The tax treatment of foreign exchange gains requires assessment of whether the underlying borrowing was on capital or revenue account by reference to the Sun Newspapers tests, with borrowings to strengthen financial standing being capital in nature.
Later decisions that cite Commercial & General Acceptance Ltd v Federal Commissioner of Taxation
Decisions cited by Commercial & General Acceptance Ltd v Federal Commissioner of Taxation
COMMERCIAL AND GENERAL ACCEPTANCE LTD. v. FEDERAL COMMISSIONER OF TAXATION
(1977) 137 CLR 373
Income Tax (Cth)
High Court of Australia
Barwick C.J.(1), Gibbs(2), Mason(3), Jacobs(4) and Murphy(5) JJ.
CATCHWORDS
Income Tax (Cth) - Assessable income - Income - Foreign currency borrowings - Exchange gain on repayment - Whether capital or income - Purpose of borrowing - Gross income - Trading stock - Income Tax Assessment Act 1936 (Cth), ss. 6 (1) "trading stock", 25 (1)*, 28.
* Section 25 (1) of the Income Tax Assessment Act 1936 (Cth) provides, so
far as is material, that "The assessable income of a taxpayer shall include -
(a) where the taxpayer is a resident
- the gross income derived directly or
indirectly from all sources whether in or out of Australia ... which is not
exempt income."
HEARING
Sydney, 1977, March 22-23; September 20. 20:9:1977DECISION
1977, September 20.
2. Fundamentally, profit is not necessarily gross income within the operation
of s. 25 (1) of the Income Tax Assessment Act, 1936,
as amended ("the Act").
In some instances, because of the terms of the Act, the net profit of a
transaction may form part of gross
income, e.g. s. 26 (a). But unless so
required, what falls within s. 25 (1) must be income. Whether a given profit
is income needs
then to be determined on general principles. So-called capital
profits do not by the very description constitute income. If what
is thought
to be a profit is the result of an income-producing activity, it will not be
the net profit but the gross income of
the activity which will fall within the
assessable income: thereafter deduction conformably to the Act may be made
from the gross
income as a whole. For convenience, the net result of the
trading account is often carried into an income tax return as the amount
of
income from which specific deductions are made. But the debit side of those
accounts should include only items which fall within
s. 51. (at p376)
3. I agree that the appeal should be allowed. As the conclusion expressed in
my brother's reasons and in my own would preclude
any inclusion of the
"exchange profit" in the assessable income, the assessment should be set
aside. (at p376)
GIBBS J. I have had the advantage of reading the reasons prepared by Mason
J. and agree with them. (at p376)
2. In International Nickel Australia Ltd. v. Federal Commissioner of Taxation
(1977) 131 CLR 347 at p 347 I discuss the circumstances
in which a gain made
by a taxpayer by reason of a variation in the rate of exchange may be treated
as part of the assessable income.
I need not repeat what I have there said as
to the principle to be applied. It is obvious that such a gain cannot be so
treated
if it is of a capital nature. It can only be regarded as part of the
assessable income if it was referable to expenditure incurred
in or for the
purpose of discharging or providing for liabilities on revenue or income
account: Texas Co. (Australasia) Ltd. v.
