The Facts
24 As stated earlier, Lamesa is a company incorporated in the Netherlands, but ultimately controlled by LGA, which is established in the United States. In 1992, Lamesa acquired shares in a company later known as Australian Resources Ltd ("ARL"), incorporated in the Australian Capital Territory. In January 1994, Lamesa sold a portion of its shareholding in ARL, generating a profit that was later assessed by the Commissioner at approximately A$73.6 million.
25 On 12 January 1996, Macquarie Equities, as agent for Lamesa, contracted to sell the balance of Lamesa's shareholding in ARL. The net proceeds of the sale of those shares was A$138,655,294, producing a profit for Lamesa later assessed by the Commissioner at approximately A$128.1 million.
26 As evidenced by the contract note issued by Macquarie Equities on 12 January 1996, it agreed with Lamesa to account for the net proceeds of the sale in USD. Settlement was to take place on 19 January 1996, when Macquarie Equities was to account to Lamesa for the sum of USD103,076,345.57. In order to cover its position, Macquarie Equities entered a forward exchange contract on 12 January 1996 with Macquarie Bank under which A$138,655,294.02 was to be exchanged for USD103,076,345.57 on 19 January 1996. The exchange rate used (A$1.00 = USD 0.743400) was the market rate on the contract day.
27 On 15 January 1996, it came to Mr Worthington's attention, through reports in the press, that Lamesa had sold a large parcel of shares in ARL at a substantial profit. On the same day, following a conversation with Mr McWhinnie of Macquarie Equities, Mr Worthington sent a notice by facsimile to Macquarie Equities. The notice, which purported to be issued pursuant to s 255 of the Assessment Act was in the following form:
"TAKE NOTICE that whereas:
1. Lamesa Holdings BV, a non-resident, is due or will become due to pay tax,
and
2. Macquarie Equities Limited have or will have the receipt, control, or disposal of money belonging to Lamesa Holdings BV pursuant to sub-section 255(2) of the Act.
You are hereby required pursuant to paragraph 255(1)(b) of the Act to retain the sum of $74,192,991 or such lesser amount which comes to you on behalf of Lamesa Holdings BV."
28 Later that day, Mr Worthington informed Mr McWhinnie that failure to retain the amount set out in the notice or its equivalent would leave Macquarie Equities liable to the extent of the failure. Mr McWhinnie suggested that an account be established to hold the money until the ATO advised that the money should be paid to it or remitted to Lamesa. Mr Worthington indicated that such a course would be acceptable to the ATO.
29 On 16 January 1996, the Commissioner issued two assessments to Lamesa. The first, in respect of the 1994 tax year, was issued pursuant to s 167 of the Assessment Act and was for an amount of A$28,073,923. The second was issued in respect of the 1996 tax year, pursuant to s 168 of the Assessment Act, and was for an amount of A$46,119,068. The total of both assessments was therefore A$74,192,991. Payment was due under the assessments thirty days after service: Assessment Act, s 204(1).
30 As Mr Worthington explained in his evidence, at the time these assessments were issued, the ATO was uncertain as to whether they would be pursued, since the complex legal issues under the Netherlands-Australia Double Tax Agreement had not at that stage been fully analysed. It was for that reason that the s 255 notice, issued on 15 January 1996, merely required Macquarie Equities to retain, rather than pay over, the tax assessed to Lamesa.
31 On the same day, 16 January 1996, Mr King, who had acted as Lamesa's taxation adviser in Australia since 1992, received instructions from Mr Schneider to contact the ATO to discuss the basis on which the s 255 notice had been issued to Macquarie Equities. Mr King thereupon telephoned Mr Worthington, who advised him that s 16 of the Assessment Act prevented an officer of the ATO from discussing the affairs of the taxpayer with a third party without the taxpayer's consent. (Lamesa had never lodged tax returns in Australia and had not previously nominated an agent to the ATO.) Mr Worthington indicated that, in view of s 16 of the Assessment Act, he required written confirmation from Lamesa, stating that Mr King was authorised by Lamesa to discuss the matter with him.
