FEDERAL COURT OF AUSTRALIA Broken Hill Pty Co Ltd v Commissioner of Taxation [1999] FCA 1628 TAXATION AND REVENUE – Income Tax(Cth) – allowable deduction – whether amount paid pursuant to share purchase agreement is interest or in the nature of interest – conditional contract for share sale and purchase – delay between vendor's loss of enjoyment and payment of the purchase price – foreign law of the contract not the subject of expert testimony – whether power to issue assessments or amended assessments – whether imposition of additional tax valid. Income Tax Assessment Act 1936 (Cth), s 51(1), s 80(2) s 170 Evidence Act 1995 (Cth), s 69, s 135 Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 applied JB Chandler Investment Company Ltd (in liq) v Commissioner of Taxation (1993) 47 FCR 588 applied Compafina Bank v Australian and New Zealand Banking Group Ltd [1982] 1 NSWLR 409 referred Ritz Hotel Ltd v Charles of the Ritz Ltd (1987) 14 NSWLR 116 referred Esquire Nominees Ltd v Commissioner of Taxation (1973) 129 CLR 177 cited Brookton Co-operative Society Limited v Commissioner of Taxation (1981) 147 CLR 441 cited Colonial Mutual Life Assurance Society Ltd v Federal Commissioner of Taxation (1953) 89 CLR 428 cited Commissioner of Taxation v South Australian Battery Makers Pty Ltd (1978) 140 CLR 645 cited Cliffs International Inc v Commissioner of Taxation (1979) 142 CLR 140 cited NM Superannuation Pty Ltd v Young (1993) 41 FCR 182 cited Commissioner of Taxation v Orica Ltd (1998) 194 CLR 500 referred Australian and New Zealand Savings Bank Ltd v Commissioner of Taxation (1993) 42 FCR 535 referred Tallerman & Co Pty Ltd v Nathan's Merchandise (Victoria) Pty Ltd (1957) 98 CLR 93 applied Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537 applied Thorby v Goldberg (1964) 112 CLR 597 referred Stern v McArthur (1988) 165 CLR 489 referred Commissioner of Taxation v Woolcombers (WA) Pty Ltd (1993) 47 FCR 561 cited Wood Preservation Ltd v Prior [1969] 1 WLR 1077 referred Kern Corporation Ltd v Walter Reid Trading Pty Ltd (1987) 163 CLR 164 referred International Railway Company v Niagara Parks Commission [1941] AC 328 cited Public Trustee v Schultz (1964) 111 CLR 482 cited In re Hewitt's Contract [1963] 1 WLR 1298 cited Harvela Investments Ltd v Royal Trust Company of Canada (C.I.) Ltd [1986] 1 AC 207 discussed Sun Newspapers Ltd v Federal Commissioner of Taxation (1938) 61 CLR 337 cited Re: Farm Security Act 1944 (Sask.) [1947] SCR 394 referred Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199 cited Consolidated Press Holdings Ltd v Commissioner of Taxation (1998) 98 ATC 5009 cited Century Yuasa Batteries Pty Ltd v Commissioner of Taxation (1997) 97 ATC 4299; aff'd (1998) 82 FCR 288 cited Chevron Petroleum (UK) Ltd v BP Petroleum Development Ltd (1981) 57 TC 137 discussed Federal Wharf Co. Ltd v Deputy Federal Commissioner of Taxation (1930) 44 CLR 24 discussed Riches v Westminster Bank Ltd [1947] AC 390 cited Inland Revenue Commissioners v Pullman Car Co Ltd [1954] 2 All ER 491; [1954] 1 WLR 1029 referred Federal Commissioner of Taxation v Midland Railway Co of Western Australia Ltd (1952) 85 CLR 306 referred Whitaker v Federal Commissioner of Taxation (1998) 153 ALR 334 distinguished Commissioner of Taxation v Northumberland Development Co Pty Ltd (1995) 59 FCR 103 distinguished Texas Co (Australasia) Ltd v Federal Commissioner of Taxation (1940) 63 CLR 382 cited Australian National Hotels Ltd v Commissioner of Taxation (1988) 19 FCR 234 cited Steele v Deputy Commissioner of Taxation (1999) 161 ALR 201 followed National Australia Bank Ltd v Federal Commissioner of Taxation (1997) 151 ALR 225 cited Wharf Properties Ltd v Commissioner of Inland Revenue [1997] AC 505 discussed Lloyd Werft Bremerhaven GmbH v Owners of the Ship "Zoya Kosmodemyanskaya" (1997) 79 FCR 71 followed National Mutual Holdings Pty Ltd v Sentry Corporation (1989) 87 ALR 539 followed Allstate Life Insurance Co v Australia and New Zealand Banking Group Ltd (No. 33) (1996) 137 ALR 138 cited Bumper Development Corp Ltd v Commissioner of Police of the Metropolis [1991] 4 All ER 638 cited Federal Commissioner of Taxation v Ryan (1998) 82 FCR 345 referred Batagol v Commissioner of Taxation (1963) 109 CLR 243 referred Austin Distributors Pty Ltd v Federal Commissioner of Taxation (1964) 13 ATD 429 referred MIM Holdings Ltd v Federal Commissioner of Taxation (1997) 97 ATC 4420 referred Danmark Pty Ltd v Federal Commissioner of Taxation (1944) 7 ATD 333 referred Restatement, 2d, Contracts, § 224 cited Ley v Fred T Ley & Co 65 N.Y.S.2d 843 (N.Y. App. Div. 1946), aff'd 296 N.Y. 956, 73 N.E.2d 266 (1947) cited Matter of Uraga Dock Co 179 N.Y.S.2d 474 (N.Y. App. Div. 1958), aff'd 6 N.Y.2d 773, 159 N.E.2d 212 (1959) cited Merritt Hill Vineyards Inc v Windy Heights Vineyards Inc 61 N.Y.2d 106 at 113, 460 N.E.2d 1077 (1984) cited Pollack v Nemet Motors, Inc 561 N.Y.S.2d 457 (N.Y. App. Div. 1990) cited Oppenheimer & Co v Oppenheim, Appel, Dixon & Co 86 N.Y.2d 685, 660 N.E.2d 415 (1995) cited Hicks v Bush 10 N.Y.2d 488, 180 N.E.2d 425 (1962) cited Kapson Construction Corp v ARA Plumbing and Heating Corp 642 N.Y.S.2d 701 (N.Y. App. Div. 1996) cited Federal Deposit Insurance Corporation v Commissioner of Taxation and Finance 594 N.Y.S.2d 447 (N.Y. App. Div. 1993), aff'd 83 N.Y.2d 44, 628 N.E.2d 1330 (1993) cited American Express Co v Tax Appeals Tribunal 597 N.Y.S.2d 485 (N.Y. App. Div. 1993), leave den. 82 N.Y.2d 663, 632 N.E.2d 461 (1993) cited P E Nygh, Conflict of Laws in Australia (6th Ed, 1995) referred Richard Fentiman, "Foreign law in English courts"(1992) 108 The Law Quarterly Review 142 THE BROKEN HILL PROPRIETARY COMPANY LIMITED v THE COMMISSIONER OF TAXATION FOR THE COMMONWEALTH OF AUSTRALIA VG 110 of 1994 THE BROKEN HILL PROPRIETARY COMPANY LIMITED v THE COMMISSIONER OF TAXATION FOR THE COMMONWEALTH OF AUSTRALIA VG 24 of 1998 KENNY J MELBOURNE 23 NOVEMBER 1999 IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VG110 OF 1994 BETWEEN: THE BROKEN HILL PROPRIETARY COMPANY LIMITED (ACN 004 028 077) Applicant AND: THE COMMISSIONER OF TAXATION OF TAXATION FOR THE COMMONWEALTH OF AUSTRALIA Respondent JUDGE: KENNY J DATE OF ORDER: 23 NOVEMBER 1999 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. The appeal be allowed. 2. The objection decision the subject of the appeal be set aside. 3. The matter of the objection be remitted to the respondent to be considered and decided according to law. 4. The respondent pay the applicant's costs of and incidental to the appeal. AND THE COURT DECLARES THAT: The sum of $198,331,374 specified in the notice of objection is an allowable deduction under s 51(1) of the Income Tax Assessment Act 1936 (Cth). Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VG 24 OF 1998 BETWEEN: THE BROKEN HILL PROPRIETARY COMPANY LIMITED (ACN 004 028 077) Applicant AND: THE COMMISSIONER OF TAXATION FOR THE COMMONWEALTH OF AUSTRALIA Respondent JUDGE: KENNY J DATE OF ORDER: 23 NOVEMBER 1999 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. The appeal be allowed. 2. The objection decision the subject of the appeal be set aside. 3. The matter of the objection be remitted to the respondent to be considered and decided according to law. 4. The respondent pay the applicant's costs of and incidental to the appeal. AND THE COURT DECLARES THAT: The sum of $147,941,201 specified in the notice of objection is an allowable deduction under s 80(2) of the Income Tax Assessment Act 1936 (Cth). Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VG 110 OF 1994 VG 24 OF 1998 V 110 of 1994: BETWEEN: THE BROKEN HILL PROPRIETARY COMPANY LIMITED (ACN 004 028 077) Applicant AND: THE COMMISSIONER OF TAXATION FOR THE COMMONWEALTH OF AUSTRALIA Respondent V 24 of 1998: BETWEEN: THE BROKEN HILL PROPRIETARY COMPANY LIMITED (ACN 004 028 077) Applicant AND: THE COMMISSIONER OF TAXATION FOR THE COMMONWEALTH OF AUSTRALIA Respondent JUDGE: KENNY J DATE: 23 NOVEMBER 1999 PLACE: MELBOURNE REASONS FOR JUDGMENT the appeals 1 The applicant, The Broken Hill Proprietary Company Limited ("BHP"), appeals to this Court against the decisions of the respondent, the Commissioner of Taxation ("the Commissioner"), to disallow BHP's objections to assessments to income tax, made by two notices of assessment both dated 21 February 1992 in respect of the year of income ended 31 May 1984 ("the 1984 income year") and the year of income ended 31 May 1985 ("the 1985 income year"). 2 Broadly speaking, the matters in issue arise out of the acquisition by the BHP Group of shares ("the shares") in Utah International Inc ("UII"), Utah-Marcona Corporation ("UMC") and Utah Development Corporation ("UDC"). The acquisition of the shares was the means by which the BHP Group acquired certain of the businesses and assets of those corporations. the assessments 3 The assessment in respect of the 1984 income year had the effect of adding an amount of $198,331,374 to BHP's net income. That amount represented the sum paid by BHP (US$185,539,000) as "interest" under the share purchase agreement. The payment of that sum was claimed by BHP as a deduction in its income tax return for the 1984 income year. The result of the addition of the sum of $198,331,374 was that BHP was assessed as liable to pay income tax on a taxable income of $50,390,173 for what had previously been a loss year. The assessment for the 1984 income year also included an amount of additional tax of $20,333,500, representing a 14.026% per annum penalty for the allegedly unpaid taxes. 4 By treating the interest payment as a deduction, BHP went on to claim carry forward tax losses of $200,087,113. As a result of adjustments (none of which are presently relevant), BHP eventually claimed carry forward losses in the 1985 income year of $147,941,201. The effect of disallowing this deduction was that BHP was assessed as liable to pay tax on a taxable income of $976,689,482. The assessment for the 1985 income year also included additional tax of $50,068,075. the issues 5 The principal issue on these appeals is whether the payment of $198,331,374, by BHP in the 1984 income year ("the interest") is non-deductible under s 51(1) of the Income Tax Assessment Act 1936 (Cth) ("the Act") because it was a loss or outgoing of capital. 6 If the interest is non-deductible, there are two further issues: whether, in the circumstances, the Commissioner was authorised under s 170 of the Act to amend the assessments for the 1984 and 1985 income years; and, if so, whether the additional tax notified and assessed ("the additional tax") was validly imposed on BHP. some of the parties involved in the share acquisition 7 In late 1982, General Electric Company ("GE"), a New York corporation, owned 100% of the issued shares in UII and UMC. UII in turn owned 89.2% of the shares in UDC, a holding company for various mining concerns. (The balance of the shares in UDC were owned by Umal Pty Ltd, a wholly-owned subsidiary of Umal Consolidated Limited ("UCL"). UCL was a publicly-listed Australian company which was de-listed after April 1984.) In late 1982, the Australian assets of UDC included a 76.25% interest in the Central Queensland Coal Associates Joint Venture ("CQCA"), the Blackwater Coal Mine in central Queensland, and a one-third interest in the Mount Goldsworthy Mining Associates Iron Ore Joint Venture in Western Australia. The remaining interests in CQCA were held by the Australian Provident Society (7.75%), Mitsubishi Development Pty Ltd (12%) and UCL (4%). 8 In late 1982, UII operated, directly and through its subsidiaries, steaming coal mines in the United States of America, a copper mine in Canada, iron sands deposits in New Zealand and extensive coal properties in Australia. It also had a substantial interest in an iron ore mine in Brazil. 9 In late 1982, BHP was Australia's largest industrial corporation. It was a publicly listed company. Its business included owning, directly and indirectly, shares in over seventy-five subsidiary companies, managing or overseeing the management of those subsidiaries, and directly conducting business operations, including iron and steel operations, collieries, and transportation and engineering activities. The BHP Group had interests in exploration, mining, minerals processing, steel making, oil and natural gas production and diverse manufacturing activities. negotiations prior to the purchase agreement 10 Around August 1982, negotiations began for the sale by GE and purchase by BHP of GE's shareholding in UII and UMC. The proposed sale and purchase was on a large scale and very complex, involving many businesses and a considerable amount of money. In an affidavit sworn on 15 December 1997, Mr R J Flew, BHP's Group general manager investor relations and from 1981 to 1984 BHP's assistant treasurer, said: BHP agreed to purchase the shares in the Utah Companies as the shares (and in particular the underlying assets) would generate very significant amounts of income consistent with its growth strategy and would complement BHP's other business assets and form a strategic part of BHP's business, which included owning and operating significant mining operations (including coal mining) through its various subsidiaries. In particular, it was thought that the Australian coal assets owned by Utah would complement BHP's existing Australian coal holdings and provide efficiencies which would further increase the profitability of the mines. GE and BHP executed a memorandum of intention on 27 January 1983 in which the parties "set forth the preliminary understandings which have been reached as a basis upon which GE and BHP will endeavour to negotiate an acquisition agreement". The proposed purchase price was US$2,330,000,000 plus the consolidated net income of UII, UMC, UDC and their subsidiaries for the period 30 June 1982 to 31 December 1982. (The purchase price also provided for some deductions to be made, none of which are presently material.) If the sale was completed, BHP was to pay interest on the purchase price (including consolidated net income) "at the rate of 13 per cent per annum from January 1, 1983 to the date of closing but in no event in an amount greater than the consolidated net income" of UII, UMC, UDC and their subsidiaries during that period. The memorandum noted that any future agreement was to be conditional, amongst other things, on the introduction of other participants into the share acquisition and on satisfactory financing. 