CONSOLIDATED PRESS HOLDINGS LTD & ANOR v FC of T

Judges:
Hill J

Court:
Federal Court

Judgment date: 13 October 1998

Hill J

Introduction

The Applicants, Consolidated Press Holdings Limited (``CPH'') and Murray Leisure Group Pty Limited (``MLG'') appeal to the Court from objection decisions of the Commissioner of Taxation (``the Commissioner'') arising out of various assessments made against them by the Commissioner.

Although when the appeals were referred to the Court there were numerous outstanding issues between the parties and in respect of various years of income, those issues have now been reduced to two, each of which concerns the amount of attributable income ultimately to be included in the assessable income of CPH and MLG through the operation of s 456(1) of the Income Tax Assessment Act 1936 (``the Act''). For ease of discussion the two issues, which will be developed subsequently, are referred to as the ``thin capitalisation issue'' and the ``debt defeasance issue''. It is convenient to consider each issue, fact and law separately.

Thin capitalisation issue - facts

There is no real dispute between the parties concerning the relevant facts. Indeed, many of the consequences arising from those facts are likewise not in dispute.

Throughout the whole of the years of income in dispute on the thin capitalisation issue (the years of income ended 30 June 1991 and 30 June 1992 respectively), Consolidated Press International Limited (``CPIL(B)'') and Consolidated Press International Holdings Limited (``CPIHL(B)'') were both companies incorporated in the Bahamas. It is common ground that, for the purposes of the Act, neither was a resident of Australia. It is also common ground that each was a controlled foreign company or ``CFC'' as defined in s 340 of the Act.

In each of the years of income CPIL(B) paid or credited interest to companies which were not residents of Australia. It also paid interest to companies now accepted to be residents of Australia. The interest paid or credited in the relevant years to companies not resident in Australia by CPIL(B) was as follows:

                                                                        $A
Year of income       Compress Assets Ltd[ta]4,230,489
ended 30 June 1991   Asiamet Resources Ltd (``ARL'')                    48,016
                     Consolidated Ellerston (UK) Ltd                     9,094
                                                                    ----------
                                                                     4,287,599
                                                                    ----------

Year of income       CP International Management Services Ltd        6,381,196
ended 30 June 1992   Compress Assets Ltd                             5,118,126
                     Consolidated Press International Finance Plc      337,782
                     ARL                                               721,616
                     Compress Investments BV                         2,333,477
                     CP International Resources Ltd                    505,811
                     CP International Investments Ltd                   30,416
                     Leyton Ltd                                          9,356
                     Sunningdale Investments Ltd                        17,321
                     Consolidated Ellerston (UK) Ltd                   183,005
                                                                    ----------
                                                                    15,638,106
                                                                    ----------

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Each of the payees is agreed to be an ``associate'' of CPIL(B) as that expression is defined in s 318 of the Act.

It is further not in dispute that, in respect of any ``attributable income'' for each relevant tax year, each of CPH and MLG has an ``attribution percentage''. The expression ``attributable income'' is, as will be seen, a construct for the purposes of Part X of the Act directed to be calculated in accordance with Division 7 of that part. The expression ``attribution percentage'' is defined in s 362 of the Act (cf s 317). The relevant percentages which were the subject of dispute prior to the time of the hearing have now been agreed. So far as is relevant these are approximately CPH 54% and MLG approximately 46%.

The dispute between CPH and MLG on this part of the case concerns whether the amount, if any, which is to be attributed to each by reference to CPIL(B) be calculated as the Commissioner contends, without regard to the interest payable (or a part thereof) by CPIL(B) to the companies earlier set out because of the operation of the provisions of Division 16F of Part III of the Act concerned with thin capitalisation, or whether, as each of CPH and MLG contend, by the allowance first of a deduction for the interest paid or credited.

The legislative background - Controlled Foreign Corporations

Part X of the Act was inserted into the Act by Act No 5 of 1991, to apply to the 1991 and subsequent income tax years. It was enacted to give effect to an Economic Statement issued on 12 April 1989, as modified in subsequent press statements as part of a package of measures designed to amend the Australian tax laws relating to foreign source income. That part of the package which is presently relevant may generally be described as prescribing an accruals system of taxation of certain foreign source income, rather than relying on the usual system of taxing income as and when derived by a taxpayer.

The mischief to which that part of the CFC legislation relevant to the present proceedings was directed may be quite simply stated. An Australian resident may wish to invest in a low or no tax country, generally to receive non business income from a foreign source. If that investment is effected directly the Australian resident would pay Australian tax in the year of income in which the foreign source non business income is derived, although receiving a credit for the tax payable there (if any). If the investment were carried out through a company controlled by the Australian resident, but in circumstances where the foreign company was not a resident of Australia as defined in s 6(1) of the Act, the income would be taxed only at the rate (if any) applicable to the overseas company and no Australian tax would be suffered at all. There would then be an incentive not to distribute that income by way of dividends to the Australian controller for so to do would attract Australian tax, so any profits might be returned to Australia in a way attracting no tax - as for example by way of loan to the Australian resident controller or otherwise in a form of capital.

As the original consultative document said:

``The longer the income can be retained offshore, or if it can be repatriated without being taxed at all, the lower will be the real effective tax rate on that income.''

The solution to this potential deferral problem was to tax Australian resident taxpayers controlling a CFC in respect of the year of income in which the controlled company derives the non Australian source income on that income or a proportionate part of it, if there is more than one Australian resident taxpayer controller. So, the Explanatory Memorandum to the Taxation Laws Amendment (Foreign Income) Bill 1990, (which became Act No 5 of 1991) stated:

``The broad aim of the proposals in relation to companies is to attribute to Australian residents income, other than active business income, derived by foreign companies that are controlled by Australian residents other than in the case of a company that is subject to a tax system comparable to Australia's or is predominantly engaged in active business.''

Part X thus operates to attribute to Australian residents treated as in control of a non-resident foreign corporation a proportionate share of the income of that controlled foreign corporation (or in some cases part of that income) as and when it accrues. Section 316(1) with which the part commences states accordingly:

``The object of this Part is to provide for certain amounts to be included in a

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taxpayer's assessable income (Division 9) in respect of:

(a) the attributable income of a CFC (section 456); and

(b) certain changes of residence by a CFC (section 457); and

(c) certain dividends paid by a CFC (sections 458 and 459).''

The operative provision, to be found in Division 9, for relevant purposes is s 456(1) which is in the following terms:

``Subject to subsection (2), where a CFC has attributable income for a statutory accounting period in respect of an attributable taxpayer, the taxpayer's attribution percentage of the attributable income is included in the assessable income of the taxpayer of the year of income in which the end of the statutory accounting period occurs.''