32 Mr King then telephoned Mr Schneider and asked him to confirm to the ATO that he (Mr King) was authorised to discuss the matter on Lamesa's behalf. Mr Schneider sent a letter on Lamesa letterhead by facsimile to Mr Worthington. The letter, which was dated 12 January 1996 but was apparently prepared on 15 January 1996 Los Angeles time, was received by Mr Worthington in the ATO's Newcastle office on 17 January 1996. It read as follows:
"Please be advised that Mr Paul King of Greenwoods & Freehills is an authorized representative of Lamesa Holding BV, duly authorized to carry on discussions with you on our behalf."
33 On 17 January 1996, Mr McWhinnie of Macquarie Bank and Mr Worthington of the ATO exchanged letters. Mr McWhinnie's letter included the following proposals:
"The current Section 255 Notice specifies the sum of AUD74,192,991 to be withheld pending further advice. You advised that in the circumstances Macquarie Equities Limited should withhold the appropriate number of US dollars instead. Given the above, we would propose to use the 0.743400 rate and retain USD55,155,069.51 (ie AUD74,192,991 x 0.743400). It would therefore be of assistance if you could reissue the Notice specifying that USD 55,155,069.51 should be withheld, as this will remove all doubt as to our obligations.
Macquarie Equities proposes to place the retained USD funds in a blocked foreign currency account with Macquarie Bank Limited styled 'Macquarie Equities Limited re Lamesa Holdings BV'.
In the event that you instruct us to remit funds to the Tax Office we would propose that you ask us to convert a set number of US dollars in the account to Australian dollars and remit the proceeds to you."
The terms of this letter were approved in advance by Mr Schneider and Mr Annick on behalf of Lamesa.
34 The ATO responded to Mr McWhinnie's letter as follows:
"It is advised that no provision appears to exist for the withdrawal of a section 255 notice. However, as discussed with you, the requirement to retain $A74,192,991 will be satisfied if an equivalent amount in US dollars is retained. On the basis of the information provided an amount of $USD55,155,069.51 would meet this requirement."
35 Copies of these letters were provided to Mr King. It became apparent to him that, if the Commissioner proceeded to litigation, fluctuations in exchange rates would mean that the USD amount held by Macquarie Equities might be more or less than the amount ultimately required to meet Lamesa's liability under the assessments. Mr King discussed the issue with Mr Annick and Mr Schneider, who advised that hedging of the "Australian dollar liability" (Mr King's words in his affidavit) was not practicable.
36 Mr King was instructed by Mr Annick and Mr Schneider that, because of these difficulties, Lamesa wished to "lock in its liability", so that if the ATO pursued the matter Lamesa would not be required to pay any further amount to the ATO. As Mr King explained it, Lamesa's position was to be "effectively hedged". Mr King's subsequent correspondence and discussion with the ATO were designed to ensure that Lamesa did not have to pay further amounts should the USD weaken against the A$. Should the USD strengthen against the A$ any "up side was for the benefit of the ATO".
37 Mr King had discussions with Mr Worthington on 17 January 1996, during which he explained that he would require instructions from Lamesa before decisions could be made.
38 On 18 January 1996, Mr King wrote to Mr Worthington, confirming the results of earlier telephone discussions:
"In accordance with our discussions, I understand that if amounts become payable under the assessments, the Australian dollars received on conversion of the amount held in the account styled 'Macquarie Equities Limited re Lamesa Holdings BV' (USD55,155,069.51) will be paid to the Australian Taxation Office and will fully satisfy the amounts payable under the notices of assessment.
It should be noted that the Australian dollar amount received on conversion is not likely to equal AUD74,192,991 and will be greater or less than the amounts specified in the notices of assessment depending upon the movement in the exchange rates."
The terms of this letter were also approved in advance by Mr Schneider and Mr Annick on behalf of Lamesa.
