation which ultimately became the Income Tax Assessment Act 1936 (Cth), the provisions of s.20 (now s.20(1) of the Act) which provided:

"For all the purposes of this Act, income

wherever derived and any expenses wherever

incurred shall be expressed in terms of

Australian currency."

20. The Privy Council ultimately affirmed the decision of the High Court reached by statutory majority. However, its decision had not been given at the time the 1936 Act was enacted. The explanatory handbook, Income Tax (31 August 1936, Commonwealth Government Printer, Canberra), issued by authority of the Commonwealth Treasurer after the 1936 Act had been passed showing a comparison with the previous legislation, made the comment that the rate of conversion was not specified in the section:

"... as it is proposed to allow the ordinary

commercial practice applicable to the

circumstances of the particular taxpayer to

operate."

21. The language of s.20 makes it clear that the section was not intended to operate to create income. The section is predicated upon the circumstance that "income" has been derived. It is unnecessary for present purposes to speculate whether the word "income", as used in the section, has the meaning of income in ordinary concepts, or "assessable income", or "taxable income". The section is concerned with the translation of the "income" into Australian currency. Likewise the section is not concerned with revealing whether an expense has been incurred but is predicated upon the fact that there has been an expense incurred and is concerned with translating the amount of that expense into Australian currency. It may be thought curious that the section was expressed in terms of "expense" rather than in terms of "losses or outgoings", but nothing turns upon that.

22. Howsoever s.20(1) is construed it adds nothing to what the law would be in the absence of specific provision. Before us the Commissioner did not seek to place reliance upon s.20 conceding, in effect, that the section did not advance his case. Rather he relied upon the provisions of s.21, also inserted for the first time into the 1936 Act. That section (now s.21(1)) provided (as enacted):

"Where, upon any transaction, any consideration

is paid or given otherwise than in cash, the

money value of that consideration shall, for the

purposes of this Act, be deemed to have been

paid or given."

23. The Commissioner submitted that there had, for present purposes, been a transaction, namely, the note discount arrangement involving a consideration being paid otherwise than in cash. It was said that the reference to "cash" was a reference to Australian dollars and that consideration given in foreign currency was therefore to be treated as consideration not given in cash. The conclusion ultimately sought to be drawn was that both at the time the notes were discounted and at the time the notes were discharged there were transactions involving consideration (United States dollars) being paid other than in cash with the result that on each occasion that consideration should, in accordance with s.21(1), be taken as the Australian dollar equivalent at the time of discounting and at the time of maturity, respectively.

24. The origin of s.21(1) is somewhat obscure. The 1936 explanatory handbook merely comments that the section:

"... is a general provision applicable to

several sections of the Act, eg, consideration

given in the form of shares in connexion with a

lease premium."

25. It is doubtful whether s.21(1) did more than declare what the position of general law would, in any event, have been. Thus, for example, where land was sold in consideration of shares, the argument that no income was derived because the shares had not been realised was rejected in Californian Copper Syndicate (Limited and Reduced) v Harris (1904) 5 TC 159. The section has not been the subject of judicial interpretation. In particular the word "cash" has not received scrutiny. The word is one the meaning of which may vary depending upon the context. The normal meaning of the expression is "ready money" or, as the Macquarie Dictionary (2nd Rev.) observes, "money, esp. money on hand, as opposed to a money equivalent (as a cheque)." The words may, however, in an appropriate context, mean merely money: cf In re Stonham. Lloyds Bank Ltd v Maynard (1963) 1 WLR 238. In the context of a bequest of cash it would seem that foreign bank notes would be comprehended: Miller v Race [1758] EngR 129; (1758) 1 Burr 452 (97 ER 398). In the present context clearly the meaning is not confined to money on hand. Rather the section is concerned with the distinction between consideration paid in cash, on the one hand, and consideration in kind, on the other.

26. I see no reason to construe the word "cash" in the context in which it is used as referring only to Australian dollars. An Australian resident taxpayer selling stock in the United States for United States dollars would be surprised to learn that no cash consideration had been received so that the section applied. But what the section does not do is require an Australian resident taxpayer engaging in business transactions abroad to convert every step in those transactions into Australian dollars to compute that taxpayer's ultimate taxable income. Absent some special provision dealing with currency transactions such as Pt.III Div.3B, a taxpayer carrying on business abroad is not required to rewrite all books of account into Australian dollars as transactions occur and arrive in that way at a taxable income calculated in Australian dollars. The taxpayer is entitled to calculate the profits of businesses conducted abroad in the unit of account in which that business is transacted but then is required to translate the result into Australian dollars. That is the approach which ERA has adopted in the present case.

