FEDERAL COURT OF AUSTRALIA Rataplan Pty Ltd v Commissioner of Taxation [2004] FCA 920 INCOME TAX – allowable deductions – Australian parent company loaned substantial sums to Texan subsidiary – parent company resolved that total balance of the loans be capitalised by making additional contribution to share capital of Texan subsidiary – book entries in each company reflected that conversion transaction – before conversion transaction, Texan subsidiary's liabilities greatly exceeded the value of its assets – conversion transaction resulted in value of its assets exceeding its liabilities by relatively modest amount – whether loss incurred as a result of "disposal or redemption" of a "traditional security" – proper law of the contracts pursuant to which the loans were made – whether a different proper law applied to the conversion transaction – whether under Texan law the conversion transaction would amount to an effective waiver by the Australian parent company – conflicting expert evidence on Texan law – how that factual dispute should be resolved – losses transferred to Australian subsidiaries – whether allowable deductions. Income Tax Assessment Act 1936 (Cth), ss 70B, 79E(3), 80G(6), 26BB(1), 166A Bonython v The Commonwealth (1950) 81 CLR 486 referred to Akai Pty Ltd v The People's Insurance Co Ltd (1996) 188 CLR 418 applied Amin Rasheed Shipping Corporation v Kuwait Insurance Co [1984] AC 50 referred to Koitaki Para Rubber Estates Ltd v Federal Commissioner of Taxation (1941) 64 CLR 241 referred to European Bank Ltd v Citibank Ltd [2004] NSWCA 76 referred to Hamlyn & Co v Talisker Distillery [1894] AC 202 referred to Kahler v Midland Bank Ltd [1950] AC 24 referred to Re United Railways of the Havana v Regla Warehouses Ltd [1960] 1 Ch 52 applied Ashton Mining Ltd v Federal Commissioner of Taxation [2000] FCA 590 referred to The King v Regos and Morgan (1947) 74 CLR 613 referred to Re Banque des Marchands de Moscou (Koupetschesky) [1958] 1 Ch 182 applied RATAPLAN PTY LTD v COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA W134 of 2000 CARR J 14 JULY 2004 PERTH IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY W134 OF 2000 BETWEEN: RATAPLAN PTY LTD Applicant AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent JUDGE: CARR J DATE OF ORDER: 14 JULY 2004 WHERE MADE: PERTH THE COURT ORDERS THAT: 1. The appeal be allowed. 2. The appealable objection decision, made by the respondent on 14 June 2000, be varied by: (a) allowing the objection, which was the subject matter of that decision, in full; (b) excluding from the applicant's taxable income for the year ended 30 June 1992 the amount of $2,336,810; and (c) reducing the tax payable accordingly. 3. The respondent pay the costs of the application. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY W134 OF 2000 BETWEEN: RATAPLAN PTY LTD Applicant AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent JUDGE: CARR J DATE: 14 JULY 2004 PLACE: PERTH REASONS FOR JUDGMENT introduction 1 This is an appeal against an appealable objection decision, made by the respondent Commissioner on 14 June 2000, to disallow the applicant's objection to the inclusion of an amount of $2,336,810 in the assessment of its taxable income for the year ended 30 June 1992. The main question in the appeal is whether a related corporation of the applicant incurred certain losses (some of which were later transferred to the applicant) on the disposal of what the respondent admits were "traditional securities" [within the meaning of s 70B(2) of the Income Tax Assessment Act 1936 (Cth) ("the Act")]. That question arises in the context of the traditional securities being loans to a corporation incorporated and carrying on business in the State of Texas, which were later converted into additional capital of that corporation. factual background 2 The applicant ("Rataplan") was incorporated in Western Australia. It is, through the interposition of two other corporations, a wholly-owned subsidiary of Australian Capital Equity Pty Ltd ("ACE"). 3 ACE was incorporated in Western Australia. At all material times the issued capital of ACE was beneficially owned by the trustee of the Griffin Unit Trust. 4 Australian Capital Equity (USA) Inc ("ACE USA") is a company organised under the laws of the State of Texas. At all material times ACE owned all the 1,000 shares of common capital stock (with a par value of US 1 cent each) on issue in the capital of ACE USA. 5 The major asset of ACE USA (owned by two of its wholly-owned subsidiaries) was an office building in Dallas Texas, known as the First Interstate Bank Tower ("FIB Tower"). 6 Between 1 July 1990 and 25 June 1991, ACE advanced funds from time to time, interest free and unsecured, to ACE USA. 7 The directors of ACE considered that the consolidation of ACE USA into the ACE group of companies had a detrimental effect on the ACE balance sheet. They decided to "de-consolidate" ACE USA before 30 June 1991 and to transfer the shares in that company to an entity which was not part of the ACE group. 8 At a meeting of the directors of ACE, held on 25 June 1991 the following resolution was passed: 'RESOLVED that the loan to ACE (USA) currently outstanding to ACE of A$ be capitalised by making an additional $US contribution equivalent to $A to the one thousand (1,000) Common Shares of 1 cent ($0.01) each held by ACE in ACE USA.' 9 At that stage the precise amount of the outstanding loans was not known. The directors discussed the amount which was to be inserted in place of the blanks in the minute of resolution. They agreed that the figure would be the amount that would reduce the balance in the loan account to nil. That amount was subsequently ascertained to be AUD$6,335,780.61. I shall refer to this transaction, on occasion, as "the conversion transaction". 