Putting s 456(1) into the present factual context therefore CPIL(B), the relevant CFC had attributable income for each of the statutory accounting periods being the years ended 30 June 1991 and 1992. That attributable income was in respect of CPH and MLG both being attributable taxpayers. The section then operates to include in the attributable income of CPH and MLG (having regard to their attribution percentages set out earlier) approximately 54% and 46% respectively of the attributable income of CPIL(B) for each of those statutory accounting periods.

It should be stated that subsection 2 of s 456 is not presently relevant.

The ``attributable income'' is directed to be calculated in accordance with Division 7 of Part X. Sections 381 and 382 provide as follows:

``381 Where, at the end of a statutory accounting period (in this Division called the `eligible period' ) of a company:

(a) the company is a CFC; and

(b) there are one or more attributable taxpayers in relation to the company;

the attributable income of the company (in this Division called the `eligible CFC' ) for the eligible period is calculated separately for each such attributable taxpayer (in this Division called the `eligible taxpayer' ) in accordance with this Division.

382(1) The attributable income is the amount that would be the eligible CFC's taxable income for the eligible period if certain assumptions were made.

382(2) For the purposes of describing those assumptions, amounts of assessable income, allowable deductions and exempt income that are to be taken into account in calculating the taxable income are referred to respectively as notional assessable income, notional allowable deductions and notional exempt income.''

The base assumptions to be made for the purposes of computation are to be found in s 383 which provides:

``The assumptions are:

(a) that the eligible CFC is a taxpayer and a resident, within the meaning of section 6, during the whole of the eligible period; and

(b) that the eligible period is a year of income, being the year of income of the eligible taxpayer in which the eligible period ends; and

(c) that this Act is modified in accordance with Subdivisions B to D; and

(d) whichever of the assumptions in section 384 or 385 applies.''

There are other assumptions to be made, depending upon whether the relevant CFC is a resident of an unlisted country or of a listed country in ss 384 and 385 which, for present purposes, have no relevance.

Legislative background - thin capitalisation

To the complexity of the CFC legislation there must, on the present facts, be added Division 16F of Part III of the Act concerned with thin capitalisation.

The Division was introduced into the Act by Act No. 138 of 1987, first applicable to assessments of income commencing 1 July 1987. As the expression ``thin capitalisation'' would suggest, the Division is concerned with resident corporations which are inadequately capitalised by equity (inadequate in the sense that the legislature defines) which are funded by debt in essence from overseas. Such Australian resident companies would, in the absence of Division 16F, be entitled to deductions from assessable income for the purposes of calculating taxable income in Australia but in circumstances where the interest payable on the foreign debt would be subject to withholding

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tax at a rate of 10% only. The legislative solution was in essence to reduce the deduction available to an Australian company for interest which is paid to a foreign controller where the debt to equity ratio exceeds three to one. This is achieved by s 159GZS(1) which provides as follows:

``Where:

(a) an amount of foreign debt interest is, apart from this Division, allowable as a deduction from the assessable income of a year of income of a taxpayer being a resident company; and

(aa) subsection (2) does not apply; and

(b) the greatest total foreign debt of the taxpayer at any time in the year of income exceeds the foreign equity product of the taxpayer of the year of income;

a proportion of the amount of the foreign debt interest ascertained in accordance
            E
with the formula - where:
            D
          
E is the amount of the excess referred to in paragraph (b); and

D is the amount of foreign debt referred to in that paragraph;

is not so allowable as a deduction.''

The various expressions used in the subsection, ie. foreign debt and foreign equity product, are the subject of definitions to be found in s 159GZA. Briefly, ``foreign debt interest'' is interest payable on foreign debt; ``foreign debt in relation to a resident company'' is defined in s 159GZF(1) as meaning:

``... the balance outstanding on any amount owing by the company (not including, in the case of a financial institution, a nostro amount), where:

(a) interest is or may become payable to a foreign controller, or to a non-resident associate of a foreign controller, of the company in respect of the amount owed;

(b) the interest is or will be, apart from this Division, allowable as a deduction from the assessable income of the company of any year of income; and

(c)... the interest is not, or would not be, assessable income of any year of income of the foreign controller or non-resident associate to whom it is or becomes payable.''

``Foreign equity'' in relation to a resident company is the sum of a number of amounts including, inter alia, the paid up value of all shares and interest in shares in the company beneficially owned at the end of the year of income by foreign controllers or non-resident associates of foreign controllers of the company. A ``non-resident'' will be a foreign controller in relation to a resident company if he satisfies certain tests as to voting power, entitlement to dividends or capacity to gain voting power or such entitlement: s 159GZE. ``Associates'' are widely defined in s 159GZC.

For present purposes it is agreed that CPIHL(B) is a foreign controller and that CPH and MLG are associates of it for the purposes of the Division. The foreign equity of CPIL(B) is, it is agreed, $102 being the 102 ``B'' Class shares held by CPIL(B). Although other equity in CPIL(B) is held by CPH and MLG this is not counted because, although those two companies are associates, they are not non-resident associates.

The consequence of the thin capitalisation provisions of Division 16F applying is, therefore, that any foreign debt interest in excess of $306 becomes subject to Division 16F.

It may readily be seen that, but for Part X of the Act, the provisions of Division 16F could have no application to interest payable by CPIL(B) to associates of CPIL(B), which associates are non residents, for the simple reason that, if nothing else, CPIL(B) would not be a resident company and so would have no foreign debt (see s 159GZF) and in any event the tests of s 159GZS(1) would not all be satisfied since no amount of foreign debt interest would be allowable as a deduction from the assessable income of CPIL(B). The third requirement in s 159GZF(4)(c) would, of course, be satisfied in that the non-resident associate recipients of the interest would not include that interest in assessable income for Australian tax purposes.

The submissions

It is the Commissioner's submission that once Part X and Division 16F are read together and, particularly having regard to the assumptions in ss 382 and 383, s 159GZS operates to preclude CPIL(B) claiming the

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interest payments to which reference has already been made as a deduction for the purposes of computing the attributable income passing ultimately through to CPH and MLG. In short, it is said that Part X requires the assumption that CPIL(B) is a resident. As an Australian resident, it is necessary in testing deductibility of interest to it, that the provisions of Division 16F apply. Particularly, if interest is payable by it to non-resident associates of a foreign controller, that interest would, apart from the Division be allowable as a deduction from its assessable income and the interest is not included in assessable income of the non- resident associate to which it is payable so that all conditions of s 159GZF(1) and therefore s 159GZS are satisfied to operate to reduce the deduction which would be otherwise allowable for the purpose of computing the ultimate attributable income of CPIL(B).