11 In order to calculate an acceptable purchase price for the shares (and to arrange finance and other matters), it was necessary for the parties to agree on a date for the valuation of the underlying assets of UII and UMC. The parties agreed upon the date of 1 January 1983, having regard to the fact that the relevant financial year for UII and UMC ended on 31 December 1982 and that the accounts would be audited to that December date. 12 The value of the assets as at 1 January 1983 was determined by estimating the present value of future cash flows to be derived from the assets over a twenty-year period by reference to past performance as well as future projections. In evidence, Mr Flew said (at transcript ("T") 36): The price we agreed to pay was based on the valuations [of the business and the properties to be transferred] determined by future cash flows as negotiated with General Electric. Speaking of the period from August 1982 until January 1983, Mr Flew said in cross-examination (at T 43) that: The prime focus of all the negotiations at this time was to see if we could agree value, and very little consideration was given to any drafts [of sale agreements] that might have been floating around and the focus was entirely on, "Do we get close enough with values to have a deal?" 13 Before January 1983, negotiations between GE and BHP included a proposal that GE retain the profits earned by UII and UMC prior to the completion of the sale. The proposal ceased to have currency, however, after GE and BHP agreed, in January 1983, that the sale should proceed on the basis that UII and UMC retain the profits for the period 1 January 1983 to the closing. As will be seen, the Commissioner placed weight on the fact that, whilst the possibility that GE retain the profits ceased to figure in negotiations after January 1983, nonetheless there was no change in the purchase price being discussed at that time. 14 The memorandum of intention executed in January 1983 reflected the parties' understanding that GE would cease to have any entitlement to profits from 1 January 1983. From that date until completion, GE was to receive what was termed "interest" on the purchase price (ultimately at an agreed rate of 12% per annum), subject to a cap equal to the Utah companies' net consolidated income during the same period. 15 Mr Flew deposed, in his December 1987 affidavit, that: BHP believed that, having agreed [on] an effective date and valuation for the businesses, BHP took on the business risk in terms of the future operations of the businesses and the financial risk of arranging all the complex consequential consortium transactions, and that GE was assuming a financial risk. Mr Flew went on to describe the benefit of the "interest" proposal in the following terms: For BHP this meant that GE would not benefit by delaying the process in the event that interest was higher than profit. Also, GE would have an incentive to manage the businesses normally. It would not be in GE's interest to run the businesses down as a low profit would mean a low interest payment. Furthermore, by BHP agreeing to pay no more than interest calculated at 12 per cent, it meant that GE had no incentive to take any number of actions (eg skimp on maintenance, suspend exploration, increase production and inventories) to obtain short term profits in excess of interest. To align the amount of interest payable with the net income of the businesses may have materially impacted the value of the investment and long term profit earning capability. The combination of these arrangements afforded BHP practical surety that the businesses would be in good condition after closing. Mr Flew amplified these comments in cross-examination, observing that, had GE been able to conduct the businesses so as to maximise profit artificially, then the value of the businesses being bought by BHP could have been materially diminished: see T 111-2. the purchase agreement 16 A purchase agreement ("the purchase agreement") was ultimately entered into on 15 April 1983. According to its terms, the agreement was to "be governed by and construed in accordance with laws of the State of New York": s 6.8(d). Neither party submitted that the law of New York was relevantly different from the law ordinarily applied in this Court. Neither party adduced evidence as to New York law, by way of expert testimony. These appeals proceeded on the basis that, in so far as it might matter, the law ordinarily applied in this Court was the same as the law of the State of New York. 17 Article 1 provided for a purchase price for the shares and for the payment of interest on that price from the date at which the purchase price was calculated. Section 1.1 relevantly provided: Subject to the terms and conditions herein set forth and on the basis of the representations, warranties and agreements herein contained, BHP purchases from GE, and GE sells to BHP, the Shares … as at and from January 1, 1983 (the "Sale") for $2,410,194,000. Interest shall be payable on such purchase price for the period from December 31, 1982 through the Closing Date calculated at the rate of 12 % per annum but not in excess of the combined net income (excluding amounts received or accrued, if any, from GE and its subsidiaries, other than the Businesses, for foreign tax credits in excess of those which would have been utilizable by the Businesses as an independent company) of the Businesses for such period. Such payment of interest shall be free and clear, and without deduction, of any withholding, or, if any withholding is required, BHP shall pay additional interest so that the net amount actually received by GE shall be equal to the amount provided in the foregoing sentence to be due. The term "Businesses" was defined so as to cover businesses and assets of companies whose shareholding was held by GE through UII and UMC (excluding certain businesses and assets that were not to be included in the sale, referred to in the purchase agreement as "Excluded Assets"). GE agreed to procure UII and UMC to distribute the Excluded Assets to GE at settlement, with the result that they would not be assets of the companies in which BHP had purchased the shares. 18 Under the purchase agreement as executed on 15 April 1983, the closing date was to be 31 October 1983 (or any other agreed date on which the closing actually occurred): see s 1.3. BHP's obligation to pay the purchase price and to pay the amount termed "interest" arose at the closing, as did GE's obligation to deliver share certificates in transferable form. Section 1.3 relevantly provided: At the Closing, GE shall deliver to BHP against receipt of payment in the amount determined as provided below in this Section 1.3 certificates representing the Shares and any Additional Shares, in each case in proper form for transfer, duly endorsed in blank … . (As it turned out, there were no additional shares involved in the transaction.) Section 1.3 continued: The amount to be paid on the Closing Date shall be the amount stated in Section 1.1 hereof plus … the amount of interest payable pursuant to Section 1.1 determined by calculating the limitation thereon to combined net income of the Businesses by reference to [accounts based on 31 December 1982]. As soon as practicable after the closing date, BHP was to prepare and deliver a set of accounts to GE as well as "a computation of the amount of interest payable pursuant to Section 1.1 hereof for such period … and of any consequent underpayment or overpayment of such amounts made at the Closing Date". The determination of the amount of interest payable was to be conclusive, in the absence of manifest error: see s 1.3. 19 The representations and warranties contained in the purchase agreement were representations and warranties both as at the date of the agreement and, subject to relevant exceptions, as at the closing date: s 4.1(a). Central to the agreement made in April 1983 were the provisions in Article III relating to "consortium and financing arrangements". Section 3.1(a) relevantly provided: It is BHP's objective to arrange on terms satisfactory to it a consortium to participate in the ownership of certain of the Australian coal properties of UDC and of BHP and financing which, taken together, will provide the funds which will satisfy the condition to its obligations referred to in Section 4.1(c) hereof. Section 3.1(b) added: BHP will use reasonable efforts to carry out in a timely fashion its objective expressed in the first sentence of Section 3.1(a) hereof. If BHP shall not carry out such objective, GE's sole remedy shall be its right of termination of this Agreement set forth in Section 5.1(c)(ii) hereof. There were covenants on GE's part governing BHP's access to information with respect to the businesses prior to the closing (e.g. in s 3.3(a)); and covenants on BHP's part with respect to the preservation of, and access to, books and records subsequent to closing (e.g. s 3.16). 20 Control over the business was retained by GE until the closing, although in the exercise of control, GE was bound to conform to undertakings for BHP's benefit. Under s 3.3(c), GE undertook, subject to the agreement, to use its reasonable efforts to preserve substantially intact the business organization of the Businesses, to keep available the services of the present officers and employees [of the Utah companies] and … to preserve the present relationships of the Businesses with persons having significant business relations therewith. GE also undertook to confer with BHP's representatives from time to time to "keep it informed with respect to operational matters of a material nature and to report the general status of the ongoing operations of the Businesses". Under s 3.3(d), GE undertook to cause, amongst others, UII and UMC "to conduct the Businesses only in the ordinary course" and not, without the prior consent of BHP, to (i) issue any capital stock or other ownership interest, (ii) grant any options … or other rights to subscribe for or purchase … any shares of its capital stock or other ownership interest …, (iii) declare, set aside, or pay any dividend or make any distribution with respect to the capital stock or other ownership interest of [UII], UMC or any Subsidiary or Affiliates (except dividends or distributions by wholly-owned Subsidiaries to their parent corporations and except, prior to the restructuring referred to in Section 3.2 hereof, cash dividends in the ordinary course by UDC). BHP's obligation to pay, in ss 1.1 and 1.3, was subject to various conditions, including in s 4.1(c) that BHP shall have obtained, in the manner contemplated by Section 3.1 hereof or otherwise, the funds which it requires to pay for the Shares purchased hereunder. GE had no right to the purchase price if BHP failed in its objective to arrange finance: s 3.1(b). Article V made provision generally for terminating the agreement if various conditions were not satisfied, including, in s 5.1(c)(ii), by GE, if BHP advised GE that "it has become evident to BHP that the participation and financing referred to in Section 3.1(a) hereof will not be available". the amendment agreements 21 Negotiations between the parties continued after April 1983, concluding shortly prior to the closing. Indeed, as will be seen, the Commissioner sought to make something of Mr Flew's evidence that there were numerous occasions prior to the closing on 2 April 1984 when it appeared the share acquisition might fail. For present purposes, it suffices to note that the negotiations after April 1983 resulted in two amendments to the purchase agreement, the first on 6 December 1983 and the second, in the following year. 22 The amendment agreements had to do principally with the consortium which was to participate in the ownership of certain of the Australian coal assets of UDC and BHP as contemplated by s 3.1(a). Mr Flew's evidence was that BHP ran into difficulties in arranging the consortium, and that key aspects were not finalised until late in 1983. (The proposed arrangements were complex and, as they have no immediate relevance to the principal issue in these appeals, I do not set them out.) 23 Although I do not think much ultimately turns upon the fact, I note that by the December 1983 amendment agreement, s 1.1 of the purchase agreement was amended so as to read: (a) Subject to the terms and conditions herein set forth and on the basis of the representations, warranties and agreements herein contained, BHP purchases from GE, and GE sells to BHP, the Shares … as at and from January 1, 1983 ("the Sale") for (i) $2,410,194,000 [less various amounts and plus any additional tax cost]. (b) Interest shall be payable on such purchase price for the period from December 31, 1982 through the Closing Date calculated at the rate of 12% per annum but not in excess of the combined net income of the Businesses and the GE/UDC Businesses (as defined in Section 3.1(i) hereof) (excluding amounts received or accrued, if any, (i) from GE and its subsidiaries, other than the Businesses and the GE/UDC Businesses, for foreign tax credits in excess of those which would have been utilizable by the Businesses and the GE/UDC Businesses as an independent company and (ii) as a result of (A) any sales and transfers by UDC as provided in Section 3.1(f) hereof and (B) any sale of inventories as provided in Section 3.1(h) hereof). The December 1983 amendment agreement also provided for a closing date of 2 April 1984. Section 3.1(b) was amended and re-located as s 3.1(r). Section 3.1(r) provided that: If BHP or GE shall not achieve its objectives expressed in this Section 3.1, the sole remedy, if any, of the other party hereto shall be its rights of termination set forth in Section 5.1 hereof. The evidence given by Mr Flew in cross-examination was that finance was not practically in place until March 1984. 