10 A similar transaction had occurred at the end of the previous financial year. Between 4 January 1989 and 30 June 1990 ACE had made various advances to ACE USA totalling AUD$58,118,134.11. On 30 June 1990 the whole of that loan had been converted into further capital in ACE USA. 11 Under Texan law such circumstances do not give rise to an obligation on the part of the (former) debtor company to issue further shares where the (former) creditor company owns all of its issued shares. 12 An important part of the applicant's case is that immediately before the second capitalisation of debt (i.e. 25 June 1991) ACE USA's liabilities greatly exceeded the value of its assets. That is, on a "net assets basis", the value of ACE's shares in ACE USA was very considerably less than nil. 13 The applicant submits (and this is an area of factual dispute) that as a result of the conversion transaction, involving disposal of the loan or disposal of the right to receive payment of the sum of AUD$6,335,780.61, the net assets position of ACE USA improved so that its assets exceeded its liabilities by US$566,000 (A$736,000). The applicant contends that ACE gave up its debt of AUD$6,335,780.61 in exchange for an increase in the value of its equity in ACE USA of AUD$736,000, thereby incurring a loss (for which it is entitled to a deduction under s 70B of the Act) equal to the difference between those two amounts. 14 Fontley Pty Ltd ("Fontley") was incorporated in Western Australia on 9 May 1991. At all material times, all of the issued capital in Fontley was owned by the trustee of the Griffin Unit Trust. 15 By an agreement entered into on and dated 28 June 1991 ACE sold all of its shares in ACE USA to Fontley. Clause 4 of that agreement specified a purchase price of US$18,886,982 plus US$0.10 for each United States dollar of carried forward consolidated tax losses. It seems to be common ground that the only potential relevance of this transaction is to the value at the relevant time of ACE's equity in ACE USA. But at the trial neither party relied upon it. The following description may thus be taken to be simply background facts. 16 Clause 5 of the agreement with Fontley provided that the figure of US$18,886,982 represented the value of the net assets of ACE USA, based on consolidated management accounts as at 31 May 1991 and shown as Schedule 1 to that agreement. Clause 5 also provided that the purchase price would be adjusted if the values of certain assets in those accounts (but not the FIB Tower) differed from the values in its audited accounts. 17 Schedule 1 of the agreement showed that the purchase price was calculated on the basis of a total value of US$190 million for the FIB Tower before adjustment for all other assets and liabilities of ACE USA. The FIB Tower was sold in September 1991 (settlement took place in November 1991)for US$170,250,000. 18 The agreement dated 28 June 1991was varied by deed dated 13 September 1991 adjusting the sale consideration for ACE's interest in ACE USA to US$182,439,being the net asset value as stated in the draft accounts of ACE USA as at the date of variation. 19 By letter dated 23 September 1991, ACE and Fontley agreed that completion of the agreement for the sale of ACE's interest in ACE USA would take place on 23 September 1991 without audited accounts, and that the consideration could not be varied from US$182,439 irrespective of the final net asset position stated in the audited accounts. 20 On 24 September 1991, the accounts of ACE USA were signed by the auditors. The audited accounts stated that the net assets of the company were US$135,441. 21 On 15 May 1992, ACE lodged its income tax return for the income year ended 30 June 1991. The return disclosed a loss of AUD$9,430,159 which included a deduction of AUD$4,066,647 under s 70B of the Act for a purported loss of disposal of a traditional security said to be the disposal of the AUD$6,556,955 advanced by ACE to ACE USA. At that stage (and indeed until a few months before the hearing of this application) the figure of AUD$6,556,955 was understood to be the total of the funds advanced. The actual total turned out to be AUD$6,335,780.61 i.e. AUD$221,174.60 less. 22 The deduction of AUD$4,066,647 was calculated as follows: Consideration for the disposal 2,490,308 Cost of acquisition 6,556,955 Loss on disposal AUD$4,066,647 23 The consideration for the disposal was stated in the income tax return as being the additional equity contributed divided by the total equity contributed with the resultant sum then multiplied by the value of the shares in ACE USA. 24 The additional equity contributed was stated in the income tax return to be AUD$6,556,955. The total equity contributed was stated as being that sum plus AUD$58,118,134 being capital already contributed as at 30 June 1990. 25 ACE calculated the value of the shares in ACE USA by reference to the purchase price in the original sale agreement to Fontley i.e. US$18,886,982 (AUD$24,563,368). The calculation can be expressed thus: AUD$6,556,955 x AUD$24,563,368 AUD$6,556,955 + $58,118,134 = AUD$2,490,308 26 On 11 May 1993, ACE and the applicant gave written notice, under s 80G(6)of the Act, to the Commissioner that the right to an allowable deduction under s 79E(3) of the Act in the amount of AUD$2,472,508 should be transferred to the applicant in the year ended 30 June 1992. That amount included an amount of AUD$2,336,810 being part of the deduction said to be allowable to ACE under s 70B of the Act. 27 Later ACE adjusted its calculation of the loss on disposal of the AUD$6,556,955 advanced to ACE USA and increased the amount claimed as a s 70B deduction by AUD$2,472,508. This adjustment increased ACE's loss for the income year ended 30 June 1991 to AUD$11,902,667. By a loss transfer agreement dated 11 May 1993, ACE transferred the additional loss of AUD$2,472,508 to the applicant pursuant to s 80G of the Act. 28 On 25 May 1993 the applicant lodged its return of income for the income year ended 30 June 1992. It returned a nil taxable income after transfer to it by ACE of the loss of AUD$2,472,508. 