For the taxpayer it is submitted that the debts in respect of which interest is payable are not foreign debts because the provisions of s 159GZS(1) (b) are not satisfied; that is to say, the interest is not, apart from Division 16F, an allowable deduction for CPIL(B) in the relevant year of income.

Reasons

Although the legislative context in which the issue arises is what many would describe as of mind numbing complexity, the actual issue between the parties is a very narrow one. In short, it is whether the combined effect of Part X of the Act and Division 16F results in Division 16F operating to disallow notional deductions to be taken into account in calculating ``attributable income''. Specifically, the question is whether in applying Division 16F and in particular ss 159GZS(1)(a) and 159GZF(1)(b) the interest payments to non- residents are to be treated here, apart from Division 16F, as an allowable deduction from the assessable income of CPIL(B). Clearly without the aid of the assumption in Part X they are not.

Although from time to time the submissions of the Commissioner appeared to suggest otherwise, it was not submitted that the assumptions required to be made by ss 382 and 383 of the Act operate for any purpose other than Part X. This must clearly be right. The assumptions that in particular s 383 require are made for one purpose and one purpose only, namely the calculation of attributable income, the whole or a proportion of which ultimately will be included in the assessable income of a taxpayer under s 561 (see particularly s 382(1)).

So for the purpose of applying Part X, and calculating attributable income it is to be assumed that the relevant CFC, here CPIL(B), is a resident of Australia. Subject to other assumptions not presently relevant and other limitations to be found in Part X, as an assumed resident of Australia, the taxable income of CPIL(B) will be calculated by reference to its assessable income less allowable deductions (see s 17 and the definition in s 6(1) of ``taxable income''). Included in allowable deductions are amounts fulfilling the criteria for deductibility in s 51(1).

For the purpose of applying s 51(1) to the calculation of attributable income it must be assumed that the CFC is a resident of Australia. As such, but subject to any impediment to deductibility to be found in Division 16F, the whole of the interest amounts with which the present issues are concerned would be allowable as deductions. To this point, there is no difficulty or dispute between the parties. In seeking to apply s 159GZF, paragraph (a) is satisfied given the basic assumption Part X requires. There is interest payable to a foreign controller or non-resident associate of a foreign controller of CPIL(B) in respect of moneys which it, as a non-resident, owes.

The next step in the Commissioner's argument, however, is the step which seems in issue between the parties. The Commissioner says that, apart from Division 16F, but given the assumption of residency, the interest which CPIL(B) pays is allowable to it as a deduction from its assessable income. [emphasis added] The contrary view is that, if the interest is deductible, that deductibility must come through Part X of the Act. Section 51(1) does not itself operate to grant the deduction. However, it is said, Part X does not make anything an allowable deduction of itself. All it does is dictate a computation of attributable income, that being determined in accordance with Division 7 of Part X and in particular s 382 as the taxable income of a CFC given the assumptions which are required to be made for the purpose of calculating notional assessable income, notional allowable deductions and notional exempt income.

The question is clearly not free from difficulty. It certainly would make good policy

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sense, particularly having regard to the legislation as it was in relevant years, that the computation of attributable income be made having regard to thin capitalisation rules that would be applicable if the relevant CFC were, contrary to the fact, a resident of Australia. The problem, if it be a problem, is that applying the assumption of residency which s 383 requires, there is no doubt that interest incurred by CPIL(B) would be allowable as a deduction apart from the provisions of Division 16F, but s 159GZF(1)(a) and the corresponding provisions of s 159GZS(1)(a) are not expressed to be concerned with the question whether on assumptions an amount would be assessable income. They are expressed in terms of whether an amount is, or in the case of s 159GZF will be , allowable as a deduction.

Although judicial views on the principles of construction of taxation statutes have differed over time (see cases referred to in the article ``A Judicial Perspective on Tax Law Reform'' (1998) 72 Australian Law Journal 685), the modern view, at least generally, would seem to be that the task of construing a taxation statute, like the task of construing any other statute, requires the Court to ascertain the meaning of the words used in the context in which they appear and so as to give effect to the purpose of the legislature to be found in the language which it has used, but aided by extrinsic materials to which regard is directed to be had by virtue of s 15AB of the Acts Interpretation Act 1901. Context is used in a broad sense to encompass such matters as the existing state of the law and the mischief, if any, which the legislature sought to remedy:
CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 and see
FC of T v Australia and New Zealand Savings Bank Ltd 98 ATC 4850; (1998) 156 ALR 570 at 577.

No doubt if one interpretation produces an absurdity, or perhaps even an anomaly, that may lead to another, and presumably less absurd or anomalous interpretation being adopted (cf
Cooper Brookes (Wollongong) Pty Ltd v FC of T 81 ATC 4292; (1981) 147 CLR 297).

The Applicants refer to an anomaly which it is said is inherent in the view of the legislation which is espoused by the Commissioner. So it is said that when one looks at the non-resident associates to whom interest is paid the Commissioner would say that they were not taken to have any amount included in their assessable income, yet they might, being themselves CFCs, have had those amounts deemed to be notional income for the purposes of inclusion in attributable income. This is said to involve, in essence, double tax.

The Commissioner accepts that at least in some cases the result of the interpretation which he espouses of the combined effect of Part X and Division 16F may be to include a payment of interest in the computation of the attributable income of a recipient of interest being a CFC, but to exclude the payment from being a notional deduction in the computation of the attributable income of the payer. However, it is said that this is the result of the clear language of ss 383 and 159GZF and accords with the legislative policy of protecting the revenue against the shifting of profits from a CFC resident in an unlisted country so that its attributable income could be reduced to zero.

Although it may be true that the interest incurred by one CFC may, if derived by another CFC to which Part X applies, be treated as notional assessable income of the recipient CFC and the interest incurred be excluded as a notional deduction in the computation of the attributable income of the payer CFC, it is hard on the language of the provisions to avoid this result. Part X directs the computation of each CFC's notional taxable income to be carried out (ie calculated) on a company by company basis, as well as statutorily in respect of each ``eligible taxpayer'': cf s 381. Unless the language of Division 16F is to be distorted, and this is ordinarily not a permissible method of interpretation, the result is that in the computation of the notional taxable income of the paying CFC the conclusion must be reached that the interest is not in fact assessable income of any year of the recipient, notwithstanding that, if it is necessary to compute the attributable income of the recipient, being itself a CFC, it may be necessary to treat the interest as ``notional'', albeit not actual, assessable income of the recipient.