27. Senior counsel for the Commissioner submitted that the outcome contended for by the Commissioner in any event arose out of the application of the general provisions of ss.51(1) and 25 of the Act. It was said to follow from Coles Myer that a taxpayer must calculate in Australian dollars the difference between the amount payable on a note, on the one hand, and the amount received when that note was discounted, on the other, in order to determine the deductible loss or outgoing. So much may be accepted but the submission was that the currency calculation had to be made by applying the exchange rate at the date of discount to the amount received and the exchange rate at the date of maturity to the amount payable. With respect, that later proposition is not self-evident and certainly does not stem from anything that was said by the various members of the High Court in Coles Myer. In my view, where a discounting transaction is conducted wholly in a foreign currency, the proper way of determining the amount of deduction to which a taxpayer is entitled by virtue of the discounting, will be to take the discount in the foreign currency and then translate the result into Australian dollars for the purpose of then computing the taxable income.

28. The Commissioner's alternative submission was, however, that there was another way of looking at the matter. It was submitted that if it were proper to take the United States dollar value of the difference between issue and maturity amounts and translate that as deductible under s.51(1), then the depreciation in the Australian dollar value of what was referred to as the "issue proceeds obligation" was an offsetting gain revealing the difference in Australian dollar values of actual receipt and payment amounts.

29. Two questions arise from this submission. The first is whether in truth the transactions undertaken in the years of income produced a gain to ERA. The second, and if I may say so the question of greater difficulty for the Commissioner, is whether such a gain was on revenue or capital account.

30. On the first of these questions we were referred to the various judgments of the High Court in Caltex Limited v Federal Commissioner of Taxation [1960] HCA 17; (1959-60) 106 CLR 205. The taxpayer in that case had incurred an indebtedness payable in United States dollars largely for trading stock of petroleum and petroleum products from an American company referred to in the case stated as "the old supplier". In fact the indebtedness related, as the case stated indicated, as well to some items on capital account but the case appears to have proceeded on the basis that the whole of the indebtedness represented the cost of trading stock.

31. According to the case stated, a new supplier lent to the taxpayer a sum of dollars to enable the taxpayer to discharge part of its indebtedness to the old supplier. The loan was effected by means of a payment in dollars to the credit of the company's bank account in New York and on the same day the company drew a cheque on that account for the full amount of the dollars borrowed and paid it into the New York account of the old supplier. As a result of a change in the rate of exchange between Australian pounds and United States dollars, the value of the "new loan" in Australian currency was considerably greater than the amount in Australian dollars taken up in its books as cost of stock in trade at the time the indebtedness had been created.

32. The question at issue between the parties was whether the taxpayer was entitled to deduct any loss. That raised the statutory issue under s.51(1) of whether a loss had been incurred. The question which divided the Court in that case was whether the transaction, whereby the new purchaser lent moneys to the taxpayer to discharge the initial loan, operated to realise a loss to the taxpayer. If it did there was little doubt, having regard to decisions such as Texas Co. (Australasia) Ltd v Federal Commissioner of Taxation [1940] HCA 9; (1940) 63 CLR 382 and Armco (Australia) Proprietary Limited v Federal Commissioner of Taxation [1948] HCA 49; (1948) 76 CLR 584, that the loss incurred was on revenue account.

33. Dixon CJ was of the view that there was no realisation of the loss but rather a "... novation of a dollar indebtedness, or something equivalent or akin to a novation." (see at 220). His Honour reached that view on the basis that on the facts appearing in the stated case it was not open to the taxpayer to use the proceeds of the cheque other than to discharge pro tanto the existing indebtedness to the old supplier. His Honour said of that (at 220):

"But I do not see that it matters. There stood

the answerable indebtedness in the same number

of dollars to the California Texas Oil Company

Limited. In many respects the money of another

country must be treated in point of law like

goods. It is not currency of this country and

it is not a measure of value in this country.

It is true that unlike goods, but like some

forms of immediately convertible security, the

receipt of foreign money may be treated as a

derivation of income. But the purpose of

introducing the analogy of goods is to

illustrate the differences between the changes

of value expressed in terms of Australian money

and the actual realization of a loss or the

`incurring' of a loss or outgoing. It is one

thing to deal in values without realization for

the purpose of s. 31; another for the purposes

of s. 51 (1). Values are ever changeable: so is

a rate of exchange."