29 In the meantime, on 15 May 1992, ACE lodged its income tax return for the year ended 30 June 1991 in which it claimed an allowable deduction of AUD$4,066,647. 30 On 2 October 1998 the Commissioner issued a notice of assessment adjusting the applicant's taxable income for the year ended 30 June 1992 by adding AUD$2,472,508 which (in an accompanying letter) the Commissioner described as being "loss transfer invalid" to the nil taxable income previously returned by the applicant. 31 On or about 27 November 1998, the applicant lodged an objection against that assessment. On 14 June 2000, the Commissioner issued a notice of his decision in relation to that objection. The Commissioner's decision was to allow the objection in part by reducing the taxable income by AUD$135,698 to take into account an unrelated loss carried forward from the income year ended 30 June 1991. On 19 June 2000, the Commissioner issued a notice of amended assessment reducing the applicant's taxable income for the year ended 30 June 1992 by AUD$135,698 with consequential reductions in additional tax assessed for late lodgement. 32 On 7 August 2000, the applicant filed this application in this Court appealing against the Commissioner's objection decision. the legislative framework 33 Section 26BB(2) of the Act provided as follows: 'Where a taxpayer disposes of a traditional security or a traditional security of a taxpayer is redeemed, the amount of any gain on the disposal or redemption shall be included in the assessable income of the taxpayer of the year of income in which the disposal or redemption takes place.' 34 Section 70B(2) of the Act, which Mr D H Bloom QC senior counsel for the applicant, aptly described as the mirror image of that sub-section, provided as follows: 'Where a taxpayer disposes of a traditional security or a traditional security of a taxpayer is redeemed, the amount of any loss on the disposal or redemption is allowable as a deduction from the assessable income of the taxpayer of the year of income in which the disposal or redemption takes place.' 35 Section 26BB(1) relevantly defined the terms "traditional security" and "dispose" in the following manner: '"Traditional security", in relation to a taxpayer, means a security held by a taxpayer that: (a) is or was acquired by the taxpayer after 10 May 1989.' '"Dispose", in relation to a security, means sell, transfer, assign or dispose of in any way the security or the right to receive payment of the amount or amounts payable under the security.' 36 Section 70B(1) provided that expressions used in s 70B that are also used in s 26BB have the same meanings as in s 26BB. 37 Section 26BB defined "security" as having the same meaning as in Division 16E (of Part III). The relevant definition was in s 159GP(1) which provided: '"Security" means: . . . (c) a secured or unsecured loan; or (d) any other contract, whether or not in writing, under which a person is liable to pay an amount or amounts, whether or not the liability is secured.' 38 Section 159GP(1) also defined the term "redemption". That definition was as follows: '"Redemption", in relation to a security, means the discharging of all liability to pay any amount or amounts under the security representing a return of the issue price of the security.' the issues in the appeal 39 When the hearing of the appeal started, I was told that the parties had, by agreement, narrowed the issues compared with those raised by the documents previously filed. The respondent conceded that ACE "acquired" a "traditional security" by reason of the amounts outlaid by it to or for the benefit of ACE USA, giving rise to a debt due by ACE USA to ACE. He also conceded that if there was a loss realised by ACE in the 1991 year, that loss was effectively transferred by ACE to the applicant within s 80G(6) of the Act. 40 The applicant abandoned various other grounds of objection which it is not necessary to specify here. As a result, so it seems to me, the questions for decision are as follows: (1) What is the proper law of the contracts of loan made between ACE and ACE USA? (2) If the law which determines the legal significance of the conversion transaction (i.e. the proper law applicable to that transaction) is not the same as the proper law referred to immediately above, what is that proper law? (3) What was the legal effect, in accordance with the applicable proper law, of the conversion transaction? (4) Was that legal effect such that ACE disposed of the debt or the right to receive payment of it within the definition of the verb "dispose" in s 26BB(1)? (5) If so, did the disposal give rise to a deductible loss, and if so, how much? 1 & 2 The proper law of the contracts of loan and the conversion transaction 41 The parties were in agreement about the principles of Australian law which determine the proper law governing the efficacy or enforcement of the contracts of loan or the transactions to which those contracts relate in this matter. That is, such proper law was: '… the system of law by reference to which the contract was made or that with which the transaction has its closest and most real connection, …' 42 The quotation is from Lord Simonds in Bonython v The Commonwealth (1950) 81 CLR 486 at 498. In relation to that quotation, a majority of the High Court of Australia in Akai Pty Ltd v The People's Insurance Co Ltd (1996) 188 CLR 418 at 441 adopted the observation of Lord Diplock in Amin Rasheed Shipping Corporation v Kuwait Insurance Co [1984] AC 50 at 61: 'It may be worth while pointing out that the 'or' in this quotation is disjunctive, as is apparent from the fact that Lord Simonds goes on immediately to speak of 'the consideration of the latter question'. If it is apparent from the terms of the contract itself that the parties intended it to be interpreted by reference to a particular system of law, their intention will prevail and the latter question as to the system of law with which, in the view of the court, the transaction to which the contract relates would, but for such intention of the parties have had the closest and most real connection, does not arise.' 