24 The second amendment agreement, dated as at 1 March 1984, provided not only for further matters arising from the consortium arrangements as finally agreed, but also for some non-material changes to s 1.1(a), some changes to s 1.2 (to permit both BHP and GE to assign their respective rights and obligations under the purchase agreement); and some changes to s 1.3 (in relation to the amounts to be paid at the closing). The effect of one of the amendments to s 1.3 was to omit reference to BHP's obligation to pay interest on the closing date. No party submitted that anything turned upon the omission. The obligation remained in s 1.1, together with BHP's obligations regarding adjustment for the over- or under- payment of interest in s 1.3. the closing 25 For the purposes of these appeals, it is generally sufficient to record that the transactions prior to the closing were complex (most of the details of those transactions having no immediate bearing on the issues raised for determination). 26 In March 1984, General Electric Holdings Inc ("GEH"), a wholly-owned subsidiary of GE, became the holder of the shares in UII, UDC and UMC. Shortly before the closing, GE assigned to GEH its right to sell the shares in UII, UMC and UDC to BHP and to receive the proceeds of sale. 27 Also shortly before the closing, BHP assigned to its subsidiary, BHP Holdings (USA) Inc ("BHPH USA") its rights to acquire the shares in UII and UMC subject to certain of its obligations under the purchase agreement as amended (but not including the obligation to pay interest). All of the assets of UII and UMC (other than assets owned by UDC) were located out of Australia and were to be managed in North America. At the same time, BHP also assigned to BHP Petroleum Pty Ltd ("BHPP"), another wholly-owned subsidiary, its rights to acquire shares in UDC subject to certain of its obligations (excluding again the obligation to pay interest). According to Mr Flew's undisputed evidence, BHP assigned these shares to BHPP because it "was one of the most profitable companies in the BHP group and its cash flow was expected to be sufficient to pay the interest on the long term borrowing to be undertaken to assist in financing the acquisition of UDC". Part of the consideration for BHP in each case causing the shares to be transferred to BHPH USA and BHPP was an agreement that, if requested by BHP, the assignees would declare dividends of up to 80 per cent of their after-tax profits. 28 The closing of the purchase agreement as amended was effected in New York on 2 April 1984. At the closing, the shares in UDC were transferred to BHPP; and the shares in UII and UMC were transferred to BHPH USA. The amounts paid at the closing were the purchase price of US$2,410,194,000 less US$377,745,000 (15.5 x $21,790,000) plus an adjustment of US$10,459,750 under s 1.1(a)(vi) of the purchase agreement. In addition, BHP paid interest in the sum of US$185,539,000 under s 1.1(b). This was equal to A$198,331,374; and, by virtue of the net income cap contained in s 1.1(b), represented an amount calculated at a rate of between 7-8%, per annum of the purchase price, and not at the rate of 12% mentioned in s 1.1(b). 29 In accordance with the purchase agreement, the profits derived by UII, UMC and UDC from 1 January 1983 to 2 April 1984 were retained by the respective companies. The payment of US$185,539,000 was calculated by reference to unaudited profit statements. When the statements were audited, it was found that the sum of A$6,562,316 had been overpaid. That amount was refunded to BHP during the year ended 31 May 1985. 30 Profits of the Utah companies for the period between 1 January 1983 and the closing on 2 April 1984 were included in the BHP Group Statement of Profit as an extraordinary item. The amount of the interest was also included as an extraordinary item. further facts relied on by the commissioner – the real deal? 31 The Commissioner submitted that the evidence established that: The agreement was originally to have been that GE would receive the Utah profits as a dividend. … [U]nder that scenario: (a) the purchase price was … to be $2.4 billion; (b) no interest on that unpaid purchase price was to be paid; (c) but GE would strip the current year profits from Utah by way of dividends. What was agreed was to substitute the current form of payment so: (a) the amount which GE would have received as a dividend remained in Utah; (b) the capital value of Utah would be increased by that amount; (c) BHP would pay out to GE the net after tax amount as so called "interest". [T]he commercial deal which was struck was for BHP to purchase the Utah shares either with or without the profits derived by the businesses between 1 January 1983 and the date of closure. If BHP was to acquire the shares without the profits, then it would pay only $2.4 billion (Note: without interest). If BHP was to acquire the shares with the profits then it was to pay GE both the $2.4 billion and an amount equal to those profits. Assuming for the moment that evidence as to pre-contractual negotiations is admissible in these appeals (but see below), did that evidence establish the facts relied on by the Commissioner to found his case? (a) An agreement that GE receive profits as dividends? 32 Mr Flew said in cross-examination that alternative proposals were discussed in negotiations between the parties prior to January 1983: see T 28. He said that, described "very simplistically", there was, on the one hand, a proposal that BHP pay about US$2.4 billion for the shares in the Utah companies, the assets of which were valued as at 1 January 1983, and that GE would enjoy the profits derived by those companies from 1 January 1983 until the closing. On the other hand, there was a proposal that BHP pay the amount of US$2.4 billion, but GE would not take the profits from the companies and, instead, BHP would pay interest on the amount of $2.4 billion capped by reference to the net combined earnings of the companies. As already noted, Mr Flew's evidence was that the former proposal was abandoned in January 1983. 33 In my view, the evidence does not rise any higher and, in particular, does not establish that there was an "agreement" at any stage that, for the period 1 January 1983 to the closing, GE would receive the profits of the Utah companies in the form of dividends. Nor, in my view, does the evidence establish that there was a "commercial deal" to the effect that BHP would purchase the shares regardless of whether GE or BHP ultimately received the profits for the pre-closing period. 34 The Commissioner relied on various documents recording parts of the course of negotiations prior to the parties' entry into the Memorandum of Intention on 27 January 1983. If those documents are admissible, they establish no more than that, in the course of preliminary negotiations, the parties considered various versions of the alternative proposals to which Mr Flew referred; and that, as Mr Flew said in evidence, the first proposal ceased to figure in negotiations by the time the parties entered into the Memorandum of Intention on 27 January 1983. The documents establish no more than that, in the course of preliminary negotiations, the parties focussed, first, on the task of reaching an agreed value for the assets of the relevant Utah companies, and then they went on to discuss the two principal proposals in various manifestations, before agreeing to continue negotiations upon the terms set out in the Memorandum of Intention of 27 January 1983. (b) The function of the interest payment? 35 As Mr Flew conceded in cross-examination, the decision that the sale should proceed on the basis that the profits were to be retained in the Utah companies from 1 January 1983, being the date at which the Utah assets were valued, to the closing did not entail a change in the purchase price. Mr Flew denied, however, that the payment to be calculated as interest was seen by BHP as a mechanism for adjusting the purchase price, although he accepted that the profits would be regarded as cash flow received and, hence, part of the working capital available from 1 January 1983 until the closing: see T 29, 39. 36 In connection with the interest payment's commercial effect, the Commissioner relied particularly on a document, headed "Notes of Discussion 26 January 1983", which had, according to Mr Flew, been annotated by him at some stage. Part of that document read: The buyer noted that there were some items which could affect his view as to the final purchase price and these were mentioned as a possible effect of deductibility of part of the purchase price (post-December adjustment) be regarded as interest. Assuming for present purposes that the author of this document (whose identity is unknown) was referring to what was later to become the provision for the payment of interest, the probable significance of the note in the overall context of protracted negotiations is a matter of conjecture. 37 Some of the other documents recording the course of negotiations, both prior to execution of the purchase agreement in April 1983 and prior to the execution of each of the amendment agreements, also referred to the payment of interest in connection with the purchase price. If these references are relevant to the principal issue raised by these appeals, their precise significance is a matter of surmise, especially when considered in the light of the entire history of the negotiations which were multi-faceted, complex and taking place in two countries over an extended period. 38 In cross-examination, Mr Flew rejected the proposition that the amount referred to as interest in truth represented the sums paid for retained earnings in the Utah companies: see T 53. The following passage (at T 50-1) is illustrative of his evidence as to the character of the transaction. Counsel: Mr Flew, is the view that you adopt of the transaction that BHP was paying the purchase price, excluding the interest component, for the future cash flows of the business? Mr Flew: Yes, we viewed the transaction as having been a value for the businesses, which was determined on future cash flows, to which was added the profits that GE had not taken out of the businesses in the period up to 31 December 1982 and the interest component which we talked about. … Counsel: Mr Flew, at the end of the day, BHP acquired shares which had a value based upon the future cash flows of the businesses. There were also transferred in those shares the retained earnings of [the] Utah Group. Mr Flew, what did BHP pay for the retained earnings? Mr Flew: We did not pay anything over and above the value of the businesses. In answer to a further question along the same lines, Mr Flew said (at T 51): Had the profits for that period been exactly in accord with our cash flow projections then we would have paid no more or no less than what we anticipated they were worth. In answer to the question, whether the retained profits in the Utah companies were valuable to BHP at the date of closing, Mr Flew said in cross-examination (at T 53): Yes, they had to be valuable to us because we had assumed through our cash flows that they would be there. Mr Flew's evidence supported BHP's submission (see below) that the price of $2.4 billion, which had been reckoned by reference to the cash flow projections, was for, amongst other things, the earnings of the Utah companies after the valuation date, and that the sale and purchase under the purchase agreement as amended took place as from that valuation date. Accordingly, so BHP's submission ran, the reason for the interest payment was that GE did not receive the proceeds of sale until the closing, although, under the agreement, the sale was to be effected from the valuation date. (c) The amount of the interest payment to equal profits earned? 