34. A similar view of the matter was taken by Fullagar and Kitto JJ. Fullagar J regarded it as a half truth to say that the taxpayer's debt for its trading stock had been finally discharged. In his Honour's view (at 227):

"The substance and reality of what happened was

simply that one creditor was substituted for

another."

35. Whether a loss arose was, in his Honour's view, a question to be determined by reference to the substantial effect of what was done on the financial position of the company.

36. The minority were of the view that the taxpayer incurred a loss when the liability to the first supplier was discharged. Taylor J said (at 239):

"... the difference between the amount at which

its cost for stock was originally taken into

account and the cost of discharging its

liability, both being expressed in terms of

Australian currency, truly represented an

additional cost incurred in carrying on its

business. The use of a trader's own dollar

funds to discharge a dollar indebtedness

overseas means, of course, that the trader is no

longer in a position to convert the dollars used

to Australian currency. And, expressed in terms

of that currency, he incurs an additional cost

which is just as real and significant as if it

had been necessary for him to expend Australian

currency to secure dollar funds for the purpose

of making the payment in question."

"Here, however, the new supplier lent the

taxpayer dollars to discharge a liability on

revenue account, and that discharge is what

seems to me to be important for income tax

purposes. An item on revenue account

disappeared from the taxpayer's books and was

replaced with a new liability to a different

creditor on capital account, so that any

allowance as a loss or outgoing for income tax

purposes must, as it seems to me, be made at the

state of the discharge of the liability for

goods or not at all."

38. It can be seen that the whole of the Court would have allowed the taxpayer a deduction for the exchange loss had all been of the view that the taxpayer's indebtedness for trading stock in United States dollars had been finally discharged. In particular, it was clear that any loss was on revenue account.

39. Our attention was drawn to the decision of the House of Lords in Pattison (Inspector of Taxes) v Marine Midland Ltd (1984) AC 362. The taxpayer in that case, a United Kingdom company, carried on an international banking business in United States dollars. It borrowed in United States dollars by the issue of subordinated unsecured loan stock and used the funds borrowed to on-lend money in United States dollars. Ultimately it retired the loan stock from its existing dollar funds. The loan stock was retired at face value. The taxpayer contended that no gain or loss had been made by it on the transaction. The Revenue, however, contended that the amount of the loan stock should be converted to pounds sterling at the time the loan was drawn down and at the time it was retired, thereby producing a profit upon which corporation tax was assessed. As appears from the argument, the taxpayer's submission was that a company carrying on a trade outside the United Kingdom was not obliged to translate every transaction it undertook into pounds sterling and thereby calculate the resultant profit or loss. Rather, it was submitted, the result of the trading was to be determined in the currency in which that trading was conducted and that resultant profit or loss translated into pounds sterling for tax purposes. Lord Templeman delivering the principal judgment with which Lords Fraser, Keith, Roskill and Brandon agreed, said (at 372-3):

"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."

40. Pattison v Marine Midland was distinguished by the Court of Appeal in the later decision of Capcount Trading v Evans (Inspector of Taxes) (1993) STC 11 and 38. Capcount concerned the question how a purchase and sale of shares in Canadian companies for Canadian dollars should be accounted for, for the purposes of the United Kingdom capital gains tax provisions. It was held that capital gains tax measured the difference computed in pounds sterling between cost and disposal proceeds and accordingly the acquisition cost and sale proceeds had to be converted to sterling to compute the capital gains tax profit. A similar result would follow under Part IIIA of the Act.

41. The distinction between Capcount and Pattison v Marine Midland decision is well expressed by Nolan LJ in a passage equally applicable to the present case. After referring to the fact that a trader's profit had to be determined by framing a profit and loss account, his Lordship said (at 26):

"... I do not find it surprising that, in the

case of trading companies operating abroad, the

commercial accounting procedures which, it

seems, commonly result in the profit being first

computed in the particular overseas currency and

then translated into sterling for tax purposes

should be adopted and accepted by the Revenue.

Given the multiplicity and the diverse character

of the transactions which may be expected to

take place in any given trade during any given

year, I imagine that it would normally be

impracticable to effect instantaneous

translations into sterling of every debit and

credit. Even if it were possible in the

exceptional case, it would still appear to me

inappropriate in principle because of the fact

that, as I have mentioned, the income tax

legislation, unlike the capital gains tax

legislation, is not generally concerned with the

measurement of a gain or loss on a single

disposal, but with a balance at the year end

computed on accounting principles."