43 Earlier, at p 437, their Honours had referred with approval to the question posed by the authors of Cheshire & North's "Private International Law" (11 ed) at p 450, namely, in which law did the contract (in that case a policy of insurance) have "its natural seat or centre of gravity" and added this: 'In answering that question, it is proper to have regard to a number of matters including the places of residence or business of the parties, the place of contracting, the place of performance, and the nature and subject matter of the contract.' 44 But the parties differed about which system of law was to be identified by the application of these principles. The applicant contended for Texan law, while the respondent submitted that Australian law was the proper law. Applicant's Submissions 45 Mr Bloom for the applicants referred to the various factors mentioned in Akai. Residence, so he said, "went each way". The lender resided in Australia and the borrower resided in the United States of America. The same applied, so he submitted, to the places of business. Mr Bloom referred me to evidence to the effect that ACE USA's principal business was the ownership and operation of commercial real estate in the United States of America. It also invested in oil and gas producing activities in that country. Mr Bloom submitted that the United States of America was "… the only place where that business could sensibly be carried on". 46 As to the place of contracting and the place of performance, the applicant contended that by far the bulk of the loans came from funds located outside Australia which were remitted to the United States of America. This, so it was put, indicated that the proper law was that of the United States of America. 47 Strictly speaking, the competing body of American law was not federal, but state – i.e. Texan law, both common law and statutory law. There was no submission from either party that the relevant American law might be federal. References to the law of the United States of America should be understood in that context. References to Australian law, as I understood the submissions, were to the body of common law and both federal and state statutory law where applicable. 48 The applicant acknowledged that although the place of repayment and the currency of repayment were not specified, it was quite clear from its own evidence that the currency of repayment was the Australian dollar and that was an indication in favour of Australian law being the proper law. 49 Mr Bloom claimed that even before reference to the conversion transaction, the preponderance of factors was in favour of United States law being the proper law. But, so he submitted, there was a special circumstance of the kind referred to by the House of Lords in Amin Rasheed. That special circumstance was that as at 30 June 1990 ACE had capitalised the loan account in a fashion recognised only under Texan law, because it did not involve the issue of shares (where all of the shares in the debtor company are owned by the creditor). The loans with which this case is concerned took place between 30 June 1990 and 25 June 1991. On the latter date a similar event occurred, being again an attempt to take advantage of Texan law which permitted the capitalisation of a loan without the issue of further shares. 50 The applicant submitted that the appropriate inference was that the parties intended this to be able to occur and intended Texan law to apply to the second conversion transaction because they intended, should it be necessary to do so, to have a valid capitalisation. This factor, if nothing else, so it was put, tipped the choice in favour of the United States of America. The Respondent's Submissions 51 The respondent contended that the proper law governing the debt and its enforceability was that of Australia, being the system of law by reference to which the contracts of loan were made and with which the transactions had their closest and most real connection. The "matter" with which the closest and most real connection was to be assessed was the asset i.e. the debt. In the context of succession to debt, the proper law of the debt was, prima facie, where it would be paid in the ordinary course of business: Haque v Haque (No 2) (1964) 114 CLR 98 at 137. 52 Mr A H Slater QC, senior counsel for the respondent, submitted that in the ordinary course of business the debt due by ACE USA to ACE was repayable in Western Australia because: (a) the management of the group which included ACE and ACE USA was conducted in Western Australia; (b) the funding by ACE of ACE USA was managed in Western Australia; (c) the loan was denominated and repayable in Australian currency; (d) the advances were disbursed from the account of ACE in Western Australia; and (e) the only repayment made was made in Western Australia. (Mr Slater acknowledged that this factor was a "slender reed"). 53 Further connection with Australia, so the respondent submitted, was the fact that the management of the affairs of ACE USA was wholly in the hands of its sole shareholder ACE in Australia. The activities of the directors of ACE USA were confined to formal circular resolutions as to the adoption of accounts and the like. The decision to invest in the principal asset of ACE USA (the FIB Tower) was taken by ACE. The real decision-making occurred in Australia. The respondent's arguments were neatly summarised in the following paragraph of his written outline of submissions: 'Having regard to where the debt was created, the currency in which it was denominated, where it might have been expected to be repaid, the residence of the creditor, the circumstance that the affairs of the debtor were materially controlled from the office of the parent, and the residence (if not the sole residence) of the debtor, the "closest and most real" connection with the existence and ownership of the debt is with, and the proper law for determining the consequences of dealings with the debt is, the law of Australia.' 