Rataplan Pty Ltd v Commissioner of Taxation

Federal Court of Australia|2004-07-14|Before: Carr J

The Applicant's Submissions 104 The applicant relied upon the width of the words used to define "dispose" in s 26BB(1) of the Act i.e. "… sell, transfer, assign or dispose of in any way …". It relied upon a line of authorities which included Henty House Pty Ltd (in voluntary liquidation) v Federal Commissioner of Taxation (1953) 88 CLR 141 at 151; Federal Commissioner of Taxation v Wade (1951) 84 CLR 105; Benwerrin Developments Pty Ltd v Federal Commissioner of Taxation (1981) 39 ALR 229; and Inland Revenue Commissioners v Buchanan [1958] 1 Ch 289 at 296. It also referred to Ashton Mining Ltd v Federal Commissioner of Taxation (2000) ATC 4307 where Merkel J at 4,313, referred to the terms "disposal" or "redemption" of a debt requiring, for the purposes of s 70B(2) the discharge of any legal obligation on the part of the debtor to repay the debt.

The Respondent's Submissions 105 The respondent's written submissions on this point ran to only two paragraphs under the heading "Whether extinction of a debt is a disposal", which were in these terms: '47. The Commissioner considers that he may not in proceedings before the Court make submissions which might be viewed as inconsistent with a published ruling or statement of the Commissioner which has not been withdrawn. 48. Annexed is an extract (paragraphs 48-60) of Income Tax Ruling TR96/14, which has not been withdrawn. The Commissioner asserts the correctness of the extract.' 106 Income Tax Ruling TR96/14 was in response to the question whether a traditional security could be disposed of by forgiving or waiving the debt of the issuer of the security. 107 In summary, the Taxation Ruling answered that question - no, because the words "dispose of in any way" should be confined by the ejusdem generis principle. The genus was said to be found in the words "sell, transfer, assign," being an alienation of the security or the right to payment from the holder. At the very least, the security or right to payment should continue to exist after the action taken. Extinguishment of a debt would not satisfy the definition of "disposal" for the purposes of s 70B.

my reasoning 108 I have some doubt whether the mere fact that the words "sell, transfer, assign" fall within a genus of transactions (being transactions which involve alienation), means that the ejusdem generis rule must be applied to the words "or dispose of in any way". There is relatively modern authority to suggest that it is not sufficient simply to identify a genus before the rule must be applied; there needs to be some other basis for construing an intention that general words are used in a sense limited to the genus identified - see the cases discussed in The King v Regos and Morgan (1947) 74 CLR 613 at 623; Gas & Fuel Corporation (Vic) v Comptroller of Stamps [1964] VR 617 at 620-621; and Mattinson v Multiplo Incubators Pty Ltd [1977] 1 NSWLR 368. It is for the party proposing the application of the rule to justify the restriction of what would otherwise be words of general application. The source of these citations is "Statutory Interpretation in Australia" (Fifth Edition) by D C Pearce and R S Geddes at pp 103-108. The authors suggest that the courts should think carefully before rejecting the ejusdem generis principle as a canon of construction. 109 I do not think that the respondent has demonstrated any justification for applying the ejusdem generis rule to restrict the general words "or dispose of in any way". In my opinion, the language of s 70B(2) is sufficiently clear not to require resort to that rule for the purposes of construction. The general words are very wide indeed. I am not persuaded to restrict them in the manner suggested, somewhat half-heartedly, by the respondent. 110 However, even assuming the application of the rule and the genus identified above, I consider that the conversion transaction falls within that genus. By the conversion transaction ACE can, in my opinion, be seen to have sufficiently divested itself of the relevant traditional securities or the right to receive payment under those securities as to be characterisable properly as an alienation. ACE exchanged that personal property for a bundle of rights arising through the application of those moneys as additional capital in ACE USA.

The Applicant's Submissions 111 The applicant submitted that the total amount of each of the traditional securities was to be assessed at its face value: Burrill v Commissioner of Taxation (1996) 67 FCR 519 at 523-525. The relevant loss, in respect of which the applicant was entitled to a deduction was the face value of the traditional securities (AUD$6,335,780) less the value of the equity in ACE USA received in exchange for converting that debt into capital. It quantified the value of that equity at US$566,000 or AUD$736,000 (and the loss at AUD$5,599,780). 112 There is a dispute between the parties about that value. There is no dispute about the liabilities of ACE USA, but the value of the assets of ACE USA is in contest. The main item disputed is the value of the FIB Tower which, it will be recalled, was sold in September 1991 (with settlement taking place in November 1991) for US$170,250,000, a figure much below the amount at which it was previously recorded in the accounts of ACE USA. As I understand the position, there is also a less substantial dispute about the value of one other item of real estate owned by ACE USA at the relevant time. It was common ground that the relevant time was 25 June 1991, being the effective date of the second capitalization of debt, or the conversion transaction.