Federal Commissioner of Taxation
[1940] HCA 9; (1940) 63 CLR 382 . I incline to think that an exchange gain or loss on the
repayment
of moneys
lent will always be a capital gain
or loss, and can never
be taken into account in the assessment of income. That seems
to have
been the
view of Latham C.J. in the
Texas Co. Case (1940) 63 CLR,at p 428 . But if that
be too extreme a view, I agree
with Mason
J. that the repayment of the
borrowing
in the present case was an expenditure on the capital account,
within the principles
stated
in the lending case, Sun Newspapers
Ltd. and
Associated Newspapers Ltd. v. Federal Commissioner of Taxation (1938) 61 CLR
337,
at pp 359-363 . I think that the proper
approach is to apply directly the
tests suggested in that case, for the purpose of
deciding
whether the
repayment was an expenditure
referable to capital account or to revenue
account, rather than to consider whether
the
moneys borrowed, when received,
became
circulating capital. The line of distinction between fixed and
circulating capital is
not
precisely drawn, and it is of little advantage
to
try to answer one question by asking another to which the answer may be
uncertain:
cf. John Smith & Son v. Moore, per Viscount
Haldane (1921) 2 AC 13,
at pp 19-20 , and Crompton v. Reynolds and Gibson, per Lord
Reid (1952) 1 All
ER 888, at p 895 . (at p377)
3. The present case is clearly distinguishable from cases in which an
exchange gain or loss was made in making a payment for trading
stock. The gain
here was referable to capital, and the appeal should be allowed. (at p377)
MASON J. This is an appeal by the taxpayer from an order made by the Supreme
Court of New South Wales (Sheppard J.) confirming
an assessment made by the
Commissioner of the taxpayer's liability to income tax based upon income
derived during the year ended
30th June 1973 (1975) 5 ATR 548; 75 ATC 4201 .
By his assessment the Commissioner had included in the taxpayer's taxable
income
a foreign exchange profit of $2,807,568, thereby increasing that income
from $8,932,120 to $11,739,688. The sole issue is whether
the amount in
question should have been treated as assessable income. (at p378)
2. The taxpayer, which is a finance company, was incorporated on 27th March
1958. Its principal shareholder is and always has
been the Commercial Banking
Company of Sydney Ltd. ("the C.B.C. Bank"). On 1st July 1970 the taxpayer
issued 4,000,000 shares of
$1 each, being 20 per cent of its issued capital,
to the Bank of America, a large United States banking corporation which,
unlike
Australian banks, carries on business as a general financier. As part
of the terms on which this issue of shares was made the Bank
of America agreed
to make a stand-by facility equivalent to $A5,000,000 in United States
currency available to the taxpayer, to
consider increasing the amount of the
stand-by facility if requested, to give access to Bank of America techniques
and financing
plans and, if necessary, to make personnel available and
generally to stand behind the taxpayer. This agreement with the Bank of
America has given the taxpayer access to valuable techniques which its
association with the C.B.C. Bank did not provide. (at p378)
3. The amount of the stand-by facility was increased in 1974 to
$US30,000,000. Loans were made by the Bank of America to the taxpayer
in
amounts of $US2,250,000 and $US15,700,000. There were staff exchanges and
visits and a substantial exchange of information in
relation to financial
markets and operating techniques. (at p378)
4. At all material times the main categories of the taxpayer's financing
activities have been: (a) Property development loans
for home unit
construction, residential subdivision, shopping centres and other commercial
developments. In some cases the taxpayer
holds an equity interest which
enables it to participate in profits made. (b) Instalment contracts which
include unsecured personal
loans, hire purchase of motor vehicles, industrial
and agricultural equipment and loans secured by mortgage, principally to
purchasers
of developed blocks of residential land. (c) Commercial term loans.
(d) The leasing of assets, in particular of motor vehicles,
plant and
equipment. (at p378)
5. Up to 30th June 1970 the taxpayer had been financed by its share capital,
its reserves, borrowings from the public, term deposits
accepted from
companies, institutions and individuals and bank overdraft accommodation with
the C.B.C. Bank. The taxpayer also
had the advantage of a stand-by facility
provided by that Bank and after 1st July 1970 it had the benefit of the
stand-by facility
provided by the Bank of America. (at p378)
6. On 30th June 1971, by a deed of agreement of that date between the Bank of
America and the taxpayer and a loan agreement of
the same date, the Bank of
America agreed to lend to the taxpayer an amount of $US15.7 million, the
second of the two loans to
which I have referred. This loan was to be repaid
in equal consecutive quarterly instalments beginning on 29th June 1975 and
ending
on 29th March 1976 and was to bear interest at a fluctuating rate per
annum of 1 1/4 per cent above the offered inter-bank rate
quoted by the Asia
currency unit of the Bank of America. The provision for repayment was subject
to cl. 3.1 of the loan agreement
which gave to the taxpayer the right at its
option to redeem the debenture stock and notes issued in respect of the loan
without
premium or penalty prior to maturity in whole by prepaying the
principal of the loan or in part by prepaying multiples of $US100,000.