39 On 19 January 1996, settlement of the ARL sale took place. The sum of USD55,155,069 was deposited by Macquarie Equities with Macquarie Bank in a trust account. Interest on that account was to accrue and be credited to the account on a daily basis. The interest on the account was to be dealt with in accordance with instructions from Lamesa. The balance of the proceeds of the ARL sale (USD47,921,276) was remitted to Lamesa. On the day of settlement, Mr McCarthy of Macquarie Equities confirmed these arrangements in writing with Mr Annick of LGA.
40 On 22 January 1996, Mr Worthington responded to Mr King's letter of 18 January, as follows:
"A letter has issued to Macquarie Equities Ltd advising that the Commissioner will accept the retention of USD55,155,069.51 as meeting the requirement under the section 255 notice to retain AUD74,192,991.
In the event that some amount less than that is to be forwarded to the Commissioner in satisfaction of Lamesa Holding BV's taxation liabilities, the amount to be forwarded will be calculated as the same proportion of the Australian dollar amount applicable to the US dollar amount.
It is noted that exchange rate fluctuations may cause some variation in the value of the USD amount retained. Regardless of such fluctuations it is considered that the amount retained will be treated as meeting in full, the income tax liabilities of Lamesa Holding BV for the assessments issued.
Would you please confirm that this arrangement is amenable to your client."
41 As Mr Worthington explained in his evidence, the ATO was prepared to agree to this arrangement largely because of a concern that, if the assessments to Lamesa were withdrawn and a loss were sustained on the conversion of currencies, the Commissioner might be sued. At this stage, Mr Worthington hoped that the matter would be resolved within a short period.
42 After receiving Mr Worthington's letter, Mr King reported in writing to Mr Schneider. Mr King made these comments in his report:
"It seems to me that the letter [of 22 January], although a little unclear, should satisfy our concerns in view of the fact that the ATO has confirmed that:
(1) the [USD] amount retained by Macquarie Bank will meet the liability of the assessments in full;
(2) if assessments for an amount less than the existing liability are issued, the amount forwarded will be on a proportionate basis".
Although there seems to have been no written response by Mr King to the letter of 22 January 1996, it is clear that dealings between the ATO and Lamesa proceeded on the basis that the letter was acceptable to Lamesa. Mr Annick gave evidence (Ts 87) that he understood that the Commissioner had accepted that payment of USD55,155,069 or its Australian equivalent would discharge Lamesa's tax liability as well as discharging Macquarie Equities' obligation to comply with the notice under s 255 of the Assessment Act.
43 On 23 January 1996, Mr McWhinnie, on behalf of Macquarie Equities, wrote to Mr Worthington of the ATO, confirming that a USD account had been opened with Macquarie Bank and that
"USD55,155,069.51 has been credited to this account in accordance with the [s 255 notice] and your letter dated 17 January 1996".
44 On 1 March 1996, Mr King sent a memorandum to Mr Schneider recording the effect of discussions with Mr Worthington, relating to interest on the payment due under the assessments. Mr King stated that Mr Worthington had indicated that the ATO would not charge interest on the assessments during the period when the ATO was deciding whether or not to pursue the matter. There was no dispute that this memorandum accurately reflected the discussions.
45 On 26 March 1996, Mr Worthington of the ATO received a letter from LGA, signed by Mr Schneider, as follows:
"As you know, Lamesa Holding BV ("Lamesa") is majority owned by Green Equity Investors, L.P., a Delaware Limited partnership, who's [sic] general partner is Leonard Green & Associates, L.P. (formerly Leonard Green & Partners, L.P. - the name was changed on January 1, 1995). As a director of Lamesa, I have previously notified you that Paul King of Greenwoods & Freehills is authorized to act to represent Lamesa in tax matters. This will serve as notification that he is also authorized to represent Green Equity Investors, L.P. and Leonard Green & Associates, L.P. on such tax matters."
It was common ground that this letter, like Mr Schneider's earlier letter, had been sent to satisfy the ATO's concerns about the operation of s 16 of the Assessment Act.
46 During the period from January until June 1996, the Commissioner was considering his position in relation to the substantive tax claim against Lamesa. By early June, deliberations within the ATO had reached a stage where it appeared to Mr Worthington that the Commissioner was likely to require payment of the USD amount retained by Macquarie Equities in the blocked account.
