Source: https://www.ato.gov.au/law/view/document?LocID=%22JUD%2F90ATC4168%22
Timestamp: 2019-04-19 20:50:15+00:00

Document:
Legal database - View: Cases: Judgment by Bowen C.J., Lockhart and Einfeld JJ.
Judgment date: Judgment handed down 22 March 1990.
Bowen C.J., Lockhart and Einfeld JJ.
applicable to income from personal exertion was more beneficial to taxpayers.
The respondent sought to have the interest derived by it classified as income from personal exertion, but the Commissioner assessed the appellant to Div. 7 tax on the basis that the interest was income from property. In a reference to the Administrative Appeals Tribunal (``the Tribunal'') of the disallowance by the Commissioner of the respondent's objection the Tribunal found that the respondent's principal business consisted of the lending of money and upheld its objection [reported at 87 ATC 808]. The Commissioner appealed to this Court and the appeal was heard by a single Judge (Burchett J.) who upheld the Tribunal's findings and dismissed the appeal [reported at 89 ATC 4183]. The Commissioner now appeals to the Full Court of this Court from his Honour's judgment.
The appeal from the Tribunal to the Federal Court lies only on a question of law (sec. 44(1) of the Administrative Appeals Tribunal Act 1975). The question of law in this case identified by Burchett J., correctly in our view, was whether the Tribunal erred in law in finding that the respondent's principal business consisted of the lending of money.
The question whether the evidence before the Tribunal ``reasonably admits of different conclusions'' as to whether the respondent's activities fall within the ordinary meaning of the words ``... the taxpayer's principal business consists of the lending of money'' is a question of law; and it is the question on which the present case turns, as it did in Hope v. The Council of the City of Bathurst: see per Mason J. at 80 ATC pp. 4390-4391; 144 C.L.R. 1 at pp. 8-9.
and it was originally intended that the loan be made to the holding company, but later it was decided that a company should be incorporated in the A.C.T. to be the borrower from the overseas lender. The evidence does not show why this decision was made, but the selection of the A.C.T. as the place of incorporation may have been prompted by perceived stamp duty advantages which then existed in certain circumstances where companies were incorporated there. Whatever the reason, the respondent was incorporated in the A.C.T. on 17 June 1981. The intention at the time was that once the respondent had borrowed the money from the overseas lender it would, amongst other things, lend moneys to another company or other companies in the group. It was not until August 1981 that the loan was in fact made by the overseas lender to the respondent. The loan was raised in Geneva, Switzerland, in Swiss francs and the lender was European Asian Bank of Singapore. The interest rate payable by the respondent to the overseas lender was to be assessed twice yearly by reference to the ```interbank' offered rate for Swiss francs... quoted in Singapore'' at particular times. The amount of the loan was $4m. and its terms were recorded in writing, the agreement being dated 13 August 1981. The parties to the agreement were the overseas lender, the respondent as borrower and other companies within the group as guarantors which supported their covenants by granting mortgage of real estate in favour of the lender.
It is not very clear from the evidence what the respondent did with the $4m. after it received it from the overseas lender, but it appears that on the day it received the moneys it lent $3,289,961 of the $4m. to the holding company with interest. The respondent deposited the balance of the moneys with Australian United Corporation (a merchant bank associated with the Commonwealth Bank of Australia) pending the making of subsequent advances within the group. Once the holding company received the moneys from the respondent it advanced them to certain of its subsidiaries which were used by them in the carrying on of their respective businesses. They appear to have been engaged in the development of caravan parks and shopping centres in the Muswellbrook-Scone area of N.S.W. The respondent invested some of the moneys received from the overseas lender in the purchase of a block of partly equipped and furnished flats during the 1982 year of income.
By deed dated 8 July 1982 a second loan was made by the same overseas lender to the respondent in Swiss francs of an amount equivalent to $A5m., but this was in the year of income following the year with which this case is concerned. This second loan was also supported by guarantees from other members of the group. The Tribunal found that the $5m. was ``on-lent'' within the group at interest.
The respondent has an issued and paid-up capital of $2. One share is held by the holding company and the other by Mr N.F. Mitchell who holds his share as nominee for the holding company.
(ii) Brokers insurance real estate land and mercantile agents financiers moneylenders and factors.
interest from ``unrelated corporations'', presumably Australian United Corporation, and 9.6% was rent from the flats. Interest paid by the respondent on the moneys borrowed overseas was $455,567.24. There was a substantial loss shown in the respondent's profit and loss statement for the 1982 year after taking into account an unrealised exchange loss, but the respondent accepted later that the exchange loss was not deductible for income tax purposes. The respondent's return showed a taxable income of $6,167.08. The details furnished by the respondent to the Commissioner showed that the amount invested in real estate represented 21.85% of the total moneys borrowed by the respondent from the overseas lender. On this basis the interest paid by the respondent was apportioned by the respondent as to $99,541.44 as an expense against income from rents and as to $356,025.80 as an expense against income from interest, thus showing a surplus in respect of loans and a loss in respect of the letting of property.