In support of the Commissioner's submission, both as regards the true construction of s 159GZF(1) on the one hand and the double tax issue raised on behalf of the Applicants on the other, reference is made on behalf of the Commissioner to the Explanatory Memorandum accompanying the Taxation Laws Amendment (Foreign Income Measures)

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Bill 1997 which ultimately became Act No 155 of 1997. By the amending legislation, s 389 of the Act, which directed that various provisions of the Act be disregarded in making the calculation of attributable income of a CFC, was amended to add Division 16F to the provisions to be disregarded. The Explanatory Memorandum commented in respect of this matter as follows:

``4.28 The thin capitalisation of debt creation rules will no longer apply in determining the attributable income of a CFC because the need for the rules will be greatly reduced following the creation of a short list of countries. The short list for accruals taxation purposes will make it more difficult to shift profits to another company without those profits being either taxed at full rates in a broad-exemption listed country or accruals taxed under the CFC measures. There is therefore less opportunity to gain a tax benefit from shifting profits through the use of thin capitalisation or debt creation arrangements. The changes reflect a change in policy and are in no way intended to affect the application of the law prior to the commencement of the changes.

4.29 Section 389 provides a list of provisions that are not to apply in determining the attributable income of a CFC. The insertion of references to Division 16F and Division 16G of Part III into paragraph 389(a) will have the effect of ensuring the thin capitalisation and debt creation rules do not apply in determining the attributable income of a CFC.''

While one may quarrel with the use of a subsequent explanatory memorandum as a guide to the construction of a previous Act which is amended by the Bill, the subject of the explanation, it is not unreasonable to take into account the actual amendment to s 389 excluding the operation of Division 16F as indicative of the parliamentary intention that prior to that amendment, Division 16F was to be applied in calculating the attributable income of an eligible CFC. There is high authority to this effect:
Grain Elevators Board (Victoria) v President, Councillors and Ratepayers of the Shire of Dunmunkle Corporation (1946) 73 CLR 70 at 85-86;
Cape Brandy Syndicate v Inland Revenue Commissioners [1921] 2 KB 403 at 414 and the judgment of McHugh J in
Hepples v FC of T 91 ATC 4808 at 4835; (1991) 102 ALR 497 at 532 which in turn refer to Grain Elevators Board. Clearly some caution in so doing must, however, be exercised.

In respect of the present dilemma, it is not impermissible to conclude that the initial legislative purpose was that Division 16F should have application in computing the attributable income of an eligible CFC. Clearly there is nothing which suggests the contrary. The prime purpose of Division 16F is to disallow deductions in cases where thin capitalisation is apparent. The usual reason Division 16F would apply is where interest is incurred. So it is tolerably clear that the legislative purpose to which effect should be given is that in the computation of attributable income and on the assumption of residency of the CFC where there is the requisite thin capitalisation, there should be a disallowance for interest, or part thereof, paid to a CFC or associate as long as that interest income did not form part of the assessable income of the recipient. This means that in interpreting s 159GZF and the corresponding provisions of s 159GZS the reference to an amount of foreign debt interest being, apart from Division 16F, allowable as a deduction must comprehend an amount intended to be taken into account in the computation of the attributable income of the CFC as a notional deduction. Hence, for example, s 159GZF is to be interpreted as applicable (subject to the other matters referred to in the subsection) where the interest payable by the CFC is, on the assumption that it is a resident, allowable as a deduction but only for the purpose of the computation of attributable income under Part X.

I would accordingly be of the view that the Respondent Commissioner should succeed on this issue. I should, however, make it abundantly clear that the drafting of the provisions, and in particular the inter- relationship of Part X and Division 16F, is hardly a model of clarity. In my view there is much to be said for the view that it is the duty of Parliament to ensure that legislation designed to extract tax from taxpayers be expressed both in ideas and language that are clear. While it is for the courts to endeavour, where possible, to give effect to the legislative purpose, it should not be expected that the courts will construe legislation to make up for drafting deficiencies which revel in obscurity.

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Debt defeasance - the facts

Consolidated Press International Finance Plc (``CPIF'') was at relevant times a company incorporated in the United Kingdom. It is common ground between the parties that it was a controlled foreign corporation (``CFC'') as defined in s 340 of the Act. It was a special purpose company established to raise loan capital for use, it may be assumed, by various international companies, members of the Consolidated Press Group of companies, by the issue of Swiss Franc denominated bonds.

On 28 March 1984 CPIF entered into a public bond issue agreement (``the 1984 Bond Agreement'') with Soditic SA (``the Agent'') and a consortium of banks to issue bonds on the Swiss bond market with an interest coupon of 6.25% maturing in 1994 with a face value of SFr 200,000,000. The bonds issued under the 1984 Bond Agreement are hereafter referred to as the ``1984 bonds''. The issue was guaranteed by an agreement between Consolidated Press Holdings Limited, an Australian resident holding company, and the Agent.

The 1984 Bond Agreement provided that the 1984 bonds were to be issued on the following terms:

(a) the 1984 bonds were bearer bonds denominated in Swiss francs;
(b) the 1984 bonds bore interest from 17 April 1984 payable by CPIF annually on 17th day of April in each year at the rate of 6.25% per annum;
(c) CPIF was to repay on 17 April 1994 the principal amount then outstanding on the 1984 bonds;
(d) provision was made for various methods of early redemption of the 1984 bonds;
(e) provision was made for payment of other costs and sums by CPIF;
(f) payments of principal, premium (if any), interest, costs and additional sums were to be made by CPIF making funds available to the agent which was required to arrange for payment to bond holders;
(g) CPIF was required to make annual redemptions of 3% of the aggregate principal amount of the bonds originally issued during the period from 17 April 1987 to 17 April 1993 provided the bonds were trading at or below par.

On 17 April 1984 CPIF issued the 1984 bonds under the 1984 Bond Agreement.

On 6 August 1985 CPIF entered into a further public bond issue agreement (``the 1985 Bond Agreement'') with the Agent and consortium of banks to issue on the Swiss bond market a public bond issue of 6.25% bonds maturing 1995 of SFr 200,000,000 nominal value (``the 1985 bonds''). The 1985 Bond Agreement was likewise guaranteed by an agreement between CPH and the Agent.