54 In the alternative, the respondent submitted that if the "contract" of disposition was the matter with which there was to be identified the system of law having the closest and most real connection, the same result followed. That was because: (a) the "contract" – the unilateral resolution to contribute the debt to capital and thereby allegedly waive the debt – specified no proper law, expressly or impliedly; (b) the sole party, ACE, was resident in Australia; (c) the place of "agreement" – where the resolution was made – was Australia; (d) the place of "performance" – where the waiver was purportedly effected – was Australia; (e) the "nature and subject matter of the contract" – the debt due to ACE – was recorded in the accounts in Australia of ACE, arose from disbursements from Australia, was denominated in Australian currency, was part of a course of funding managed from Australia, was impliedly repayable in Australia, and was payable to an Australian resident company; and (f) the only connection with Texas was that the debtor, said not to be a party to the "contract", was incorporated in Texas, but was resident (if not solely resident) in Australia. No action was required of or taken by ACE USA. my reasoning 55 There is no express choice of law in the contracts of loan in this matter. But, as was pointed out by the majority in Akai (at 441-442), it may be that, upon the construction of a contract by permissible means, a court can infer that the parties intended the contract to be governed by reference to a particular system of law. That inference may emerge upon a proper construction of the contract as a whole. 56 The evidence shows that there was no formal documentation entered into between ACE and ACE USA concerning the advances. Mr K H Parker, a director of ACE, gave evidence to that effect and said that he believed that each such advance was made on the basis that it was interest free and repayable on demand in Australian dollars. The evidence of Mr P J T Gammell, also a director of ACE, was to the same effect. At all material times Mr Gammell was also general manager of ACE and of its subsidiary companies and either a vice-president or an executive vice-president of ACE USA. Each of the advances was made under and pursuant to Mr Gammell's direction. 57 The advances were recorded in ACE's books by debits to a loan account entitled "Loan-ACE (USA)" numbered 2472. They were also recorded in a corresponding loan account in the books of ACE USA entitled "Capitalised/Pay-ACE Australian" numbered 26301. There is direct evidence that, not surprisingly, ACE's records showed the relevant amount in Australian dollars. Although there is no direct evidence to like effect in relation to ACE USA's accounts, I am prepared to infer (and do infer) from certain accounts payable vouchers exhibited to the first affidavit of Ms Noelene Vivienne Woodhouse, Taxation Manager for the ACE group of companies, and on the basis of inherent probability that the records kept by ACE USA in relation to these loans were in US dollars. 58 I am unable to infer from the materials before me that, as a matter of construction, ACE and ACE USA chose a governing law for these contracts. There being no express or other choice of law by the parties, the proper law must be ascertained by application of the principles referred to earlier in these reasons at pars [42] to [44]. 59 In my view, the proper law of the creation and enforcement of contracts of loan made during the period 1 July 1990 and 25 June 1991 was, having regard to the various relevant factors, Australian law. Those factors are as follows. The decision to make the loan was made in Australia by ACE, a company incorporated and resident in Australia. ACE USA was a wholly-owned subsidiary of ACE and its central management was conducted from Western Australia. In particular, ACE managed the funding of ACE USA from Western Australia. The loan was denominated and repayable in Australian currency. Many of the advances were disbursed from ACE's bank account in Western Australia. It is true that, in terms of amount, the bulk of the loans were made from funds located out of Australia and sent to the United States of America. But the decision to transfer those funds was made by office bearers of ACE in Australia. 60 In my opinion, those factors outweigh the fact that, on one view, ACE USA resided in the United States of America and, on any view, carried out business activities in that country. 61 On the facts (incorporation in Texas plus the carrying on of those activities) I find that ACE USA was resident in Texas. In my opinion, it had dual residence i.e. being resident also in Western Australia by reason of its central management being located there. The matter (residence) is one of fact which means that the authorities on residence of a corporation are not particularly helpful. But I think that the process of reasoning adopted by Starke J in Koitaki Para Rubber Estates Ltd v Federal Commissioner of Taxation (1941) 64 CLR 241 at 247 is most useful for present purposes. 62 The transaction comprising the creation of the agreements giving rise to the loans and their enforcement had, in my opinion, its closest and most real connection with Australian law. That was, in my view, the proper law of that transaction. 63 However, there was a further transaction, namely a dealing with the debt, i.e. the conversion transaction. In fact that dealing was one intended to extinguish the debt by applying it by way of a contribution to the capital of ACE USA. 64 The general rule is that the discharge of a debt is governed by the proper law of the contract – see European Bank Ltd v Citibank Ltd [2004] NSWCA 76 at para [51] and the cases there cited. But is there only one proper law for the contracts of loans which became the subject of the conversion transaction? 