FEDERAL COURT OF AUSTRALIA St.George Bank Limited v Commissioner of Taxation [2009] FCAFC 62 INCOME TAX – whether interest payments allowable deductions – payments made under debenture in connection with capital raising by bank to improve capital adequacy ratios – whether payments outgoings of a capital nature INCOME TAX – whether valid election to invoke Div 974 of the Income Tax Assessment Act 1997 (Cth) CORPORATIONS – nature of assets acquired by company upon issue of shares Held: interest payments outgoings of a capital nature – appeals dismissed "capital", "of a capital nature" Acts Interpretation Act 1901 (Cth) ss 15AA, 15AB Banking Act 1959 (Cth) s 9(6) Corporations Act 2001 (Cth) ss 124, 254B, Pt 2H.5, Ch 2J Income Tax Assessment Act 1997 (Cth) ss 8-1(1), 8-1(2), 974-115 New Business Tax System (Debt and Equity) Act 2001 (Cth) sch 1, cl 118 Taxation Administration Act 1953 (Cth) s 14ZZ(a)(ii) Amalgamated Society of Engineers v Adelaide Steamship Company Ltd (1920) 28 CLR 129 considered CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 referred to Commissioner of Taxation v South Australian Battery Makers Pty Ltd (1978) 140 CLR 645 referred to Commissioner of Taxation v Star City Pty Ltd [2009] FCAFC 19 referred to Commissioner of Taxation (WA) v Boulder Perseverance Ltd (1937) 58 CLR 223 cited John Fairfax & Sons Pty Ltd v Federal Commissioner of Taxation (1959) 101 CLR 30 cited Liversidge v Anderson [1942] AC 207 considered Macquarie Finance Ltd v Commissioner of Taxation (2004) 210 ALR 508 considered Macquarie Finance Ltd v Commissioner of Taxation (2005) 146 FCR 77 considered Northern Territory of Australia v Collins (2008) 235 CLR 619 referred to Pondicherry Railway Co v Commissioner of Income Tax, Madras (1931) LR 58 Ind App 239 cited Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 applied Re Advance Bank Australia Ltd (1997) 22 ACSR 513 cited Re Bolton; Ex parte Beane (1987) 162 CLR 514 cited Re The Swan Brewery Co Ltd (1976) 3 ACLR 164 cited Richardson v Austin (1911) 12 CLR 463 referred to St George Bank Limited v Commissioner of Taxation [2008] FCA 453 affirmed Steele v Deputy Commissioner of Taxation (1999) 197 CLR 459 considered Sun Newspapers Ltd v Federal Commissioner of Taxation (1938) 61 CLR 337 applied Ure v Federal Commissioner of Taxation (1981) 34 ALR 237 referred to ST.GEORGE BANK LIMITED v COMMISSIONER OF TAXATION NSD 617 of 2008 NSD 618 of 2008 NSD 619 of 2008 NSD 620 of 2008 NSD 621 of 2008 EMMETT, STONE AND PERRAM JJ 25 MAY 2009 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD 617 of 2008 NSD 618 of 2008 NSD 619 of 2008 NSD 620 of 2008 NSD 621 of 2008 ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: ST.GEORGE BANK LIMITED Appellant AND: COMMISSIONER OF TAXATION Respondent JUDGES: EMMETT, STONE AND PERRAM JJ DATE OF ORDER: 25 MAY 2009 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The appeals be dismissed with costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using eSearch on the Court's website. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD 617 of 2008 NSD 618 of 2008 NSD 619 of 2008 NSD 620 of 2008 NSD 621 of 2008 ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: ST.GEORGE BANK LIMITED Appellant AND: COMMISSIONER OF TAXATION Respondent JUDGES: EMMETT, STONE AND PERRAM JJ DATE: 25 MAY 2009 PLACE: SYDNEY REASONS FOR JUDGMENT EMMETT J: 1 These appeals are concerned with whether interest payments of $45,548,093, $49,831,034, $57,616,769, $53,954,975 and $45,686,065 made in the 1999 to 2003 years of income respectively by the appellant, St George Bank Limited (St George), were allowable deductions. The payments were made by St George to St George Funding Company LLC (LLC), which is a subsidiary of St George. In its tax returns for each of the relevant years, St George claimed the relevant payment as a deduction from its assessable income. On 20 April 2005, the Commissioner issued notices of amended assessment for each of the years of income reflecting his determination that the interest payments were not allowable deductions. The notices of amended assessment also included amounts of interest and additional tax for late payment. 2 On 15 June 2005, St George lodged notices of objection to the assessments. The Commissioner made unfavourable objection decisions on 30 August 2005. Thereafter, St George commenced a separate proceeding in the Court in respect of each of the five years of income, pursuant to s 14ZZ(a)(ii) of the Taxation Administration Act 1953 (Cth). The five proceedings were heard together and on 11 April 2008 a judge of the Court made orders dismissing the proceedings with costs. 3 The principal question before the primary judge was whether, as the Commissioner contended, the interest payments in question constituted outgoings of a capital nature within s 8-1(2) of the Income Tax Assessment Act 1997 (Cth) (the 1997 Act). His Honour concluded that they were and that, accordingly, they were not allowable deductions. 4 The Commissioner also relied on a further contention, which was relevant only if the payments were not outgoings of a capital nature. The Commissioner contended that St George had validly elected to have Division 974 of the 1997 Act apply and that those payments made after 1 July 2001 constituted non share distributions within the meaning of s 974-115 of the 1997 Act. The primary judge concluded that St George had not validly elected to have Division 974 of the 1997 Act apply. In those circumstances, it was not necessary for his Honour to determine whether the payments constituted non share distributions. 5 St George filed notices of appeal to the Full Court from each of the orders of dismissal. The Commissioner filed notices of contention supporting some of the dismissals on the basis of Division 974 of the 1997 Act. Thus, the same question arose in the appeals as were argued before the primary judge. 6 I have had the advantage of reading in draft form the reasons for judgment of Stone J and Perram J. I agree with the conclusion reached by Perram J, for the reasons given by his Honour, that the interest payments were all outgoings of a capital nature within s 8-1(2)(a) of the 1997 Act. It is therefore not necessary to determine whether St George validly elected that Division 974 should apply. However, I would be disposed to agree with the conclusion of Stone J, for the reasons given by her Honour, that St George did not validly elect to have Division 974 apply. It is not necessary to determine whether the interest payments constituted non share distributions within the meaning of s 974-115. 7 In the circumstances, I agree with the orders proposed by Perram J, that each of the appeals be dismissed with costs. I certify that the preceding seven (7) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett. Associate: Dated: 25 May 2009 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD 617 of 2008 NSD 618 of 2008 NSD 619 of 2008 NSD 620 of 2008 NSD 621 of 2008 ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: ST.GEORGE BANK LIMITED Appellant AND: COMMISSIONER OF TAXATION Respondent JUDGES: EMMETT, STONE AND PERRAM JJ DATE: 25 MAY 2009 PLACE: SYDNEY REASONS FOR JUDGMENT STONE J: 8 This appeal raises three issue main issues concerning the deductibility of the interest payments made under a debenture by the appellant to St George Funding Company LLC from 1999 to 2003. Those issues are: (a) whether, within s 8-1 of the Income Tax Assessment Act 1997 (Cth) (1997 Act) the interest payments were outgoings of a revenue or a capital nature (the capital issue); (b) if the payments were not of a capital nature, whether the appellant had validly elected to invoke the provisions of Division 974 of the 1997 Act in relation to the debenture (the election issue); and (c) if there was a valid election whether the interest payments made after 1 July 2001 were non-share distributions within the meaning of s 974-115 of the 1997 Act (the non-share distribution issue). The capital issue 9 I have had the advantage of reading, in draft, the reasons of Emmett J and of Perram J concerning this issue. I agree with their Honours that the payments were outgoings of a capital nature within the meaning of s 8-1(2) of the Actand with the reasons on which this conclusion is based. Given this conclusion it is not strictly necessary to consider Division 974 however the election issue was argued fully before the primary judge and on the present appeal. Therefore, in deference to counsel, and in case the conclusion as to the capital nature of the payments is incorrect, I propose to consider the election issue. The Election Issue 10 On 13 February 2002 the appellant purported to invoke the provisions of Division 974 of the 1997 Act (the debt/equity provisions) in relation to the debenture. The provisions of Division 974 were introduced into the 1997 Act by the New Business Tax System (Debt and Equity) Act 2001 (Cth) (Debt and Equity Act). These provisions raise the prospect of the appellant's payments of interest made after 1 July 2001 not being allowable deductions by reason of s 26-26 of the 1997 Act even if they would otherwise have been deductible under s 8-1 of that Act. 11 The debt/equity provisions apply to all transactions in relation to interests that were issued on or after 1 July 2001; the Debt and Equity Act, Schedule 1, Item 118(2). Item 118(6)(b) provides that, in relation to interests that were issued before 1 July 2001, these provision only apply from that date to transactions if the issuer of the interests elects for them to do so. In the absence of an effective election the provisions apply only to transactions that take place on or after 1 July 2004. 