42. While the Australian income tax legislation is not couched in terms of the determination of profits or gains, but rather of the determination of taxable income being assessable income less allowable deductions, it is obvious that it would normally be impractical to effect instantaneous translations into Australian dollars of every debit and credit arising in the course of business transactions. Ultimately, although not directly founded upon a profit and loss calculation, the taxable income is a balancing figure computed at year end in the Australian Act, just as the United Kingdom Act requires profits and gains of the year to be so determined.

43. What was said in Pattison v Marine Midland was relied upon heavily by senior counsel for ERA in the present case. Thus it was said that, at least where there are a series of Euronote discounting transactions and ERA's obligation remains constant, ERA had incurred no profit or loss so far as the principal value of its obligation was concerned. That proposition may well be correct where the obligation remains constant. The substance and reality of the transaction, to echo the language of Fullagar J in Caltex is, in such a case, that the indebtedness of the taxpayer in United States dollars continues. The proposition is rather more difficult in a case such as the present where the facility agreement required the face value of the indebtedness to be reduced on a regular basis and such reduction in fact took place in the years of income.

44. The simpler basis of rejecting the Commissioner's argument is that any so-called profit which may be thought to arise would not, in any event, be on revenue account. The present is not a case, like Caltex, where the borrowings were borrowings in payment of trading stock. Here the moneys borrowed went to retire a loan which, in turn, financed ERA's mining operation. Any exchange gain or loss arising would, like the exchange loss claimed to arise in Federal Commissioner of Taxation v Hunter Douglas Limited [1983] FCA 229; (1983) 78 FLR 182, be on capital account. As Fisher J made clear in that case, there is a distinction between currency gains or losses incurred by a finance company in financing its business where the moneys used are part of the circulating capital of the taxpayer (cf Avco Financial Services Limited v Commissioner of Taxation [1982] HCA 36; (1981-82) 150 CLR 510) and exchange gains or losses incurred for the purpose of financing the expansion (or the commencement) of the taxpayer's business and providing the working capital which that required. Further, here, as in Hunter Douglas, the funds borrowed were not used in or as an integral part of the profit-making activities of the taxpayer but in the financing of those activities. So seen, the exchange gains or losses were on capital account.

45. The fact that the manner of borrowing, namely, through discounting of Euronotes, occurred with regularity so that, on the Commissioner's submissions, the exchange gains or losses occurred with the same frequency is not, of itself, sufficient, in my view, to characterise those gains or losses as being on revenue account. Ultimately, it is the purpose of the financing which will determine the character of the exchange gains or losses. As Mason J said in Commercial and General Acceptance Limited v Commissioner of Taxation (1977) 137 CLR 373 at 384:

"... the principle purpose of the borrowing was

to strengthen `the business entity, structure,

or organization set up or established for the

earning of profit'; it was not part of the

process by which the organization operated to

obtain regular returns, this being the

distinction drawn by Dixon J in Sun Newspapers

Ltd. v. Federal Commissioner of Taxation (1938)

[1938] HCA 72; 61 CLR 337 at 359, in elaborating the difference

between expenditure and outgoings on revenue

account and on capital account. In truth the

transaction was designed to strengthen the

framework within which the taxpayer intended to

carry on business ...".

46. It follows, in my view, that if the Commissioner is entitled to succeed in the present appeal, it must be by virtue of the specific statutory provisions of Pt.III Div.3B to which I now turn.

Part III Division 3B

47. Division 3B comprising ss.82U to 82ZB was inserted into the Act by the Taxation Laws Amendment Act 1987 (Cth). The introduction of the Division gave effect to an announcement that had been made previously on 18 February 1986, to the effect that foreign exchange gains or losses of a capital nature realised on or after the date of 19 February 1986, to the extent to which money borrowed was used for the purpose of producing assessable income or in carrying on a business for that purpose, would be assessable income or allowable deductions as the case may be. In order to construe the Division it is necessary to recall the state of the law as at the time it was introduced.

48. By 1986 there had been a succession of cases which had considered the income tax consequences of foreign exchange gains or losses made or incurred by taxpayers who either owed money in foreign currency or had borrowed moneys in foreign currency. The cases distinguished between liabilities, on the one hand, arising from the acquisition of trading stock, in the case of a trader or the analogous situation of liabilities arising from borrowings by banks or finance companies of moneys used in the finance business, and liabilities arising from other borrowings to finance capital raisings and working capital.