39 It was also part of the Commissioner's case that the amount of the interest payment was always going to equal the amount of the combined net profits of the Utah companies whose shares were being acquired by BHP. I reject that submission. Under the purchase agreement, BHP was to pay an amount calculated at 12 per cent per annum on the amount of the purchase price, as defined, subject to an upper limit equal to the combined net income of the Utah companies from 1 January 1983 until the closing (on 2 April 1984). In this connection, Mr Flew denied that the combined net income, expressed as a percentage of the stated purchase price, was most unlikely to have reached 12 per cent. Mr Flew gave evidence in cross-examination (at T 39-40) that: [T]here was no uncertainty as to the maximum possible amount [of interest] payable being 12 per cent on the purchase price. There was certainly uncertainty as to the amount that would actually be paid because it was pegged to profit and that remained an uncertain amount until the end. He said further in cross-examination (at T 109-110): The estimated profit at the time we did the deal, for any specific year, was not absolutely determinable. It was a matter of forecasting and could well have exceeded 12 per cent. As already noted, the actual profit rate for the Utah companies for the period 1 January 1983 to the closing was in the vicinity of 7-8%. The Commissioner relied on schedules ("D-1" and "D-2") to the purchase agreement which showed profitability rates of 9-10% for 1981 and 1982. Counsel for the Commissioner put to Mr Flew that BHP "had no basis for assuming … the figure would be anywhere near the 12 per cent", to which Mr Flew responded (at T 110): We had sufficient information to be uncertain about what the number could be and we believed that it could be, under some circumstances, significantly greater. In answer to a further question to similar effect, Mr Flew said (also at T 110): The period that we are talking about was a period in which there was considerable volatility in the businesses in which these acquisitions were being made. The value or the specific profit that could eventuate could be influenced by price, volume, currency, any number of factors. Bearing in mind that (so it seems to me) BHP carried a risk of loss for the period 1 January 1983 to the closing and in the absence of evidence to the contrary, I accept Mr Flew's evidence in this regard. (d) Purpose to obtain a tax deduction? 40 The Commissioner further submitted that the interest mechanism was devised solely to take advantage of a tax deduction. In effect, so the Commissioner contended, the interest payment (1) compensated GE for the sale to BHP of shares that at the closing were worth more than at 1 January 1983; and (2) reduced the net cost to BHP of the purchase by the value of the tax deduction that BHP would obtain if the payment were deductible. The Commissioner relied particularly, in this regard, on a memorandum dated 17 March 1983 which was sent by Mr F A Kenna, second in charge of BHP's taxation department, to Mr Willard Taylor, an attorney with the New York law firm, Sullivan and Cromwell. That firm was acting on BHP's behalf in relation to the share acquisition. Again, assuming that the memorandum is admissible on these appeals, it did not, in my view, show anything more than BHP's desire, as recorded in it, "to obtain an Australian tax deduction for the interest payable on the purchase price" and to ensure the provision for interest was drafted so as to maximise the opportunity for that deduction. Given the commercial objects of BHP and of the share acquisition, such desire is scarcely surprising. Kenna's comment, in par 4, that the original wording of Section 1.1 did not show that there was a debt owing at 1st January, 1983 and that what was referred to as interest was really part of the purchase price which would become payable on the closing date is not enough on its own to make good the Commissioner's contention. If the hurdles of admissibility (including relevance) are passed, that comment is not, I think, to be understood as an admission by BHP that the interest provision was merely a device to obtain an illegitimate tax advantage. Kenna is, I think, to be understood as saying merely that the former draft did not give effect to BHP's real intentions. If it were relevant, the evidence does not establish, in my view, that the principal (or a principal) reason for the introduction of the interest provision was to obtain a tax deduction in order to reduce the net cost to BHP of compensating GE for an increase in share value on account of retained profits. Indeed, I am inclined to the view that, if admissible, the documents relating to the drafting of the purchase agreement as amended tend to point to the contrary conclusion. After all, some of those documents show that, prior to the closing, BHP had received legal advice that, although the claim for deductibility of the interest might legitimately be made, acceptance of the claim was by no means guaranteed. evidentiary issues 41 As may be seen from the above discussion, BHP challenged the admissibility of a large number of the documents tendered by the Commissioner, and the documents were admitted subject to BHP's objections. BHP's primary objection rested on the statement of principle contained in the reasons for judgment of Mason J in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 352, which is to the following effect: The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although, as we have seen, if the facts are notorious knowledge of them will be presumed. It is here that a difficulty arises with respect to the evidence of prior negotiations. Obviously the prior negotiations will tend to establish objective background facts which were known to both parties and the subject matter of the contract. To the extent to which they have this tendency there are admissible. But in so far as they consist of statements and actions of the parties which are reflective of their actual intentions and expectations they are not receivable. The point is that such statements and actions reveal the terms of the contract which the parties intended or hoped to make. They are superseded by, and merged in, the contract itself. The object of the parol evidence rule is to exclude them, the prior oral agreement of the parties being inadmissible in aid of construction, though admissible in an action for rectification. Consequently when the issue is which of two or more possible meanings is to be given to a contractual provision we look, not to the actual intentions, aspirations or expectations of the parties before or at the time of the contract, except in so far as they are expressed in the contract, but to the objective framework of facts within which the contract came into existence, and to the parties' presumed intention in this setting. We do not take into account the actual intentions of the parties and for the very good reason that an investigation of those matters would not only be time consuming but it would also be unrewarding as it would tend to give too much weight to these factors at the expense of the actual language of the written contract. Mason J was, of course, primarily concerned with an evidentiary rule governing the construction of written contracts. There was, in this case, no relevant uncertainty about the meaning of the purchase agreement. What was uncertain was the character, for income tax purposes, of the payment made pursuant to s 1.1 of the purchase agreement, the meaning of which was plain enough. Evidence of the surrounding circumstances, including the prior negotiations, was not rendered admissible by reason of an ambiguity of the kind to which Mason J referred. To the extent that the Commissioner sought to rely on the documentary record as evidence of prior negotiations to assist in construing the purchase agreement, that evidence was inadmissible. I accept, however, that this was not the only purpose for which the Commissioner sought to adduce the documentary record of the surrounding circumstances, including negotiations relating to the purchase agreement. 42 It seems to me, however, that little of the evidence relating to the contractual negotiations is relevant to the Court's inquiry on these appeals. As Hill J said in JB Chandler Investment Company Ltd (in liq) v Commissioner of Taxation (1993) 47 FCR 588 at 598: [T]o accept that the circumstances in which a payment is made will be relevant to a determination of the character of that payment in the hands of a recipient is not to say that surrounding circumstances can be used to contradict the words of an agreement reached between parties bargaining at arm's length as to what the consideration for a particular payment is to be, except in a case (and the present is not such a case) where it is claimed that the agreement is a sham and does not represent the true intention of the parties to it. Having regard to that observation (with which I agree) the evidence of contractual negotiations was of limited, if any, relevance to the question of deductibility. That is not to say that other evidence, of an objective kind, about the character of the payment made pursuant to s 1.1 of the purchase agreement, as, for example, the basis of valuation, was not relevant: it plainly was. 43 Besides objecting to the admissibility of almost all the documents tendered by the Commissioner on the grounds of relevance, BHP made specific objections to a comparatively small group of particular documents. Included in that group were documents (discovered by the Commissioner and to which O 18 r 3 of the Federal Court Rules applied) that had been provided to the Commissioner by the Internal Revenue Service of the US Department of Treasury ("the IRS documents"). 44 The IRS documents may be identified as SB113, 118, 123, 124 and 125 (together with SB5). SB113 is a copy of a letter dated 18 July 1984 from the IRS written by Mr John W Hott, Director, Corporation Tax Division, to Messrs Willard B Taylor and M Bernard Aidinoff, both of Sullivan and Cromwell, relating to a request for a ruling for GE. SB118 is a copy of a letter dated 5 November 1984 from the IRS, also written by Mr Hott, and addressed to Mr Taylor of Sullivan and Cromwell, relating to a request for a supplementary ruling. SB123, headed "Department of Treasury – IRS – Notice of Proposed Adjustment" is addressed to GE and GEH and its contents indicate that it was intended to notify those companies of an IRS decision with respect to their taxation liability for the interest payment. SB124 headed "Form 886A – Explanation of Items", does not record its author, although its contents and that of SB123 indicate that it was written by an officer of the IRS. SB125, headed "Reply to NPA I.E. – 3", does not record its author. Perusal of the contents of SB125 suggest, however, that he or she might have been an employee of GE but that is by no means clear. SB5 was, it seems, an attachment to SB125. 45 The Commissioner submitted that the IRS documents fell within s 69 of the Evidence Act 1995 (Cth) and, in consequence, the hearsay rule did not apply to them. Relying on Compafina Bank v Australian and New Zealand Banking Group Ltd [1982] 1 NSWLR 409 ("Compafina"), the Commissioner submitted that the Court should infer from the contents of the IRS documents that their authors might reasonably be supposed to have had personal knowledge of the facts stated in the documents, and that the Court should infer that the statements were made in the course of and for the purposes of the business of GE and the IRS. In the latter connection, the Commissioner referred to Ritz Hotel Ltd v Charles of the Ritz Ltd (1987) 14 NSWLR 116. 46 I reject these submissions. At best, the evidence establishes that the documents formed part of the records of the Commonwealth (s 182). Even if I were to accept that they formed records of the IRS and GE for the purpose of a business (as defined in the Evidence Act), the Commissioner made little attempt to identify the representations recorded in the documents (some of which were lengthy) which were, on his submission, to be excepted from the hearsay rule. In so far as the Commissioner did so, I am unable to draw the inferences upon which the Commissioner relies to satisfy s 69(2) of the Evidence Act. In any event, were there any doubt about the matter, I would hold that the documents in question were either inadmissible on the grounds of relevance; or should not be admitted on the grounds referred to in s 135(a) and (b) of the Evidence Act: cf Compafina at 412. 