The Respondent's Submissions 113 The respondent submitted that, in the context of s 70B, loss was a net loss not a gross amount. It was the difference between what was outlaid and what was obtained as a result of ("on") the disposal. 114 The respondent accepted that ACE had outlaid AUD$6,335,780. 115 But, so it was put, as a result of the disposal ACE obtained an increase in the value of the 1,000 shares held by it in ACE USA because the liabilities of ACE USA which were a claim on its assets ranking ahead of the share capital were reduced by the amount released, and the net assets of ACE USA were correspondingly increased. As ACE was the sole shareholder, the whole of the increase accrued to it. Prima facie, the increase in value in the shares equalled the amount by which the debts were reduced, so that the value of the investment of ACE in ACE USA did not change in consequence of the release. As a result, so the respondent argued, no loss was realised. 116 The respondent relied on the following figures shown in the accounts of ACE USA. Surplus assets (assets less liabilities, being shareholders funds or "total capital") were US$4,279,810. This was based on a book value of the FIB Tower of US$175,392,828. 117 The capital contributed (being the agreed outlay referred to above) increased the surplus assets of the company by the same amount. ACE's "investment" in ACE USA, so the respondent contended, did not change in value in consequence of the disposal. No loss was realised on the disposal of the debt. 118 Alternatively, so the respondent submitted, the applicant had failed to discharge its obligation of demonstrating that it had incurred a loss as a result of the conversion transaction. In essence, the respondent put the applicant to proof of the values upon which it relied. 119 The respondent's position was that a relatively small increase in the value of, for example, the FIB Tower, would increase the value of the net assets of ACE USA and negate the loss on disposal of the loan.

my reasoning 120 From the above it can be seen that there is no dispute that the face value of the total of the debts, namely, $A6,335,780.61 is the starting point for any calculation of loss. 121 The applicant's case is that the value of the equity which it received in exchange by reason of the conversion transaction was less than the face value of the debt. An essential part of the applicant's case was that before the conversion transaction its shares had a nil value whereas after the conversion transaction those shares became worth US$566,000 or AUD$736,000. 122 In its statement of facts, issues and contentions the respondent asserted that:- '…the calculation of the purported loss is not supported by the contemporaneous evidence of the value of the FIBT at the time of the disposal of the security.' 123 It would appear that this reflects the position adopted by the respondent in his reasons for disallowing the applicant's objection. Paragraphs 30 and 31 of those reasons read as follows:- '30. In its valuation report Coopers & Lybrand adopted the sale price of the FIBT as the market value as at 25 June 1991. Apparently no other evidence of market value was considered, and in particular there was no attempt made to work back from the sale price to the value as at 25 June 1991. I do not regard the report as establishing a reliable value for the FIBT, particularly given the indications of a higher value set out in the paragraph above [The indications of a "higher value" referred to in paragraph 30 above comprised:

· an assessment by Messrs Goldman, Sachs & Co ("Goldman Sachs"), who had been engaged as agents to sell the FIB Tower, that a price of not less than US$220,000,000 was a "reasonable expectation";

· a memo dated 7 May 1991 from ACE USA noting that Goldman Sachs had introduced a potential buyer with a "strong interest in the building" and that a company called Chubb "reintroduced the notion of their purchase of FIBT" and that "their offer could be improved; and

