The PMI Group, Inc v QBE Holdings

Supreme Court of NSW|2016-05-17|Before: Ball J

Introduction

By a Share Sale Agreement dated 14 August 2008 (the SSA) between the second plaintiff, PMI Mortgage Insurance Co (PMI), and the defendant, QBE Holdings (AAP) Pty Limited (QBE), QBE acquired from PMI all of the shares in a company then known as PMI Mortgage Insurance Australia (Holdings) Pty Limited (defined in the SSA as "the Company") for USD920,491,602. The Company, through a subsidiary known as PMI Mortgage Insurance Limited (defined in the SSA as "the Company Subsidiary") and a related company known as Permanent LMI Pty Limited, carried on in Australia and New Zealand a mortgage insurance business. The Company and the companies through which it carried on business are together referred to in the SSA as "the Consolidated Companies". The Company Subsidiary had both Australian and New Zealand operations. The Australian operations comprised the bulk of the operations of the Consolidated Companies.

The Share Sale Agreement

By cl 2.1 of the SSA, QBE agreed to purchase all of the shares in PMI Australia for the "Purchase Price". "Purchase Price" was defined to mean "USD920,491,602, being the Net Tangible Assets, subject to adjustment under this Agreement".
"Net Tangible Assets" is defined in the SSA as follows: Net Tangible Assets means US$920,491,602, being the value of net tangible assets of the Consolidated Companies as at the Effective Date [that is, 30 June 2008] which has been calculated as the Consolidated Companies' shareholders' equity as of that date, minus the Consolidated Companies' intangible assets of that date, using USGAAP, as adjusted by agreement of the parties for the value of the investment portfolio of the Consolidated Companies and using an agreed exchange rate of A$1/US$0.95.
The SSA contains extensive provisions dealing with the period between the date the contract was signed and the date of completion. In broad terms, the SSA provided for some adjustments to the purchase price if there was an increase in the Reserve Bank of Australia's cash rate above 7.75% or there was a diminution in value of the net tangible assets of the Consolidated Companies in excess of USD10,000,000 attributable to a "Material Adverse Effect" as defined in the agreement. A Material Adverse Effect did not include any change in law or any change in general economic, political or market conditions. There was also an adjustment to the purchase price of up to A$1,050,000 if the value of PMI Australia's investment portfolio decreased.
By cls 16.1 and 16.3 the SSA, PMI warrants that each of the statements set out in Schedule 8 to the agreement was correct both as at the date of the SSA and as at the time immediately before completion. Clause 16.8 requires PMI to indemnify QBE against all "Loss" which is incurred by QBE as a result of any breaches of those warranties. Schedule 8 contains a large number of warranties including warranties concerning the accuracy of the Unaudited Financial Statements and a number of warranties in relation to tax. None of the warranties in relation to tax is specifically concerned with the payment of PAYG instalments. However, warranties 34 and 50 are relevant. They provide: 34. All Taxes and Duties due and payable by the Company and the Company Subsidiary in respect of periods ending on or before the date of this Agreement have been paid by the due date or provided for in accordance with Warranty 50. … 50. The Unaudited Financial Statements fully provide for all Tax or Duty which the Company Group is liable to pay in respect of the period up to and including the Effective Date, including any joint and several liability as part of a group for either GST or income tax purposes.