49. A taxpayer who owed money for trading stock in foreign currency and, as a result of a change in the relative value of the Australian currency was required to discharge that indebtedness by payment of a greater value of Australian currency than was represented by the amount at which the trading stock was taken into its books, incurred an outgoing on revenue account which was deductible under s.51(1): cf Moreau v Federal Commissioner of Taxation [1926] HCA 28; (1926) 39 CLR 65; Texas Co. (supra); Armco (supra); Caltex (supra); International Nickel Australia Limited v Commissioner of Taxation [1977] HCA 49; (1976-77) 137 CLR 347; and Avco (supra). However, even where the initial liability arose from the purchase of trading stock if the account owing was capitalised the resulting loss or gain, as the case may be, might be on capital account.

50. Further, in the case of finance companies in particular, the purpose of the borrowing was required to be analysed. Thus in Commercial and General an exchange gain arising from a borrowing made to strengthen a finance company's capital base was not income because the gain was on capital account. Conversely where the gain or loss arose from a borrowing for a purpose other than trading stock or equivalent circulating capital in the case of a finance company, exchange gains or losses would ordinarily be on capital account even if the moneys borrowed were used to fund the ordinary day to day outgoings of the taxpayer: see Hunter Douglas (supra). The question whether the borrowing was on capital or revenue account was ultimately to be determined by the application of the principles laid down by Dixon J in Sun Newspapers Limited v Federal Commissioner of Taxation [1938] HCA 72; (1938) 61 CLR 337.

51. Not surprisingly in an environment where exchange gains or losses had become a recurrent incident of overseas borrowing transactions and where such transactions had become quite frequent, there was much agitation for a deduction to be allowed for foreign currency losses without the distinction being drawn as to whether such losses were on revenue or capital account. The agitation was, no doubt, fuelled by the continuing depreciation of the Australian dollar against foreign currency. It was in that environment that the Government announced the proposed amendment to the Act, inserting Div.3B. Although not relevant to the present discussion, the legislation also referred to gains and losses from forward cover or other currency hedging contracts.

52. As the Explanatory Memorandum to the Taxation Laws Amendment Bill (No.5) 1986 (which became the previously mentioned Act in 1987), circulated by the authority of the then Treasurer, made clear, exchange gains were not to be assessable nor losses deductible until the gains or losses were realised. In that connection the Memorandum said:

"In broad terms, in the case of a borrowing or

loan, this will be when the borrowing or loan

(or an instalment) is repaid and, in the case of

a contract for the sale or purchase of an asset,

when the taxpayer receives or makes the payment

for the asset (or an instalment of the

payment)."

53. The central provisions in Div.3B are ss.82Y and 82Z, which operate respectively to include any "currency exchange gain" made by the taxpayer in the year of income under an eligible contract in assessable income (s.82Y) or grant to the taxpayer a deduction in respect of any currency exchange loss incurred by that taxpayer in the year of income under an eligible contract (s.82Z), but subject in the case of losses to certain conditions not presently relevant.

54. The key concepts are that there be a currency exchange gain or currency exchange loss, as the case may be, and that the gain or loss be made under an "eligible contract". The expressions "currency exchange gain" and "currency exchange loss" are defined in s.82V(1) as follows:

"'currency exchange gain' means a gain to the

extent to which it is attributable to currency

exchange rate fluctuations;

'currency exchange loss' means a loss to the

extent to which it is attributable to currency

exchange rate fluctuations."

55. These definitions are affected by the provision of s.82V(2)(b) which restrict the relevant gains or losses to those which are realised. Thus in the present case the Division will have operation only where ERA can be said to have made a realised gain or loss attributable to currency exchange rate fluctuations. Further, that realised gain or loss must be made under an eligible contract.

56. An eligible contract is defined in s.82V(1) as meaning any contract entered into by the taxpayer on or after the commencing date, other than a hedging contract, or certain kinds of hedging contracts. It is not necessary to explore the operation of the Division in relation to hedging contracts. Thus, relevantly, any contract will be an eligible contract provided it has been entered into after the relevant commencing date, defined as 19 February 1986.

57. It will be noted that the facilities agreement itself was entered into on 22 January 1986 and so would not be an eligible contract. However each time ERA offered notes for tender and, in the result, issued and sold at a discount its promissory notes, the arrangements so made constituted a contract and was in the result, when made after 19 February 1986, an eligible contract.

58. The only section specifically assisting in defining whether a gain or loss is made under a contract is s.82V(2)(a), which provides:

"A currency exchange gain made, or a currency

exchange loss incurred, in respect of currency

purchased under a contract shall be taken to

have been made or incurred under that contract;

...".