47 Besides the IRS documents, there were a number of other specific documents, to the tender of which BHP objected. As it turned out, not much turned on those documents. For the reasons advanced by BHP at the hearing, I would uphold the objections. question one: the application of s 51(1) (a) General observations 48 At the relevant times, s 51(1) of the Income Tax Assessment Act 1936 (Cth) ("the Act") provided: All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income. It was not in dispute that the outgoing of $198,331,374 satisfied both of the positive limbs of s 51(1). That is, it was not in dispute that the outgoing was incurred: (a) in gaining or producing assessable income; and (b) in carrying on BHP's business, being a business which was carried on for the purpose of gaining or producing assessable income. As we have seen, BHP carried on businesses which included holding shares in and managing its subsidiaries. The holding of shares in subsidiaries can of itself constitute the carrying on of a business for the purposes of s 51(1) of the Act: cf Esquire Nominees Ltd v Commissioner of Taxation (1973) 129 CLR 177 at 221 per Menzies J and Brookton Co-operative Society Limited v Commissioner of Taxation (1981) 147 CLR 441 at 469 per Aickin J. The principal issue in this case is whether the outgoing of $198,331,374 is an outgoing of a capital nature as the Commissioner contended, or on revenue account as BHP would have it. 49 On the one hand, the Commissioner's case was that the payment of $198,331,374 was made to secure the increased value of the shares between 1 January 1983 and the closing on 2 April 1984. The shares were, so the Commissioner submitted, necessarily worth more in April 1984 than in January 1983 because of the profits earned by and retained in UII and UMC during that period. The Commissioner relied upon the facts that (1) initial negotiations proceeded on the basis that GE would take the profits earned by UII and UMC from 1 January 1983 until the closing; and (2) although it was ultimately agreed that those profits would remain in UII and UMC until the closing, the purchase price did not alter in consequence, rather the price attracted an additional payment called "interest". The Commissioner submitted that none of the amount of $198,331,374 was paid by BHP for the delay in the payment of the purchase price of $2.4 billion. 50 The case for BHP, on the other hand, was that the payment of $198,331,374 was made on account of the fact that the shares in UII and UMC were sold to BHP (or its assignee) as from 1 January 1983, but GE (or its assignee) was not to receive the purchase money until the closing, which turned out to be in April 1984. In substance, what had been agreed by the purchase agreement was, so BHP submitted, that (1) if the sale were completed, then BHP would purchase the businesses and assets of UII and UMC, through the share acquisition, as from 1 January 1983, by payment of a purchase price calculated by reference to valuations and accounts as at 31 December 1982; (2) after that date, GE would lose the benefit of the income attributable to the shares arising from the businesses conducted by UII and UMC (which BHP would acquire on the closing); and (3) BHP would pay interest on the purchase price (capped by reference to UII and UMC profits) to GE (or its assignee) from 31 December 1982 to the closing date. Properly understood, so BHP submitted, the interest was compensation for the delay between GE's loss of the use and enjoyment of its shares and its receipt of the purchase price. 51 Plainly enough, the difficulty in the present case is to determine the character of the advantage sought by BHP in paying the amount of $198,331,374 to GE: cf Colonial Mutual Life Assurance Society Ltd v Federal Commissioner of Taxation (1953) 89 CLR 428 at 454 per Fullagar J (with whom Kitto and Taylor JJ agreed) and Commissioner of Taxation v South Australian Battery Makers Pty Ltd (1978) 140 CLR 645 ("Battery Makers") at 656 per Gibbs ACJ (with whom Stephen and Aickin JJ concurred). The fact that the payment is called "interest" in the purchase agreement is not determinative of its character which may, on examination, turn out not to be interest in the true sense at all: cf Battery Makers at 655; Cliffs International Inc v Commissioner of Taxation (1979) 142 CLR 140 ("Cliffs") at 148; and NM Superannuation Pty Ltd v Young (1993) 41 FCR 182 at 198-9. Nor is the payment necessarily of a capital nature simply because it is made in the performance of a promise given as part of the consideration for the acquisition of a capital asset. If, however, the payment is made as part of the purchase price of an asset forming part of the fixed capital of a company, then the payment is an outgoing of capital or of a capital nature: cf Cliffs at 148. 52 The characterisation of the payment of $198,331,374 turns on the question, what was the payment for? What was the character of the obligation which the payment discharged? The answer depends very largely, although not entirely, on the effect of the purchase agreement. It does not, of course, depend on "what other transactions the taxpayer might have made to achieve a commercial result substantially the same" as that said to flow from the agreement: cf Commissioner of Taxation v Orica Ltd (1998) 194 CLR 500 at par 70 per Gaudron, McHugh, Kirby and Hayne JJ. The Commissioner does not allege sham. Nor does he rely on Part IVA of the Act. The focus in this case is, therefore, on the effect of the purchase agreement made between the parties, although there are some other matters besides the terms of the agreement which are relevant to the inquiry: cf Australian and New Zealand Savings Bank Ltd v Commissioner of Taxation (1993) 42 FCR 535 at 560; reversed on other grounds (1994) 181 CLR 466. (b) The character of the purchase agreement 53 The purchase agreement entered into by BHP and GE on 15 April 1983 was a conditional contract for the sale and purchase of shares. I accept that, as BHP submitted, neither of the amendments made to the original agreement had the effect of rescinding the agreement. Instead, the original agreement continued in force, although in its twice amended form. That was what the parties plainly intended: see Tallerman & Co Pty Ltd v Nathan's Merchandise (Victoria) Pty Ltd (1957) 98 CLR 93 at 112. Indeed, the Commissioner did not submit to the contrary, notwithstanding that there was a possible hiatus between the parties' failure to close on 31 October 1983 (as originally stipulated in s 1.3 of the agreement) and failure to conclude a formal agreement to amend (to fix another date) until 6 December 1983. 54 The purchase agreement was conditional in the sense that, whilst there was on foot as at 15 April 1983 a binding contract for the sale of shares, there were conditions precedent to the parties' respective obligations to "close" the contract: see Art IV, especially s 4.1. Although the contract gave rise to a set of binding obligations, the performance of some of those obligations was not required unless and until certain conditions precedent were either met or waived: cf Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537 at 542 per Gibbs CJ, 551-2 per Mason J, 556 per Wilson J and 565-6 per Brennan J (with whom Stephen J agreed). Any failure to satisfy the conditions precedent gave rise to a right to terminate the contract: Art V. Save, perhaps, briefly in November 1983, the parties were not, however, at liberty at any stage after 15 April 1983 to terminate the contract at will. The representations and warranties in Articles II and III of the purchase agreement, represented and warranted, as at the date of the agreement and the closing, depended to a large extent on future events involving the conduct of third parties. 55 Probably the most important condition on sale was that BHP obtain the funds that it was required to pay under the purchase agreement. GE's right to obtain the purchase price for the shares depended upon the satisfaction of that condition: see ss 1.1, 3.1(b), 3.1(r), 4.1(c) and 5.1(c)(ii) of the purchase agreement as amended. That is not to say, however, that the purchase agreement did not give rise to binding obligations in relation to the payment of the purchase price as from 15 April 1983. BHP had, as we have seen, assumed an obligation to use "reasonable efforts to carry out" its objective to arrange a consortium to participate in the financing for the share purchase: see s 3.1(b) (amended to become s 3.1(r)) set out above. An obligation may be binding, though it leaves a party (here, BHP) a latitude of choice as to the manner it goes about discharging it: see, e.g., Thorby v Goldberg (1964) 112 CLR 597. Further, upon satisfaction (or waiver) of the relevant conditions precedent, GE and BHP were bound to perform their respective obligations at the closing and, in BHP's case, to pay the purchase price. If BHP succeeded in arranging financing (and assuming other relevant conditions were satisfied), GE was bound to proceed on the purchase agreement; and BHP could not decline to proceed because, for example, some economic downturn had lessened the value of the shares, or some other event extrinsic to the contract had made the purchase less attractive to it. 56 I accept, as the Commissioner submitted, that the ownership of the shares was not transferred from GE to BHP on entry into the purchase agreement on 15 April 1983 and that the transfer did not occur before the closing: see s 1.3. I also accept, as BHP submitted, that on entry into the agreement, BHP acquired the protection of equity to the extent of its interest under the agreement. If, for example, GE had set out to sell the shares to another purchaser or to destroy the underlying businesses and assets, BHP would have been entitled to injunctive relief. BHP had, in that sense, acquired an interest in the shares commensurate with the extent to which equity would protect it: see Stern v McArthur (1988) 165 CLR 489 at 522 per Deane and Dawson JJ and Commissioner of Taxation v Woolcombers (WA) Pty Ltd (1993) 47 FCR 561 at 574. 57 Upon entering the purchase agreement, GE was deprived of much of the use and enjoyment of the shares, in so far as it was precluded from selling them or plundering the underlying businesses and assets. GE could not have declared dividends in its favour, since under the purchase agreement it had precluded itself from so doing. Upon satisfaction (or waiver) of the relevant conditions precedent, it (or its assignee) was bound to transfer the shares to BHP (or its assignee). Further, in the period prior to the closing, GE was unable to run the underlying businesses simply as it pleased, but was bound, by virtue of s 3.3 of the purchase agreement, to conduct the businesses only in the ordinary course and, as we have seen, to keep BHP informed on operational matters. Had GE departed from its contractual obligations in this regard, BHP might have sought appropriate injunctive relief. 58 GE was, to use Harman LJ's expression in Wood Preservation Ltd v Prior [1969] 1 WLR 1077 at 1097, "tied hand and foot". In that case, there was a conditional contract for the sale of shares, pursuant to which the vendor precluded itself from declaring dividends or paying bonuses and from conducting its business other that in the ordinary course. Of that situation, Lord Donovan said at 1095-6: The shares (in a word) were like a tree which the owner could not sell and could not cut down and of which he could enjoy none of the fruit. The Court of Appeal held in that case that the vendor had, on entry into the share sale contract, given up the beneficial ownership of the shares for the purposes of s 17 of the Finance Act 1954. In relation to these appeals, it suffices to say that, upon entry into the purchase agreement, GE was deprived of so much of its beneficial interest in the shares as equity would deny it. Consequently, I reject the Commissioner's submission that the 15 April purchase agreement did not constitute a contract binding as between the parties. (c) Was the purchase agreement retroactive in any sense? 59 Absent any contractual provision to the contrary, on the completion of a contract for sale, "some of the equitable rights of the purchaser, which (in their entirety) then constitute constituting beneficial ownership" may relate back to the date of the contract: cf Kern Corporation Ltd v Walter Reid Trading Pty Ltd (1987) 163 CLR 164 at 192 per Deane J. Under the purchase agreement with which we are now concerned, the transfer from GE to BHP of beneficial ownership in the shares was to relate back to 1 January 1983 (in so far as that was possible), rather than the date of the agreement, 15 April 1983. Under the purchase agreement, GE agreed to sell, and BHP agreed to purchase, the shares "as at and from January 1, 1983": s 1.1. That date was chosen because the underlying businesses and assets could be (and were) valued as at 1 January 1983. It was from that date, pursuant to the agreement, that BHP was to acquire the right to the enjoyment of any earnings to which the shares gave rise; and it was from 31 December 1982 that GE was to give up any entitlement to those earnings. As already noted, pursuant to s 1.1 of the purchase agreement as amended, from 31 December 1982 interest was payable on the purchase price. The purchase agreement was "retroactive" in the sense that it provided for a transfer of entitlement as at 1 January 1983, and not as at the date of the agreement or the closing. 