Clause 16.19, which is the critical clause, provides: Tax Relief The Purchaser must pay to the Vendor an amount equal to any credit, refund, rebate, reimbursement or other form of relief allowed by or received from a Taxation Authority in respect of: (a) any Tax or Duty paid by the Company or the Company Subsidiary before the Effective Date or provided for in the Unaudited Financial Statements except to the extent that the credit, refund, rebate, reimbursement or other form of relief is already provided for (to the extent such provision exists); or (b) any Tax or Duty paid by the Company or the Company Subsidiary after Completion to the extent the Purchaser has received an amount under a Tax Warranty for such Tax or Duty, in which case, account must be taken of the amount by which the Purchaser was subject to Tax or Duty in respect of the amount received under a Tax Warranty. Any amount paid by the Purchaser to the Vendor under this clause 16.19 will be in addition to and an increase in the Purchase Price.
It is common ground that the amounts in issue do not fall within the definition of "Duty". "Tax" is defined in cl 1.1 of the SSA as follows: Tax: (a) means a tax, levy, impost, fee, deduction, compulsory loan, charge, withholding or duty of any nature, including, without limitation, any Income Tax, value added, consumption or goods and services tax (including GST), gross receipts, franchise, withholding, unemployment insurance, social security, sales, use, excise, real and personal property, municipal, payroll or workers' compensation tax, or any liability for any of the foregoing (including all fines, additional tax, interest or penalties) which is assessed, levied, imposed or collected by a Governmental Entity under the Tax Act or any other statute, ordinance or law, in Australia or elsewhere; (b) includes any Liability for the payment of any amounts of the kind described in paragraph (a) as a result of being a transferee or successor or a party to any agreement or any express or implied obligation to indemnify another person; (c) excludes Duty. "Tax Act" is defined to mean "the Income Tax Assessment Act 1936 (Cth) and the Income Tax Assessment Act 1997 (Cth)". It is accepted that the definitions of "Taxation Authority" and "Governmental Entity" include the ATO.
"Effective Date" is defined to mean 30 June 2008. "Unaudited Financial Statements" is defined to mean "the unaudited consolidated statements of income, changes in equity and cash flows of the Consolidated Companies for the six months ended 30 June 2008 and the unaudited consolidated balance sheets of the Consolidated Companies as at such date, prepared in accordance with USGAAP for the purposes of SEC Reports, as set out in Schedule 4 of the Disclosure Letter". The Reference to "USGAAP" is a reference to Generally Accepted Accounting Principles in the United States.
Clause 1.5 of the SSA provides: If a party fails to pay any amount payable by it under or in accordance with this Agreement …, the party must, if demand is made, pay simple interest on that amount from the due date for payment until that amount is paid in full at the rate per annum which is the sum of the Pre-Completion Interest Rate (as defined in clause 5(c)(ii)), plus an additional margin of 1%, calculated daily. … It is not disputed that the interest rate payable in accordance with this clause is 4.7875 percent per annum.