65 There is authority, at very high level, for the proposition that the fact that one aspect of a contract is to be governed by the law of one country does not necessarily mean that that law is to be the proper law of the contract as a whole: see Hamlyn & Co v Talisker Distillery [1894] AC 202 at 207; Kahler v Midland Bank Ltd [1950] AC 24 at 42 (per Lord MacDermott) and Re United Railways of the Havana v Regla Warehouses Ltd [1960] 1 Ch 52 at 92 (per Jenkins LJ with Romer LJ concurring). 66 Lord Herschell LC in Hamlyn & Co at 207 said this: 'Where a contract is entered into between parties residing in different places, where different systems of law prevail, it is a question, as it appears to me, in each case, with reference to what law the parties contracted, and according to what law it was their intention that their rights either under the whole or any part of the contract should be determined.' [Emphasis added] 67 In United Railways, the law of Pennsylvania was held to be the proper law of the contract for the lease of locomotives and rolling stock, save for certain clauses governing the right to possession of rolling stock in the event of default, and formal compliance with Cuban law, as to which matters the proper law was regarded by the Court of Appeal as being Cuban law – see pp 57 (for the seventh clause) and 93-94. 68 These authorities show that, when ascertaining the proper law of a contract, a court will not split the contract readily and without good reason. In my view, there is good reason for applying Texan law to the conversion transaction. 69 The evidence is clear that the intention of ACE (and through it the intention of its wholly-owned subsidiary ACE USA) was to convert the total of the loans from unsecured debts into further capital of ACE USA. That is, the moneys represented by the right to repayment of the loans were to be applied by way of subscription for that further capital. 70 There is a rebuttable presumption that foreign law, for present purposes Texan law, is the same as Australian law. There is no contrary evidence about the status of capitalised debt in Texas. Accordingly, I find that the effect of the conversion transaction would be to relegate ACE's status in a winding up to rank after all the unsecured creditors of ACE USA. The winding-up would be carried out under Texan law. 71 Had ACE USA subsequently prospered (and there is no evidence either way on this), the conversion transaction would have resulted in ACE or its assigns having the right to participate in dividends and possibly enjoy capital gains. 72 All of these matters, in my opinion, have the closest and most real connection with Texan law. In my view, the parties are to be taken to have accepted that the consequences under the conversion transaction would be governed by Texan law. 3. WHAT WAS The legal effect, in accordance with Texan law, of the conversion transaction? 73 The applicant submitted that the conversion of the debt into capital amounted, under Texan law, to a valid waiver by ACE of the right to receive payment which in turn amounted to a disposal within the meaning of s 70B(2). Under Texan law, so the applicant asserted (and this is another factual dispute) there was no requirement for consideration or estoppel in the case of a waiver. 74 Each party called a professor of law with particular expertise in Texan law. The applicant called Professor Robert Allan Ragazzo. Professor Ragazzo is a professor of law at the University of Houston Law Center who graduated magna cum laude from Harvard Law School in 1985. The respondent called Professor Loftus C Carson, II, who is a professor of law at the University of Texas Law School and the Distinguished Professor of Government at the George Bush School of Government and Public Service at Texas A & M University. I mention only two (each) of their professional qualifications. [Research by the library of this Court indicates "A & M" once reflected the name "Agricultural and Mechanical College of Texas" under which the University was founded in 1876, a name which was changed in 1963 to its present style because the curriculum of the University was (and is) as comprehensive as any other university.] 75 Neither party suggested that either expert was better qualified than the other. I accept, without hesitation, that each of the professors is highly qualified to give expert evidence about Texan law for the purposes of this case. Each professor provided affidavit evidence and each appeared by video-link to give oral evidence together, in accordance with what is colloquially described as this Court's "hot tub" procedure for the taking of expert evidence. 76 There was substantial common ground between the two experts. 77 Professor Carson, having researched the case law of Texas concerning waiver of rights, agreed that the cases cited in Professor Ragazzo's supplementary report dated 13 May 2004 comprised all the relevant authorities with regard to cases involving waiver of some of the terms of a contract, whether material or immaterial. 78 Professor Ragazzo's evidence was that Texan case law demonstrated that a waiver of material terms or material rights did not need to be supported by consideration or an estoppel. He said that this was established by a decision of the Supreme Court of Texas in United States Fidelity & Guaranty Co v Bimco Iron & Metal Corp. 464 S.W.2d 353, 358 (Tex. 1971) which Professor Ragazzo described as a decision expressly overruling pre-1971 cases which had held to the contrary. Professor Ragazzo furnished a lengthy list of subsequent decisions which applied United States Fidelity. 79 Professor Carson's opinion was that none of those cases went further than to decide that neither consideration nor writing was required in the case of a waiver of: * one of several obligations imposed by a contract, deed or order, leaving other obligations subsisting (e.g. the waiver of a contractual term without discharging the contract); or * one of alternative rights where the obligee elects to rely on the other of the alternative rights. 