12 The requirements for an effective election are set out in item 118(10) which provides as follows: (10) An election in relation to an interest is effective for the purposes of paragraph (6)(b) only if: (a) the election is lodged with the Commissioner within: (i) 90 days after the day on which this Act receives the Royal Assent; or (ii) such further time as the Commissioner allows; and (b) an election under paragraph (6)(b) is made in relation to all other interests that: (i) were issued by the issuer before 1 July 2000; and (ii) are substantially similar to that interest and in relation to which an election under that sub item can be made; and (c) the election contains the following information: (i) the name of the issuer; and (ii) that tax file number of the issuer; (iii) the legal form of the interest; (iv) ASX code or other stock exchange listing code allotted to the issue (if applicable); (v) the date of the issue; (vi) the face value of the issue; (vii) the number of interests of that kind on issue when the election is made; (viii) coupon/dividend rates and terms including contingencies; (ix) maturity details; (x) redemption details and terms including contingencies; (xi) conversion/exercise details. An election under paragraph (6)(b) cannot be revoked. 13 The relevant interest here is the debenture that was created in 1997. Consequently, payments made in respect of the debenture prior to 1 July 2004 would not be affected by the debt/equity provisions unless the appellant had, in accordance with item 118(10), made a valid election that they should apply. 14 It is not in contention that the appellant attempted to make such an election although it now submits that this election was ineffective. The primary judge accepted this submission and based his conclusion on the appellant's failure to provide information required under subparagraphs (vii), (viii), (ix) and (x) of item 118(10)(c) and the consequence of that failure as indicated by the words, "is effective … only if …" in the opening words of paragraph 118(10). 15 By its notice of contention the respondent alleges that the primary judge erred in so concluding, and that his Honour should have held that the appellant had made an effective election under Item 118(10) of the Debt and Equity Act with the result that Division 974 of the 1997 Act applies to the interest payments. Failure to comply with the requirements of Item 118(10)(c) 16 The information that the primary judge held to be erroneous or inadequate fell within four of the subparagraphs of Item 118(10)(c). The Commissioner did not contend that the information provided was absolutely accurate. Rather, the Commissioner submitted that strict compliance was not required. It is only necessary that the information be sufficient to identify, for the benefit of the Commissioner, the interest that the taxpayer seeks to have dealt with under Division 974. In oral submissions Ms Davies SC reiterated that the errors in the information provided in the election document, "were not errors of such a kind that the election did not fulfil its statutory purpose". 17 The information provided and the errors identified by the primary judge are set out below. Item 118(10)(c)(vii) - number of interests 18 Item 118(10)(c)(vii) refers to "the number of interests of that kind on issue when the election is made". Under this heading the appellant's election form stated, "interests with a face value totalling US $350,000,000 remain on issue". His Honour found that it was plain that there was only one debenture (in the principal sum of US $350 million) issued by the appellant to LLC. His Honour held that the appellant's response referred to "the value of interests on issue" and therefore did not contain the information called for. Item 118(10)(c)(viii) - dividend rates and terms 19 The primary judge held that St George has failed in two ways to comply with the requirement of item 118(10)(c)(viii) that the "coupon/dividend rates and terms including contingencies" be provided. First, the information initially provided was incorrect and secondly, the subsequent correction was not only inadequate but was also made outside the time period specified in item 118(10)(a)(ii) as extended by the Commissioner. 20 It happened like this. At the request of the solicitors for the appellant the Commissioner granted an extension of time for the election to be made until 18 February 2002. By letter dated 13February 2002 the appellant's solicitors wrote to the ATO stating, "SGB has elected to have paragraph 6(b) of item 118 apply to the interests described in the election to this letter". Two documents attached to the letter concerned respectively, the debenture and the subordinated notes issue. On 11 March 2002 (that is after the extension of time granted by the Commissioner had expired) the Commissioner sought confirmation that the election was in respect of the debenture. In their reply, the solicitors for the appellant confirmed this and pointed out a typographical error in the election document which identified the applicable interest rate as 9.485% rather than 8.485%. 21 The appellant submitted that neither the interest rate first identified (9.485%) nor the amended rate set out in the letter of 5 April 2002 (8.485%) is correct. The correct position is that the initial interest rate was 8.485%, stepping up to 8.985% from 1 July 2017 and 9.485% from 1 July 2022. The appellant also pointed out, even if that were not so, the "correction" in the letter of 5 April was given outside the time extended by the Commissioner under Item 118(10)(a)(ii). The primary judge agreed with the appellant's submissions and said at [93] of his reasons: None of the election documents, the correction, or the two read together, provided the "coupon rates and terms" or the "coupon rates". There was a deficiency in that only one rate was given in each communication, whereas, in fact, the information was the three rates stepped up in the way identified in the Indenture and the Annexure to it. The second part of the election was also out of time. Item 118(10)(c)(ix) - maturity details 22 Against this item the election document merely stated "Perpetual". His Honour found that this statement was incorrect because the debenture clearly stated that it had a maturity date of 30 June 2023. The Commissioner had submitted that the information was correct because SGB and LLC had the capacity to ensure that the holder of capital securities could not redeem in cash and because "in such circumstances, the debenture was repaid to LLC at a time when the Series B Capital Securities holder would be SGB itself (and so it would receive the funds repaid by it to LLC, from LLC, as repayment redemption of the Series B Capital Securities that it held)". While his Honour accepted that "these aspects of the total arrangement take their place in the analysis of the characterisation of the interest outgoings as capital" the clear expression of a maturity date in the debenture (even though there was provision for the period to maturity to be extended in certain circumstances) could not be ignored. Item 118(10)(c)(x) – redemption details and terms including contingencies 23 In the election document against this heading the information entered by appellant included the statement that "the debentures shall have no stated maturity date". For this reason his Honour accepted that the information required was not provided. The purported election under Item 118(6)(b) 24 Item 118(6)(b) provides that if an interest was issued before 1 July 2001, the debt/equity provisions: … apply to transactions that take place in relation to the interest on or after 1 July 2001 if the issuer elects to have this paragraph apply to the interest. If no election is made, the debt/equity provisions only apply to transactions in relation to the interest on or after 1 July 2004. 25 The primary judge considered that the inadequacies in the information provided pursuant to item 118(10)(c) were such as to render the election ineffective. His Honour laid particular stress on the fact that, for the purposes of item 118(6)(b), item 118(10) provides that an election is "effective … only if" the information is provided and stated his conclusion thus: It is unnecessary to reinterpret the debate into language of "mandatory" and "facultative" or "permissive" or "directory": cf Project Blue Sky Inc v Australian Broadcasting Authority (1988) 194 CLR 355. The clear intention of the words used by Parliament requires all the information in para (10)(c) be provided for the election to be effective. All such information was not provided. The election was not effective. The Commissioner submitted that there was sufficient information in the election document to enable the Commissioner to identify the Debenture as the security in respect of which the election was made. This was, it was said, the purpose of the document. This may be so, but the words of item 118(10) are clear - the election is only effective if certain information is provided. It was not. 26 As can be seen, his Honour held that the plain words and clear meaning of the statute prevailed over any argument based on the purpose for which the information was to be provided. 27 On appeal, it was submitted for the Commissioner that the mandatory terms in which item 118(10) is expressed are not conclusive as to whether non-compliance with such terms necessarily renders an election invalid. Ms Davies argued that the words "effective … only if" were not relevantly different from "must" and therefore it was necessary to look to the statutory purpose of the election to determine the effect of non-compliance. In making this submission Ms Davies was invoking the "purposive" approach to the construction of statutes. 28 The long-standing tension in the construction of statutes (and other legal documents) between giving words their "literal" meaning and construing them in the context of the document in which they appear is well-known. However, this way of articulating the problem is somewhat misleading. While words may have a stand-alone meaning or meanings which may be found in a dictionary, generally oral or verbal communication does not proceed by way of individual words but by language; by words used in conjunction with one another to express propositions or sentiments or otherwise communicate meaning. The task of a court in construing a statute is to construe the language of the statute, not the individual words. This is implicit in the frequently quoted comment of Higgins J in Amalgamated Society of Engineers v Adelaide Steamship Company Ltd (1920) 28 CLR 129 at 161-162: The fundamental rule of interpretation, to which all others are subordinate, is that a statute is to be expounded according to the intent of the Parliament that made it; and that intention has to be found by an examination of the language used in the statute as a whole. The question is, what does the language mean; and when we find what the language means, in its ordinary and natural sense, it is our duty to obey that meaning even if we think the result to be inconvenient or impolitic or improbable. Words limiting the power are not to be read into the statute if it can be construed without limitation. 