· a letter dated 9 May 1991 from a Chubb subsidiary (Bellemead Development Corporation) to ACE, stating that Chubb was "willing to discuss a possible purchase of the property for [US]$181,000,000".] 31. The Australian Valuation Office (AVO) was engaged by the ATO to provide a market valuation of the FIBT as at 25 June 1991 and a trend analysis of the Dallas market during the period 1 May 1991 to 30 September 1991 on a monthly basis. In its report dated 15 May 1997 the AVO was unable to provide a market valuation or the trend analysis requested due to the difficulty of obtaining the necessary information.' 124 As part of the interlocutory processes in this appeal, orders were made for the filing of affidavits by each party. It must have been apparent to the respondent from the applicant's affidavits that the applicant was not aware that the value of, amongst other things, the FIB Tower was still a live issue in the appeal. There was very little, if any, admissible evidence relating to that issue in the applicant's affidavits filed before the trial. 125 About a month before the hearing, so I was told from the bar table, senior counsel for the respondent drew the attention of senior counsel for the applicant to the fact that the applicant had not filed any evidence of asset values. 126 At the trial there was an argument about the admissibility of some evidence of the value of the FIB Tower. The applicant's position was that the respondent should not be allowed to put the value of the building in issue. 127 I ruled that the respondent had put the value of the FIB Tower in issue to the extent of putting the applicant to its proof. I also ruled that the evidence to which objection had been taken was inadmissible. That was one of the reasons why the hearing of this appeal was adjourned part heard. The other reason was to enable further evidence of Texan law to be adduced. 128 During that adjournment (of about three months), the applicant obtained and filed affidavit evidence from experts in the United States of America going to the question of the value of the assets of ACE USA. 129 I mention these matters to make quite clear the context of the valuation dispute. In particular, the context is that over 7 years ago the respondent attempted, unsuccessfully, to obtain a market valuation, was well aware of the sale of the FIB Tower at US$170,250,000 in a contract entered into about 3 months after the relevant date, chose to reject that sale as being evidence of value and put the applicant to proof. The respondent did not make any further efforts to obtain expert evidence of value for the purposes of the appeal but, as I say, chose to put the applicant to proof and attack (I might say quite vigorously) the evidence of Ms Randi Sue Rosen an expert valuer called by the applicant to give evidence about the value of the real estate assets of ACE USE at the relevant time. Ms Rosen was subjected to vigorous but, of course, fair cross-examination when she appeared by video link from the United States of America to give her evidence. 130 I now turn to the expert valuation evidence adduced on behalf of the applicant. The first witness was Mr Robert Van Ling a valuer from Houston, Texas. Mr Ling is a partner in the economic and valuation services division of KPMG LLP, an accounting firm. KPMG LLP was engaged to prepare a valuation of the equity in ACE USA as of 25 June 1991 after capitalisation of the debt previously owed to ACE. 131 Mr Ling valued that equity at US$566,000. Mr Ling's evidence shows that he considered various alternative valuation approaches. He noted that ACE USA had incurred substantial losses in the years before 30 June 1991. Principally for that reason, Mr Ling chose to use a valuation method which adjusted the balance sheet of ACE USA. In brief summary, Mr Ling adjusted the value for real estate on the basis of valuations prepared by Ms Rosen, and made his own adjustment in respect of the value of oil and gas properties - an area in which Mr Ling had expertise. 132 Mr Ling freely acknowledged that valuation was not an exact science and that the substituted values were estimations (in respect of the oil and gas assets) and were otherwise based on Ms Rosen's opinion. He also agreed (in cross-examination) that his figure of US$566,000 was an estimated valuation based upon the estimates of asset value. That was the extent of the cross-examination of Mr Ling. 133 Ms Rosen was the second expert valuer called on behalf of the applicant. 134 Ms Rosen is a managing director in the economic and valuation services division in the Los Angeles and San Diego offices of KPMG LLP. She prepared valuations of real estate assets owned directly or indirectly by ACE USA as of 25 June 1991. Those assets, with her respective valuations shown in brackets, comprised: · the FIB Tower (US$170,363,000); · 2 units in a condominium building in Beaver Creek, Colorado (US$342,074 and US$3,856,736 respectively); · a partnership interest in approximately 1.58 acres in Dallas, Texas (US$100,000); · a partnership interest in approximately 1 acre of land in Washington D.C. (US$750,000); and · approximately 428 acres in Hillsborough, New Jersey (US$12,000,000). 135 In relation to the FIB Tower, Ms Rosen noted that there were three generally accepted approaches to value i.e. sales comparison, cost, and income. She did not use the income approach because the financial information as at the date of the valuation was not available. Ms Rosen was able to identify what she considered to be two comparable sales in the city of Dallas. She then prepared an estimate of what it would have cost to replace the FIB Tower as at 25 June 1991. That estimate was US$162,800,000 for the building plus US$10,019,735 for the land, or US$143.97 per square foot. Analysis of the two comparable sales reflected sale proceeds ranging from US$111.27 per square foot to US$132.92 per square foot. Ms Rosen's report indicates that she consulted three local real estate brokers familiar at the relevant time with the FIB Tower. She formed the opinion that the sale proceeds per square foot for the two comparable properties were not truly comparable "due to their inferiority in terms of quality of improvements when compared to the [FIB Tower]". The local real estate brokers informed her that the FIB Tower had been regarded as a prestigious quality office building in the Dallas CBD. 136 In all of those circumstances Ms Rosen formed the opinion that based on a replacement cost approach the value of the FIB Tower was $172,800,000. The sales comparison approach indicated a value of US$146,500,000. But, in Ms Rosen's opinion, the best indication of value would be the sale which took place pursuant to the contract of September 1991 which was completed in November 1991 and in which the purchase price at completion was US$170,363,000. 137 The respondent made various criticisms of Ms Rosen's evidence. He went so far as to assert that the only exercise of expertise in Ms Rosen's report was that involved in making calculations based on assumed facts. The focus of the respondent's attack upon Ms Rosen's report was in relation to the FIB Tower and the larger of the two units in Colorado. 138 The respondent pointed to the fact that Ms Rosen and her associate were described in her report as being located, based and certified in California and Nevada. The disclaimer to the report indicated that Ms Rosen had relied on information obtained from ACE USA and the public record and garnered from interviews with other persons whose location and experience was undisclosed, and had "not relied on any experience as a realtor or valuer of land or buildings in Dallas in or about 1991". Then there was a complaint that Ms Rosen had not inspected the FIB Tower. 139 I deal with the latter complaint first. The valuation date was almost 13 years ago. I do not lessen the weight which I give to Ms Rosen's report by the fact that she did not inspect the property. If she had inspected the property, enquiries would have had to have been made about whether it had been refurbished in the intervening years and the extent of such refurbishment. If there had been no such refurbishment, then Ms Rosen would have had to make some kind of notional adjustment for wear and tear. On balance, I do not think that any current inspection was called for. Ms Rosen had recourse to recorded information (some of which is referred to below) for her assessment of the situation as it was in June 1991. 