Background

It is common ground that the Unaudited Financial Statements were properly prepared in accordance with USGAAP. The statement of income that forms part of those statements discloses that for the period from 1 January 2008 to 30 June 2008 PMI Australia's income before tax was $85,405,000 (rounded to the nearest $1000). In addition, the accounts recorded a tax provision in respect of that period of $25,413,000. That figure included an amount of $23,084,000 for tax payable on income earned in the period covered by the accounts together with a number of adjustments relating to, among other things, deferred tax.
In accordance with USGAAP, the tax expense for the six month period was calculated by estimating the accounting year's profit, determining the applicable tax rate based on that estimate (in this case, 30 percent) and multiplying the profit (after adjustments) earned in the six month period by that rate.
PMI Australia was liable under Part 2-10 of Schedule 1 of the Taxation Administration Act 1953 (Cth) (the Administration Act) to pay quarterly PAYG instalments towards its income tax liability. Under s 45-110 (as it was at the relevant time), those quarterly instalments were to be calculated in accordance with the following formula: Applicable instalment rate x Your instalment income for that quarter The "applicable instalment rate" was determined by the Commissioner of Taxation and in the case of PMI Australia was at the time 13.88 percent. "Your instalment income" for a quarter is defined in s 45-120 to mean "your ordinary income derived during that period, but only to the extent that it is assessable income of the income year that is or includes that period".
In fact, PMI Australia did not calculate its PAYG instalments in accordance with s 45-110. Instead, it took the provision it was required to make for tax in accordance with USGAAP and it divided that amount by the applicable instalment rate to arrive at a notional figure for its instalment income. It then reported that amount as its instalment income to derive the amount of its PAYG instalments. As a result, the total PAYG instalments owing in respect of the six months ending 30 June 2008 corresponded to the amount to be recorded in PMI Australia's accounts in respect of its income tax liability for that period.
As I have said, PMI Australia paid a quarterly PAYG instalment in respect of the period 1 January to 31 March 2008 of $10,804,033 on 21 April 2008. As a result of that payment, the cash that otherwise would have been included in the balance sheet as at 30 June 2008 was reduced by the amount of the payment as was the provision in respect of tax, with the result that the balance sheet disclosed a current income tax liability of $11,387,000.
Under s 8AAZC of the Administration Act, the Commissioner may establish "one or more systems of accounts for primary tax debts". Each account is known as a "Running Balance Account (or RBA)".
The Commissioner established an RBA in respect of PMI Australia and the April and July PAYG instalments were credited to that account. Under Div 3 of Pt IIB of the Administration Act, the Commissioner may apply amounts held in an RBA towards "tax debts" (as defined), including income tax. Under s 8AAZLF, the Commissioner must refund to an entity "so much of … an RBA surplus of the entity … as the Commissioner does not allocate or apply under Division 3".
PMI lodged an income tax return for the period 1 January 2008 to 22 October 2008, prior to it becoming part of the broader QBE consolidated tax group on completion. That return reported a tax loss of $76,976,000 for the period 1 January to 22 October 2008. As I have said, it is not disputed that that loss arose from losses incurred by PMI Australia after 30 June 2008.
In view of that tax loss, PMI Australia applied for, and in January 2009 received from the ATO, a refund of the surplus balance of its RBA reflecting the credits arising from its April and July PAYG payments.

Relevant legal principles

The principles applicable to the interpretation of a commercial contract are not in dispute. They were recently summarised by the High Court in Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640 at [35] in these terms: The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding "of the genesis of the transaction, the background, the context [and] the market in which the parties are operating". As Arden LJ observed in Re Golden Key Ltd, unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption "that the parties … intended to produce a commercial result". A commercial contract is to be construed so as to avoid it "making commercial nonsense or working commercial inconvenience". [Footnotes omitted] See also Toll (FGCT) Pty Limited v Alphapharm Pty Ltd [2004] HCA 52; 219 CLR 165 at [40]; International Air Transport Association v Ansett Australia Holdings Limited [2008] HCA 3; 234 CLR 151 at [153].
Applying these principles, the court will normally give effect to the ordinary grammatical meaning of the words used: Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; 76 NSWLR 603 at [53] per Giles JA. However, it will not be appropriate to do so where an alternative construction is available that will avoid a result which appears to be capricious, unreasonable, inconvenient or unjust. As Gibbs J (in dissent, but not on this issue) explained in Australian Broadcasting Commission v Australasian Performing Right Association Limited (1973) 129 CLR 99 at [109-10]: If the words used are unambiguous the court must give effect to them, notwithstanding that the result may appear capricious or unreasonable, and notwithstanding that it may be guessed or suspected that the parties intended something different. The court has no power to remake or amend a contract for the purpose of avoiding a result which is considered to be inconvenient or unjust. On the other hand, if the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust, "even though the construction adopted is not the most obvious, or the most grammatically accurate" … See also JP Morgan Australia Ltd v Consolidated Minerals Pty Ltd [2011] NSWCA 3 at [96] per Macfarlan JA with whom Campbell JA and Young JA agreed; Peppers Hotel Management Pty Ltd v Hotel Capital Partners Ltd [2004] NSWCA 114; Hohn v Mailler [2003] NSWCA 122.