The 1985 Bond Agreement provided that the 1985 bonds were to be issued on the following terms:

(a) the 1985 bonds were bearer bonds denominated in Swiss francs;
(b) the 1985 bonds bore interest from 20 August 1985 payable by CPIF annually on the 20th day of August in each year at the rate of 6.25% per annum;
(c) CPIF was to repay on 20 August 1995 the principal amount then outstanding on the 1985 bonds;
(d) provision was made for various methods of early redemption of the 1985 bonds;
(e) provision was made for payment of other costs and sums by CPIF;
(f) payments of principal, premium (if any), interest, costs and additional sums were to be made by CPIF making funds available to the Agent which was required to arrange for payment to the bond holders;
(g) CIPF was required to make annual redemptions of 3% of the aggregate principal amount of the bonds originally issued for the period 20 August 1988 to 20 August 1994, provided the bonds were trading at or below par.

On 14 August 1985 CPIF issued the 1985 bonds under the 1985 Bond Agreement.

By December 1989 the 1984 and 1985 bonds were trading at a substantial discount in the market. By the same time and since 1985, CPIF had made some US$75.5 million exchange losses as the result of adverse movements between the Swiss Franc and the Australian dollar. As at 29 December 1989 and 19 January 1990, 1984 bonds with a nominal value of SFr 5,325,000 had been redeemed, leaving 1984 bonds with a nominal value of SFr 194,675,000 outstanding (``the outstanding 1984 bonds''). As at the same dates, 1985 bonds with a

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nominal value of SFr 10,420,000 issued under the 1985 Bond Agreement had been redeemed leaving 1985 bonds with a nominal value of SFr 189,580,000 outstanding (``the outstanding 1985 bonds'').

Thereafter CPIF both advanced funds to companies in the Consolidated Press Group as well as purchasing bills of exchange at a discount (as part of its financing activities).

According to Mr Mackenzie who was at various times company secretary of a number of companies in the Consolidated Press Group of companies including, inter alia, both MLG and CPH, there were two options open to CPIF to help it recoup some of the exchange losses it had incurred. The first was to buy back the outstanding bonds on the market. So to do would have increased the prices of the bonds and therefore the cost of the buy-back. The second was to enter into a defeasance arrangement which was, in fact, the course adopted.

Accordingly, on 29 December 1989, CPIF entered into an obligation assumption agreement (``the 1984 Assumption Agreement'') with EFS European Finance and Securities Limited (``EFS''), a company incorporated in the British Virgin Islands and acting as trustee of the EFS European Finance and Securities Settlement (``the EFS Trust'') established under the laws of the British Virgin Islands. Under a further agreement entered into on the same day, EFS, in its capacity as trustee of the EFS Trust, entered into an additional obligation assumption agreement with Consolidated Press International Limited (UK) (``CPIL(UK)'') whereunder CPIL(UK) agreed to assume all the obligations of EFS with the exception of the payments of principal, interest and commissions. It is unnecessary to note the detail of these arrangements. It suffices to say that for a payment of SFr 179,725,000 by CPIF which was to be applied in accordance with a provision of the 1984 Assumption Agreement. EFS undertook to meet, as and when the same became due and payable, interest obligations under the 1984 bonds, commission which was payable to the Agent pursuant to the 1984 Bond Agreement and amounts payable by way of principal at maturity, by acceleration, on optional redemption by the borrower or upon other redemptions referred to in the 1984 Bond Agreement. CPIF remained itself obligated to pay interest, principal and commission on the 1984 bonds. The relationship between EFS and the Consolidated Press Group of companies, if any, was not explained.

Similar debt defeasance arrangements were entered into on the same day in respect of the 1985 bonds. These agreements are referred to as the 1985 Additional Assumption Agreement as the case may be. The parties were the same, the consideration for the assumption of liability by EFS of the obligations of principal, interest and commission under the 1985 Bond Agreement was the transfer to EFS of SFr 189,580,000 to be applied in accordance with the agreement. There was other consideration in both cases payable to CPIL(UK).

In its financial accounts for the year ended 30 June 1990 CPIF brought to account as at 31 December 1989 a defeasance profit of US$38,966,288 (SFr 59,930,151) according to the Commissioner, US$34,305,501 according to the taxpayer. Thereupon that company removed the liability from the Swiss Franc borrowing in respect of both the 1994 and 1995 debt from its balance sheet.

It may be noted that, notwithstanding that CPI has taken up a profit in the amount shown above, the profit which the Commissioner seeks to treat as being attributable income was in fact US$34,306,000. Nothing however turns upon the specific difference in the figures.

Thereafter EFS paid interest and commission on both the 1984 and 1985 bonds in accordance with its obligation so to do. Some bond holders exercised an option to redeem the 1984 bonds in 1992 and, as at 7 February 1992, 1985 bonds with a nominal value of SFr 189,600,000 were still outstanding. In April 1992, at the request of CPIF and CPIL(B), 1985 bonds having a face value of SFr 114,730,000 were cancelled. Further 1985 bonds were redeemed between 7 February 1992 and 20 May 1992 so that at the expiration of that period, 1985 bonds with a nominal value of SFr 68,850,000 were still outstanding.

A further assumption agreement was executed in respect of the outstanding 1985 bonds effective as at 20 May 1992 in April of the same year.

Although, as I have indicated, there is a discrepancy in the calculation of the defeasance profit, between the figures shown in the accounts and the figure taken by the Commissioner as being the attributed income,

ATC 5021

the Commissioner now seeks to support the assessment made on a further alternative basis. It is unnecessary to say much of the detail of the alternative basis. Suffice it to say that it treats the relevant defeasance arrangements as severable as between principal and interest and treats profit as having been made in the year of income in which the obligation redeemed arose. Indeed it treats each ultimate meeting of the responsibilities of CPIF by EFS as giving rise to a separate profit at the time the obligation is met by EFS. This alternative arose from an application for leave by the Commissioner to amend its Statement of Facts, Issues and Contentions to permit the alternative basis to be argued. Although the recalculation would result in greater profits and therefore more tax being payable in some years than others, the parties request me to not decide that issue but to consider the matter as one of principle. If I am of the view that the Commissioner's alternative approach is correct, the matter can be sent back for reassessment in accordance with the relevantly correct principle. One reason for doing this, if no other, is that the figures which support the Commissioner's alternative basis proceed on conversion rates into Australian dollars at the date when the respective obligations arose. There is no evidence before me as to the appropriate figure. Nor, if it matters, is there any evidence of accounting principle.

It is accepted between the parties therefore that, were I to find that the Commissioner's alternative view is correct, the proper course would be to give the parties an opportunity to see whether figures can be agreed. If they can, then the Court's orders can reflect this. If they cannot, then it may be a necessary course before making orders to stand the matter over so that further evidence can be adduced on the question of quantum.