140 I reject also the assertion that all Ms Rosen did was to make calculations based on assumed facts. In my opinion, Ms Rosen brought to bear her extensive qualifications and experience to the task of making a valuation of the FIB Tower. In her report she identified three real estate brokers, whom she consulted, who had experience in the Dallas Central Business District at the relevant time. The other enquiries which she made were, in my view, quite conventional and non-controversial. They included gathering and reviewing relevant property information, including site plans and property tax records, and having recourse to a commercial real estate transaction database for the Dallas metropolitan area. 141 I acknowledge that Ms Rosen's task was a difficult one, given how much time had elapsed since the relevant date. But I think that she carried out that task in a manner which required her professional skills to be exercised and I place considerable weight on her evidence. 142 I found Ms Rosen to be a credible witness. She was prepared to agree to propositions which were potentially unfavourable to the applicant when those were put to her in cross-examination. I considered that her experience was such that she was well qualified to review evidence required for valuation purposes and to form a reliable opinion on the value of real estate in Dallas, Texas and Avon, Colorado, notwithstanding that her Real Estate Appraiser's licences were issued for the States of Colorado and Nevada. 143 My impression of Ms Rosen, gained both from her report and from her presentation as a witness, was that she was a seasoned valuer with sufficient experience whom I could trust to give me a reliable opinion as to the value of an office building in Dallas, Texas. I think that her decision to place reliance on the actual sale in September 1991 was well placed. 144 I interpolate to note that the respondent, in his written submissions, insisted upon describing the actual sale as being in November 1991. It is true that settlement took place in November 1991, but the evidence shows that that contract of sale was made in September 1991 i.e. within about 3 months of the relevant date. I note that a draft "Sale-Purchase Agreement" between the relevant ACE USA subsidiary as vendor and the relevant Chubb subsidiary as purchaser, showing the purchase price of US$170,500,000, was in existence as early as 24 June 1991. 145 I do not accept the respondent's submission that that transaction was not a reliable foundation for an assessment of fair market value as at 25 June 1991. The respondent submitted that some of the evidence suggested that there had been a deterioration in the relevant market in July 1991. I was referred to Exhibit R3 Document 92 for that proposition. I do not think that the evidence establishes such a rapid or sudden deterioration. If anything, the evidence suggests that the Dallas commercial real estate market had, by that time been in a decline since 1984 or 1986. I refer also to Mr Gammell's unchallenged evidence that the ACE USA subsidiaries purchased the FIB Tower from a mortgagee in possession on 9 September 1988 for a price of US$167 million. 146 I have had regard to the authorities regarding events subsequent to a date of valuation including Cannane v Official Trustee (1996) 65 FCR 453, but I think that the present case is a very unusual one. The task of the court here, assisted by the expert valuer, is to go back nearly 13 years in time and form a view about a matter of valuation. In that context, I regard the actual sale of the property at a particular price, taking place within about 3 months of the relevant date, as being clearly relevant evidence. Furthermore, the evidence shows that as at 25 June 1991 ACE USA and Chubb had in contemplation the sale of the FIB Tower at a sale price of US$170,500,000. In my view, Ms Rosen was correct to regard that sale as being the best evidence of the value of the FIB Tower some three months earlier, provided that there are no other factors (i.e. other than the fact that the sale was post the relevant date) which warrant rejection of her assessment. As will be seen, the respondent submits that the sale was not at arm's length. But in my view that is another issue altogether, to which I now turn. 147 The sale in question was between two subsidiaries of ACE USA (the Freeman Ross limited partnership) and a subsidiary in the Chubb group of companies (Bellemead/Fountain Place Inc). As a matter of convenience I shall usually refer to the vendor as ACE USA and the purchaser as being Chubb. 148 The respondent contended that this sale was not a dealing between a willing but not anxious purchaser and a willing but not anxious vendor. Nor was it, so the respondent submitted, unaffected by collateral transactions or prior relationships. 149 First, the respondent referred to evidence which showed that another company in the Chubb group, Chubb Realty Inc, held a second mortgage over the FIB Tower. In the mortgage documentation there was an option for Chubb Realty Inc to acquire the FIB Tower by converting its loan to a 50% equity in the property. That option could have been exercised on 1 February 1995 and 1 February in each subsequent year to the date of maturity (23 March 2000). The amount secured by the second mortgage was US$46,000,000. The evidence shows that the principal amount secured by the first mortgage was US$113,500,000 with periodical principal payments at the rate of US$12,500 per month initially but escalating to US$41,700 per month from 10 January 1995. The respondent submitted that the effect of the second mortgagee's option was that Chubb Realty Inc could acquire a half interest for US$46,000,000 at a time after ACE USA had repaid the first mortgage and thus at much less than the market value of the interest acquired. 150 It is difficult, on the limited evidence available, to make an assessment about whether this option gave such a substantial benefit to Chubb Realty Inc. Much probably depends upon the state of the market at the time it chose (had it so chosen) to exercise the option and how much had been repaid to the first mortgagee. There is some evidence that Chubb Realty Inc's option was not "in the money" as late as 24 June 1991. The same document discusses a range of values for the FIB Tower of between US$140 million and US$172.5 million (according to an appraisal which the author expresses confidence in obtaining), with a median of US$156 million. The median value was for the purposes of selecting a figure which might be acceptable to the Court which would administer a reconstruction in bankruptcy proceedings which ACE USA had in mind as part of its tactics in dealing with Chubb. Another contemporaneous memorandum, written by an adviser to ACE USA on 24 June 1991, assumes the value of the FIB Tower to be $140 million. 151 In my view it is not necessary to make an assessment of the value of the option to Chubb. If the option held by Chubb Realty Inc had an effect upon the proper value to be allocated to the FIB Tower in ACE USA's books as at 25 June 1991, it must have been a negative effect. It was a fact of life, whether the putative buyer was a Chubb company or anyone else. If the option was worth something to Chubb another buyer would have had to buy that option as well. But, of course, the money would go to Chubb, not to ACE USA. In my view, if that option should have been made known to Ms Rosen and if it should have been taken into account, it would have to have been taken into account as something in the nature of an encumbrance, reducing or at least putting a ceiling on the amount which ACE USA might reasonably have been expected to realise from its sale. 152 The respondent suggested that the evidence established that: · Companies in the ACE USA group were subject to financial obligations to companies in the Chubb group and were, or were asserted to be, in default of those obligations in relation to ventures in Washington, New Jersey and Dallas;

