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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 [2011] 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 [52] 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 [1937] 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 [1999] HCA 34; (1999) 198 CLR 639 at [111], 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 [2012] FCAFC 106 (Full Federal Court; Edmonds, Greenwood and Robertson JJ; 10 August 2012).

 


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