The parties' contentions

PMI's case is straightforward. It submits that the refund received by PMI Australia in January 2009 was a refund from a Taxation Authority "in respect of" the PAYG instalment amounts paid in April and July 2008. The April instalment was paid before 30 June 2008. There was a provision in the accounts for the July instalment. Consequently, under cl 16.19, QBE is required to pay PMI an amount equal to the amount of the refund plus interest under cl 1.5 of the SSA.
QBE's case that it is not obliged by cl 16.19 to pay PMI broadly speaking has two limbs.
First, QBE identifies available interpretations of the clause or characterisation of the events that have happened which, if accepted, lead to the conclusion that cl 16.19 does not apply. Second, it contends that one or more of those interpretations or characterisations should be preferred to the one advanced by PMI because the result for which PMI contends lacks commercial logic and is so at odds with the commercial purpose and object of the SSA that it could not have been intended by the parties. PMI takes issue with both limbs of QBE's case.

Does the construction for which PMI contends lack commercial logic?

It is convenient to begin with the second of QBE's contentions.
Leaving aside for the moment the precise words of the SSA and the precise accounting for the income earned and liabilities incurred by PMI Australia in the six months to 30 June 2008, it is apparent that PMI Australia earned substantial profits in the six months to 30 June 2008, that in the normal course of events those profits would be liable to income tax and that because of the requirements of USGAAP and the way in which the purchase price was fixed, PMI received the benefits of those profits and bore the corresponding tax liability as components of the net tangible assets of the company that was sold - that is, PMI Australia.
The SSA contains detailed and, no doubt, carefully negotiated provisions setting out what was to happen during the period between the date the SSA was signed and the date of completion and the allocation of risk during that time. Broadly speaking, and subject to a number of exceptions, losses occurring after 30 June 2008 were allocated to QBE and losses before that date were allocated to PMI.
Between 30 June 2008 and the date of completion, PMI Australia suffered substantial losses. Those losses were not anticipated at the time of sale and arose largely from events connected to the global financial crisis.
As a result of the losses actually suffered by PMI Australia after 30 June 2008, PMI Australia was not liable to any tax in respect of the period between 1 July 2008 and 22 October 2008 (the last day of the adjusted tax year). In addition, it was entitled to a refund of tax provisionally paid in respect of income tax for the whole of the adjusted tax year. For the purposes of calculating its taxable income for the year, PMI Australia was required in effect to set off the losses it made after 30 June 2008 against income it earned in the six months prior to 30 June 2008. Similarly, for the purpose of determining the tax payable by it, it was entitled to the benefit of the instalments it had paid on account of tax on the basis that, taking account of the setoff, it had made a loss for the whole (adjusted) year.
Leaving cl 16.19 to one side, two points may be made about that outcome. First, from the point of view of PMI, it obtained the benefit of the income earned during the period 1 January 2008 to 30 June 2008 but bore the burden of the tax referable to that income. Second, from the point of QBE, it (subject to a minor adjustment under the SSA arising from a diminution in the value of PMI Australia's investment portfolio) bore the full amount of the loss suffered during the period 1 July 2008 to 22 October 2008 but obtained the full amount of the tax benefit associated with that loss, partly as a result of having carried forward tax losses and partly as a result of a return of tax that had been paid provisionally by PMI Australia. QBE submits that those results are entirely consistent with the allocation of risk under the SSA. However, if it is required to pay PMI an amount equal to the tax refund received by PMI Australia, PMI will receive both the benefit of the profits earned between 1 January 2008 and 30 June 2008 and the tax referable to those profits. On the other hand, QBE will have to bear the loss incurred between 1 July 2008 and 22 October 2008 but will not receive any tax benefit in respect of that part of those losses which are set off against income earned prior to 30 June 2008. Moreover, it is only because PMI Australia suffered a loss which must be borne by QBE that PMI is entitled in effect to a refund of tax. QBE submits that that is not what the parties could have intended and that it produces a result which is perverse in the context of the bargain they struck.
PMI takes issue with that conclusion. It points to the detailed and carefully drafted provisions of the SSA concerned with the allocation of risk. Tax was treated differently from other types of risk. The parties recognised in the drafting of cl 16.19 that, as a result of its operation, PMI may recover more than the net tangible assets of PMI Australia. The clause specifically states that the amount paid under it will be in addition to the Purchase Price; and the Purchase Price was calculated by reference to net tangible assets. There is nothing perverse in PMI recovering tax which effectively it paid or which, but for a provision made as at 30 June 2008, it would otherwise have received as an increase in the purchase price.
In my opinion, the difficulty with PMI's submission is that it does not explain why the consideration it receives for the shares it sold increases in proportion to decreases in the value of those shares (at least up to the point where the losses that occur after 30 June 2008 consume entirely the PAYG instalments that were paid). If PMI Australia (and therefore QBE) suffered no loss in respect of the period from 30 June 2008, PMI would have received nothing by way of an adjustment to the purchase price. The greater the losses PMI Australia (and therefore QBE) suffers, the greater the refund to which it would be entitled and the more QBE would be liable to pay PMI. It makes no commercial sense for PMI to receive more because and only because the value of what it sold declines between the date of sale and the date of settlement, which is the effect of cl 16.19 on the interpretation for which it contends. This is not a case where the price is calculated by reference to a formula that on its face appears to have no logic. In such a case, the price that is produced by the formula may be seen as nothing more than the price that is agreed in the context of a commercial bargain. The result of that commercial bargain does not have to have a rational explanation. It is simply the price that was agreed as part of a commercial negotiation. But here the parties have specifically chosen to base the purchase price on the value of the net tangible assets of the company being sold and to include a mechanism for adjusting that price in the event that a tax refund is received. On the interpretation contended for by PMI, that mechanism produces a windfall because PMI receives both the benefit of the profits earned and the tax payable on those profits. Moreover, it only receives that windfall because the value of what it sold went down. In my opinion, cl 16.19 should only be given that interpretation if the words used admit no other.