60 Of course, the purchase agreement did not (and logically could not) alter the legal relationship between the parties as it actually existed between 1 January 1983 and 15 April 1983. Between 1 January and 15 April 1983, there was no contract on foot and, at that time, GE owned the shares and was entitled to their earnings, BHP having nothing. What GE did under the purchase agreement in respect of the pre-15 April period was to confer on BHP an entitlement to earnings which had already been generated. (d) What was the purchase price of $2.4 billion for? 61 According to the terms of the purchase agreement, BHP purchased the shares "as at and from January 1, 1983": s 1.1. That provision conformed to the basis of the valuation used by the parties to agree upon the purchase price. That is, as already noted, the price of $2.4 billion represented the combined estimated net income of UII and UMC over a twenty-year period beginning on 1 January 1983 (discounted to present value). The valuation included the estimated net profits of the 1983 and 1984 income years. The purchase price therefore included a component for the earnings generated by UII and UMC in those two years. It stood to reason that, under the purchase agreement, BHP, and not GE, was to be entitled to those earnings. At least from 15 April 1983 until the closing, the net profits generated by UII and UMC since 1 January 1983 were locked into the companies. Since the profits were part of the valuation of the capital which BHP had agreed to purchase as at 1 January 1983, for the price of $2.4 billion, then upon the satisfaction of the conditions precedent and upon payment of the $2.4 billion price, BHP was entitled to the profits. There was no need for an additional payment for the profits. 62 I reject the Commissioner's submission that the additional amount payable under s 1.1(b) of the purchase agreement as amended was payable for "the increased value of the Utah shares arising from the profits which Utah had earned and which remained in the companies which BHP … acquired". That submission is inconsistent with what the purchase price was intended to encompass, as shown by the agreed basis of valuation of the underlying businesses and assets. 63 It is implicit in what I have said thus far that I also reject the Commissioner's further submission that the price of $2.4 billion did not include a component for the profit which UII and UMC expected to earn from 1 January 1983 to the closing. The evidence before me establishes the contrary as the fact. (e) What was the function of the interest payment? 64 As we have seen, under the purchase agreement, the shares were sold to BHP as at 1 January 1983 but the purchase price was not paid until much later, as it turned out on 2 April 1984. As we have also seen, as from 15 April 1983, GE was deprived of the practical use and enjoyment of the shares in UII and UMC as from 31 December 1982, but BHP was not called upon to pay GE until the closing (upon which BHP was to receive not only the shares but also the accumulated net profits of UII and UMC as from 1 January 1983). I reject the Commissioner's submission that GE was "to keep the benefits of the businesses until closure". In those circumstances, I accept, as counsel for BHP submitted, that it was not surprising that GE sought and obtained compensation by way of interest or in the nature of interest for the delay in payment of the purchase price. I do not draw a contrary conclusion from the fact that that delay was specifically contemplated and permitted by the agreement. 65 I accept, as counsel for BHP submitted, that, in the circumstances of the case, the payment of the $198,331,374 as interest or in the nature of interest was analogous to the payment which, under the rule in Birch v Joy (1852) 3 HLCas 565, courts of equity would award when a purchaser became entitled to, or acquired the benefit and enjoyment of, what had been purchased before payment of the purchase price: see, e.g., International Railway Company v Niagara Parks Commission [1941] AC 328 at 345 and Public Trustee v Schultz (1964) 111 CLR 482 at 498. Indeed, there is authority to the effect that, absent a contractual provision to the contrary, a contract of sale will be construed so as to give effect to that principle: see, e.g., In re Hewitt's Contract [1963] 1 WLR 1298 at 1301-2. 66 The decision in Harvela Investments Ltd v Royal Trust Company of Canada (C.I.) Ltd [1986] 1 AC 207 ("Harvela") is illustrative of equity's general approach. Harvela concerned a settlement for the sale of shares which had been delayed for nearly four years as a result of the vendor's anticipatory breach of contractual obligations and ensuing litigation. The purchaser, who had had the use of the purchase price for nearly four years after what should have been the settlement date, was ordered to pay interest to the vendor in compensation for the receipt of the profits which had been locked up in the target company during that time. Their Lordships held that it would be unconscionable for the purchaser to have had the use of the purchase price and, when completion finally came, to have the benefit of the profits attributable to the shares without payment of interest to the vendor: [1986] 1 AC at 237. 67 Plainly enough, the situation considered in Harvela is different from the present case: the award of interest in Harvela was made in exercise of equitable jurisdiction, and consequent upon a breach of contract as well as the effluxion of time. No question of contractual breach arises in this case; and equity is not the source of any interest payment. Harvela is, however, helpful in so far as it shows that circumstances may arise in which the receipt of a benefit arising from the acquisition of property without relatively contemporaneous payment of the purchase price will, as a matter of fairness, result in an equitable award of interest on the purchase price. In the present case, any interest payment was made pursuant to contract. Under the purchase agreement, BHP was to receive the net profits attributable to the shares as from 1 January 1983 upon payment of the purchase price which, as it turns out, did not occur until 2 April 1984. It is plain enough that, in an analogous situation, courts of equity would recognise that interest ought, as a matter of fairness, be paid by the purchaser on the purchase price. In that circumstance, I see nothing artificial or unreasonable in the proposition that, in paying the interest (as it is described in the purchase agreement), BHP can be regarded as compensating GE for the fact that, under the agreement, GE lost its beneficial enjoyment of the shares on 1 January 1983, but BHP was not to pay the purchase price until well after that date. (I discuss below the question whether there is a distinction relevant to deductibility between the "interest" payment in respect of the period prior to 15 April 1983 and the interest payment in respect of the period subsequent to that date.) (f) Did the limitations on the interest payable change its fundamental purpose? 68 The additional amount payable under s 1.1(b) of the purchase agreement as amended was subject to a cap. Broadly speaking, whilst the amount was to be calculated for the period from 31 December 1982 until the closing date at the rate of 12 per cent per annum on the purchase price, it was not to exceed the combined net income of UII and UMC. The Commissioner submitted that the cap established that the additional amount was in the nature of capital, not revenue. In particular, the Commissioner submitted that that amount payable under s 1.1(b) was always going to equal the amount of profits. As already indicated, I do not accept that that is the effect of the evidence before the Court. The Commissioner also submitted that, as the cap operated to protect the structural integrity of the businesses carried on by UII and UMC (a point conceded by Mr Flew), then the payment of the additional amount was to be regarded as referable to capital account. 69 One must distinguish between the purpose of a payment in the nature of interest and the function of a cap such as that agreed upon by the parties in s 1.1(b) of the purchase agreement as amended. Let it be assumed that the primary purpose of the cap was to remove any incentive for GE to run down the businesses of UII and UMC. The purpose of the cap would not alter the purpose for which BHP paid the interest, which was to compensate GE for the lapse of time between its loss of enjoyment of the shares and receiving payment for them. The need for the cap arose, in the first place, out of the fact that interest on the purchase price was to be payable. If interest was to be payable by BHP on the purchase price and GE was not to have an incentive to delay closing, then the quantum of interest had to be limited; if GE was not to have an incentive to neglect the businesses of UII and UMC, then the quantum of interest had to be tied to the profits of those companies. In the end, the possibility (even probability) that the payment under s 1.1(b) of the agreement as amended would equal UII's and UMC's net profits is to be regarded as a matter of the parties' practical convenience. Of itself, that possibility (or probability) is not determinative of the purpose for which BHP made the interest payment; and by itself does not convert the payment of the additional amount into a payment on capital account. 70 I accept that if it was indeed established that the additional amount was paid for the maintenance of the businesses that BHP sought to acquire, then the Commissioner's submission would be correct: see Sun Newspapers Ltd v Federal Commissioner of Taxation (1938) 61 CLR 337 ("Sun Newspapers") at 359-360, 363. I do not, however, consider that the evidence supports that proposition. On the contrary, the evidence is that the purchase price of $2.4 billion included a component for the net profits in the 1983 and 1984 income years. It is, it seems to me, inherently unlikely that BHP would pay for those profits twice over, rather than paying for them once by way of the purchase price (of $2.4 billion). This tends to confirm that, practically speaking, the payment of the amount of $198,331,374 was for the delay in payment of that price. That is, the outgoing was payment in the nature of interest. (g) Is deductibility affected by the conditional nature of the contractual obligation? 71 It was part of the Commissioner's case that the additional amount payable under s 1.1(b) of the purchase agreement as amended was not "interest" or in the nature of interest, because under that agreement there was, prior to the closing, no amount owing (let alone due for payment) which was capable of being regarded as a principal sum (on which interest could accrue). 72 There must be an obligation to pay a principal money sum in order for an obligation to pay interest to arise. In Re: Farm Security Act 1944 (Sask.) [1947] SCR 394 at 411-412, aff'd [1949] AC 110 (P.C.), Rand J observed as follows: Interest is, in general terms, 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. … But the definition, as well as the obligation, assumes that interest is referrable to a principal in money or an obligation to pay money. Without that relational structure in fact and whatever the basis of calculating or determining the amount, no obligation to pay money or property can be deemed an obligation to pay interest. That description of "interest" found favour with the High Court in Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199 at 218. See also Consolidated Press Holdings Ltd v Commissioner of Taxation (1998) 98 ATC 5009 at 5026 and Century Yuasa Batteries Pty Ltd v Commissioner of Taxation (1997) 97 ATC 4299 at 4314; aff'd (1998) 82 FCR 288; and Chevron Petroleum (UK) Ltd v BP Petroleum Development Ltd (1981) 57 TC 137 ("Chevron") at 143. Cf Federal Wharf Co. Ltd v Deputy Federal Commissioner of Taxation (1930) 44 CLR 24 ("Federal Wharf") at 28 and Riches v Westminster Bank Ltd [1947] AC 390 at 400 per Lord Wright. 73 I reject the Commissioner's submission, however, that, after entry into the purchase agreement on 15 April 1983, there was no amount capable of being regarded as a principal sum owing to GE. As we have seen, upon entry into that agreement, BHP assumed an obligation to pay a fixed and certain price for the shares, the performance of which was conditional, amongst other things, on BHP's obtaining finance: see s 4.1(c) of the purchase agreement. The fact that GE had no right to receive the purchase price if BHP failed to arrange finance (s 3.1(b); 3.1(r) as amended); that finance was not arranged until March 1984; and that the purchase monies were not payable until the closing (s 1.3) does not lead to a contrary conclusion. 