· It was "an absolute priority" for the ACE group to eliminate funding obligations and the FIB Tower was running at a cash deficit;

· There were extensive negotiations between ACE and Chubb in relation to a joint compromise or renegotiation of the several obligations and rights arising out of the ventures;

· ACE asserted an entitlement to damages for breach of agreements said to have been made in the course of the negotiations, and formulated them in terms of claims for usury and fraud in procuring payment of instalments in respect of the various ventures; and

· ACE examined the possibility of seeking Chapter 11 bankruptcy protection and exerting "cramdown" on Chubb to diminish the value of its debt in reliance of a decision known as Greystone.

153 The respondent contended that the disposal of the FIB Tower was part of a resolution of all of these obligations, pursuant to a deal, performance of which was the subject of an agreement for concurrent settlement of disposals of interests and discharges of liabilities in respect of all of them. Hence, the disposal was not a transaction between unrelated parties dealing with each other at arm's length in respect of it, unaffected by other relationships and dealings, and was not indicative of the fair market value of the property. 154 The respondent referred to further matters which, so it contended, showed that the price nominated in the June 1991 sale was lower than fair market value: · Goldman Sachs were instructed in September 1990 that the desired sale price was US$220,000,000;

· In November 1990 Chubb had valued the property at US$185,000,000 and ACE had sought US$190,000,000 for it;

· In January 1991 Chubb had offered to purchase the FIB Tower for US$177,000,000 which ACE had rejected, whereupon Chubb increased its offer to US$180,000,000;

· In April 1991 Chubb proposed a purchase of the FIB Tower for US$180,000,000 which ACE again rejected;

· In May 1991, despite agreements as to the extent to which the parties were committed to a different agreement, Chubb was "willing to discuss a possible purchase of the property for US$181,000,000 if you should wish to consider it" independently of resolution of the parties' interests in the other properties;

· On 17 June 1991 an executive of Chubb agreed that the "US$181,000,000 offer would always be on the table" notwithstanding that a sale document was in the course of preparation nominating a price of US$170,500,000;

· Other purchasers had evinced an interest in the FIB Tower, namely Danielli Bondini and C. Itoh; and

· Proposals were formulated for the sale of an interest in the Freeman Ross partnership on a basis which valued the FIB Tower at US$200,000,000.