Clause
6.6 of the loan agreement provided that so long as there was any indebtedness
outstanding the taxpayer would maintain in
cash and money market instruments
in a form approved by the Bank an amount of not less than 65 per cent of the
loan from time to
time outstanding. (at p379)
7. The amount of the loan was received on 30th June 1971 and amounted in
Australian dollars to $13,906,111.60. It was included
in the taxpayer's
published accounts under the head of public borrowings. (at p379)
8. The primary judge found that the reason why the taxpayer sought the loan
was that the taxpayer's receivables were increasing
at a time when the general
liquidity of the country was diminishing. The expression "receivables" means
the total to fall due under
the various loan or leasing arrangements entered
into by the taxpayer and not the amount presently due at any particular time.
There was, due to the liquidity situation in Australia at the time, an
increasing demand for finance with the result that more business
was being
written and at the same time an increasing difficulty was being experienced in
borrowing money by way of the public issue
of debentures and notes. When
negotiations for the loan were commenced in January 1971 by Mr. Fletcher, the
then general manager
of the taxpayer, the amount sought was $US4.5 million,
but the increasing low level of liquidity in the taxpayer became so great
that
the amount sought later increased to $US15.7 million. (at p379)
9. After the making of the loan the Australian dollar appreciated in value
against the United States dollar and the taxpayer opened
in its books an
account entitled "Exchange Fluctuation Reserve". To this account were credited
from time to time the amounts by
which the liability to repay the debt was
reduced as the result of exchange fluctuations. (at p379)
10. By the beginning of 1973 the taxpayer's liquidity problem had been
overcome. The amount borrowed was no longer required to
enable the taxpayer to
demonstrate a sound liquidity position. The condition set out in cl. 6.6. of
the loan agreement prevented
65 per cent of the amount borrowed being put to
commercial use and in fact the total amount of the loan was held in short term
money market securities and was not put to use in the ordinary lending and
financing business of the taxpayer. The interest received
under the money
market instruments in which the loan funds were invested was less than the
interest payable under the loan agreement.
Accordingly, in 1973 it was decided
to repay the loan. It was repaid on 27th February 1973 by payment of
$A11,239,587.75, being
the Australian dollar equivalent of $US15,899,520.83,
being repayment of the principal together with interest of $US199,520.83.
(at
p380)
11. According to Mr. Fletcher's evidence, which was accepted by his Honour,
the loan transaction between the Bank of America and
the taxpayer differed
from any other borrowing transaction entered into by the taxpayer in that it
was a special loan for a large
amount for a particular purpose from a foreign
bank with which the taxpayer had a special relationship. Apart from an earlier
short
term loan of $US2,250,000 borrowed from the Bank of America in January
1971 the taxpayer did not enter into any other borrowing
transaction overseas.
At the time it entered into the transaction there was no intention or
expectation of making a gain on fluctuations
in exchange rates. (at p380)
12. His Honour concluded that the exchange gain was income of the taxpayer
within the meaning of s. 25 (1) of the Income Tax Assessment
Act 1936, as
amended, according to the ordinary usages and concepts of mankind. His reasons
for reaching this conclusion may be
summarized
as follows:
(1) That the amount of the loan was circulating capital derived by the
company in the course of carrying on its business (Ammonia
Soda Co. Ltd. v.
Chamberlain (1918) 1 Ch 266, at pp 286-287 ), notwithstanding that there was a
limitation upon the use to which
65 per cent of the borrowing could be put,
because the entire amount of the loan increased the taxpayer's financial
standing and
entitled it to borrow and lend far greater amounts than would
otherwise have proved possible.