47 On 5 June 1996, Mr Worthington had a conversation with Mr Neligan of the Complex Recoveries Unit in the ATO. By that time the A$ had appreciated against the USD, so that the amount of A$ likely to be received on conversion of the USD sum in the blocked account was substantially less than Lamesa's liability under the assessments issued to it in January. Mr Worthington sought advice as to how to handle a payment by Macquarie Equities to the ATO and, in particular, how to avoid the prospect that the ATO would become liable for any exchange fluctuation, should the matter go to litigation and the ATO lose. Mr Neligan referred to reg 20 of the Taxation Administration Regulations and advised that the ATO should require Macquarie Equities to make any payment in AUD, either taking conversion costs out of the payment or recording a charge to the ATO separately.
48 On 5 and 6 June 1996, Mr Buckley of the ATO made inquiries about the mechanics by which Macquarie Equities could make payment. These included inquiries of the Reserve Bank, which advised that Australian banks do not hold physical USD, but that Macquarie Equities could pay the amount held in USD to the Reserve Bank's USD account with the Federal Reserve Bank in the United States. The Reserve Bank would then be able to credit the ATO's local account with the A$ equivalent of Macquarie Equities' USD payment.
49 On or about 19 June 1996, the Commissioner decided to maintain the assessments issued to Lamesa. On 19 June 1996, Mr Worthington requested the Deputy Commissioner in Newcastle to sign a notice under s 255 directed to Macquarie Equities. The memorandum recorded the following:
"Arrangements have been made with the Reserve Bank of Australia to receive the USD amount into its account in New York with the Federal Reserve with subsequent crediting of the Australian Dollar equivalent to the Newcastle ATO account in Australian Dollars. This ensures that the fees on the conversion go to the Reserve Bank rather than to Macquarie Equities or its agent. Instructions from the Reserve Bank confirming the arrangement have been received in writing."
50 The same day a further notice, purporting to be issued under s 255 of the Assessment Act,was sent to Macquarie Equities, in the following form:
"You are hereby required pursuant to paragraph 255(1)(a) of the 'Act' to pay the tax due and payable by Lamesa Holdings BV of $74,199,875.00 or such lesser amount held by you on behalf of Lamesa Holdings BV.
Instructions for payment are as follows:
Please pay Amount into Federal Reserve Bank New York, New York
Account Name: Reserve Bank of Australia Sydney
Account Number: 021-083-116."
The covering letter said this:
"The amount is requested in Australian Dollars as required under the Income Tax Provisions. Reference is made to your letter dated 17 January 1996 to Michael Worthington of the Australian Taxation Office Newcastle. The letter requested that Macquarie Equities Limited be permitted to hold US dollars instead of Australian Dollars in satisfaction of the original notice. Acceptance of the retention in US dollars was also made to you on the same date. Remittance of the amount of USD55,155,069.51 plus any other amounts accruing to the account will be accepted as satisfying the attached notice. Payment should be made to the Federal Reserve Bank of New York, New York for credit to the account of the Reserve Bank of Australia, Sydney, account number 021083116. Confirmation of the deposit should be made immediately."
Mr Worthington accepted in evidence that the reference to "other amounts accruing to the account" had been an error, since it had previously been agreed that Macquarie Equities would not be obliged to pay interest accruing on the USD amount to the ATO. In fact, Macquarie Equities caused approximately USD 1.2 million in interest to be paid on the USD sum held on deposit with Macquarie Bank to Lamesa during the currency of the deposit.
51 Later on 19 June 1996, Mr McCarthy of Macquarie Equities wrote to Mr Annick advising of receipt of the s 255 notice and of the separate letter whereby the ATO had agreed to accept a remittance in the sum of USD55,155,069 in satisfaction of the notice. Macquarie Equities' letter stated that it was obliged to comply with the notice and that it proposed to remit the funds as directed on Friday, 20 June 1996 (presumably a mistake for Friday, 21 June 1996). The letter asked for written confirmation from Lamesa that the payment was to take place on the following Friday. On 21 June 1996, Mr King advised Mr Walshe of Macquarie Equities that Lamesa had verbally confirmed that Macquarie Equities could remit the amount of USD55,155,069 to the ATO in accordance with the s 255 notice.