59. There are certain transitional provisions contained in s.82W(1) and (2), to which reference should be made in so far as they may cast light upon the meaning of the expression "under a contract". It is only necessary here to refer to s.82W(1) which provides as follows:

"Where, on or after the commencing day and under

a contract entered into by a taxpayer before the

commencing day, any of the following happens in

relation to the taxpayer (otherwise than

pursuant to a contractual obligation that was

binding on the taxpayer before the commencing

day):

(a) the taxpayer receives loan money;

(b) a loan made to the taxpayer is wholly or

partly rolled over;

(c) the period for which money has been lent

to the taxpayer is extended,

this Division applies as if -

(d) where paragraph (a) applies - the loan

money had been received by the taxpayer

under a contract entered into by the

taxpayer at the time when the loan money

was received;

(e) where paragraph (b) applies - the loan

resulting from the roll-over had been made

to the taxpayer under a contract entered

into by the taxpayer at the time of the

roll-over; and

(f) where paragraph (c) applies - a new loan

of the amount outstanding immediately

before the commencement of the extension

period had been made to the taxpayer under

a contract entered into by the taxpayer at

the commencement of the extension period."

60. In a case such as the present where a funding arrangement is constituted by a facility agreement, which does not bind the person for whom funds are provided to utilise that facility but binds the financiers to make funds available where required, there may be said to be two contracts under which the ultimate note discount arrangement or loan is made: the facilities agreement and the ultimate agreement entered into, as in the present case, for the discounting of the note. Which contract is regarded as being the relevant contract under which the note discounting transactions were made is a question which depends upon the proper meaning of the phrase "under a contract" in the circumstances of the case.

61. The phrase "under a contract" was considered by Wilcox J in Elmslie v Federal Commissioner of Taxation [1993] FCA 549; (1993) 118 ALR 357, a case decided in the context of capital gains tax, albeit on facts clearly distinguishable from the present facts. The issue in Elmslie was whether certain shares allotted to the applicant after 20 September 1985, the date upon which Pt.IIIA of the Act imposing essentially tax on capital gains commenced to apply, were assets acquired "under a contract" made before that date. There had been on the facts of that case heads of agreement dealing with the allotment of shares and an allotment made thereafter as contemplated in the heads of agreement. Wilcox J held that the relevant contract under which the allotment was made was the immediately empowering contract rather than a more remote source of authority, with the result that the relevant contract was held to be the contract of allotment itself and not the prior heads of agreement. His Honour described as the critical question whether the statutory formula "under a contract" encompassed a contract that envisaged or provided for the acquisition of the asset, or even required a party or parties to undertake the transaction that constituted the acquisition of the asset, but was not the means by which the asset was actually acquired. His Honour was of the view that that question should be answered in the context before him in the negative.

62. The expression "under a contract" must, of necessity, be construed by reference to the context in which it appears. That context in Div.3B includes the provisions of s.82W(1). That sub-section contemplates that where a taxpayer receives a loan which the taxpayer is not bound to take in a case where there is a previous contract entered into by the taxpayer before the commencement date pursuant to which the loan is to be made, the loan would, but for the terms of the sub-section, be made under the original contract rather than the source of the ultimate obligation, namely, the loan. It likewise contemplates that a loan roll-over resulting in a new loan agreement and a new loan would not, but for the sub-section, result in the loan being made under the roll-over contract, but rather that the roll-over, if contemplated by an earlier contract not binding the taxpayer to take out the loan, would be made under the earlier contract.

63. There is no definition in the Division of the expression "roll-over", but the expression has a well understood commercial meaning. In the case of a loan it contemplates the renewal of the loan at the time of maturity, generally at a rate of interest based on the then ruling rate at the time of renewal (cf the Macquarie Dictionary definition of "rollover provision") and in the case of bills or promissory notes, the issue of new bills or notes at the time of maturity of earlier notes, resulting in the discharge of the liability on the earlier bills or notes, the new bills or notes being discounted generally at some prevailing rate (cf K.D. Morris and Sons Proprietary Limited (In Liquidation) v Bank of Queensland Limited [1980] HCA 20; (1979-80) 146 CLR 165.

64. Section 82W(1) would seem to be limited to cases involving loans of money and thus not to extend to bill or note discharge arrangements. It is well accepted that a bill discount arrangement would not in law be a loan (cf K.D. Morris and Sons (at 194ff per Aickin J); Willingale (Inspector of Taxes) v International Commercial Bank Ltd (1978) AC 834. The section thus has no direct application.