(2) That in some circumstances a profit or gain is gross income falling
within s. 25 (1) of the Income Tax Assessment Act. For
this proposition his
Honour found support in the decision of Menzies J. in Australasian Catholic
Assurance Co. Ltd. v. Federal
Commissioner of Taxation [1959] HCA 26; (1959) 100 CLR 502, at
pp 505-509 where it was held that a profit on sale made in the ordinary
course
of the company's business
was assessable income as a profit according to the
ordinary usages and concepts of mankind.
(3) That no distinction can be drawn between foreign exchange gains made out
of debts for trading stock - which have been held
to constitute assessable
income (see Caltex Ltd. v. Federal Commissioner of Taxation [1960] HCA 17; (1960) 106 CLR 205
) - and
foreign exchange
gains made out of other debts. (at p381)
13. The Income Tax Assessment Act 1936, as amended ("the 1936 Act") provides
for a method of arriving at a taxpayer's taxable
income which is artificial in
that it is
based on the taxpayer's assessable income from which are subtracted
the deductions allowed
by the Act (s. 48). The expression "assessable
income"
is defined by s. 6 so as to mean "all the amounts which under the provisions
of this Act are included in the assessable
income". The Act contains a series
of specific provisions including a variety of amounts
in the assessable income
of a taxpayer.
Of these specific provisions s. 25 (1) is the most important;
it includes in the assessable
income the gross income of the taxpayer.
It is
followed by a number of provisions whose effect is to include in the
assessable
income receipts or profits made in particular
circumstances, e.g.
s. 26 (a). All losses and outgoings to the extent to which they
are incurred
in gaining or producing assessable
income, or are necessarily incurred in
carrying on a business for that purpose
are, subject to certain exceptions,
allowable deductions
(s. 51). (at p381)
14. In this respect the scheme of the 1936 Act is broadly similar to the
scheme of the Income Tax Assessment Act 1922, as amended
("the 1922 Act"),
although its provisions are less elaborate than the provisions of the 1936
Act. Both Acts differ from the United
Kingdom Income Tax Act which taxes the
profits or gains of a business. The differences between the two methods of
arriving at the
taxable income of a taxpayer have been discussed in such cases
as Federal Commissioner of Taxation v. Gordon [1930] HCA 49; (1930)
43 CLR 456,
at p 461 and
New Zealand Flax Investments Ltd. v. Federal Commissioner of Taxation (1938)
[1938] HCA 60; 61 CLR 179,
at pp 199,206 . (at p381)
15. The judgment appealed from proceeds upon the footing that,
notwithstanding the reference to "gross income" in s. 25 (1), the
sub-section
catches net profit in some circumstances at least. At first glance it might be
thought that this view of s. 25 (1)
fails to take account of the presence of
s. 51 (1) which provides for the deduction of outgoings from a taxpayer's
assessable income.
In the ordinary case in the process of arriving at the
amount of net profit outgoings are deducted. To say that net profit falls
within gross income and is therefore within assessable income seemingly is to
say that outgoings are deducted before arriving at
the assessable income
whereas s. 51 requires that they be deducted from that income. (at p382)
16. However, in the Flax Investments Case, Dixon J. said (1938) 61 CLR, at p
206 :
"But, as the Income Tax Assessment Act 1922-1930 hasAlthough there are differences between the 1936 Act and the 1922 Act, they do not in themselves necessarily dispose of his Honour's observations. To the extent to which there are cases in which the character of income may attach to a net profit which is derived from a gross receipt which lacks the character of income, the inclusion of the net profit, if otherwise authorized by the Act, can be reconciled with s. 51 (1). The antecedent deduction of outgoings from the gross amount received so as to ascertain the net profit figure would not involve the application of s. 51 because the gross amount received is ex hypothesi neither gross income nor assessable income. And if it is the net profit only which is taken into assessable income there is no outgoing which has been incurred in relation to that figure which can be deducted. (at p382)
been interpreted, authority for the deduction must be found
not in general principles but under some provision of the
statute. In par. ba of the definition of income in sec. 4
'profit' is specially brought into the assessable incoem and
this involves a preliminary account of the particular
transaction, which, no doubt, is a departure from the general
scheme ascribed to the Act. There may be other similar
examples and perhaps, apart from such express provisions,
instances of special businesses and transactions may be
found where nothing but the net profit could be regarded as a
revenue item. But, generally speaking, the gross receipts on
account of revenue must be taken into the assessable income
and therefrom the deductions allowed by the Act must be
made and no others."