80 Professor Carson's evidence was that there was no Texan authority in which a court has upheld the total discharge of the whole of the obligations of the obligor as a result of a waiver by the obligee which is not in writing nor supported by consideration moving from the obligor. 81 Professor Carson's view was that Texan law was reflected in the language of the Restatement (2nd) of Contracts §273. The basic principle stated at that paragraph is that: 'An obligee's manifestation of assent to a discharge is not effective unless it is made for consideration, or it is made in circumstances in which a promise would be enforceable without consideration, or it has induced such action or forbearance as would make a promise enforceable,' 82 Professor Ragazzo's opinion was that although the Texan case law may be contrary to the second Restatement of Contracts, the Restatement was of little precedential value where there is substantial Texan case law to the contrary. 83 It is quite clear that, under Australian law, the content of foreign law is a question of fact: see the authorities discussed by Lindgren J in Allstate Life Insurance Co v Australia and New Zealand Banking Group Ltd (No 6) (1996) 64 FCR 79 at 82. The factual issue which I have to decide is what are the relevant legal principles under Texan law. I then have to decide, by applying those principles, whether under Texan law the waiver by ACE, as part of the conversion transaction, of the debt owing by ACE USA, was legally effective. 84 The parties tendered an agreed bundle of Texan authorities (Exhibit A15). There were some 30 cases and other materials including a copy of extracts from the Restatement (2nd) of Contracts Chapter 12. Some of the cases were not relevant to the question which I have to decide. 85 It was a somewhat unusual task to weigh up the eminent professors' apparently conflicting views on a matter of Texan law in the light of the case law "evidence" with a view to finding which of their evidence was to be accepted. But that task flows logically from the proposition that the content of foreign law is a matter of fact. The approach to be taken is helpfully explained (and some authority discussed) by Roxburgh J in Re Banque des Marchands de Moscou (Koupetschesky) [1958] 1 Ch 182 at 193-194. 86 The evidence establishes that the Supreme Court of Texas is the highest court in that State. Below it are (at the same level with each other) the various benches of the Texas Court of Appeals, each of which has jurisdiction over a specific geographic area. Those appellate courts supervise the trial courts which in Texas are called the District Courts. The Supreme Court of the United States is not permitted to hear an appeal from the Texas Supreme Court on issues of Texas State law. The Texas Supreme Court thus has the last word on issues of Texas State law. In that context I turn to its decision in United States Fidelity Co. 87 The relevant circumstances in that case were that the respondent had made a claim upon the petitioner (i.e. the petitioner for a rehearing) for loss arising out of damage to a building caused by a burglary. The petitioner had appointed a loss adjustor. The respondent signed a non-waiver agreement which provided in part: '… that any action taken by the Company … in investigating said accident shall not operate in any way as a waiver, or invalidate any of the conditions of said policy.' 88 The time limited by the insurance policy for the respondent to file a proof of loss expired without it having done so. Later the loss adjustor told the respondent's attorney that the petitioner would not pay that portion of the loss resulting from theft, but would pay for damage to the door of the building caused by the breaking-in of the burglars. 89 The question was whether the loss adjustor had, on behalf of the petitioner, waived the defence of late filing of the proof of loss. The Supreme Court affirmed the judgment of the (Houston) Court of Civil Appeals which had held that the evidence of waiver had been improperly excluded by the District Court. 90 At p 357 of the report, the Supreme Court dealt with the question of waiver occurring after expiration of the time for performance of a condition had expired. The Court referred to an earlier Supreme Court of Texas decision, Equitable Life Assurance of the United States v Ellis, 105 Tex.526, 147 S.W.1152 (1912) to the effect that waiver of a condition precedent to liability may be established by conduct occurring after the time for performance of the condition had expired. 91 The Court then turned to the distinction between waiver and estoppel, and said this, at p 358: '[6] Waiver need not be founded on a new agreement, nor be supported by a consideration nor based on estoppel. To the extent that the following cases and others have held to the contrary and are in conflict with this opinion, they are overruled: (citing five reported decisions).' 92 The Court, comprising five justices, was unanimous on this point. 93 My review of the Texan authorities in evidence suggests (and I so find) the following: 1. "The affirmative defense of waiver can be asserted against a party who intentionally relinquishes a known right or engages in intentional conduct inconsistent with claiming that right." 2. "A party's express renunciation of a known right can establish waiver …". [Both of these propositions are from the Supreme Court of Texas decision in Tenneco Inc v Enterprise Products Co 925 S.W. 2d 640 (Tex. 1996). 