74 In Chevron, Sir Robert Megarry V-C held that a liability to pay interest on a contingent indebtedness did not cease to be a liability for interest merely because the indebtedness was contingent. Chevron'scasewas that, for a payment to be interest in the true sense, there had to be a subsisting indebtedness during the period for which the interest was accruing. Absent such indebtedness, (according to this argument) any subsequent compensation, although otherwise in the nature of an interest computation, was not the calculation of interest in the true sense but merely a unit of calculation. Describing the circumstances in Chevron, Sir Robert said at 144-5: All that was done was done under a continuing legal obligation binding all the parties; and each party knew from the outset that if at any stage it was found that any party's payments had exceeded the true liability, as redetermined, that party would receive a sum in respect of the excess payment, while if it was found that that party had not paid enough, that party would have to pay a further sum. In each case the sum received or paid would include a sum in respect of what was called 'interest'. True, this would not be calculated directly on the rest of the sum that was repayable or receivable, but by more complex means. Nevertheless, for those who received it, it would represent some compensation for their money having been used towards the discharge of an obligation which had since been ascertained to be an obligation of another, and, for those who paid it, it would represent some compensation for those whose money had been used towards the discharge of what had since been ascertained to be an obligation of the payers. … [Counsel for Chevron] contended that since it could not be foretold which of the operating parties would become debtors and payers, and which would become creditors and receivers, the liability of the former was contingent and not vested, and so there was no debt or other sum upon which there could be 'interest' in the true sense of the word. I do not think that this follows. I cannot see why the contingency should deprive the so-called 'interest' of the quality of being true interest. If X lends Ł100 to Y, the loan to carry interest at ten per cent. per annum, why should a provision for repayment and interest to be waived in certain events, or for repayment with interest to be made only in certain events, prevent the interest from being true interest if in the event it becomes payable? The approach set out in the above passage is consistent with that adopted by Harman J in Inland Revenue Commissioners v Pullman Car Co Ltd [1954] 2 All ER 491 at 494; [1954] 1 WLR 1029 at 1037 where an amount was held to be interest notwithstanding that the liability to pay it was contingent on there being sufficient profits out of which to pay interest. In Federal Commissioner of Taxation v Midland Railway Co of Western Australia Ltd (1952) 85 CLR 306, an amount payable on a debenture was held to be deductible under s 51(1) of the Act notwithstanding it was contingent and payable out of surplus revenue. 75 The present is not a case where the "principal sum" is not relevantly ascertainable until an award of "interest" is made. That consideration contributed to the decision in Whitaker v Federal Commissioner of Taxation (1998) 153 ALR 334 ("Whitaker") that pre-judgment "interest" included in an award of damages for personal injuries was not interest in the true sense of the word. 76 The principal sum upon which the interest was calculated under s 1.1(b) of the purchase agreement as amended was the purchase price of $2.4 billion (plus and minus certain adjustments). That price was fixed and certain at the time the obligation to pay interest on it came into being. That was not the case in Whitaker. On the other hand, there are, in this case, factors similar to the three principal factors which contributed to Rich J's decision in Federal Wharf. In that case, his Honour held that interest, which was payable on the amount of compensation to be paid for the compulsory acquisition of property from the time the Minister entered into occupation, was payable on revenue account: Federal Wharf at 27-28. First, in the present case, that principal sum represented the capital value of the shares, the substantial benefit of which GE had precluded itself from enjoying when it entered into the purchase agreement on 15 April 1983. Secondly, the amount to be paid at the closing under s 1.1(b) (namely, $198,331,374) was "calculated and payable in respect of time", namely, for the period from 15 April 1983 to the closing, computed by reference to the period from 1 January 1983 (see below). Thirdly, the time in respect of which that sum was so calculated commenced when GE was deprived of "the actual profitable enjoyment" of the shares under the purchase agreement (i.e. from 15 April 1983 to the closing, computed by reference to the period from 1 January 1983) and ending at the closing with the payment of the purchase price, which represented the capital value of the shares as at 1 January 1983. 77 The amount payable under s 1.1(b) of the purchase agreement as amended can be contrasted with the incremental factor considered in Commissioner of Taxation v Northumberland Development Co Pty Ltd (1995) 59 FCR 103 which merely permitted the calculation of an amount to bring the compensation for "a single capital asset, the coal" up to its actual value on the date of the determination of the Compensation Board: see Northumberland at 116 per Beaumont J, 108 per Davies J and 121 per Einfeld J. (h) What is the effect of the absence of contractual obligations between 1 January 1983 and 15 April 1984? 78 It will be plain from what I have said thus far that I have not overlooked the fact that there were no contractual obligations binding GE and BHP in the period from 1 January 1983 to 15 April 1983 and that, during that period, BHP was under no obligation to pay the purchase price of $2.4 billion, although it subsequently agreed to pay an amount computed as "interest" on the price in respect of that three and a half month period. In the absence of an obligation to pay a principal sum for that period, there can be no interest in the true sense. I do not think, however, anything turns on this. As it was, the obligation to pay the additional amount under s 1.1(b) of the purchase agreement arose at the same time as the obligation to pay the principal sum (the purchase price) under s 1.1(a). Since the profitable enjoyment of the shares was, by virtue of the agreement between the parties, denied GE from 31 December 1982 and the purchase price represented the capital value of the shares as at 1 January 1983, the obligation to pay interest (arising on entry into the agreement) was also computed from 31 December 1982. The 1 January 1983 valuation of the Utah companies' businesses and assets made this a reasonably logical date from which to compute interest. The determination of a purchase price as at 15 April would, presumably, have required an additional audit and valuation, and that within a few months of the 1 January valuation. In the circumstances of the case, the fact that the computation of the interest commenced from a time prior to the existence of the obligation to pay the principal sum does not, in my view, deprive the obligation to pay interest (when it arose) of its character as an interest obligation. If this were wrong and the proportion of the amount payable under s 1.1(b) which was referable to the period prior to 15 April 1983 were not interest in the true sense, I would be disposed to hold that, as it was paid by BHP for substantially the same reason as the rest of the additional amount and was of substantially the same character, it ought to be regarded as payable on the same account, namely, revenue account. 79 If a liability for interest is incurred in order to acquire a capital asset for an income-earning business activity, the amount of the interest is ordinarily regarded as payable on revenue account and deductible under s 51(1) of the Act: see Texas Co (Australasia) Ltd v Federal Commissioner of Taxation (1940) 63 CLR 382 at 430 per Latham CJ and 468-9 per Dixon J; Australian National Hotels Ltd v Commissioner of Taxation (1988) 19 FCR 234 at 240-1; and Steele v Deputy Commissioner of Taxation (1999) 161 ALR 201 at 208-9. A payment does not cease to be on revenue account simply because it is not recurrent: see Sun Newspapers at 362-3; National Australia Bank Ltd v Federal Commissioner of Taxation (1997) 151 ALR 225 at 237. (i) Even if it is interest or in the nature of interest, is the additional amount nonetheless payable on capital account? 80 Relying on Whitaker and Wharf Properties Ltd v Commissioner of Inland Revenue [1997] AC 505, the Commissioner submitted that, even if the Court were to decide that the outgoing of $198,331,374 was aptly described by the purchase agreement as "interest", the outgoing should nonetheless be characterised as on capital account. 81 The decision in Whitaker is plainly distinguishable and the decision in Wharf Properties offers little guidance in the present case. Whitaker concerned the characterisation of an award of pre-judgment interest in a successful action for personal injuries. The considerations relevant to the decision in that case were entirely different from those relevant in this. The Full Court of the Federal Court held that because the purpose of an award of pre-judgment interest was to compensate the plaintiff for the loss which the plaintiff had suffered by being kept out of monetary compensation between the accrual of the cause of action and judgment, then an award of pre-judgment interest took its character from the award of damages, and it was to be regarded as being of a capital nature: Whitaker at 335 per Black CJ, 340, 344 per Lockhart J and 351 per Burchett J. 82 Moreover, as the decision of the High Court in Steele makes plain, Wharf Properties cannot be regarded as stating the law with respect to Australian income tax. In Steele, Gleeson CJ, Gaudron and Gummow JJ acknowledged (at 208-9) that interest payments for something other than the raising or maintenance of a borrowing had the potential to be of a capital nature, but nothing in the majority's reasons for judgment in that case calls into question the analysis made by Rich J in Federal Wharf. As we have seen, if a similar analysis to that adopted by Rich J were pursued in this case, the payment of $198,331,374 by BHP in the 1984 income year would be characterised as on revenue account. That analysis reflects, in my view, the true nature of the outgoing. The sum was, it seems to me, deductible under s 51(1) of the Act. It was not a loss or outgoing of a capital nature. 83 The Commissioner sought to make something of the facts that GE assigned the shares to GEH shortly prior to the closing and that BHP transferred its rights under the purchase agreement to its subsidiaries. The assignment by GE to GEH does not affect the proper characterisation of the payment of $198,331,374. Further, the assignment by BHP of rights under the purchase agreement to its subsidiaries does not permit a different view to be taken of the outgoing. BHP retained the contractual liability to pay each of the amounts payable by it under the agreement. The circumstance that it procured a subsidiary to pay some of the obligation (namely, the purchase price of the shares) does not change the character of the interest obligation. In a practical sense, of course, the dividend stream was removed one step. Given that the subsidiaries were wholly-owned by BHP, and part of BHP's business was that of a holding company, the ownership of the shares by the subsidiaries does not, however, change the character of the advantage sought from a practical and business point of view. a postscript to question one 84 As already noted, the purchase agreement provided, in s 6.8(d), that it was to "be governed by and construed in accordance with the laws of the State of New York". In the absence of evidence to the contrary (and subject to exceptions which are not presently relevant) the law of a foreign jurisdiction is presumed to be not materially different from the law of the forum, i.e., of this Court: see Lloyd Werft Bremerhaven GmbH v Owners of the Ship "Zoya Kosmodemyanskaya" (1997) 79 FCR 71 at 93; P E Nygh, Conflict of Laws in Australia (6th Ed, 1995) at 266 and Richard Fentiman, "Foreign law in English courts"(1992) 108 The Law Quarterly Review 142. Foreign law is treated as a matter of fact to be proven by admissible evidence. The general rule was explained by Gummow J in National Mutual Holdings Pty Ltd v Sentry Corporation (1989) 87 ALR 539 at 556 in the following terms: The existence, the nature and the scope of any rules and principles of the law of a foreign jurisdiction is to be treated as an issue of fact upon which evidence is receivable; on the other hand, the effect of the application of those rules and principles, as so ascertained, to the particular facts and circumstances of the instant case is a question of law for the court of the forum, upon which evidence is not receivable: United States Surgical Corp v Hospital Products International Pty Ltd (Supreme Court of New South Wales, McLelland J, 19 April 1982, unreported). Where the relevant rules and principles of foreign law are so framed as to confer discretions upon the courts which administer them, then, in my view, evidence is receivable as to the manner in which those discretions are exercised, with reference to any pattern or course of decision. To similar effect, see Allstate Life Insurance Co v Australia and New Zealand Banking Group Ltd(No. 33) (1996) 137 ALR 138 at 141 per Lindgren J and Bumper Development Corp Ltd v Commissioner of Police of the Metropolis [1991] 4 All ER 638 at 646. 