QBE's alternatives

QBE advances three reasons for why cl 16.19 does not have the result for which PMI contends.
First, in order for cl 16.19 to apply the "credit, refund, rebate, reimbursement or other form of relief" must be in respect of relevantly a "Tax". A PAYG instalment is not a "Tax".
Second, in order for cl 16.19 to apply the Tax must be paid by PMI Australia before 30 June 2008 or provided for in the Unaudited Financial Statements and the credit, refund, rebate, reimbursement or other form of relief must not be provided for in those financial statements. QBE submits that the July PAYG instalment was not paid before 30 June 2008 or provided for in the Unaudited Financial Statements. On the other hand, it submits that the refund in respect of the April PAYG instalment was provided for in those accounts.
Third, the refund was not a refund "in respect of" any Tax paid by PMI Australia or provided for in the Unaudited Financial Statements because there was no relevant connection between the refund and the Tax that was paid or provided for, the refund was attributable to the loss suffered in the period from 1 July 2008 to 22 October 2008 and the payment of the PAYG instalments and the receipt of the refund did not affect the Purchase Price.
QBE submits that on each of these interpretations, cl 16.19 still has work to do. It should be understood as the mirror image of the provisions in the SSA dealing with the tax warranties given by PMI. The effect of those provisions is that if PMI Australia underpaid or under-provided for Tax for the period up until 30 June 2008, PMI had to compensate QBE for any loss arising from that underpayment or under-provision. Similarly, the purpose of cl 16.19 is to require QBE to compensate PMI for any overpayment of Tax in respect of the period up until 30 June 2008. That overpayment might arise, for example, from an arithmetic error relevant to the calculation of tax payable in respect of the period up until that date or a failure to claim a deduction to which PMI Australia was entitled in respect of the period up until that date.