155 The respondent pointed to the fact that for the purposes of making her valuation, Ms Rosen had not been informed of and did not take into account any of the above matters. All of those matters, so the respondent submitted would affect the extent to which reliance could be placed on the June 1991 transaction as an indicator of the fair market value of the property in June 1991. 156 Ms Rosen's valuation, so the respondent submitted, should not be accepted because it was founded on a transaction which was not an independent arm's length purchase and further because she was not informed of the relevant facts. 157 The respondent submitted that it was more likely than not that the value of the FIB Tower at 25 June 1991 was in the order of US$181,000,000. If that were the case then the shares in ACE USA would have a value (on Mr Ling's approach) at that date of some US$5,000,000 before and US$10,000,000 after the capitalization of the debt due to ACE i.e. they would increase in value by the amount claimed to be waived and there would on the applicant's case be no loss. 158 Alternatively, the respondent submitted that the difference between book value at 25 June 1991 and the amount of the agreed sale price was insufficient to result in a loss on disposal of the debt of the amount claimed. The shares increased, so it was argued, in value by the amount released (US$5,128,782) and decreased in value by the amount by which the FIB Tower was written down. 159 The applicant submitted that the sale of the FIB Tower in conjunction with the sale of ACE USA's interest in some adjacent land and real estate in Washington DC and New Jersey was a sale at arm's length. The applicant pointed out that, despite extensive marketing efforts, ACE USA had been unable to obtain an offer to purchase the FIB Tower from any person other than Chubb. 160 The applicant and the respondent, in their respective written submissions, referred me to numerous documents (there were 107 of them which filled three lever arch files and became collectively Exhibit R3) which had been produced pursuant to a subpoena issued at the request of the respondent and served upon ACE. The documents spanned virtually the whole of the calendar years 1990 and 1991. In summary, they comprised memoranda, letters of advice and other documentation relating to ACE USA's dealings and proposed dealings with its interest in the FIB Tower and, to a lesser extent, its other commercial real estate interests in the United States of America. 161 I found it difficult, simply from reading those documents, to make the assessment whether, as the respondent contended, Chubb was able to extract a below market price for the FIB Tower or whether, as the applicant contended, the contracting parties were indeed at arm's length. 162 Doing the best that I could, my assessment from perusing all of the documents to which I was referred was that the parties were in fact bargaining at arm's length. The documents disclosed that ACE USA had some prospects of instituting proceedings in a Texas court against Chubb on a range of grounds. They included usury in respect of the transaction which I have described at paragraph [116] above. Part of ACE USA's legal advice was that if the usury claim were successful Chubb ran the risk of forfeiting the principal amount of their loan of US$46 million. There were other claims of breach of fiduciary duty, negligent misrepresentation and fraud. My impression of the legal advice given to ACE USA was that these claims were not particularly strong ones, but that there was a reasonable prospect of successfully defending a motion by Chubb for summary judgment. A draft document, in the nature of a statement of claim, had been prepared. This was part of a strategy with the aim of achieving an overall settlement of the disputes between ACE USA and Chubb. The two parties had interests, of varying sorts, in each of the real estate ventures which eventually formed the contract of sale. 163 The documents also show that ACE USA had what might be described as a "fall-back" strategy of filing for Chapter 11 bankruptcy with a proposed reconstruction. The reconstruction, so it was hoped, might lead to a substantial dilution in the value of Chubb's security over the FIB Tower. 164 I infer from the documentation that ACE USA made known to Chubb that there was a real threat of litigation, including the claims which I have summarised above, and also a real threat that ACE USA would cause the bankruptcy proceedings to be instituted. 165 All in all, I am satisfied that the settlement reached and documented in the agreement of 23 September 1991 was between parties who were at arm's length. Accordingly, I accept Ms Rosen's valuation of the FIB Tower based on the consideration expressed in the sale document, the first draft of which emerged on or about 24 June 1991. 166 If I am wrong in that assessment, and that sale should not have been taken into account, then I accept Ms Rosen's evidence that she would have valued the FIB Tower as at 25 June 1991 in the range of US$146,500,000 to US$150,000,000 instead. I accept that, on the materials to which she referred, she would have been justified in taking that course. The result would have been that the loss suffered by ACE would have been even higher. The respondent obtained some admissions from Ms Rosen that her cost calculations did not include funding or holding costs of the developer or any development profit. I take that into account, but the respondent made no effort to quantify these amounts either in further cross-examination or by way of adducing evidence. I am not prepared to reject that portion of her evidence on the basis of those omissions. I accept that part of her evidence as simply being a further indication that the value of the FIB Tower at the relevant time was not likely to be more than US$170,363,000. I do not need to find whether the precise figure fell within the alternative range of US$146,500,000 to US$150,000,000 posited by Ms Rosen. 167 The respondent submitted that Ms Rosen's valuation of the larger of the two units in Colorado ("Unit 500") at US$3,856,736 should be rejected as being based on assumptions which did not correspond to the established facts and was not founded on relevant expertise. 168 The objections made by the respondent were that Ms Rosen had relied on contact with "local government" to verify zoning and use restrictions, an appraisal by one S F Ebert dated 15 June 1992 and certain unspecified enquiries of "Vail Associates". The respondent noted that neither S F Ebert nor Vail Associates had been called to give evidence. Further, the respondent argued that Ms Rosen had not been shown to have any expert knowledge of the value of real estate in Colorado in 1991 and had not inspected the subject property or the putative comparable properties so as to be in a position to express an opinion as to the extent of any material comparability. 169 In my view, the contacts and enquiries made by Ms Rosen were, once again, of a conventional and uncontroversial type. For example what better source can there be for verifying zoning and use restrictions than the local government? It was not put to Ms Rosen that the position in America was any different from Australia where such enquiries are standard practice. The other enquiries were the sorts of enquiries which a valuer would be expected to make, particularly given the lapse of time. 170 I find, on the evidence, that Ms Rosen did have sufficient expert knowledge to review the information available and to provide a valuation which was of assistance to the Court. 171 I accept her valuation of Unit 500 as being one upon which I can rely, and I do rely upon it. 172 It does seem a little strange that the respondent complained about the quality of the valuation evidence produced by the applicant when his own efforts, some 7 years ago, failed to produce any evidence. It would appear that the respondent made no further subsequent efforts to establish the facts. Even if that is not correct, he chose not to tender any expert evidence to support his contentions. 173 As I have accepted the applicant's expert evidence about the value of the assets of ACE USA at the relevant time, the figures put forward by the respondent in his submissions are not to the point. 174 The valuation evidence which I have accepted shows that ACE's shares in ACE USA were worth nothing at the time of the conversion transaction. As a result of the conversion transaction the shares became worth $US566,000. 175 I find, on the basis of that evidence, that the value of what ACE obtained by the conversion transaction was US$566,000. The difference between the nominal value of the debt and the Australian equivalent of US$566,000 (AUD$736,000) as at 25 June 1991 was the loss which it sustained. In other words ACE gave up AUD$6,335,780 for shares worth AUD$736,000. 176 I reject the balance of the respondent's submissions on the question of loss, because the question is not, in my opinion, whether the value of ACE's overall "investment" in ACE USA increased or decreased as a result of the conversion transaction. The respondent's submission requires ACE's "investment" in ACE USA to be regarded as a combination of loans and capital investment and to be treated as a composite unit. That approach leads to the wrong question. The question is not whether ACE's overall "investment" in ACE (USA) increased or decreased as a result of the conversion transaction. The question is whether ACE incurred a loss when it disposed of the relevant traditional securities i.e. the loans or the right to receive repayment thereunder. In my view, the evidence shows that it incurred the loss referred to in paragraph [111] above, namely AUD$5,599,780.