85 As we have seen, no admissible evidence was adduced as to the law of the State of New York on the contractual effect of the purchase agreement as amended. The parties were content to proceed on the basis that there was no material difference between the law of New York and the law ordinarily applied in this Court. The only course available to me is to proceed on the same basis, despite any reservations I might have concerning whether the purchase agreement would be regarded as having binding contractual force in New York: cf Restatement, 2d, Contracts, § 224 and Ley v Fred T Ley & Co 65 N.Y.S.2d 843 (N.Y. App. Div. 1946), aff'd 296 N.Y. 956, 73 N.E.2d 266 (1947); Matter of Uraga Dock Co 179 N.Y.S.2d 474 (N.Y. App. Div. 1958), aff'd 6 N.Y.2d 773, 159 N.E.2d 212 (1959); Merritt Hill Vineyards Inc v Windy Heights Vineyards Inc 61 N.Y.2d 106 at 113, 460 N.E.2d 1077 at 1082 (1984); Pollack v Nemet Motors, Inc 561 N.Y.S.2d 457 at 458 (N.Y. App. Div. 1990); and Oppenheimer & Co v Oppenheim, Appel, Dixon & Co 86 N.Y.2d 685 at 690, 660 N.E.2d 415 at 418 (1995); but contrast Hicks v Bush 10 N.Y.2d 488, 180 N.E.2d 425 (1962); Kapson Construction Corp v ARA Plumbing and Heating Corp 642 N.Y.S.2d 701 at 703 (N.Y. App. Div. 1996); Federal Deposit Insurance Corporation v Commissioner of Taxation and Finance 594 N.Y.S.2d 447 (N.Y. App. Div. 1993), aff'd 83 N.Y.2d 44, 628 N.E.2d 1330 (1993); and American Express Co v Tax Appeals Tribunal 597 N.Y.S.2d 485 (N.Y. App. Div. 1993), leave den. 82 N.Y.2d 663, 632 N.E.2d 461 (1993). question two: the alleged invalidity of the 1984 and 1985 assessments 86 BHP submitted that, if the Court were to find that the interest was not deductible, then the Court should consider whether or not the Commissioner was authorised under s 170 of the Act as it then stood to issue the assessments for the 1984 and 1985 income years. At the relevant time, s 170(3) of the Act provided that, in a case where there has been full and true disclosure, an amended assessment could not be made in respect of the relevant year after the expiration of three years from the date upon which the tax became due and payable under the assessment (except to correct an error in calculation or a mistake of fact). In a case where there was not full and true disclosure (there being no fraud), the time limit was six years: see 170(2) (b). 87 BHP submitted that the assessment, which had been issued on 21 February 1992 for the 1984 income year, was beyond the Commissioner's power, because the assessment had been issued more than six years after the Commissioner had first notified BHP that he had assessed its taxable income and ascertained that there was no tax payable. A notice from the Australian Taxation Office dated 25 June 1985 and addressed to BHP had stated: No tax is payable on the income shown on the return lodged for the year ended 30 June 1984 and no refund is due. An adjustment advice also dated 25 June 1985 contained the statement: The income tax return in respect of the year ended 31 May 1984 has been assessed non-taxable. After setting out adjustments to BHP's claimed net loss (none of which are presently material), the form of adjustment advice also stated: The question of the amount of loss that will be finally allowed as a deduction from the company's income of subsequent years will not arise as a practical question until the returns of income for those years are lodged and assessed. The quantum of deduction allowable will be determined in the light of information then available and the statutory provisions then applicable. BHP received two subsequent adjustment advices, one dated 23 July 1985 and one undated. Both were in the same form as the first adjustment advice. In addition to reiterating the statement set out above, they contained a heading "Net Income/Loss as Returned" with the words "Loss as Returned" struck-out and the words "previously assessed" typed in, with the result that the heading actually read "Net Income previously assessed". A figure appeared beside that heading. 88 The decision of the Full Court of this Court in Federal Commissioner of Taxation v Ryan (1998) 82 FCR 345 (on appeal to the High Court of Australia) applied, so BHP submitted, with the result that the notice and adjustment advice of 25 June 1985, together with the subsequent adjustment advices in relation to the 1984 income year, constituted the requisite notification that brought to completion the process of assessment which the Commissioner had made in respect of that year. In Ryan, Merkel J (with whom Burchett and French JJ agreed) held, at 358, that Batagol v Commissioner of Taxation (1963) 109 CLR 243 did not preclude the possibility that a nil assessment might constitute an assessment for the purposes of s 170(3) of the Act. His Honour stated at 370: An 'assessment' that no tax is assessed or payable on the taxable income fixes and thereby renders certain the taxpayer's liability to the Commissioner for the purposes of the Act as much as an 'assessment' that a positive amount of tax is assessed or payable. The Commissioner submitted that not only was the decision in Ryan in error, but also that the present case was relevantly distinguishable from it. In relation to the latter submission, the Commissioner relied in part on the disclaimer (set out above) appearing at the bottom of each adjustment advice. The disclaimer related to the amount of potential carry forward losses which might be available in the future, when issues of deductibility would arise. It did not qualify or render uncertain BHP's tax liability with respect to the year in question. Further, if the disclaimer does constitute a real point of difference (which I doubt) there would remain the seemingly unequivocal statement (set out above) in the notice of 25 June 1985. The real point of difference, if there be one, lies in the fact that, in contrast to the notification considered in Ryan, neither the notice of 25 June 1985 nor any of the adjustment advices purported to be an "assessment" and none of those documents really purported to fix BHP's taxable income. They merely notified BHP of a nil tax liability. That brought this case closer to Batagol which concerned the effect of a "refund notice" informing the taxpayer that his income was non-taxable. In Ryan, by contrast, the relevant notice on its face was called an "assessment" and it purported to specify the taxpayer's precise taxable income. The reasons for decision of the Full Court in Ryan therefore may not apply in the present case. In view of my decision on the principal question arising in these appeals, it is unnecessary to decide the scope of the decision in Ryan or the effect of Batagol, and I do not do so. 89 In contrast to the 1984 assessment, there was no dispute that an initial assessment was issued in 1986 in respect of the 1985 income year and that the assessment which issued on 21 February 1992 in respect of that year was an amended assessment. In relation to the 1985 income year, BHP submitted that, as it had made "a true and full disclosure" in respect of that year and the amended assessment was issued more than three years after the tax in the original assessment dated 4 April 1986 became due, then there was a want of power to issue the amended assessment. 90 Whether or not there was a full and true disclosure of all the material facts may be tested by reference to the hypothetical adviser referred to by Menzies J in Austin Distributors Pty Ltd v Federal Commissioner of Taxation (1964) 13 ATD 429. In that case, his Honour described, at 433, the relevant inquiry in the following terms: If advice were to have been sought by the taxpayer … would the person from whom that advice was sought have required more information than [was] disclosed to the Commissioner? In MIM Holdings Ltd v Federal Commissioner of Taxation (1997) 97 ATC 4420 at 4431, the Full Court of this Court said: [A]ny omission must be a material one for the full and true disclosure of which the section speaks is a full and true disclosure of all the material facts. [T]he purpose of the sub-section was to ensure that the Commissioner was given an adequate opportunity to consider properly whether a particular receipt was assessable income or a particular outgoing was an allowable deduction. Such questions are often notoriously difficult. … The mere fact that there has been a submission in a return as to the character of a payment which turns out not to be accepted by a Court does not bring about a lack of full and true disclosure if otherwise all relevant facts have been disclosed …. The test is, plainly enough, designed to secure an objective reference point, but the answer which a Court gives may very well be affected by its view of the merits of the taxpayer's claim. That may well be so in this case, where many of the supposed omissions were dependent upon the merits of BHP's deductibility claim. One such example was the Commissioner's assertion that BHP ought to have disclosed "facts showing that the payment … secured for BHP (or its assignee) the increased value of the Utah shares by reason of the profits made and kept by the Utah companies between 1 January 1983 and the date of closure"; and that BHP ought to have disclosed "that the interest was paid to enable BHP to keep the value of the retained earnings in the Utah companies". 91 Bearing this in mind as well as the fact that, in light of my answer to the principal question arising on these appeals, it is unnecessary to decide whether or not BHP made a full and true disclosure, I do not propose to do so. I do no more than note that, in order to reach a reasoned conclusion about BHP's claim to deduct the interest, an adviser would have needed the purchase agreement and, so it seems to me, information as to the basis upon which the businesses and assets of UII and UMC were valued and the purchase price calculated. The facts relating to those matters were material. Information disclosing the fact (1) that the valuation was based upon an income stream over twenty years starting from 1 January 1983 and (2) that the purchase price was derived solely from the valuation was, it seems to me, material to a decision on the deductibility claim, although the disclosure of those facts would, as it turned out, have supported BHP's position. question three: penalty tax 92 The Commissioner included in the 1984 assessment an amount of additional tax by way of penalty in the sum of $20,333,500. The penalty was said to be imposed by s 226(2) and remitted in accordance with s 226(3). Section 226(2) was part of Part VII of the Act prior to 14 December 1984. With effect from 14 December 1984, s 226(2) and certain related provisions were repealed and were replaced by different provisions comprising a new Part VII: Act No. 123 of 1984, s 152. BHP lodged its income tax return for the 1984 income year on 28 December 1984. Accordingly, BHP submitted that, even if it failed on all other questions, the 1984 assessment should be set aside in so far as it assessed additional tax by way of penalty. Particular reference was made to Danmark Pty Ltd v Federal Commissioner of Taxation (1944) 7 ATD 333. It was not open, so BHP submitted, for the Commissioner to support the assessment of the additional tax by reference to s 223 of the Act as it stood on 28 December 1984. In relation to the 1985 income year, BHP submitted that the penalty had been invalidly imposed because BHP had not made a statement that was false or misleading in a material particular, and did not omit from a relevant statement any matter or thing without which the statement was misleading. It was also BHP's submission that the Commissioner's exercise of discretion to remit the additional tax had miscarried. It is, of course, unnecessary to decide any of the questions raised by these submissions, or any of the questions raised by the Commissioner in reply (including one relating to the effect of a settlement agreement). I do no more than note that some of the questions raised in connection with the imposition of the additional tax may also be affected by the view one takes of the merits of BHP's deductibility claim. summary 93 For the reasons set out above, I am of the view that the amount of $198,331,374 paid by BHP on 2 April 1984, pursuant to s 1.1(b) of the purchase agreement as amended, was deductible pursuant to s 51(1) of the Act and that BHP has established that the challenged assessments were excessive. I propose to allow the appeals, set aside the objection decisions the subject of the appeals, and remit the matter of the objections to the respondent to be considered and decided according to law. In proceeding VG 110 of 1994, I also propose to declare that the sum of $198,331,374 specified in the notice of objection is an allowable deduction under s 51(1) of the Act. In proceeding VG 24 of 1998, I propose to declare that the sum of $147,941,201 specified in the notice of objection is an allowable deduction under s 80(2) of the Income Tax Assessment Act 1936 (Cth). I certify that the preceding ninety-three (93) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Kenny. Associate: Dated: 23 November 1999 VG 110 of 1994: Counsel for the Applicant: Mr B Shaw QC, Mr D Bloom QC and Mr J de Wijn QC Solicitor for the Applicant: Arthur Robinson & Hedderwicks Counsel for the Respondent: Mr G Pagone QC, Mr G Davies QC and Ms A Richards QC Solicitor for the Respondent: Australian Government Solicitor VG 24 of 1998: Counsel for the Applicant: Mr B Shaw QC, Mr D Bloom QC and Mr J de Wijn QC Solicitor for the Applicant: Arthur Robinson & Hedderwicks Counsel for the Respondent: Mr G T Pagone QC, Mr G Davies QC and Ms A Richards QC Solicitor for the Respondent: Australian Government Solicitor Dates of Hearing: 7 - 9 December 1998 Date of Judgment: 23 November 1999