QBE's first argument

The question raised by cl 16.19 is whether there has been a refund in respect of "any Tax ... paid by [PMI Australia] before [30 June 2008] or provided for in the Unaudited Financial Statements". Consequently, what is critical is the character of the amount paid before 30 June 2008 or provided for, not the character of the refund. The payment must be a payment of "Tax" and the thing provided for must be "Tax". The character of the refund is irrelevant provided it is "with respect to" the payment or provision.
QBE led exhaustive evidence from Ms Ripepi, an expert in USGAAP. The effect of her evidence, which was consistent with the evidence given by Mr O'Bryan, an expert on USGAAP called by PMI, was that PMI Australia was required in the 30 June 2008 interim accounts to make provision for income tax payable on the profit earned during the period covered by the accounts (that is, the period from 1 January 2008 to 30 June 2008). It was not required to account for amounts payable to a taxing authority under an instalment regime such as PAYG, since those amounts do not represent tax payable on taxable income earned during the relevant period. On that basis, it is plain that the provision for tax in the balance sheet as at 30 June 2008 was a provision for future income tax, not a provision for the July PAYG instalment. Consequently, it was clearly a provision for "Tax"; and QBE's first argument is not available in relation to it.
On the other hand, the payment made in April 2008 was the payment of a PAYG instalment; and the question raised by cl 16.19 is whether that payment was the payment of a "Tax". If it was not, then to the extent that the refund was a refund in respect of that payment, it was not a refund caught by cl 16.19.
I have concluded that a PAYG instalment is not a "Tax" as defined.
The definition of "Tax" is unquestionably very broad. It is defined to mean "a tax, levy, impost, fee, deduction, compulsory loan, charge, withholding or duty of any nature …which is assessed, levied, imposed or collected by a Governmental Entity under the Tax Act or any other statute, ordinance or law, in Australia or elsewhere". However, unlike a number of other types of payment obligation, PAYG instalments are not expressly mentioned and the question is whether PAYG instalments have the characteristics of any of the general payment obligations referred to in the definition.
PMI submits that a PAYG instalment most readily falls within the description of a "tax … of any nature" or of a "charge … of any nature".
As to "tax", QBE relies on cases such as FCT v Clyne [1958] HCA 10; (1958) 100 CLR 246 and Moore v The Commonwealth [1951] HCA 10; (1951) 82 CLR 547 in which the High Court drew a distinction between a tax and a liability ancillary to a tax that is designed to provide a mechanism for collecting tax in advance of assessment, such as provisional tax. That mechanism does not itself impose a tax. Payments of PAYG instalments fall into the same category. PMI, on the other hand, submits that those cases have no application in this context. The definition of "Tax" speaks of tax being "assessed, levied imposed or collected". By using the word "collected" the parties made it clear that they intended "tax" to include ancillary obligations of a nature referred to in the cases relied on by QBE.
As to "charge", QBE submits that that word was included having regard to the well-established distinction between a charge in the nature of a fee for service and a charge which has the character of a tax: see Airservices Australia v Canadian Airlines International Ltd [1999] HCA 62; (2000) 202 CLR 133; Air Caledonie International v Commonwealth [1988] HCA 61; (1988) 165 CLR 462. The word "charge" was included in the definition of "Tax" to make it plain that the defined term included a fee for service that had the characteristics of a tax. PMI, on the other hand, points to the decision of the New South Wales Court of Appeal in Davison v Bathurst City Council [1966] 1 NSWLR 61 at 64, where it was said that "An ordinary meaning of the word "charge" is a liability to pay money". According to PMI, that is the meaning that should be given to the word in this context.
In my opinion, each of the expressions used in the definition of "Tax" should be given a meaning that is consistent with the context in which they appear and the purpose of the definition. "Tax" in the context of the SSA is important because it may have an effect on the calculation of the net tangible assets of PMI Australia as at 30 June 2008 and therefore the purchase price. The defined term is used in clauses of the SSA where the purpose of the clause is to adjust the purchase price because there has either been an underpayment of or under-provision for liabilities in the nature of a tax or an overpayment of or over-provision for a liability of that kind, with the result that the net tangible assets which formed the basis of the purchase price was either overstated or understated. That is, the quality that each of the obligations included in the definition of "Tax" share is that they are payment obligations that must be provided for in the accounts of PMI Australia in accordance with USGAAP, and therefore had an effect on the calculation of the purchase price. That is plainly true for a "tax", "levy", "impost", "fee", "deduction", "charge", "withholding" or "duty". It is to be expected that in each case where a Governmental Entity assesses, levies, imposes or collects a liability of that nature, the relevant liability had to be reflected in the Unaudited Financial Statements.