Legislative framework relevant to the debt defeasance issue

I have earlier in these reasons outlined the legislative purpose behind Part X of the Act. As is apparent from the discussion on the thin capitalisation issue, it is necessary to determine what the attributable income of a CFC is: s 456. Where a CFC is a resident of an unlisted country (and it is common ground here that CPIF is a resident of an unlisted country), the income side of the attributable income calculation, that is to say the notional assessable income, is directed to be computed on the additional assumptions set out in s 384(1).

A dichotomy in s 384(2) is drawn between what the legislation refers to as ``active income'', on the one hand, and what it refers to as ``adjusted tainted income'' on the other. For present purposes, it suffices to say that the notional assessable income part of the calculation of attributable income is to include ``adjusted tainted income''. Having regard to s 386(1), ``adjusted tainted income'' includes, relevantly, passive income as well as income of other classes.

The expression ``passive income'' is defined in s 446(1). That sub-section contains the following relevant provisions:

``Subject to this Division, for the purposes of this Part, the following amounts are passive income of a company of a statutory accounting period:

(a) dividends (within the meaning of section 6) paid to the company in the statutory accounting period;

...

(d) tainted interest income derived by the company in the statutory accounting period;

(e) annuities derived by the company in the statutory accounting period;

...

(j) income derived from carrying on a business of trading in tainted assets;

(k) net gains that accrued to the company in the statutory accounting period in respect of the disposal of tainted assets.''

The provisions of paragraph (k), as set out in s 446(1), must however be read together with s 386(2) so that it reads for relevant purposes: ``amounts derived from the disposal of tainted assets''. When one turns to s 317 of the Act, the expression ``tainted assets'' is defined, relevantly, to mean:

``(a) any of the following:

(i) loans (including deposits with the bank or other financial institution);

(ii) debenture stock, bonds, debentures, certificates of entitlement, bills of exchange, promissory notes or other securities;

...

ATC 5022

(xii) a right or option in respect of such a loan, security, share, interest, contract or policy;

(xiii) any similar financial instruments; or

(b)...

(c) an asset other than:

(i) trading stock; or

(ii) any other asset used solely in carrying on a business;

but does not include a commodity investment.''

The submissions

The Commissioner submits that the defeasance profit is to be treated as passive income because it falls within the provisions of s 446(1)(j) and (k) as modified by s 386. The Applicants on the other hand submit that, whatever the relevant nature of the defeasance profit may be, whether income or capital, no part of the profit is to be taken into account as passive income. In consequence, no part of the profit would be included in attributable income of CPIF and thereby ultimately form part of the assessable income of the taxpayers.

The Commissioner relies primarily upon s 446(1)(j); that is to say the Commissioner submits that the proper characterisation of the defeasance transaction is that it gave rise to income derived from carrying on a business of trading in tainted assets, the tainted assets being the bonds issued by CPIF, the loans made by CPIF intra group and the bills of exchange which CPIF acquired from within the group.

The starting point of the Commissioner's submission is a conclusion as to the nature of the business of CPIF. It is said to be clear that the business of CPIF was borrowing and on- lending for a profit. That conclusion is challenged by the Applicants. They point to the fact that CPIF was a special purpose company. They say that the transactions of defeasance were ``singular transactions'' concerning liabilities separately created in raising capital for CPIF's business.

It is, however, it must be said, conceded by the Applicants that in reports accompanying the annual financial accounts of CPIF, that company described its principal activity as that of a finance company. But, it is submitted, CPIF was not a finance company in the traditional role of a public borrowing corporation such as was found to exist in
Avco Financial Services Limited v FC of T; FC of T v Avco Financial Services Limited 82 ATC 4246; (1981-1982) 150 CLR 510;
Coles Myer Finance Limited v FC of T 93 ATC 4214; (1992-1993) 176 CLR 640.

Again it may be noted that, in a prospectus issued in connection with the 1985 bonds, CPIF describes its activities as follows:

``The purpose of Consolidated Press International Finance PLC (`the Company') is to act as a finance company. Its activity includes the raising of guaranteed and non- guaranteed loans, the issue of guaranteed and non-guaranteed bonds and notes and the raising of funds through promissory notes and similar instruments. Such funds are used for on-lending to companies of the Consolidated Press Holdings Ltd group (`the CPH Group') or for the Company's own investment activity.''

Analysis

The combined effect of ss 382, 383 and 384 (the latter applicable where, as is admittedly the case here, the CFC, namely CPIF, is a resident of an unlisted country) is that the attributable income of the CFC is to be calculated on the assumption that the CFC is a resident of Australia. Further, the taxable income of the CFC is to be calculated, that is to say its assessable income and allowable deductions, by reference to this assumption. Hence, the starting point is the determination of whether the CFC would have, inter alia, amounts which would be included in its assessable income given the assumption of residency. However, not all items otherwise assessable income are to be taken into account in the calculation, for s 384(2) limits the computation only to those amounts being otherwise notional assessable income which are listed in the subsection.

Amounts not assessable income in accordance with the statutory hypothesis of residency therefore do not fall within the computation. Likewise, amounts of assessable income computed in accordance with the statutory hypothesis fall out of account (and are to be treated as notional exempt income) if they fall outside s 384(2). For present purposes that means that the attributable income of CPIF will only include amounts which are assessable income and are also encompassed within the concept of adjusted tainted income as defined in s 386, but modified as earlier indicated.

ATC 5023

It is for this reason that the submissions on behalf of the Applicant proceed in two stages. First, it is said that the defeasance profit would not on the statutory assumption of residency be assessable income. Second, it is submitted that, even if it would be, it is not adjusted tainted income. It is convenient to proceed here in the same way.

The submission that the defeasance profit would not be assessable income is, with respect, a difficult one having regard to the combined effect of the decision of the Full Court of this Court in
FC of T v Unilever Australia Securities Ltd 95 ATC 4117; (1995) 56 FCR 152 and of the High Court in
FC of T v Orica Limited (formerly ICI Australia Limited) 98 ATC 4494; (1998) 154 ALR 1. Together these cases stand for the proposition that a defeasance profit made in the ordinary course of business will be income in ordinary concepts and thus assessable income but that otherwise, where the profit is of a capital nature, and that will be the case, it would seem, if the profit is not one made in the ordinary course of business, the profit will be brought to tax under the capital gains tax provisions in Division 3A of the Act. I note, in passing, a formal submission that these cases were, or at least Orica was, wrongly decided. Clearly each is binding upon me.

