13 Aug 12 Appeal dismissed: Forward exchange contract indemnity fee deductible - Visy
The Full Federal Court (Edmonds, Greenwood and Robertson JJ) has dismissed the Commissioner's appeal against the decision of Gordon J in Visy Industries USA Pty Ltd v FCT  FCA 1065.
In that decision, Gordon J held that the taxpayer (Visy Industries USA Pty Ltd) was entitled to a deduction under s 8-1 ITAA 1997 for a one-off non-refundable amount of USD17,801,325 or A$27,053,685 (the Indemnity Fee) that it paid in 1999 to a related company Pratt Investments Inc, in consideration of Pratt Investments Inc undertaking to indemnify the taxpayer against its potential loss under a Forward Exchange Contract entered into in 1997.
Gordon J considered that the Indemnity Fee was deductible under s 8-1 of ITAA 1997. The taxpayer incurred the fee in gaining or producing its assessable income or was necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. Further, the Indemnity Fee was not a loss or outgoing of capital or of a capital nature. Gordon J also rejected the Commissioner's contention that the Forward Exchange Contract was not a commercial transaction or was not an adventure in the nature of trade.
First, the Full Federal Court rejected the Commissioner's submissions that Gordon J was in error in concluding that the taxpayer entered into the Forward Exchange Contract with a not insignificant purpose of profit-making. This rejection was based on the fact that the findings of primary fact made by Gordon J were "largely unchallenged" by the Commissioner in the Full Federal Court.
Secondly, the Commissioner argued that the Indemnity Fee had been incurred in an"isolated profit-making transaction" to which, amongst other things, s 8-1 could have no application, and was incurred outside the scope of the taxpayer's business. However, the Full Federal Court said at para 60:
"There is a fundamental difficulty with the premise upon which those grounds were predicated which goes back to the concern we expressed in  above. That is, the Indemnity Fee was incurred by Visy USA in carrying on a business albeit not in the ordinary course of that business. But s 8-1 of the 1997 Act, like its predecessor s 51(1) of the Income Tax Assessment Act 1936 (Cth) (“1936 Act”), does not distinguish between outgoings incurred in carrying on a business and outgoings incurred in the ordinary course of carrying on a business; both are allowable deductions provided they are not outgoings of capital or of a capital nature."
Specifically, the Full Federal Court rejected the Commissioner's submissions that Gordon J wrongly relied on W Nevill & Co Ltd v FCT  HCA 9; (1937) 56 CLR 290 in relation to substituted expenditure; wrongly likened the Indemnity Fee to a payment for insurance; and wrongly held that the Indemnity Fee was not capital or of a capital nature.
Finally, the Full Federal Court rejected the Commissioner's submission that the Indemnity Fee was incurred in an"isolated profit-making transaction" to which, amongst other things, s 8-1 could have no application, as only a net profit was to be included in assessable income. It did so firstly on the basis of what the High Court said in FCT v Montgomery  HCA 34; (1999) 198 CLR 639 at , namely:
"By contrast ... if the singular adventure is undertaken in the course of a wider business, the gross receipts, as opposed to the net profit from the adventure, are properly characterised as revenue receipts."
The Full Federal Court then continued, at para 84:
"But the ground is fallacious on fundamental principle. If an item is income, either according to ordinary or statutory concepts, its derivation is not deferred, indeed denied, until a profit can be determined in a subsequent year by reference to some wider transaction of which the item of income forms part: Investment and Merchant Finance at 255 per Barwick CJ. Equally, if an outgoing is an allowable deduction in a year because it was incurred in that year, its deductibility is not denied or deferred until a profit can be determined in a subsequent year by reference to a wider transaction of which the outgoing forms part."
The Commissioner's appeal was dismissed: FCT v Visy Industries USA Pty Ltd  FCAFC 106 (Full Federal Court; Edmonds, Greenwood and Robertson JJ; 10 August 2012).