17. There is a problem in accommodating the language of s. 25 (1) to the
notion that an amount of net profit forms part of gross
income. Is the
reference in the sub-section confined to the gross receipts only of the
taxpayer which possess the character of
income or does it also include a net
amount having that character, provided that the net amount is not itself
derived from gross
income? The expression "gross income" in relation to a
taxpayer conveys the sense of entire income of a taxpayer. No doubt in the
context of the Act that income is to be ascertained in the first instance by
reference to the gross income receipts of the taxpayer,
but in my view it also
includes a net amount which is income according to the ordinary concepts and
usages of mankind, when the
net amount alone has that character, not being
derived from gross receipts that are revenue receipts. (at p383)
18. It was suggested that the decision of Menzies J. in Australasian Catholic
Assurance Co. Ltd. v. Federal Commissioner of Taxation
[1959] HCA 26; (1959) 100 CLR 502
supports this view. I doubt whether it does; the judgment is not explicit upon
the point. Be
that as it may,
the decision can be explained on the footing
that the investment was part of the taxpayer's insurance business.
(at p383)
19. However, the conclusion to which I have come is that the amount in
question does not possess the character of income and that
it is not caught by
s. 25 (1), even if, as I have suggested, that sub-section includes net profit
in some circumstances, as, for
example, where it is derived from a gross
receipt which is not income. (at p383)
20. The exchange gain was in reality a saving or reduction in the amount of
Australian currency equivalent which the taxpayer
required to repay its
indebtedness. In essence it was a windfall advantage stemming from a reduction
in a liability to repay a
borrowing of capital. I can see no persuasive reason
for saying that the gain was a receipt of income. (at p383)
21. In my view, to support the assessment it is not enough to say that the
gain was made when the moneys borrowed formed part
of the taxpayer's
circulating capital. The distinction between fixed and circulating capital was
described by Jenkins L.J. in Reynolds
and Gibson v. Crompton (1950) 33 Tax Cas
288, at p 303 as "debatable". His Lordship went on to say that "circulating
capital" is
"simply an expression used to denote capital expended in the
course of the trade with a view to disposal at a profit of the assets
produced
or acquired by means of such expenditure, and represented at different stages
of its career by cash, assets into which
the cash has been converted, and
debts owing from customers to whom those assets have been sold". See the same
case on appeal Crompton
v. Reynolds and Gibson (1952) 1 All ER at pp 893-895 .
As I have said, the taxpayer's exchange gain was a reduction in the taxpayer's
liability to repay; it was not a gain made on the investments in which the
moneys borrowed were placed or in those assets which
might be said to be the
taxpayer's circulating capital from time to time. (at p383)
22. The evidence accepted by his Honour established that the principal
purpose of the borrowing was not to arm the taxpayer with
more funds to lend
or apply in the ordinary course of its finance business - 35 per cent only of
the loan could be so applied -
but rather to provide a base of additional
assets which would generally strengthen the taxpayer's financial standing and
enable
it the more readily to borrow moneys from the public by demonstrating
that it was free of liquidity problems. Indeed, the evidence
shows that by
reason of the condition contained in cl. 6.6. of the loan agreement, that 65
per cent of the amount of the loan should
be kept in cash and money market
instruments, it was inevitable that the interest payable under the loan would
exceed the income
to be derived from it. This was because the interest charges
payable to the Bank of America were those appropriate to a long-term
loan,
whereas the interest payable on money market securities was at a lower rate
appropriate to short-term securities. No doubt
the effect of the loan was to
enable the taxpayer to divert other funds into the more profitable channels of
its finance business,
but this does not affect the character of the loan
transaction itself. (at p384)
23. In these circumstances the principal purpose of the borrowing was to
strengthen "the business entity, structure, or organization
set up or
established for the earning of profit"; it was not part of the process by
which the organization operated to obtain regular
returns, this being the
distinction drawn by Dixon J. in Sun Newspapers Ltd. v. Federal Commissioner
of Taxation
[1938] HCA 72; (1938) 61 CLR
337, at p 359 in elaborating the difference between
expenditure and outgoings on revenue account and on capital
account.