However, it will be necessary to consider these cases in a little more detail in so far as they bear upon the issue whether the profit is to be regarded as adjusted tainted income. Clearly the Commissioner's case would be more difficult if the present facts fall within Orica, than if they fall within Unilever.

The proposition that a profit made by a taxpayer in the ordinary course of business is income in ordinary concepts and thus made assessable income pursuant to s 25(1) of the Act is not controversial:
London Australia Investment Co Ltd v FC of T 77 ATC 4398 at 4402-4403; (1976-1977) 138 CLR 106 at 115-116 per Gibbs J and at ATC 4410-4411; CLR 128-130 per Jacobs J. At least where the taxpayer is a company it will be necessary to have regard to the nature of the company and in particular the nature of the business which it carries on as well as the circumstances which give rise to the profit in question: London Australia at ATC 4403; CLR 116 per Gibbs J. A well established application of that principle is to be found in the cases dealing with banks and insurance companies:
The National Bank of Australasia Ltd v FC of T (1969) 15 ATD 220; (1969) 118 CLR 529 and amongst others the cases referred to by Jacobs J in London Australia. In the case, therefore, of a company which carries on the business of borrowing and lending money it is well settled that a gain made in the course of and as an incident to that ordinary business will be on revenue account: Coles Myer at 643 and Avco.

In determining whether this basic principle applies it will, perhaps always, be necessary to make ``both a wide survey and an exact scrutiny of the taxpayer's activities'', although in cases such as those involving general finance companies and banks the answer will, almost always, be obvious.

A particular taxpayer may take itself outside the general principle either because its activities involve no business or because in the relevant sense the gain does not arise in the course of or as an incident to that business so that it has the character of a capital rather than a revenue gain. Or, perhaps, in a particular case the issue may be whether a taxpayer has made a gain at all. Each of these possibilities was raised in submissions on behalf of the Applicants to distinguish the present facts from Unilever.

The Applicants' first submission was that CPIF was not to be regarded as a finance company of the kind dealt with in Avco or Coles Myer. It was, so it is said, a special purpose company created for the Swiss Franc bond borrowing. It did not deal with the public as Avco did. Its transactions were relevantly small in number and confined. So, it is said, the defeasance profit is not to be characterised as part of the regular means whereby CPIF obtained returns.

The circumstances which bring about the creation of a company may, no doubt, be relevant in the examination of the business which a taxpayer carries on, although obviously more attention will be focused upon the activities which the taxpayer engages in than circumstances before it embarked upon those activities.

In another context (money lending legislation) it has been suggested that a company which does not deal with the public but borrows to finance related entities does not carry on the business of money lending, for that business may entail lending to all and sundry: cf
Litchfield v Dreyfus [1906] 1 KB 584 per Farwell J. Further, a person may not be a

ATC 5024

money lender for the purposes of legislation regulating money lending merely because he may on several isolated occasions lend money to a stranger:
Edgelow v MacElwee [1918] 1 KB 205 at 206 and cf
FC of T v Bivona Pty Ltd 90 ATC 4168 at 4173; (1990) 21 FCR 562 at 567.

It is true that in Unilever a concession was made on behalf of the taxpayer that it was a finance company, whatever that expression may mean. No concession was made by counsel in the present case, although it may be inherent in both the director's statements and prospectus statements to which reference has already been made. The real question in the present case is not directly whether CPIF should, for some statutory purpose, be characterised as ``a finance company'', (or money-lender) but rather whether the activity which gave rise to the defeasance profit was one done in, to adopt the language of the Lord Justice Clerk in
Californian Copper Syndicate Ltd v Harris (Surveyor of Taxes) (1904) 5 TC 159 at 166 ``what is truly the carrying on, or carrying out of a business.''

In my view the business activities of CPIF can be characterised as being nothing other than the borrowing of money and the lending of funds throughout the Consolidated Press Group of international companies by way of loan or bill discounting so as to produce a profit. While it may be correct to say, as senior counsel for the taxpayers submitted, that each of the 1984 and 1985 bond issues were unrelated, not only to each other but to the defeasance transactions which ultimately followed, what is more relevant is the characterisation of CPIF's activities as a whole. Mere scale of activity, if otherwise a business, does not affect that question. A company may carry on a small or a large business of financing. The taxation results are the same. Subject to one matter yet to be noted, I am of the view that the defeasance profit was made in the course of and for the purpose of carrying on a business of borrowing and lending.

To avoid this conclusion the taxpayers submitted that the defeasance profit was not made in the course of the business activity of financing but rather made in the course of going out of business. The submission echoes a similar submission made in Unilever. While it may be the case that a profit made in putting an end to a business may have a different taxation consequence to a profit made in the course of carrying on a business (cf
Modern Permanent Building and Investment Society v FC of T (1958) 11 ATD 438 at 441; (1958) 98 CLR 187 at 191-192) the factual basis for such a submission does not arise here. While it is true that according to the Directors' Report for the year of income ended 30 June 1990 CPIF was ``dormant'', that statement does not mean that CPIF had ceased business. It remained liable to pay interest and repay principal on the bonds. It was as at that date owed US$2,020,000 by companies in the Consolidated Press Group. In fact in the year ended 30 June 1992 it lent further monies to the group and continued to receive interest. The facts do not lead to the conclusion that the defeasance profit arose in the course of going out of business any more than they did in Unilever.

The third submission that there was no profit or gain appears to be precluded by Unilever. The discussion of this matter, and the difference between amount expended and that which would have been expended if the liability assumption agreement had not been entered into, in the majority judgment in Orica (see at 98 ATC 4513; 72 ALJR 986) is in the context of the fact that the enquiry in that case was the characterisation of the difference between actual and hypothetical outlays. The reason for the formulation involving that characteristic is to be found in the context of the fact that the taxpayer's liability, which was discharged by the assumption party in that case was on capital account. Here the liability is on revenue account. Not only did the accounts of CPIF properly reflect that a profit had been made when CPIF's liability was discharged by payment, but in every sense of the word there was not merely ``an accounting difference'' (whatever significance those words might have) but a profit or gain. That profit or gain was, like the liability of CPIF, discharged by payment on revenue account.

Adjusted tainted income?