29 His Honour's words are often referred to as an example of "extreme literalism" which fails to recognise that "there may be no single, unambiguous, ordinary meaning"; Pearce and Geddes Statutory Interpretation in Australia 6th edition 2006 at 25. While in the light of his Honour's reference to the "statute as a whole" this assessment may be unduly critical, nevertheless later observations of the High Court have more commonly focussed on the duty of the court as being "to give the words of a statutory provision the meaning that the legislature is taken to have intended them to have"; Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 at 384 per McHugh, Gummow, Kirby and Hayne JJ. As early as 1911 Griffith CJ drew attention to the danger he saw in focusing too much on the intention of the legislature. In Richardson v Austin (1911) 12 CLR 463 at 470, the Chief Justice observed: … there is nothing more dangerous and fallacious in interpreting a statute than first of all to assume that the legislature had a particular intention, and then, having made up one's mind what that intention was, to conclude that that intention must necessarily be expressed in a statute, and then proceed to find it. 30 An alternative to referring to Parliamentary intention is to concentrate on the object or purpose of a statute and construe the language of the Act in the context of that purpose. This approach, which directs attention to the objective nature of the enquiry, has achieved legislative sanction in ss 15AA and 15AB of the Acts Interpretation Act 1901 (Cth). Section 15AA(1) provides: Regard to be had to purpose or object of Act (1) In the interpretation of a provision of an Act, a construction that would promote the purpose or object underlying the Act (whether that purpose or object is expressly stated in the Act or not) shall be preferred to a construction that would not promote that purpose or object. 31 Section 15AB(1) authorises the use of extrinsic material in the interpretation of an Act in the following circumstances: (a) to confirm that the meaning of the provision is the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act; or (b) to determine the meaning of the provision when: (i) the provision is ambiguous or obscure; or (ii) the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act leads to a result that is manifestly absurd or is unreasonable. 32 It is not always easy to determine whether words are 'clear and unambiguous' or 'unclear and ambiguous'. For instance, the difference between the reasons of the majority and the powerful dissent of Lord Atkin in the landmark case of Liversidge v Anderson [1942] AC 207 was that the majority thought the words, "has reasonable cause to believe" were ambiguous whereas Lord Atkin (at 228) thought that they had "a plain and natural meaning". It is for this reason the reference to the object or purpose of the statute is not just a response to ambiguity but logically precedes it. The power of this approach is captured in the following comments of Brennan CJ, Dawson, Toohey and Gummow JJ in CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 at 408: "… if the apparently plain words of a provision are read in the light of the mischief which the statute was designed to overcome and of the objects of the legislation, they may wear a very different appearance. Further, inconvenience or improbability of result may assist the court in preferring to the literal meaning an alternative construction which, … is reasonably open and more closely conforms to the legislative intent." 33 In this case, the Commissioner identified the purpose behind the provision of information required by item 118(10) as being to enable the interest that the taxpayer seeks to have dealt with under Division 974 to be identified. This submission relied more on the nature of the information required rather than on any extrinsic material. It was submitted that the information that was actually supplied was sufficient for the purpose and that "there is no doubt that that which the Commissioner had identified as being the relevant interest which was sought to be the subject of the election was the very interest with which we are concerned today". 34 For present purposes it may be accepted that the interest was sufficiently identified although the confirmation sought by the Commissioner in its letter of 11 March 2002 suggests that the information initially provided was not sufficient. In any event there is much to support the suggested purpose. The generality of the information required by subparagraph (10) is such that it is hard to imagine the information, by itself, would be useful for much beyond the identification of the interest. For instance making an assessment would surely require more details about the interest and the documents pursuant to which it was created. Indeed, in the letter of 13 February 2002 under cover of which the election document was provided to the Commissioner, the solicitors for the appellant state that it was not clear what level of detail was required by the paragraph. The letter further advised that they would be happy to provide additional information if required. 35 It is important to remember, however, that all of the various approaches to statutory interpretation are directed to finding the meaning of the language of the statute. The function of the Court is "to give effect to the will of Parliament as expressed in the law"; Re Bolton; Ex parte Beane(1987) 162 CLR 514 at 518 per Mason CJ, Wilson and Dawson JJ. The point was recently made by Gummow ACJ and Kirby J in Northern Territory of Australia v Collins (2008) 235 CLR 619 at [16] where their Honours observed: … the fundamental duty of the Court is to give meaning to the legislative command according to the terms in which it has been expressed; legislative history and references to the pre-existing law should not deflect the Court from its duty in resolving an issue of statutory construction which ultimately is always a text based activity. 36 That being so there will be occasions when the words of the statute are so clear and so compelling that resort to purpose is unnecessary or unhelpful. This was clearly the primary judge's view in the present case. I agree with his Honour. It is difficult to imagine why the legislature would have used such a singular express as "is effective … only if" unless it intended that failure to supply the information, as requested, would result in the election being ineffective. Put another way, if the language used was not sufficient to determine the matter, what could Parliament have said if it intended the election to be ineffective in such circumstances. For these reasons I find that the primary judge was correct in holding that the election was ineffective for the purpose of item 118(6)(b). The non-share distribution issue 37 The parties have urged us not to express any opinion about the operation of Division 974 should we conclude that the election was ineffective. In any event, for the reasons expressed by the primary judge, it is also my view that to do so would be inappropriate. Conclusion 38 For the reasons given above I would dismiss the appeal with costs. I certify that the preceding thirty-one (31) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Stone. Associate: Dated: 25 May 2009 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD 617 of 2008 NSD 618 of 2008 NSD 619 of 2008 NSD 620 of 2008 NSD 621 of 2008 ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: ST.GEORGE BANK LIMITED Appellant AND: COMMISSIONER OF TAXATION Respondent JUDGES: EMMETT, STONE AND PERRAM JJ DATE: 25 MAY 2009 PLACE: SYDNEY REASONS FOR JUDGMENT PERRAM J: Introduction 39 In 1997 the appellant ("St George") merged by way of a scheme of arrangement with Advance Bank Australia Ltd ("Advance"). As a consequence of that merger St George thereafter needed to augment its capital base. On 18 and 19 June 1997 a subsidiary of St George raised, in the capital markets of the United States, the sum of US$350 million. The subsidiary, St George Funding Company LLC ("LLC"), was a limited liability corporation incorporated under the laws of Delaware. Upon raising the funds LLC then on-lent them to St George in return for a debenture. The debenture required the payment of interest. In the years of income 1999 to 2003 St George paid LLC interest of AU$45,548,093, AU$49,831,034, AU$57,616,769, AU$53,954,975 and AU$45,686,065 respectively. 40 In its tax return for each of those years St George claimed the interest it had paid to LLC as a deduction. On 11 April 2005, the Commissioner prepared income tax adjustment sheets disallowing those deductions. Shortly thereafter, on 20 April 2005, he issued notices of amended assessment for each of those years to reflect that disallowance and to impose interest and additional tax for late payment. On 15 June 2005 St George lodged notices of objection to those assessments. The Commissioner rejected each objection in full on 30 August 2005. 