Conclusion 177 For the foregoing reasons, I have decided that the relevant assessment by the respondent was excessive and his objection decision of 14 June 2000 should have been made differently. The appeal will be allowed. The respondent's objection decision, made on 14 June 2000, will be varied by allowing the applicant's objection in full, excluding the sum of $2,336,810 from its taxable income for the year ended 30 June 1992 and reducing the tax payable accordingly. The respondent must pay the applicant's costs of the appeal.

I certify that the preceding one hundred and seventy-seven (177) numbered paragraphs are a true copy of the Reasons for Judgment herein of Justice Carr.

Counsel for the Applicant: Mr D H Bloom QC (with him Mr J H Momsen)

Solicitors for the Applicant: Messrs Norton & Smailes

Counsel for the Respondent: Mr A H Slater QC (with him Ms L B Price)

Solicitors for the Respondent: Australian Government Solicitor

Date of Hearing: 9,10,11 March, 9,10 June 2004

1 & 2 The proper law of the contracts of loan and the conversion transaction 41 The parties were in agreement about the principles of Australian law which determine the proper law governing the efficacy or enforcement of the contracts of loan or the transactions to which those contracts relate in this matter. That is, such proper law was: '… the system of law by reference to which the contract was made or that with which the transaction has its closest and most real connection, …' 42 The quotation is from Lord Simonds in Bonython v The Commonwealth (1950) 81 CLR 486 at 498. In relation to that quotation, a majority of the High Court of Australia in Akai Pty Ltd v The People's Insurance Co Ltd (1996) 188 CLR 418 at 441 adopted the observation of Lord Diplock in Amin Rasheed Shipping Corporation v Kuwait Insurance Co [1984] AC 50 at 61: 'It may be worth while pointing out that the 'or' in this quotation is disjunctive, as is apparent from the fact that Lord Simonds goes on immediately to speak of 'the consideration of the latter question'. If it is apparent from the terms of the contract itself that the parties intended it to be interpreted by reference to a particular system of law, their intention will prevail and the latter question as to the system of law with which, in the view of the court, the transaction to which the contract relates would, but for such intention of the parties have had the closest and most real connection, does not arise.' 43 Earlier, at p 437, their Honours had referred with approval to the question posed by the authors of Cheshire & North's "Private International Law" (11 ed) at p 450, namely, in which law did the contract (in that case a policy of insurance) have "its natural seat or centre of gravity" and added this: 'In answering that question, it is proper to have regard to a number of matters including the places of residence or business of the parties, the place of contracting, the place of performance, and the nature and subject matter of the contract.' 44 But the parties differed about which system of law was to be identified by the application of these principles. The applicant contended for Texan law, while the respondent submitted that Australian law was the proper law.