It seems axiomatic that if, contrary to my view, the defeasance profit was on capital account, CPIF could have no tainted income. Although Orica would bring about the result that the capital profit would be included in assessable income, this would be only because the provisions of Division 3A of the Act have the consequence that the satisfaction or discharge of an obligation, including, it would

ATC 5025

seem, performance of an executory contract, results in a ``disposal'' (as defined) of the obligation or rights under the executory contract, these being an asset which the taxpayer has acquired. Whatever one may think of this unusual legislative scheme it is impossible to reach the conclusion that such a profit falls within the defined meaning of adjusted tainted income. The reason may be shortly stated, although the discussion which follows reinforces it. There is no actual disposal of an asset, (the deeming of ``disposal'' in s 160M(3)(b) operates only for the purposes of deciding whether there is a change in the ownership of an asset for the purposes of Division 3A of the Act and not for the purposes of the CFC provisions) and no asset which would meet the statutory description necessary to result in the profit being adjusted tainted income.

However, the Commissioner submits that the profit being a revenue profit, made in the ordinary course of business, should be treated as adjusted tainted income.

It is common ground between the parties that CPIF does not pass the ``active income test'' as defined in s 432 so the issue between the parties which falls to be determined is whether the profit is ``passive income'' as defined in s 446(1) after regard is had to the modifications to that sub-section by s 386(2).

The primary submission of the Commissioner is that the profit falls within s 446(1)(j) as being:

``income derived from carrying on a business of trading in tainted assets.''

There is no difficulty in concluding, for the reasons stated earlier, that the profit is ``income derived from carrying on a business'', notwithstanding the submissions made on behalf of the Applicants. However, the difficulty which then arises is whether that business is one of ``trading in tainted assets'', ``tainted assets'' being defined in s 317. The debt defeasance transaction did not involve trading in any asset at all, and certainly not in any of the assets listed in s 317(a). For the Commissioner it is submitted that the bonds issued, the loans intergroup and the bills of exchange were all ``tainted assets''. It may be conceded that bonds, bills and loans all fall within the definition. But what the definition is concerned with is income derived from trading in assets, not income derived from having liabilities discharged by another. A taxpayer deriving income from carrying on a business of trading in bonds would clearly derive passive income. The same would be true of a taxpayer trading in bills or loans or indeed other financial instruments. The debt defeasance transaction did not involve such trading. CPIF did issue and redeem bonds and purchased bills of exchange at a discount but whether or not the latter case may be said to involve trading where the bills were held to maturity, the present profit was not derived from the carrying on of such trading. It arose out of its financing activities. Nothing in the facts suggests that CPIF ever traded in bonds, or that the bonds it issued (ie. its liabilities) were assets in which it traded.

The second preferred position of the Commissioner is that the profit fell within paragraph (k) as:

``amounts derived from the disposal of tainted assets''

In my view, paragraph (k) can have no operation. The debt defeasance arrangement involved no disposal of any asset, tainted or otherwise. All that happened was that for the payment of money CPIF obtained the benefit of an obligation on the part of the assumption party to make payments of money in satisfaction of CPIF's obligation to bondholders for principal and interest and of commission. Although the bonds were capable of falling within the definition of ``tainted assets'' they were never assets of CPIF. While ``disposal'' is defined in s 317 to include in relation to an asset the redemption of that asset, the profit made by CPIF did not arise from redemption of an asset of CPIF, but rather satisfaction of a liability of CPIF.

The final fall back position as stated in the Commissioner's written submissions was that the profit was ``tainted interest income'' falling within s 446(1)(d). It is said that tainted interest income was derived by CPIF as and when it derived a profit from the discharge of its obligations to pay interest in respect of the bonds.

``Tainted interest income'' is an expression defined in s 317. In relation to a company it means:

``(a) interest or a payment in the nature of interest; or

(b) an amount that, if the company were a resident within the meaning of section 6,

ATC 5026
would be included in assessable income under Division 16E of Part III; or

(c) factoring income

but does not include...''

Paragraph (b) has no application for the reasons given in Unilever. CPIF was not the ``holder'' of any relevant security. Nor was the profit relevantly ``factoring income''. That expression is defined in s 317 as ``income derived from carrying on a business of factoring.'' Although there could be some dispute as to the outer limits of the expression ``factoring'', it involves in general terms the acquisition of debt obligations, generally receivables, at a discount, see AG Milne, ``A Comparative Review of Factoring in Australia and in the United States of America'', (Nov, Dec 1967) (Parts 1 and 2) The Chartered Accountant in Australia, pp 410-416, 472-478. By no stretch of language could it be said that CPIF carried on a factoring business or that it derived the profit from such a business.

Clearly CPIF received no payment of interest. Indeed it received no payment at all. It is true that its liability to pay interest was satisfied by the assumption party but that involved no payment to CPIF. It is thus unnecessary to consider in detail the meaning of the words ``in the nature of interest''. ``Interest'' is the:

``return or consideration or compensation for the use or retention by one person of a sum of money, belonging to, in a colloquial sense, or owed to, another''

See
Re: Farm Security Act 1944 of the Province of Saskatchewan [1947] SCR 394 at 411, cited by Cooper J in
Century Yuasa Batteries Pty Ltd v FC of T 97 ATC 4299 at 4314, affirmed by the Full Court of this Court at 98 ATC 4380.

The words ``in the nature of interest'' suggest some payment not itself ``interest'' but which has at least some of the essential characteristics of interest. It may well be that a bill discount profit would be, while not interest, for not compensation for a loan, in the nature of interest. It is unnecessary to enter upon that problem here. In one sense, although the point was not raised by the Commissioner it is possible to characterise the present transaction as involving in substance no more than a loan to the assumption party on terms that a higher amount is to be repaid to the lender and applied in satisfying obligations of the lender. But to find that there was a payment in the nature of interest would involve acceptance of economic equivalence rather than legal analysis.

It follows in my view that the defeasance profit was not ``adjusted tainted income''. Accordingly, it was to be treated as ``notional exempt income'' and thus excluded from the computation of ``attributable income.'' The assessment was, thus, to the extent that it included in the assessable income of the Applicants a proportionate amount of the defeasance profit which the Commissioner claimed to be included in the attributable income of CPIF, wrong. To this extent, the objection decision should be set aside.

As the Commissioner has been partly successful and partly unsuccessful on the matters argued I would be of the view that rather than attempting to apportion costs on each issue, the appropriate order should be that there be no order as to the costs of these appeals. However, as other matters were involved in the appeals and, as the parties desire to argue other matters as to costs, I would make no other order than that the Applicants bring in draft short minutes of order reflecting these reasons and any submissions as to costs which the parties desire to make can be made at a time to be determined with counsel.

THE COURT ORDERS THAT:

The applications be stood over to a date to be fixed with counsel to settle orders and hear argument as to costs.

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