65. Two conclusions may, however, be drawn from s.82W(1). The first is that s.82W(1) recognises for the purposes of the Division the view taken by the statutory majority in Caltex that where funds are made available by way of a loan (or for that matter a discounting transaction) on terms that those funds may only be used to pay out an existing indebtedness, no gain or loss is realised. Second, s.82W(1) contemplates that a loan (and a fortiori, the same would follow with a discount transaction) made pursuant to a facility agreement will have been made under that facility agreement rather than under the fresh contractual arrangement made thereafter.

66. In part s.82W(1) is also consistent with the views of Stephen and Wilson JJ in K.D. Morris and Sons. That was a case of a bill discount facility between a bank and a building company providing for the issue and discounting of accommodation bills of exchange for a period of five years. The bills were limited in terms from 180 to 190 days to maturity. The result of the transaction for the building company was that it effectively retained the use of the funds under the facility, less the amounts successively lost with each discounting (see at 170). The question at issue was whether amounts paid by the bank on the bills immediately after the winding up of the building company had priority to other unsecured debts, pursuant to s.292(1)(a) of the Companies Act 1961-1975 (Qld). That question, in turn, depended upon whether it was correct to treat the company's liability to the bank, as if it first arose when the last series of bills was accepted by the bank or whether it arose at the time the first bill was discounted under the facility. Stephen and Wilson JJ (who, with Murphy J, formed the majority of the Court) said (at 173-4):

"This was no case of the occasional acceptance

of bills by the Bank in a number of transactions

each one unconnected with the others. It was,

rather, a case of acceptances by the Bank

pursuant to a contractual obligation originally

undertaken by it in 1973. It was essential to

the whole concept of the Bank's commercial bill

acceptance facility that there should be this

continuity of obligation; without it the

facility was denied its prime character, that of

a means of providing to the Company over a

period of years access to funds.

The Bank's contractual obligation arose out of

the concluded negotiations between it and the

Company in the second half of 1973, which

culminated in the acceptance on 30th August 1973

of the Bank's offer contained in its several

letters written on various dates earlier in that

month. That offer, once accepted, obliged the

Bank to accept the Company's initial bills up to

a maximum of $1 million and to go on accepting

new replacement bills as existing bills matured

and were retired ...

Once it availed itself of the facility the

Company also became subject to a continuing

obligation. That obligation was to put the Bank

in funds in respect of the Bank's payment of

bills on their maturity. ...

So long as the Company continued, as it in fact

did, to use the roll over mechanism to discharge

its periodic obligation to the Bank it was

continually subject to this liability."

67. The same can be said of the present facilities agreement, albeit that it differed in two respects from that in K.D. Morris and Sons: the first in that it was a note rather than bill facility; the second that the facility did not contemplate the same parties would continue to roll-over the notes at the end of each cycle, but rather that individual members of the consortium varying from time to time would so do. Neither of these differences, in my view, is however material.

68. Once ERA availed itself of the facility it became subject to a continuing obligation in respect of the face value of the notes reduced in accordance with the facilities agreement or payments which ERA at its option might make discharging the facility obligation. Likewise, although individual members of the consortium did not have a specific obligation to purchase ERA's notes, there was an obligation that notes would be purchased from within the consortium providing access to the funds (subject to scheduled reductions) over the 8 year term of the facility.

69. Two conclusions seem to me to follow. The first is that in the context of the agreement it is incorrect to see each roll-over as a discharge of indebtedness upon a new indebtedness arising from the issue and discounting of fresh notes for the same reasons as the statutory majority in Caltex took the view that no exchange loss arose. Second, and more fundamental for the present case, it seems to me that the relevant contract under which the notes were issued was the facilities agreement rather than the individual contracts arising out of the acceptance of tenders for purchase of notes and the issue and sale of those notes at a discount.

70. The second of these conclusions suffices to determine that part of the appeal which concerns Div.3B. If ERA did make a realised currency exchange gain or loss, such a gain was a loss or gain made under the facilities agreement and accordingly not made or incurred under an eligible contract (s.82V(1)) and not therefore assessable income (s.82Y) or an allowable deduction (s.82Z) for the purposes of Div.3B.

71. If, contrary to my view, the relevant contract to be considered is the contract arising out the acceptance of tenders for the discount of notes, then I would be of the view that Div.3B was capable of operation to a limited extent but not in the manner submitted for by the Commissioner. In taking this view I have the misfortune to differ from the learned trial judge who was of the view that no exchange gains or losses arose under Div.3B, even if the relevant contract was not the facilities agreement.