41 A person dissatisfied with an objection decision may apply for a review of that decision by this Court in its original jurisdiction pursuant to s 14ZZ(a)(ii) of the Taxation Administration Act 1953 (Cth). St George applied for such a review in respect of all five of the objection decisions. Those applications were heard together by a judge of this Court who, on 11 April 2008, dismissed the applications with costs: St George Bank Ltd v Commissioner of Taxation [2008] FCA 453. From those dismissals St George now appeals. The issues on the appeal 42 The appeal raises the following issues: 1. The capital issue. St George contended that interest payable under a loan to secure capital or working capital was inherently of a revenue nature and, hence, that the interest payable under the debenture should have been allowed as a deduction pursuant to s 8-1(1) of the Income Tax Assessment Act 1997 (Cth) ("the Act"). The Commissioner, on the other hand, stressed that the transaction, viewed as a whole, was a capital raising transaction so that the interest should be characterised as being of a capital nature within the meaning of s 8-1(2)(a). The trial judge agreed with the Commissioner. 2. The election issue. Lest that conclusion be incorrect, the Commissioner contended that those payments made after 1 July 2001 were disallowable by reason of Div 974 of the Act. Division 974 could, however, apply only if St George had validly elected to have it apply. The Commissioner contended, and St George denied, that it had so elected. The trial judge agreed with St George. 3. The Division 974 issue. If the Commissioner succeeded in demonstrating that Div 974 did apply to the interest payments after 1 July 2001, St George argued that they did not constitute "non-share distributions" within the meaning of s 974-115 of the Act, a proposition denied by the Commissioner. The trial judge did not need to, and did not, determine this issue. 43 To understand the issues which arise in this appeal it is necessary to say something of the background to, and substance of, the transactions. St George 44 St George was founded as a housing-based financial institution in 1937 and grew to become Australia's largest building society. On 1 July 1992 it converted to a company and obtained a banking licence. Prior to 1996 St George became eager to increase its size so that it could better compete with the major trading banks in the Australian market. To that end it cast around for potential mergers with, and acquisitions of, other banks. There were failed attempts to acquire the Bank of South Australia, the Challenge Bank and the Bank of Melbourne. Another such transaction was a proposed merger with Metway Bank Limited ("Metway") in March 1996. To facilitate that proposed merger St George raised approximately $360 million of stockholders' capital by way of a renounceable rights issue of converting preference shares. However, the merger with Metway did not proceed. This left St George both with the cash to fund an acquisition of, or merger with, another bank and the inclination to use the cash for that purpose. 45 On 14 October 1996, St George announced that it would acquire all of the issued ordinary shares in Advance pursuant to a scheme of arrangement. That scheme of arrangement was approved by the Supreme Court of New South Wales on 9 January 1997: Re Advance Bank Australia Ltd (1997) 22 ACSR 513. The merger was achieved by the issue to Advance shareholders of shares in St George, a cash payment to Advance shareholders, the payment of a special dividend to Advance shareholders and the cancellation of all of the shares in Advance not already held by St George by means of a selective reduction in capital. As Santow J noted when approving the scheme of arrangement in Re Advance Bank Australia Ltd (1997) 22 ACSR 512 at 516 this scheme was "of considerable complexity". Although the merger took the form of a scheme of arrangement together with a capital reduction it was, in essence, a takeover – a fact recognised both by Santow J and St George which treated the transaction as an acquisition for accounting purposes. The merger was completed on 29 January 1997 and was partially funded by the proceeds of the $360 million rights issue raised in March 1996 in contemplation of the failed merger with Metway. The cash component paid to Advance shareholders was approximately $767 million. In addition, St George issued 228 million shares to the Advance shareholders which represented $1.8 billion in value. Capital adequacy ratios 46 At present the regulation of entities which accept monies on deposit is accomplished by the Banking Act 1959 (Cth). The prudential supervision of such bodies – which, naturally enough, include banks – is conducted by the Australian Prudential Regulation Authority ("APRA") under Part II of the Banking Act 1959 (Cth). However, APRA's role as the prudential regulator was brought about only by the passage of the Financial Sector Reform (Amendments and Transitional Provisions) Act 1998 (Cth) and the Australian Prudential Regulation Authority Act 1998 (Cth). Relevantly, those laws commenced on 1 July 1998. Prior to that time, and more particularly during the merger between St George and Advance, the prudential regulator was the Reserve Bank of Australia ("RBA"). From 1996 to 1997 the RBA required all banks in Australia to maintain certain minimum ratios of capital to risk-weighted assets. 47 The expressions "capital" and "risk-weighted assets" were explained in a document issued by the RBA entitled "Capital Adequacy of Banks: Prudential Statement C1" ("PSC1"). There is no dispute that PSC1 sought to be, and expressed itself as, consistent in all substantial respects with the approach to bank capitalisation recommended by the Basel Committee on Banking Supervision. Those recommendations were then known as the Basel Capital Accords and were issued by the Basel Committee which, at the time, consisted of representatives of the central banks and regulatory authorities of the eleven countries presently making up the Group of Ten. Since the time of the transactions the subject of the present litigation those accords have been replaced with a fresh accord known as Basel II. However, Basel II has no present relevance. 48 For the purposes of PSC1 the capital of a bank is broken into Tier 1 and Tier 2 capital. Tier 1 capital was described in PSC1 in the following terms: 16. The foundation of a bank's capital is made up of permanent shareholders' equity and disclosed reserves (created or increased by the appropriation of retained earnings or other surplus). Such elements fully meet the essential characteristics of capital and represent capital resources which can best contribute resilience and flexibility to a bank experiencing financial difficulties. 17. Tier 1 capital includes paid-up ordinary shares, non-cumulative irredeemable preference and any non-repayable premiums arising from the issue of such shares. Partly paid shares (and other capital instruments) qualify only for the value of funds actually received. General reserved and retained earnings (including measured current year earnings net of expected dividends and taxation payments), although distributable in some circumstances, generally meet the attributes of Tier 1 capital. Minority interests in subsidiaries which are consistent with other named capital instruments are eligible to be counted in the calculation of Tier 1 capital of the consolidated group. 18. Non-cumulative irredeemable preference shares included in Tier 1 capital must be subordinated to depositors and unsecured creditors of the bank; may not contain any conversion feature that effectively provides for a return of capital or compensation for unpaid dividends; and dividends payable on the shares should not be influenced by the credit standing of the bank. The shares should not provide for any compensation to investors other than by way of dividend. The non-declaration of a dividend should not trigger any restrictions on the bank other than the need to seek approval of the holders of the shares before paying dividends on other shares or before retiring other shares. 49 Tier 2 capital was described in PSC1 in this way: 20. There are other capital elements that impart strength to a bank's position but to a varying degree fall short of the qualities of Tier 1 capital instruments. These may be included in a bank's capital base as Tier 2 capital up to an amount equal to the bank's Tier 1 capital (net of goodwill, other intangible assets and future income tax benefits). 21. Tier 2 capital is divided into two segments, termed Upper and Lower Tier 2 capital. Upper Tier 2 capital includes elements that are essentially permanent in nature and have characteristics of both equity and debt. 22. Lower Tier 2 capital consists of elements which are not permanent. Lower Tier 2 capital may be included in Tier 2 capital to a maximum, in aggregate, of 50 per cent of Tier 1 capital (net of goodwill, other intangible assets and future income tax benefits). 50 Further explanation of lower Tier 2 capital appeared from cl 33 of PSC1 which showed that appropriately subordinated debt could be counted as Tier 2 capital: 33. Term subordinated debt and similar limited life instruments (including redeemable preference shares) are eligible to be included in Lower Tier 2 capital provided they satisfy the criteria set out in Attachment III. This includes being appropriately subordinated and having an original maturity of at least seven years. 51 It will be apparent that the capital requirements of PSC1 comprehended notions of "capital" which formed a spectrum constituted by equity interests at one end and subordinated debt interests at the other. 52 Risk-weighting was referred to in cl 10 of PSC1 in the following terms: 10. Each Australian bank is expected to maintain a minimum ratio of total capital to risk-weighted assets, on both a consolidated group and stand-alone basis, of 8 per cent (of which at least 4 per cent should be Tier 1 capital). These levels will be kept under review. 53 The concept of the risk-weighting of assets was explained in Attachment IV to PSC1 which it is not necessary to set out. In essence, the riskier an asset held by a bank the greater the proportion of its value which was to be brought to account in calculating capital adequacy. Thus gold, notes and balances held with the RBA were treated as riskless and assigned a zero weighting whereas, at the other end of the continuum, loans to Australian trading enterprises were weighted at 100%. Clause 10, therefore, required each bank to maintain a ratio of capital to risk-weighted assets of at least 8% of which at least 4% had to be Tier 1 capital. In practical terms cl 10 meant, for example, that for a $100,000 commercial loan to an Australian business a bank would be required to have $8,000 of capital made up of at least $4,000 of capital having equity characteristics (Tier 1) and $4,000 having qualities lying somewhere between subordinated debt and equity (Tier 2). 