52 In the meantime, on 20 June 1996, G & F lodged notices of objection on behalf of Lamesa against each of the 1994 and 1996 assessments, claiming that each should be reduced to nil, on the ground that the profits derived from the sales of shares in ARL were exempt from Australian tax. On 21 June 1996, the Commissioner issued amended assessments to Lamesa assessing tax in a total amount of A$74,199,875. This amount varied from that in the original assessments only by some A$7,000.
53 In a telephone conversation on 21 June 1996, Mr McWhinnie of Macquarie Bank told Mr Buckley of the ATO that Macquarie Equities recognised that, although at that stage it had not been able to contact the client, it had a legal liability to remit "the money" to the ATO and would do so. Shortly thereafter, in separate conversations, Mr McWhinnie advised that the money would be transferred to the ATO's New York account on Friday, 21 June 1996, New York time, while Mr Buckley advised that the amount to be transferred was USD55,155,069.
54 During the morning of 21 June 1996, a conversation took place between Mr King and either Mr Worthington or Mr Buckley of the ATO. Mr King raised the question of interest on the funds in USD held by Macquarie Equities on behalf of Lamesa. Mr Worthington or Mr Buckley advised that the ATO would only look to recover USD55,155,069 from Macquarie Equities.
55 Probably a little later on the morning of 21 June 1996, Mr King and Mr Worthington had a telephone conversation upon which the Commissioner placed considerable reliance. In his evidence, Mr Worthington acknowledged that the record he made of the conversation at about noon on 21 June on his computer was the best evidence of the words involved in the conversation and that he had no better recollection of the conversation than the record (which he had printed in hard copy). It is therefore convenient to reproduce that record:
"Phone discussion with Paul King re treatment of monies.
A concern from Kevin [Buckley] was that they may seek to treat the amount now received under 255 as equating to $74M, rather than the actuallity [sic] of it now being only $69.8M.
I outlined to Paul that we envisaged that we would accept the retention of the USD55M as meeting the 255 notice and as meeting the income tax liability of $74M. This meant that the balance difference received from the USD receipt would be written off as not collectable in our accounts if it did not convert to at least $74M and any gain would be the revenue's good fortune.
The situation is now changing because the monies are now being forwarded in, the conversion to AUD occurs and a loss of $4-5M crystallising from the appreciation of the AUD. What happens though if a repayment is due to Lamesa of some or all this money.
The most likely outcome is a simple win/loss situation. If the ATO wins no difficulty arises. If Lamesa wins then the amount of $69.8M is available for refund. Paul agreed that his understanding was that they now assume the exchange risk, and that they would not be expecting AUD74M to be repaid, only the amount actually paid in being AUD69.8M plus interest as statutorily payable. I pointed out that this problem arose because we had agreed to allow retention in USD at their request.
What occurs if a lesser amount is repayable to Lamesa. I suggested that a similar calculation to that employed in my letter dated 22/1/96 be employed, such as say the amendment reduces the income tax liability from $74M then we refund 69.8x24M/74M=22.6M.
Paul will consider this last point and get a discussion paper back to me on it."
The reference in the second paragraph to a "concern from Kevin" is to a concern expressed by Mr Buckley that it could possibly be argued that the Commissioner was bound to treat the receipt of A$69.8 million as full satisfaction of Lamesa's obligation to pay A$74 million under the assessments and, in the event that the assessments were set aside, the Commissioner was bound to repay A$74 million.
56 At 3.40 pm on 21 June 1996, Mr Worthington of the ATO sent a letter to Macquarie Equities, in the following terms:
"Reference is made to our letter dated 19 June 1996 to The Public Officer, Macquarie Equities Limited, concerning remittance of funds under a Section 255 notice.