my reasoning 55 There is no express choice of law in the contracts of loan in this matter. But, as was pointed out by the majority in Akai (at 441-442), it may be that, upon the construction of a contract by permissible means, a court can infer that the parties intended the contract to be governed by reference to a particular system of law. That inference may emerge upon a proper construction of the contract as a whole. 56 The evidence shows that there was no formal documentation entered into between ACE and ACE USA concerning the advances. Mr K H Parker, a director of ACE, gave evidence to that effect and said that he believed that each such advance was made on the basis that it was interest free and repayable on demand in Australian dollars. The evidence of Mr P J T Gammell, also a director of ACE, was to the same effect. At all material times Mr Gammell was also general manager of ACE and of its subsidiary companies and either a vice-president or an executive vice-president of ACE USA. Each of the advances was made under and pursuant to Mr Gammell's direction. 57 The advances were recorded in ACE's books by debits to a loan account entitled "Loan-ACE (USA)" numbered 2472. They were also recorded in a corresponding loan account in the books of ACE USA entitled "Capitalised/Pay-ACE Australian" numbered 26301. There is direct evidence that, not surprisingly, ACE's records showed the relevant amount in Australian dollars. Although there is no direct evidence to like effect in relation to ACE USA's accounts, I am prepared to infer (and do infer) from certain accounts payable vouchers exhibited to the first affidavit of Ms Noelene Vivienne Woodhouse, Taxation Manager for the ACE group of companies, and on the basis of inherent probability that the records kept by ACE USA in relation to these loans were in US dollars. 58 I am unable to infer from the materials before me that, as a matter of construction, ACE and ACE USA chose a governing law for these contracts. There being no express or other choice of law by the parties, the proper law must be ascertained by application of the principles referred to earlier in these reasons at pars [42] to [44]. 59 In my view, the proper law of the creation and enforcement of contracts of loan made during the period 1 July 1990 and 25 June 1991 was, having regard to the various relevant factors, Australian law. Those factors are as follows. The decision to make the loan was made in Australia by ACE, a company incorporated and resident in Australia. ACE USA was a wholly-owned subsidiary of ACE and its central management was conducted from Western Australia. In particular, ACE managed the funding of ACE USA from Western Australia. The loan was denominated and repayable in Australian currency. Many of the advances were disbursed from ACE's bank account in Western Australia. It is true that, in terms of amount, the bulk of the loans were made from funds located out of Australia and sent to the United States of America. But the decision to transfer those funds was made by office bearers of ACE in Australia. 60 In my opinion, those factors outweigh the fact that, on one view, ACE USA resided in the United States of America and, on any view, carried out business activities in that country. 61 On the facts (incorporation in Texas plus the carrying on of those activities) I find that ACE USA was resident in Texas. In my opinion, it had dual residence i.e. being resident also in Western Australia by reason of its central management being located there. The matter (residence) is one of fact which means that the authorities on residence of a corporation are not particularly helpful. But I think that the process of reasoning adopted by Starke J in Koitaki Para Rubber Estates Ltd v Federal Commissioner of Taxation (1941) 64 CLR 241 at 247 is most useful for present purposes. 62 The transaction comprising the creation of the agreements giving rise to the loans and their enforcement had, in my opinion, its closest and most real connection with Australian law. That was, in my view, the proper law of that transaction. 63 However, there was a further transaction, namely a dealing with the debt, i.e. the conversion transaction. In fact that dealing was one intended to extinguish the debt by applying it by way of a contribution to the capital of ACE USA. 64 The general rule is that the discharge of a debt is governed by the proper law of the contract - see European Bank Ltd v Citibank Ltd [2004] NSWCA 76 at para [51] and the cases there cited. But is there only one proper law for the contracts of loans which became the subject of the conversion transaction? 65 There is authority, at very high level, for the proposition that the fact that one aspect of a contract is to be governed by the law of one country does not necessarily mean that that law is to be the proper law of the contract as a whole: see Hamlyn & Co v Talisker Distillery [1894] AC 202 at 207; Kahler v Midland Bank Ltd [1950] AC 24 at 42 (per Lord MacDermott) and Re United Railways of the Havana v Regla Warehouses Ltd [1960] 1 Ch 52 at 92 (per Jenkins LJ with Romer LJ concurring). 66 Lord Herschell LC in Hamlyn & Co at 207 said this: 'Where a contract is entered into between parties residing in different places, where different systems of law prevail, it is a question, as it appears to me, in each case, with reference to what law the parties contracted, and according to what law it was their intention that their rights either under the whole or any part of the contract should be determined.' [Emphasis added] 67 In United Railways, the law of Pennsylvania was held to be the proper law of the contract for the lease of locomotives and rolling stock, save for certain clauses governing the right to possession of rolling stock in the event of default, and formal compliance with Cuban law, as to which matters the proper law was regarded by the Court of Appeal as being Cuban law - see pp 57 (for the seventh clause) and 93-94. 68 These authorities show that, when ascertaining the proper law of a contract, a court will not split the contract readily and without good reason. In my view, there is good reason for applying Texan law to the conversion transaction. 69 The evidence is clear that the intention of ACE (and through it the intention of its wholly-owned subsidiary ACE USA) was to convert the total of the loans from unsecured debts into further capital of ACE USA. That is, the moneys represented by the right to repayment of the loans were to be applied by way of subscription for that further capital. 70 There is a rebuttable presumption that foreign law, for present purposes Texan law, is the same as Australian law. There is no contrary evidence about the status of capitalised debt in Texas. Accordingly, I find that the effect of the conversion transaction would be to relegate ACE's status in a winding up to rank after all the unsecured creditors of ACE USA. The winding-up would be carried out under Texan law. 71 Had ACE USA subsequently prospered (and there is no evidence either way on this), the conversion transaction would have resulted in ACE or its assigns having the right to participate in dividends and possibly enjoy capital gains. 72 All of these matters, in my opinion, have the closest and most real connection with Texan law. In my view, the parties are to be taken to have accepted that the consequences under the conversion transaction would be governed by Texan law.

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