54 Because it will be presently relevant two further matters should also be noted: first, this requirement did not apply just to a bank on a standalone basis but also on a consolidated group basis; secondly, the RBA could require a bank – pursuant to cl 11 – to maintain a higher minimum capital adequacy ratio. Clause 11 provided: 11. The Reserve Bank may require a bank to maintain a higher minimum ratio, eg for a newly established bank, or a bank judged to have an excessive concentration of credit risk exposures or significant other risk exposures. 55 Obedience to the requirements of the RBA was secured by a condition to that effect imposed by the Commonwealth on St George's banking licence and the then s 9(6) of the Banking Act 1959 (Cth) which made compliance with such conditions mandatory. St George's capital adequacy ratios 56 As at 30 September 1996, prior to the merger with Advance, St George's capital adequacy ratio was 15.3% comprising 12.3% Tier 1 capital and 3.2% Tier 2 capital. This was in excess of what was required by cl 10 of PSC1 (namely 8%). It was anticipated by St George that after the merger its capital adequacy ratio would fall to a total of 9.2% consisting of Tier 1 capital of 6.4% and Tier 2 capital of 3.0%. Again, this still represented compliance with cl 10 of PSC1 which required a total of 8% (as opposed to 9.2%) consisting of at least 4% Tier 1 capital (as opposed to 6.4%). The primary reason for the decline in St George's capital adequacy ratio was the cash component of $767 million paid by St George to Advance shareholders. Although these levels still complied with cl 10 of PSC1, St George had agreed during 1996 with the RBA to target benchmark prudential capital ratios of 10% or more comprising at least 7.5% Tier 1 capital following the merger. The fact that immediately after the merger the ratio would drop to 9.2% would have put St George in breach of that arrangement with the RBA. It was, therefore, essential from St George's point of view to conduct a further capital raising to bring itself back into compliance with the ratios agreed with the RBA. 57 On 20 November 1996, St George wrote to the RBA and informed it of this problem and indicated that the issue would be resolved by the raising of a further $360 million in capital by way of converting preference shares to be issued immediately after court approval of the merger. St George sought approval from the RBA to operate the St George group's capital adequacy ratio below the agreed minimum for those three months. On 2 December 1996, the RBA sent St George a letter assenting to that arrangement in the following terms (relevantly): We refer to your letter of 20 November 1996, relating to the proposed acquisition of Advance Bank by St. George Bank. We have passed our recommendation on this proposal to the Treasurer. Subject to the necessary approvals being granted, we confirm that the Reserve Bank has no objection to the consolidated capital ratio of St. George falling to around 9.2 per cent immediately after the acquisition. This is on the understanding that your bank will immediately arrange an underwritten capital issue for the purpose of restoring the ratio to around 10.7 per cent. We note from the Explanatory Memorandum that the policy of St.George Bank will be to maintain a Tier 1 capital ratio of around 8 per cent, with Tier 2 of some 3 per cent. (Emphasis added.) Some aspects of the capital raising from St George's point of view 58 As the trial judge found, St George entered into the capital raising solely to satisfy the RBA's requirements. However, the manner in which the capital raising was to be achieved was, so long as ultimate RBA approval was received, a matter for it. The actual capital raising transaction is explained below. However, some of its structural features are obscure without an understanding of the concerns held by St George. As a result of the merger there had been a significant broadening of its capital base because of the issue of 228 million shares to the shareholders of Advance. Until such time as the synergies which were anticipated from the merger were achieved this meant that the group's profitability had not increased but the number of shares on issue had. This, in turn, had had a diluting effect on St George's earnings per share. The issue of further shares in St George was expected only to exacerbate this problem. This was a particular difficulty because, unlike the other major trading banks at the time, a significant proportion of the shareholders on St George's share register – 67% according to its 1996 annual report – was made up of retail investors. Any reduction in the dividend paid by St George was likely to have been viewed by those shareholders very negatively. 59 There was a related problem which arose from a shortage of franking credits(itself another side effect of the merger) which degraded St George's ability to pay fully-franked dividends. Dividends of that kind were of paramount importance to St George shareholders many of whom were self-funded retirees who relied on the payment of a regular, fully-franked dividend. There were other difficulties too about which it is not necessary to make any remark save that each contributed to the desirability of raising equity capital through a vehicle other than St George. Merrill Lynch 60 Throughout the merger process St George maintained a regular dialogue with a number of investment banks with a view to conducting the anticipated capital raising. Following close consultation with management the board of St George resolved to retain Merrill Lynch International Limited ("Merrill Lynch") on 24 March 1997 to assist in the raising of the capital. The particular solution suggested by Merrill Lynch to St George was a proprietary capital securities product known as a "US$ Tax Deductible Perpetual Preferred" or "TDPP". Merrill Lynch proposed that its TDPP would be used to raise US$250 million in the United States markets in a way which did not further dilute the share register of St George and which did not reduce the earnings per share of St George. That US$250 million would serve as Tier 1 capital for the group. At the same time there would be an issue of subordinated notes which would serve as Tier 2 capital. 61 A feature of the TDPP product was the establishment of a special purpose vehicle in the United States which would raise the Tier 1 capital. The funds raised by the special purpose vehicle would then be on-lent to St George itself. St George would make interest payments which precisely mimicked the dividends to be paid by the special purpose vehicle to its shareholders. The pricing of the TDPP product to St George assumed the deductibility of the interest payments made by St George to that special purpose vehicle. However, the obtaining of that deduction was not the primary purpose of the transaction. 62 St George was the first Australian bank to use the TDPP but a number of US and non-US resident banks had apparently done so before. Between 11 April 1997 and 12 June 1997 St George and the RBA discussed how the capital raising would be treated for the purposes of PSC1. Ultimately four points emerged clearly: (a) The amount to be raised through the TDPP was to be US$250 million. (b) The amount raised by the special purpose vehicle would count as Tier 1 capital for the group but not for St George itself. (c) The subordinated notes issue would be for US$150 million. It would be raised by St George itself in the US and would count as lower Tier 2 capital for St George and its group. (d) There would be a loan from the special purpose vehicle to St George (also by then known as the "Step-Up Subordinated Debentures") which would count as lower Tier 2 capital of St George but not the group. It is important to emphasise that whilst the subordinated notes issue of US$150 million and the funds obtained in return for the debenture both counted as lower Tier 2 capital they were, in fact, wholly separate transactions. The subordinated notes issue is not directly relevant to the issues which arise in these proceedings. 63 A roadshow was conducted in the United States in June 1997. Ultimately St George decided to raise US$250 million using the TDPP (as Tier 1 capital) and US$150 million in subordinated notes (to be used as Tier 2 capital). The US$250 million was then on-lent to St George in a highly subordinated fashion thereby counting as lower Tier 2 capital for St George. The need of St George for that lower Tier 2 capital is not obvious by reference to the RBA's requirements. However, no issue as to the correctness or relevance of that matter presently arises. The capital raising 64 At its simplest the capital raising may be described this way: on 18 and 19 June 1997 the special purpose Delaware vehicle, LLC, raised US$350 million by the issue of certain securities. Having raised those monies, it on-lent them to St George in return for a debenture. The interest received by LLC from St George was used to pay the dividends paid by LLC to the holders of its securities. The simplicity of that statement conceals a great deal of detail some, but by no means all, of which is relevant. There are, however, six matters which require emphasis. 65 First, although the raising appeared to be for US$350 million it was, in fact, for US$250 million. Two subsidiaries of St George initially subscribed for $107.2 million of "common securities" in LLC. It was Merrill Lynch itself, as the initial purchaser, which invested US$242.8 million in LLC. Rather than obtaining common securities, it obtained "capital securities". In fact, it was able to raise the US$250 million in the markets. The lesser sum of US$242.8 million represented the amount raised by it less its fee of US$7.2 million. Correspondingly, an amount representing that fee was added to the US$100 million subscribed by the St George subsidiaries. That figure was invested by the subsidiaries to provide confidence in the US market that LLC could comply with its obligations to the capital security holders. 