The Tribunal analysed the return obtained from the investments, as revealed by the accounts, and pointed out that the relatively small real estate investment returned 5.3% in the period while the interest received on moneys lent returned 13%. The learned primary Judge was of the view that it was 13.8%. His Honour noted that, although the Tribunal did not expressly advert to the fact, the interest paid in respect of the borrowing of $4m. by which the activities were funded was just under 11.4% for the period which was not quite one year.
Commercial Banking Co. of Sydney Ltd. v. F.C. of T. (1950) 81 C.L.R. 263 at pp. 303-304. The Tribunal concluded that the respondent's principal business consisted of the lending of money. The primary Judge analysed the findings of the Tribunal and the path by which they were reached and concluded that the Tribunal was correct.
F.C. of T. v. Marshall and Brougham Pty. Ltd. 87 ATC 4522 at pp. 4528-4529; (1987) 17 F.C.R. 541 at p. 549.
Kirkwood v. Gadd (1910) A.C. 422, especially per Lord Loreburn L.C. at p. 423 and Lord Atkinson at p. 431. Each member of the House of Lords stressed, however, that the inquiry was one of fact in each case.
The necessity for the repetition of acts or continuity is perhaps clearer from the phrase ``carries on business'' than the word ``business'' standing alone in a definition section (see the judgment of Mason J. in Hope v. The Council of the City of Bathurst at 80 ATC 4386 at p. 4390; 144 C.L.R. 1 at p. 8); but for a business to exist there must be activity of the body concerned to constitute a commercial enterprise and generally one must look for system, regularity or recurrence.
Modern Permanent Building And Investment Society (in liq.) v. F.C. of T. (1958) 98 C.L.R. 187 per Williams J. at pp. 191-192. But in Edgelow v. MacElwee (above) McCardie J., after citing Farwell J.'s dictum, said at p. 207 that it ``may require future consideration''.
The key to the passage from Farwell J.'s judgment lies in the introductory words ``speaking generally...''. Whether Farwell J.'s statement is consistent with modern authority is not a matter for us to consider because it is used in the context of moneylending legislation, whereas a different inquiry is involved in this case.
As mentioned earlier this was the test applied by the Tribunal.
The essence of the submission by counsel for the Commissioner was that the only conclusion reasonably open on the material before the Tribunal was that the respondent's activities in the 1982 year of income could not be characterised as its principal business consisting of the lending of money either because it was not a business at all and the respondent was a mere ``conduit'' for the borrowing of money and ``on-lending'' it to members of the same group of companies or because it was an ``investment'' business. It was argued that the Tribunal misapplied the tests expounded by Dixon J. in the Commercial Banking Co. case.
It is true that members of the group of companies to which the respondent belonged decided to borrow money from an overseas lender, that the respondent was incorporated as the vehicle for this borrowing and that immediately after borrowing the moneys it lent most of them to the holding company for use by the operating subsidiaries. But the fact is that the respondent did enter into the borrowing transaction with the overseas lender, borrowed a substantial sum of money at interest, the bulk of which it then lent to its holding company, again at interest. There was no suggestion that any of the interest rates, either on moneys borrowed or lent by the respondent, were not commercial rates. The loans by the respondent to the holding company yielded a profit to the respondent, if one puts to one side the loss realised on foreign exchange transactions. The primary Judge found that this loss did not prevent the Tribunal drawing ``the natural inference'' that the operations so conducted by the respondent were business operations intended to yield a profit and that this was sufficient to sustain the finding of the Tribunal. We agree with his Honour's statement. As mentioned earlier, 83% of the income received by the respondent represented interest on the loans by the respondent within the group, 7.4% represented interest from Australia United Corporation, leaving only 9.6% from sources other than interest, namely, rents from the block of flats. The return received by the respondent from moneys lent by it amounted to 13% (or perhaps 13.8%) and the interest paid in respect of the borrowing of the $4m. was a little under 11.4% for the relevant period.
The respondent's activities consisted principally of the borrowing and lending of money. By far the greatest proportion of its income consisted of interest on moneys lent and its largest outgoing was interest on moneys borrowed from overseas. There was no suggestion that any of the relevant transactions were shams. Even if it were right to describe the role of the respondent in its activities of lending money, as counsel for the Commissioner did, as a ``conduit'' for its parent company or other members of the group, that begs, not answers, the question whether the activities of the respondent are correctly characterised as its principal business consisting of the lending of money.
It is not correct to say that the only conclusion reasonably open on the material before the Tribunal was that the respondent's activities either did not constitute a business at all or that, if they did, it was a business of ``investment'' not a business consisting of the lending of money.
Nor, however, would the converse be correct that the evidence before the Tribunal reasonably admits only of the conclusion that the respondent's principal business consisted of the lending of money. The facts mentioned earlier could, in our view, reasonably support the conclusion either that the lending of money or ``investment'' constituted the respondent's principal business. But whether the respondent's principal business consisted of the lending of money or of some other business such as ``investment'' is a question of fact which the Tribunal resolved in favour of the respondent. Plainly there was evidence before the Tribunal to support this conclusion. Thus, it could not be said that there was no evidence upon which the Tribunal could reasonably have come to the conclusion which it did.
We would dismiss the appeal with costs.

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