The position in relation to a "compulsory loan" is perhaps less clear. Why that expression is used in the definition of "Tax" is not apparent, since neither party suggested that there was any payment obligation to a Governmental Authority that met that description at the time the SSA was executed (or meets that description now). On the other hand, it is apparent that the definition of "Tax" is concerned with obligations that existed at the time. This is not a case where the definition had to cater for possible changes in the taxation system. The provisions of the SSA in which the defined term appears are concerned with amounts that were paid or payable as at 30 June 2008, not with the possibility that some time in the future a Governmental Entity might impose some other form of payment obligation that might then have consequences for the parties' agreement. Consequently, there was nothing to which the expression "compulsory loan" could refer. In any event, it is to be expected that if a Governmental Entity had exacted a compulsory loan from PMI Australia within the timeframe with which the SSA is concerned, that loan would have to be accounted for in the accounts of the company. Consequently, it shares that characteristic with the other payment obligations that are referred to in the definition of "Tax".
In contrast, I accept Ms Ripepi's evidence that a liability for a PAYG instalment did not need to be accounted for in the accounts of PMI Australia in accordance with USGAAP. What needed to be accounted for was the underlying tax liability. Mr O'Bryan appears to take issue with this proposition. In the joint experts' report, he says this: [M]y opinion is that the income tax expense in the interim financial statements as at 30 June 2008 under US GAAP was made to reflect an estimate of the tax obligation due to the ATO which was later, in part, satisfied by the PAYG instalment paid on 21 July 2008 … That opinion appears to be based at least in part on the fact that, in this particular case, "after making the appropriate US GAAP tax provision, PMI did not calculate a separate amount for its PAYG instalment payment. Rather, PMI remitted the same amount recorded for tax liability to the ATO as the second quarter PAYG instalment payment". However, the fact that PMI Australia incorrectly calculated its PAYG instalment payment cannot affect the character of the payment or the nature of the provision. The provision in the 30 June 2008 accounts was a provision in respect of future income tax. Both experts agree that it had to be made whether or not PMI Australia was required to pay a PAYG instalment in July 2008. And both experts agree that the amount of the provision did not depend on the amount of the instalment. In those circumstances, I do not accept that the provision and the payment should be regarded as having been made in respect of the same liability.
It is true that if a PAYG instalment is actually paid, then cash will be reduced to the extent of the payment. It is unclear on the evidence what would have happened in the accounts if PMI Australia had paid an amount in respect of the April PAYG instalment, but did not have to make a provision for tax in the half yearly accounts in accordance with USGAAP. It is difficult to see how, as a practical matter, that situation would ever arise; and cl 16.19 should be interpreted in the context of practical reality, not the accounting treatment that would be given to theoretic possibilities. In any event, the critical difference between a PAYG instalment and the payment obligations with which cl 16.19 is concerned is that the accounts of the company - and, in particular the Unaudited Financial Statements - had to make an allowance for the latter but not the former. That distinction is important because of the effect that any allowance would have on the purchase price. And as I have explained, it makes commercial sense if the operation of cl 16.19 is confined to cases where what is refunded is amounts that have been paid and have as one of their characteristics that, in accordance with USGAAP, they had to be provided for in the Unaudited Financial Statements.
That conclusion is not undermined by the last sentence of cl 16.19. That sentence simply makes it clear that any payment under cl 16.19 is in addition to the payment of USD920,491,602. The sentence is not inconsistent with the general proposition that the parties chose to fix the purchase price by reference to the amount of the net tangible assets of PMI Australia and sought to include terms in the SSA that provided for an adjustment of the purchase price where because of the under-provision or over-provision for tax the net tangible assets were different from the amount that they had agreed.