66 Secondly, the holders of the capital securities were entitled to receive non-cumulative dividends in arrears on 30 June and 31 December of each year commencing 31 December 1997. The initial rate of the dividend was to be 8.485%. On 1 July 2017 that was to increase to 8.985% and from 1 July 2022 the annual rate was to be 9.485%. 67 Thirdly, the loan to St George by LLC took the form of a debenture issued by St George to LLC with a face value of US$350 million. The sole purpose of LLC was to issue the capital securities and to invest the proceeds in that debenture. The loan was due for repayment on 30 June 2023. The interest obligations mirrored those of the dividend obligations under the capital securities. 68 Fourthly, that view of things would suggest that LLC was engaged in a business which consisted of earning money from the debenture and distributing profits to the holders of the capital securities. However, such a view is incomplete for the debenture had the following unusual features: (a) The obligation to pay interest under the debenture was contingent upon St George being "solvent" if the payment was made. "Solvent" was defined in the relevant document to mean an excess of assets over liabilities for St George on a standalone basis in its most recent audited balance sheet. In practice, this permitted the subordination of the interest due under the debenture to any dividend that might be paid to St George shareholders. (b) The obligation to pay the interest was also subordinated to all other creditors. (c) The interest obligation was cumulative. 69 On the other hand, the capital securities had these features: (a) The obligation on LLC to pay the dividend only arose if St George had paid the corresponding amount of interest to LLC. (b) The rights under the capital securities were non-cumulative so that if a payment was missed (because St George did not make the relevant interest payment to LLC) it did not carry forward to the next payment but was lost. 70 The fact that the capital securities were non-cumulative but the debenture was cumulative gave rise to the possibility of the accumulation of a surplus inside LLC. When that occurred the excess was refunded to St George by way of a dividend through its two subsidiaries. 71 Fifthly, the stepping up of the interest rate due on the capital securities provided an economic incentive to St George to refinance the arrangement although, as the present international circumstances show, it is a mistake to assume that economic incentives would necessarily lead to a refinancing. 72 Sixthly, if the facility was not paid out early then the holders of the capital securities would never get their money back. A complex exchange mechanism meant that they would end up with preference shares in St George or securities in another special purpose vehicle. In practical terms, if the arrangement was not paid out early, the funds advanced by the holders of the capital securities would never leave the St George group. Of course, that did not mean that St George would never repay the loan from LLC. It was bound to do that by 30 June 2023. Were payments of interest by St George to LLC of a capital nature? The nature of the question 73 Whether the payments of interest by St George to LLC could be deducted by St George from its assessable income was determined by the operation of s 8-1(1) and (2) of the Act. Relevantly they provided: (1) You can deduct from your assessable income any loss or outgoing to the extent that: (a) it is incurred in gaining or producing your assessable income; or (b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. (2) However, you cannot deduct a loss or outgoing under this section to the extent that: (a) it is a loss or outgoing of capital, or of a capital nature; … 74 It was accepted by the Commissioner that the interest paid by St George to LLC was an outgoing incurred by St George in gaining, or in carrying on a business for the purpose of gaining, assessable income. Accordingly, there was no issue but that s 8‑1(1) was satisfied. 75 As the trial judge noted, no argument was pursued by St George that the Commissioner's concession that the interest payments were incurred by St George in gaining assessable income necessarily meant that they could not be of a capital nature. That being so it is unnecessary to explore whether the exemptions created by s 8-2 are true exceptions or, rather, as some see it, examples in contradistinction to s 8-1: cf. John Fairfax & Sons Pty Ltd v Federal Commissioner of Taxation (1959) 101 CLR 30 at 34 per Dixon CJ (with whom Kitto J agreed at 43), 40 per Fullager J and 48 per Menzies J (with whom Taylor J agreed at 43); Steele v Deputy Commissioner of Taxation (1999) 197 CLR 459 at 468 [24] per Gleeson CJ, Gaudron and Gummow JJ (with whom Callinan J agreed at 491 [93]), 482 [69]-[70] per Kirby J; cp. Macquarie Finance Ltd v Commissioner of Taxation (2005) 146 FCR 77 at 106-107 [104] per French J, 141-142 [255] per Gyles J; Parsons RW, Income Taxation in Australia (1985) Law Book Company at [5.12]-[5.13]. 76 That issue not being raised, the case was conducted on the basis that the question for determination was whether the interest payments were of a capital nature within the meaning of s 8-1(2)(a) and, hence, were not deductible. 77 That question is well-known and has been traversed by a number of authorities both in the High Court and this Court. For present purposes, both the Commissioner and St George accepted as a correct statement of the law the following passage from the judgment of Dixon J in Sun Newspapers Ltd v Federal Commissioner of Taxation (1938) 61 CLR 337 at 363: There are, I think three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment, or by making a final provision or payment so as to secure future use or enjoyment. The Commissioner's argument 78 The Commissioner's arguments were as follows: (a) the entire set of transactions entered into by St George and its group needed to be examined in determining whether the interest payments were of a capital nature; (b) so viewed, the interest payments were to be seen as the "consideration for the acquisition of a capital asset, namely the perpetual capital raised", and since the interest payments were the consideration for the acquisition of a capital asset it followed that their character was of a capital nature; (c) the payments made by St George to LLC were properly to be seen as securing the advantage to St George of maintaining sufficient capital and, thereby, complying with the conditions of its banking licence which gave the payments their capital nature; (d) the capital nature of the payments was also to be derived from the very close analogy with the payment of dividends by LLC to the holders of the capital securities. 79 It is useful to consider these arguments in turn. (a) The nature of the transaction in context 80 St George argued that in determining the character of the expenditure and the character of the advantage sought, regard was to be had to the particular transaction undertaken and to the advantage sought by the specific taxpayer and not other related companies. This required a focus on the nature of the liability created in St George by the debenture. Reliance was placed upon the Full Court's decision in Asiamet (No 1) Resources Pty Ltd v Commissioner of Taxation (2003) 126 FCR 304 at 334 [104] per Emmett J (affirmed (2004) 137 FCR 146 at 195 [150], 197-198 [162]-[164] per Allsop J with whom Ryan and Finkelstein JJ agreed) and on the well-known judgment of Gibbs ACJ in Commissioner of Taxation v South Australian Battery Makers Pty Ltd (1978) 140 CLR 645 at 655-656. The Commissioner, on the other hand, argued that the character of the interest payments was not exhaustively to be determined by a consideration of the terms of the debenture but was to be gauged by a consideration of the broader series of transactions of which the debenture was merely an integer. 81 There is no tension between these arguments. The questions raised by s 8-2(a) are concerned with the characterisation of liabilities which already exist and whose legal nature is not in doubt. Section 8-2(a) takes as its point of departure known legal qualities and asks whether those qualities are capital in nature. Thus, to say of a liability that it is "rent" or "interest" is not to answer the question posed by s 8-2(a). As this Court's decision in Ure v Federal Commissioner of Taxation (1981) 34 ALR 237 shows, interest may, depending on the purposes for which the application and use of the borrowed money were intended to gain, be of a capital or a revenue nature. Consistent therewith, in Steele v Deputy Commissioner of Taxation (1999) 197 CLR 459 at 470 [29] Gleeson CJ, Gaudron and Gummow JJ thought that particular circumstances might make it appropriate "to regard the purpose of interest payments as something other than the raising or maintenance of the borrowing and thus, potentially, of a capital nature". 82 Unsurprisingly, no different principle obtains in the case of rent. Indeed, although Gibbs ACJ did not think it appropriate on the particular facts in Commissioner of Taxation v South Australian Battery Makers Pty Ltd (1978) 140 CLR 645, his Honour was clearly of the view (at 655) that a payment of rent could be partly capital. Stephen and Aickin JJ agreed at 661. 83 It should be accepted, as St George submitted, that resort to the wider context must not be permitted to obscure or alter the legal characterisation of the payments in issue. However, acceptance of that proposition provides no reason so to limit the focus when the question is how the liability thus identified is to be characterised for the purposes of s 8-2(a). The authorities are usefully collected by Goldberg J in Commissioner of Taxation v Star City Pty Ltd [2009] FCFCA 19 at [27]-[31] and make the same point. The Commissioner's argument that the wider context must be examined should therefore for present purposes be accepted. (b) Are the payments of interest to be characterised as consideration for the acquisition of a capital asset? 