In truth
the transaction was designed to strengthen the framework within which the
taxpayer intended to carry on business
- see
Commissioner
of Taxes v. Nchanga
Consolidated Copper Mines Ltd. (1964) AC 948, at p 959 ; B.P. Australia Ltd.
v. Federal
Commissioner
of Taxation
[1965] UKPCHCA 2; (1965) 112 CLR 386, at p 392; (1966) AC
224, at p 232 . (at p384)
24. It remains only to dispose of the suggestion made in support of the
Commissioner's case that money borrowed by the taxpayer
should be regarded as
trading stock. In this event, the reduction in the amount required to repay
the liability would be reflected
by a corresponding increase in the taxpayer's
assessable income - see s. 28. As trading stock does not ordinarily embrace
money,
the submission was based on the statutory definition of "trading stock"
contained in s. 6. The definition includes "anything produced,
manufactured,
acquired or purchased for purposes of manufacture, sale or exchange, and also
includes live stock". Although the
decision in Investment and Merchant Finance
Corporation Ltd. v. Commissioner of Taxation [1971] HCA 35; (1971) 125 CLR 249 shows
that
"trading
stock" in its statutory sense includes choses in action such as
shares and is not confined
to goods and commodities,
the definition
is not
wide enough in my opinion to comprehend money borrowed by a finance company
for
use in its business, in particular
for the
use to which the taxpayer
applied the moneys which it borrowed from the Bank of America.
Even if the
moneys were "anything
acquired",
they were not acquired for purposes of
"exchange", as the Commissioner argued. What
the taxpayer did with the moneys
which it borrowed
could not, by any feat of imagination, be accurately
described as an "exchange
of money". (at p385)
25. The present case is to be distinguished from cases in which a
manufacturer or trader buys or sells stock-in-trade for a price
payable in a
foreign currency which appreciates or depreciates before payment is made. Then
there is a case for saying that the
exchange gain or loss forms part of the
taxpayer's assessable income or is an outgoing in gaining or producing
assessable income
(Texas Co. (Australasia) Ltd. v. Federal Commissioner of
Taxation [1940] HCA 9; (1940) 63 CLR 382 ; cf. Armco (Australia) Pty.
Ltd. v. Federal
Commissioner of Taxation [1948] HCA 49; (1948) 76 CLR 584 ; Caltex Ltd. v. Federal
Commissioner of Taxation [1960]
HCA 17; (1960) 106 CLR 205 ). (at p385)
26. Accordingly, I would allow the appeal. (at p385)
JACOBS J. In my opinion the exchange profit was a capital profit. I agree
with the reasons which Mason J. has expressed in reaching
this conclusion.
That being so, the profit is not brought to tax under any provision of the
Income Tax Assessment Act 1936. It
is certainly not a profit under the first
limb of s. 26 (a). It is certainly not a profit arising from the carrying out
of
a profit-making
scheme under the second limb of s. 26 (a). There was no
scheme of profit making in respect of the relevant loan.