QBE's second argument

QBE's second argument has two aspects. The first is that the July PAYG instalment was not paid or provided for in the Unaudited Financial Statements. Consequently, the refund of that payment was not a refund in respect of any Tax paid by PMI Australia before 30 June 2008. The second is that the refund of the April PAYG instalment was already provided for in the Unaudited Financial Statements.
I accept the first of these propositions but not the second.
It is plain that the July PAYG instalment was not paid before 30 June 2008. However, PMI submits that it was provided for in the Unaudited Financial Statements because there was an amount of tax provided for in those statements and on payment of the PAYG instalment there would, to the extent of the payment, be a reduction in cash and a reduction in the provision for tax payable in respect of the period covered by the accounts. For reasons which are apparent from what I have said already, I do not accept that submission. The amount of the provision was required to be included in the accounts whether or not PMI Australia had a PAYG instalment obligation. Under USGAAP, no provision was required or permitted to be made for future PAYG instalment obligations. The parties determined the purchase price by reference to accounts prepared in accordance with USGAAP, and included terms in the SSA that had the effect of adjusting the purchase price in the event that those accounts under-provided for or over-provided for tax. In that context, I do not think it can be said that the July PAYG instalment was "provided for in the Unaudited Financial Statements".
It is not easy to follow QBE's submission in relation to the refund in respect of the April PAYG instalment. Its case appears to be that the refund was provided for in the Unaudited Financial Statements because the amount of the PAYG instalment and consequently the amount of the refund was deducted from the amount that otherwise would have been provided for tax. I do not accept that submission. The submission is not easy to reconcile with the evidence led by QBE, which I accept, that what is provided for in interim accounts are liabilities in respect of tax, not liabilities arising from interim arrangements concerned with the collection of tax, such as the PAYG instalment regime. Moreover, it is a distortion of language to say that an amount is provided for merely because it has been deducted from an amount to arrive at an amount that is provided for in the accounts. An amount is "provided for" in accounts if the accounts include that amount as an asset or liability or if the amount is a component of an amount so included. In addition, and most importantly, at the time the Unaudited Financial Statements were prepared, it was not known whether there would be a refund in respect of the April PAYG instalment. It makes no sense in those circumstances to say that that refund was provided for in the Unaudited Financial Statements.

QBE's third argument

QBE's third argument concerns the connection between the refund and the PAYG instalments that were paid. It only arises if the PAYG instalments fall within the definition of "Tax". QBE submits that there is not a sufficient connection to say that the former is "in respect of" the latter. I do not accept that submission. There was a clear and direct connection between the refund and the amounts paid. The refund was a refund of the amounts paid. On any reasonable meaning of the words "in respect of" that fact is sufficient to say that the former was in respect of the latter. The fact that the refund came about because of losses incurred in the period from 1 July 2008 to 22 October 2008 and the fact that the receipt of the refund did not affect the purchase price does not alter that fact.

Conclusion and orders

It is not disputed that the refund in respect of which PMI makes its claim was a refund of the April and July PAYG instalments paid by PMI Australia. On the conclusions I have reached, the refund in respect of the April instalment was not a refund in respect of any "Tax" paid by PMI Australia because, as properly understood, the April instalment was not an instalment of "Tax" paid by PMI Australia. In addition, the refund in respect of the July instalment was not a refund in respect of an amount of "Tax" provided for in the Unaudited Financial Statements because, as properly understood, those accounts did not "provide for" that payment. Rather, they provided for the underlying tax liability, which, because of events after 30 June 2008, never eventuated.
It follows that QBE is not liable to pay PMI any amount under cl 16.19 and that the proceeding must be dismissed with costs.

Amendments 31 May 2016 - Typographical error in [45] - changed "Tax Act of any other statute" to "Tax Act or any other statute" DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 31 May 2016

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