84 It is useful in the first instance to recall some basic matters. In what follows, references are to the present Corporations Act 2001 (Cth) but equivalent provisions existed under the Corporations Law in the relevant years of income. 85 First, a company has a separate legal identity from that of its members and, having that separate existence, has all the powers and capacities of a natural person: s 124. 86 Secondly,the relationship between a company and its members is unlike relationships that natural persons may have for reasons which include the inability of natural persons to issue interests in themselves. It is because of that that the powers to raise and return shareholders' capital and to pay dividends thereon are expressly granted by statute: see s 124(1). Such powers are not included beneath the broad canopy of powers possessed by natural persons. A necessary consequence is that the payment of dividends and the raising and return of capital are sui generis activities neither sourced in, nor analogous with, the activities of natural persons. 87 Thirdly, s 8-2(a) is directed to all persons both natural and otherwise. It operates on notions of capital which are applicable to every kind of transaction regardless of the legal personality of the actors concerned. Further, the questions it raises are questions concerned with the characterisation of outgoings. Thus although s 8-2(a) refers in terms to outgoings of "capital" as well as those which are of a "capital nature" the denotation of those terms must extend beyond the company law meaning of "capital". 88 Fourthly,by contrast, company law observes a distinction within a company between "capital", on the one hand, and "profits" on the other: cf. Pt 2H.5 and Ch 2J of the Corporations Act 2001 (Cth). Although there are corresponding concepts in the law of partnership and the law of trusts the position of company law is attended by a significant distinguishing feature. Whereas a company has a legal personality separate from its members and its liabilities are not those of its members, the liabilities of a partnership are indistinguishable from the liabilities of the partners comprising it. In the case of a trust, the trust has no separate existence – what exists is the trustee and its liabilities are its alone although it has a right of indemnity out of the trust assets. No question therefore arises in the case of a partnership or of a trust of creditors being prejudiced by the removal of wealth from the undertaking embodied in them. No distribution of capital by a partnership to its partners can erase their liability to creditors and a trustee remains just as exposed to creditors even if it has disposed of all of the trust assets and even though its indemnity out of those assets be insufficient. The existence of a separate legal personality in a company, by contrast, makes necessary that those contributing their capital to the constituted venture do not withdraw it in a way which prejudices creditors. It is because the existence of the corporate veil presents the opportunity for injustice to be visited upon creditors that those standing behind the company are required to maintain their capital in it. The quid pro quo, therefore, of the granting of separate legal personality to a company is the concomitant obligation to ensure that the capital advanced by its members remains in play. 89 Fifthly,to give effect to that fundamental consideration two principles are axiomatic: members may receive dividends only out of the profits and the members' capital may only be returned to them in tightly controlled circumstances which include requirements protecting both creditors and the position of the members inter se. Such requirements are absent from the law of trusts and the law of partnerships. 90 Sixthly,where a company issues a share to a member, the member acquires and owns the bundle of rights making up the share. Unless the member's business consists of buying and selling such shares so that the share forms part of a body of trading stock, the share thus held will ordinarily be a capital asset. Where such an issue occurs what is obtained by the company depends upon the terms upon which the share was issued: s 254B(1). If the subscription consideration is money then the company obtains money; if it is land, it obtains land; if the share is not fully paid then the company acquires a right to call upon the unpaid portion. The "capital" of the company is the money or money's worth derived by the company from the issue of shares: Re The Swan Brewery Co Ltd (1976) 3 ACLR 164 at 166per Gillard J. 91 Seventhly,by that issue of shares the company obtains assets consisting of the subscription consideration proffered for the shares. Those assets may or may not be capital assets. The company may, of course, use the assets obtained by the issue of the shares in any lawful way it chooses. If cash has been obtained, it may choose to acquire another capital asset. If it does so, then the purchase monies constituting that outgoing will clearly be capital in nature. On the other hand, if the money is used to meet ordinary everyday expenses such outgoings will not be ones to which s 8-2(a) applies. 92 Eighthly,the assets thus acquired by the company on the issue of its shares are, however, not the share capital of the company. Those assets are owned by the company; the share capital is owned by the members. Whilst it is no doubt convenient to refer to a company's capital it is important to understand the limitations inherent in that expression. In particular, it must not be thought that the use of the possessive connotes ownership by the company of the capital. Where every member of a group owns a thing or shares a quality it is common to ascribe ownership of that thing or possession of that quality to the noun describing the entire group. Thus, the army's hopes really means the hopes of the soldiers of the army for armies, unlike soldiers, do not have hopes, and to speak of the speed of a team is but a shorthand way of saying the speed of the players on a team. It is in that sense that the expression the company's capital is to be understood and in that light it denotes not capital owned by the company but rather, as commonsense suggests, the capital owned by the members of the company. 93 Ninthly,as such, both the concept of "capital" in this context and the concomitant notion of "profits" are concepts whose purpose is to ensure that creditors of a company are not prejudiced by the surreptitious reduction in the company's wealth. This is achieved by the requirement that dividends be paid only out of profits and that reductions in capital only occur where no prejudice is visited upon creditors. So viewed, this notion of capital – quite unlike the notion of capital referred to in s 8-2(a) – is not concerned with a quality possessed by outgoings but, rather, with a concept operating beyond and above the assets of a company and dictating, at that conceptual level, particular outcomes of allocation, distribution and confinement. It is for that reason that no particular asset owned by a company can be identified as being part of the company's capital or of its profits. Both are concepts existing dehors the company's assets. 94 It is then useful to compare those principles with the Commissioner's submission that a capital asset was acquired consisting of the "perpetual capital raised". No doubt LLC raised capital but to say that is only to say that it issued shares in return for money. That money was, of course, an asset of LLC. In calculating the shareholders' capital in LLC the asset constituted by that money would, no doubt, have to be brought to account (along with all of its liabilities). But this is equally true of all of LLC's assets both those which were capital assets and those which were not. The mere fact, therefore, that the cash held by LLC was obtained from the issue of the capital securities does not make it part of the capital of LLC in the company law sense. 95 Nor is it possible to describe the money held by LLC as being, in itself, a capital asset. The precise definition of a capital or structural asset may be elusive. However, whatever the limits on the concept, money, or choses in action representing money, lie beyond it. 96 It follows that the Commissioner's submission that the issue by LLC of the capital securities represented the acquisition by LLC of a capital asset cannot be accepted. Neither the increase in LLC's shareholders' capital nor the obtaining by it of the money raised from the issue of the capital securities were of that nature. (c) Can the structure of a company's capital be a structural advantage of a capital nature? 97 For reasons already given, the allotment and issue of a number of shares by a company does not result in the acquisition by it of a capital asset. In an ordinary case, the number of shares on issue and the arrangements by which the members owning those shares agree inter se to distribute the profits derived from the company have nothing to do with the activities by which the company earns those profits. They are separated conceptually by the distinction between the derivation of profit and the application of profit which has been derived: cf. Parsons RW, Income Taxation in Australia (1985) Law Book Company at 414. Profit, in that sense, is what is left after the process of income derivation. Ordinarily, the distribution of such profit cannot be an outgoing incurred in the course of its own earning for similar reasons to those which explain why a cake cannot be one of its own ingredients. 