72. Where a taxpayer borrows in overseas currency, uses the borrowed funds in its business and ultimately repays the borrowing in the same overseas currency, an exchange gain or loss arises where there has been a movement in the exchange rate between Australian dollars and United States dollars, between the date of borrowing and the date of repayment. By way of an example, if a taxpayer borrows United States dollars and there is a devaluation of the Australian dollar against the United States dollar, the number of Australian dollars that would be required to fund the repayment of the indebtedness will be greater than the Australian dollar value of the amount received. Such a case involves, for the purposes of Div.3B, the making of a currency exchange loss under the contract of loan and it matters not that that loss was not derived from an actual exchange transaction involving the conversion of currency. While Div.3B is not happily worded, there will have been a loss attributable to currency exchange rate fluctuations realised once the loan is discharged. It is precisely such a case to which Division 3B was, at least principally, directed. There is no difference in substance between a loan and a note discounting transaction for this purpose.

73. Some assistance may be derived on the question whether a gain or loss is realised under the facilities agreement when a borrowing and repayment of foreign currency occurs without the necessity to actually convert currency from the American jurisprudence. Care must, however, be taken in the application of United States decisions where the issue is not merely whether the gain or loss is ordinary income but includes also whether there is a gain or loss for capital gains tax purposes.

74. The starting point of the United States cases is the decision of the Supreme Court of the United States in Frank K Bowers, Collector v Kerbaugh-Empire Company 1 USTC 1431 (1926), where it was held that the repayment of a borrowing in the currency of that borrowing gave rise to no gain where that currency had devalued against the United States dollar. The decision is however complicated because the borrowed money had been advanced to a subsidiary which had lost it and the ratio of the case seem rather to be that overall the taxpayer had made a loss which had been diminished by the exchange gain rather than that the taxpayer had made no gain.

75. Bowers, the subsequent decision in Foundation Co. v Commissioner 14 TC 1333 (1950) and BF Goodrich Co. v Commissioner 1 TC 1098 (1943), seem to have been thought to stand for the proposition that the payment of a loan in foreign currency did not give rise to a taxable gain or loss if there was no necessity of converting the foreign currency into United States dollars. A proposition similar to that advanced before us. This view of the law was, however, rejected by the United States Court of Claims in KVP Sutherland Paper Company v United States 344 F.2d 377 (1965) which held that the plaintiff's receipt of Canadian currency in repayment of a loan made by it in the same currency to its subsidiary from funds borrowed in Canadian dollars gave rise to a taxable gain in the United States at the time the repayment took place. However, in that case the Canadian currency had been converted into United States dollars.

76. The current position in the United States would now, however, seem to be that a taxable gain or loss will be held to arise upon the repayment of an overseas currency borrowing in that currency, irrespective of the fact that no actual exchange transaction is involved, see National-Standard Co. v Commissioner 80 TC 551 (1983) and cases and articles referred to therein and Gillin v United States 423 F.2d 309 (1970). The latter case, however, may be thought to introduce some uncertainty into the discussion (at 311) where the Court seems to have left open the question whether a repayment of a Canadian borrowing from Canadian funds of the taxpayer necessarily gave rise to a taxable gain or loss.

77. Returning to the present case, where the face value of a loan or discount arrangement remains outstanding during the term of the facility, no gain or loss is realised because the taxpayer has a continuing liability. Once, however, the facility comes to an end or the loan, bill or note is discharged, not from the proceeds of a roll-over but from other sources, there will be a realisation to the extent of the repayment of the loan or the discharge of the bill or note other than from roll-over sources.

78. On the facts of the present case the facility agreement required the progressive retirement of bills over the term of the facility. ERA also had an option to retire the facility, in whole or in part, faster than the scheduled requirement. It is impossible from the facts contained in the appeal book to determine the extent to which the bills were in fact discharged, but discharged in part they clearly have been in the years of income.

79. In these circumstances it is clear to me that an exchange gain or loss has arisen, which, if under an eligible contract would be deductible or assessable under Div.3B, but the quantum of that gain or loss can not simply be discerned. For that reason, but for the view I take that the relevant contract was the facilities agreement, I would have remitted the assessments to the Commissioner for reassessment.

80. Accordingly I am of the view that, in principle, the appeal should be dismissed with costs. The parties are, however, in agreement that one of the orders made by his Honour related to matters in years of income outside those the subject of the appeal and to the extent necessary to correct that matter, I would allow the appeal.