Nor is it a profit
arising from the carrying on of a profit-making undertaking within the second
limb of s. 26 (a). The only "profit
making undertaking"
within the meaning to
be ascribed to those words (see McClelland v. Federal Commissioner of Taxation
[1970] HCA 39; (1970) 120
CLR 487; (1971)
1 WLR 191; (1971) 1 All ER 969 ) was in this case
the general business undertaking of the taxpayer.
The profits
of that business
undertaking do not include capital profits but only include profits to revenue
account. Likewise,
even if a net
profit from an
income producing activity can
be gross income under s. 25, the net profit will here be in no different
case
from
a profit arising
from the carrying on of the business of the taxpayer.
Therefore, if there is in the relevant circumstances
no profit
arising from
the carrying on of the taxpayer's business undertaking, there is likewise no
income falling within s. 25.
(at p386)
2. I would therefore allow the appeal. (at p386)
MURPHY J. I have considered the Income Tax Assessment Act 1936, as amended,
and the authorities and come to the following conclusions
that, in general:
(1) If an amount receivable by a taxpayer (the principal sum) is assessable
income, then any increase or decrease in the principal
sum caused by exchange
rate variation is to be taken into account (in determining the taxable income
of the taxpayer) as assessable
income or allowable expenditure, in accordance
with (3) and (4) below.
(2) If an amount payable by a taxpayer (the principal sum) is allowable
expenditure, then any increase or decrease in the principal
sum caused by
exchange rate variation is to be taken into account (in determining the
taxable income of the taxpayer) as allowable
expenditure or assessable income,
in accordance with (3) and (4) below.
(3) If the variation occurs in the year of income in which the amount
receivable or payable is taken into account, adjustment
should be made to
reflect the actual income or expenditure.
(4) If the variation occurs in a later year of income, any exchange gain
(that is, an excess of the amount actually received
over the amount
receivable, or an excess of the amount payable over the amount actually paid)
is assessable income; any exchange
loss (that is, an excess of the amount
receivable over the amount actually received, or an excess of the amount
actually paid over
the amount payable) is allowable expenditure.
(5) If an amount receivable by a taxpayer (the principal sum) is not
assessable income, then any increase or decrease in the
principal sum caused
by exchange rate variation is not to be taken into account in determining the
taxable income of the taxpayer.
(6) If an amount payable by a taxpayer (the principal sum) is not allowable
expenditure, then any increase or decrease in the
principal sum is not to be
taken into account in determining the taxable income of the taxpayer. (at
p386)
2. This means different treatment when an exchange variation effects a gain
or loss in both a non-deductible repayment of capital
(it is ignored) and a
deductible payment of interest on it (it is treated as above). Thus, if
interest payable on a borrowed sum
were deductible, exchange variation which
effected a saving would result in assessable income (unless occurring in the
income year
in which the interest is taken into account in which case the
allowable expenditure is reduced to reflect what was actually expended).
(at
p387)
3. There is no conceptual difficulty when the variation occurs in the income
year in which the income or expenditure is taken
into account. There is a
conceptual difficulty in treating a decrease in income as deductible
expenditure and a decrease in expenditure
as assessable income when the
variation occurs in a later income year but this gives a rational operation to
the Act. This would
also be achieved by treating the decrease in income (or
expenditure) as negative income (or negative expenditure) and deducting
it
from assessable income (or allowable expenditure). I have not dealt with what
should be done when intermediate exchange rate
variation occurs. (at p387)
4. I accept that the appellant's overseas borrowing was a capital
transaction, unlike its local borrowings and lendings. The repayment
of the
borrowed sum was a capital transaction and was not allowable expenditure. It
follows that on the repayment of the capital
the saving or gain from exchange
variation was not to be taken into account in assessing income. (at p387)
5. The appeal should be allowed. (at p387)
ORDER
Appeal allowed with costs.Judgment of the Supreme Court set aside. In lieu thereof order that the assessment appealed from should be remitted to the Commissioner to be amended in accordance with this judgment, and that the respondent pay the appellant's costs of the appeal to the Supreme Court.