98 However, the complexities of the modern commercial world are such that, in some circumstances, the productive venture carried on by a company may become enmeshed, directly or indirectly, with the position of the shareholders themselves and even with the rights of those members inter se. It is difficult to be definitive about these matters but when commercial circumstance, or regulatory obligation, impose upon a company particular requirements as to its capital structure, the cost of meeting those requirements may, in some cases, be capital in character. They will be capital in character if the structural advantage accruing to the company by meeting the requirements as to its share capital is an advantage of the kind referred to by Dixon J in Sun Newspapers. Where the conclusion is reached that the structural advantage sought is sufficient to render the outgoings associated therewith as capital in nature, it is important to be clear that that capital nature has nothing to do with the fact that the structure in question is in the shareholders' capital. In that sense, the word "capital" carries with it a considerable risk of conceptual confusion in the context of s 8-2(a). Indeed, it is the structure, rather than the medium in which the structure is expressed, which gives the advantage its capital nature. 99 By way of analogy, the locations in which a company does business could not ordinarily be meaningfully described as capital in nature. Yet, if a company acquire an exclusive right to operate in a particular area then there are usually no particular difficulties in treating that right as a structural or capital advantage for the purposes of determining the nature of an associated outgoing under s 8-2(a) as the result in Sun Newspapers itself shows. The capital nature springs not from the concept of location but rather from the structure of rights imposed on the medium of location. 100 So too, when a requirement as to shareholders' capital is found to bring into existence a structural or capital advantage, the capital nature emerges from the structural advantage and not from the fact that, confusingly, that structural advantage exists in a medium known as shareholders' capital. 101 The question then devolves to the ordinary kind of inquiry required by Sun Newspapers. There are various requirements which may be imposed on a company's capital structure by the rigours of commerce or the law. A company operating under a licence to broadcast television may be required to maintain a majority of shareholders with a particular national characteristic; a company operating a newspaper may not be permitted to acquire another newspaper without removing a particular shareholder from amongst its members. Other examples of such businesses may be readily imagined. 102 The business of banking is one such business. The existence of shareholders' equity in a bank increases its ability to absorb losses. The absorption of losses is, no doubt, a benefit to any business, but in the case of banks that utility has the additional beneficial effect of maintaining the confidence of its depositors. The sudden evaporation of that confidence may lead to a significant proportion of depositors withdrawing their funds which, in turn, may expose a bank to a risk of insolvency. It is precisely the need to avoid such losses of confidence and their concomitant damage to the economic system which has led to the introduction of capital adequacy requirements. In this case, compliance by St George with the RBA's requirements had the immediate effect of improving the ability of St George to withstand losses. That ability went to the heart of St George's business as a bank, namely, its continued ability to maintain the confidence of its depositors. It also had, as Hill J pointed out in Macquarie Finance Ltd v Commissioner of Taxation (2004) 210 ALR 508 at 512 [7], the superadded effect of allowing the bank to expand its operations where, but for the capital raising, the bank would be prohibited by PSC1 from incurring further debts to make loans. 103 The increased ability to maintain the confidence of depositors and the associated ability to increase the size of its loan book were advantages "of a lasting character" which enured for the benefit of the "profit earning subject" which was St George: cf. Sun Newspapers at 361 per Dixon J. 104 St George objected that the payments of interest did not secure anything but the use for a limited term of the funds advanced under the debenture. The Commissioner, on the other hand, denied that the payments had that quality at all. Neither party suggested St George made the payments for both purposes and that apportionment was appropriate (although St George did make an unrelated submission about apportionment). The case was argued on an all or nothing basis: cf. Macquarie Finance Ltd v Commissioner of Taxation (2004) 210 ALR 508 at 528 [64] per Hill J. 105 The payments of interest were an important – indeed essential – element in an overall transaction whose purpose was to achieve the structural advantage to which reference has been made. The debenture served as the conduit by which profits which had not been distributed to ordinary St George shareholders could be channelled, via LLC, to the holders of the capital securities. The essentiality of those payments can be seen from the evidence that it was the requirements of the RBA which constituted the sole necessity for the capital raising. There was no evidence which suggested that St George needed the funds extended to it for the debenture although it was accepted that it used the funds in the ordinary course of its business. The capital adequacy requirements of the RBA would have been met even if the funds had remained in LLC. For that reason, the predominant purpose underpinning the payments of interest was the securing of the structural advantage flowing to St George itself from the increase in the shareholders' equity in LLC. 106 St George also stressed the recurrent nature of the interest payments to support the notion that the payments were on the revenue account. The significance of recurrence may be accepted but is not conclusive and, in this case, does not detract from the conclusion that the outgoings were of a capital nature. Examples of recurrent payments which are nevertheless capital in nature are common enough. The repayments on a home loan almost invariably include a recurrent capital component; a rental payment may also include a capital component which does not vanish merely because it recurs. Closer to the present context, the recurrent nature of the interest payments due on the stapled securities in issue in Macquarie Finance Ltd v Commissioner of Taxation (2005) 146 FCR 77 did not prevent their being characterised as capital in nature. 107 For these reasons, the interest payments were of a capital nature. (d) Analogy with dividends 108 Having so concluded, it is not necessary to express a view on the Commissioner's argument that the interest payments should be seen as capital in nature because of their similarity to the dividends paid by LLC to the holders of the capital securities. However, it is perhaps open to doubt whether the payment of a dividend is an outgoing to which s 8-1(2) is directed. Since dividends may be paid only out of profits and not out of capital it is not immediately apparent whence their status as an outgoing incurred in the course of earning assessable income might derive: cf. Commissioner of Taxation (WA) v Boulder Perseverance Ltd (1937) 58 CLR 223 at 234 per Latham CJ, Dixon and McTiernan JJ; Pondicherry Railway Co v Commissioner of Income Tax, Madras (1931) LR 58 Ind App 239 at 251 per Lord Macmillan; Macquarie Finance Ltd v Commissioner of Taxation (2004) 210 ALR 508 at 525 [55] per Hill J; Upfold R, "When might dividends be deductible" (2001) 30 Australian Tax Review 5. No occasion arose and no argument was advanced in the present proceedings as to the status of a dividend which was, as a matter of fact, paid in the course of earning assessable income. Apportionment 109 In the alternative, St George argued that only that part of the interest payments which went to service the capital securities should be treated as being on the capital account. This was because it was only the US$250 million which had the effect of strengthening the balance sheet of the St George group. The balance of the dividend was paid to St George subsidiaries who had injected US$100 million in common securities into LLC in order to generate confidence in the US market as to LLC's ability to meet its obligations. 110 The Commissioner, on the other hand, submitted that that aspect of the matter was to be seen as necessary and incidental to the capital raising. The Commissioner's submission should be accepted. Whilst it is true that a component of the interest payments was not directly attributable to the capital securities, it is apparent that the existence of the St George subsidiaries' equity in LLC was indeed an essential step in the capital raising. The evidence showed that in order for the US markets to have confidence that LLC could meet its obligations it was essential that it be sufficiently initially capitalised. The costs associated with those steps are, therefore, to be seen as part of the costs incurred in securing the capital advantage. Useful comparison may be made with the legal expenses incurred by the taxpayer in defending the validity of the allotment of shares at issue in John Fairfax & Sons Pty Ltd v Federal Commissioner of Taxation (1959) 101 CLR 30. Other issues 111 It follows that the appeals must be dismissed with costs. It is not strictly necessary therefore to consider whether a valid election to have Div 974 apply was made in those circumstances. However, I have had the advantage of reading in draft the reasons of Stone J on this issue and I agree both with her Honour's reasons and with her Honour's conclusion that St George did not elect to have Div 974 apply. That being so, the parties were in agreement that we should not attempt to determine the Div 974 issues. Conclusion 112 Each appeal must be dismissed with costs. I certify that the preceding seventy-four (74) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Perram. Associate: Dated: 25 May 2009 Counsel for the Appellant: Mr B Walker SC with Mr J Lockhart and Mr M Richmond Solicitors for the Appellant: Gilbert + Tobin Counsel for the Respondent: Ms J Davies SC with Mr SH Steward and Mr J Hmelnitsky Solicitors for the Respondent: Australian Government Solicitor Dates of Hearing: 26, 27 November 2008 Date of Judgment: 25 May 2009