After discussions with Mr Paul King it is mutually agreed that the remittance of the amount of USD55,155,069.51 will be accepted as satisfying the said Section 255 notice. The balance of any amounts held may be treated at the direction of Lamesa Holding BV.
Payment directions as per previous advice should otherwise be followed."
Mr Worthington said in his evidence that this letter was merely intended to reflect the understanding between Mr King and himself, reached on the morning of 21 June 1996, that the letter of 19 June 1996 had been in error when it referred to Macquarie Equities being obliged to remit interest on the USD amount to the ATO.
57 The amount of USD55,155,059 was transferred by Macquarie Equities on 21 June 1996 (New York time) to the Federal Reserve Bank in New York, to the credit of the Reserve Bank of Australia. On 24 June 1996, the Reserve Bank of Australia purchased this sum from the ATO and credited the ATO's account with the Reserve Bank with the sum of A$69,860,759, reflecting an exchange rate of A$1 = USD 0.7895.
58 On 3 July 1996, Lamesa lodged notices of objection in respect of each of the amended assessments, claiming that each should be reduced to nil.
59 On 18 September 1997, the time expired for the filing of an application for special leave to appeal to the High Court from the decision of the Full Court in FCT v Lamesa. It was common ground that on that date the decision of the Federal Court at first instance, which included a declaration that no tax was payable by Lamesa in respect of the 1994 and 1996 tax years, became "final" within the meaning of s 14ZZQ(1) of the Administration Act. The Commissioner was therefore obliged to take such action, including amending any assessments, as was necessary to give effect to the decision. On 3 October 1997, the Commissioner issued an amended assessment for each of the relevant years, showing Lamesa's taxable income and the gross tax due to be nil.
60 As soon as the time for filing a special leave application expired, Lamesa's solicitors requested immediate payment of the full amount paid to the Commissioner on 19 June 1996, namely, USD55,155,069, together with interest. The letter of 18 September 1997 requested that the principal be refunded in USD, but that the interest be paid in Australian currency.
61 On 3 October 1997, the Australian Government Solicitor forwarded a cheque for $A69,860,759.35, together with a further amount of $5,436,655.11, being interest on the overpayment of A$69,860,759.35, less ten per cent withholding tax. Lamesa accepted these amounts as the "first instalment" of the full amount said to be due. It commenced the present proceedings on 21 November 1997.
The Statutory Claim
Lamesa's Submissions
62 Lamesa submitted that it had an entitlement, pursuant to s 172(1)(b)(i) of the Assessment Act, to a refund of the amount the Commissioner agreed to accept and the amount actually paid in discharge of Lamesa's tax liability, namely USD55,155,069.51. It was this amount which had been paid into the account of the Reserve bank for the credit of and at the direction of the Commissioner.
63 Mr Slater QC, who appeared with Mr Ryan for Lamesa, argued that reg 20(1)(f) of the Taxation Administration Regulations contemplated an arrangement for the payment of a debt due by a taxpayer by means of a payment in a foreign currency. He contended that the Commissioner's letters of 19 and 21 June 1996 to Macquarie Equities and the latter's payment in USD constituted an arrangement whereby Macquarie Equities had paid the debt due by Lamesa in USD. The Commissioner had accepted payment of Lamesa's indebtedness in USD. Accordingly, it was this sum in USD which was paid to the Commissioner and which constituted "tax overpaid" for the purposes of s 172(1)(b)(i) of the Assessment Act. Similarly, the amount of "relevant tax" paid by or on behalf of Lamesa, for the purposes of s 9(a) of the Interest Act, was the sum of USD55,155,069. It followed that Lamesa was entitled to interest calculated in accordance with the Interest Act on that sum.
64 Mr Slater conceded that the argument was only open to Lamesa because Macquarie Equities had not converted the USD sum into A$ prior to payment to the Commissioner. Had conversion taken place beforehand, as was contemplated in Mr King's letter of 18 January 1996, Mr Slater accepted that Lamesa could not rely on s 172(1) of the Assessment Act to recover more than the amount repaid by the Commissioner on 3 October 1997.