3. "Waiver is an affirmative defense… Under Texas case law, waiver is the intentional relinquishment of a known right or the intentional conduct inconsistent with claiming that right… The elements of waiver include the following: (1) existing right, benefit or advantage; (2) actual or constructive knowledge of its existence; (3) an actual intent to relinquish the right (which can be inferred from the conduct)." Sedona Contracting Inc v Ford, Powell & Carson, Inc 995 S.W. 2d 192 (a decision of the Court of Appeals of Texas at San Antonio in 1999). 4. "Until United States Fidelity was handed down, waiver, to be effective, required consideration. However, United States Fidelity expressly overruled prior law requiring consideration, and held that waiver need not be founded on a new agreement, nor be supported by a consideration, nor be based on estoppel. The doctrine of waiver has been held to apply to all rights or privileges to which a person is legally entitled." Burton v National Bank of Commerce of Dallas 679 S.W. 2d 115 at p 117 (a decision of the Court of Appeals of Texas at Dallas in 1984). I interpose here to acknowledge Professor Carson's argument that the language of the Court in Burton may suggest a wider principle than was necessary to decide that case. However, as I read the decision, it was simply applying the principle explained and declared by the higher court in United States Fidelity. But I note Professor Carson's point that this was a case of waiver of one particular right (enforcement of a promissory note after sale of the subject matter of the collateral security). I understand how it would fit into each of the categories referred to by him and set out at paragraph [80] above. 94 Professor Carson argued that the decision of the Court of Appeals of Texas (at Corpus Christi) in Victoria Bank & Trust Company v Brady 779 S.W. 2d 893 (1989) was authority for the proposition that consideration is required to discharge the entirety of obligations. He asserted that all post-United States Fidelity cases addressed only waiver of specific terms and not the entirety of the obligations and that Texas law remained unchanged as to the principle that consideration was required to discharge the entirety of obligations. 95 But, as Professor Carson very fairly acknowledged in cross-examination, the Victoria Bank case involved a contractual release, not a unilateral act. The decision was to the effect that a release which was intended to be given for a certain consideration, but turned out to be unsupported by that consideration was therefore not effective. I accept Professor Ragazzo's evidence that the Victoria Bank case does not apply to the concept of a waiver and accordingly does not assist in identifying the relevant Texan law for the purposes of the present case. Professor Carson also relied upon the second Restatement of Contracts, but the relevance of that depends very much on the actual content of Texan case law. That is, I accept Professor Ragazzo's evidence that if Texan case law differs from the Restatement, the former prevails. 96 In my opinion none of the Texan cases in Exhibit A15 can be said to be on all fours (i.e. directly in point) with the facts of the present case. I accept Professor Carson's evidence to that effect, which I have summarised at paragraph [81] above. 97 My next task is to assess how a Texan court would apply the relevant law to the facts of this case. 98 I am conscious of a slight feeling that I am trespassing into Texan jurisprudence. In the perhaps unlikely event that these reasons for judgment should find their way to that State, I must emphasise that nothing written here should be taken as indicating any disrespect. Having had the pleasurable duty of reading some thirty Texan cases, that is far from my intention. 99 My assessment is that a Texan court would hold that the conversion transaction should not be characterised as, to use Professor Carson's words, "… the total discharge of the whole of the obligations of the obligor …" but as a consensual variation of those rights. The variation was the agreement that instead of the moneys owing (the debt) being repaid to ACE, they were to be applied as a subscription for further equity capital in ACE USA, with the latter company acknowledging the (changed) status of those funds. That characterisation would, in my view, give the present case quite a strong degree of similarity in principle to the Court of Appeals of Texas' decision in Burton. In that case, the jury in the District Court found that an officer with the appellee bank had told the appellant that if he delivered to the bank the collateral security, a truck, for which the officer said there was a buyer available, the bank would extinguish the debt. The appellant delivered the truck to the bank, but the bank sought to enforce a promissory note (the primary security) in respect of the balance said to remain owing after sale of the truck and receipt of the proceeds. The Court applied United States Fidelity and the law of waiver as recognised by the Supreme Court of Texas in that decision. But I do not think that it matters whether the facts of the present case are to be characterised as a total discharge of the whole of the obligations of the obligor. The question is how would Texan law be applied to the facts here? It seems to me that, in principle, ACE has conducted itself in much the same way as the bank in Burton. If Professor Carson is right in his opinion that that portion of the decision in Burton was not part of the ratio decidendi, I regard the Court's dicta in that case as reflecting how Texan law would be applied. 100 The Texan authorities show that the key element of waiver is "intent" – see, for example, Gage v Langford 582 S.W. 2d 203 (1979 Tex. App.) at 207 and the cases there cited. I hold that under Texan law ACE would be held to have intentionally relinquished its known right to repayment of the loans and thereby to have waived that right. 101 I diverge, for two paragraphs, from fact finding and the application of Texan law to legal speculation. The historical roots of the principles of waiver can probably be traced back, through Pinnel's case (1602) 5 Co Rep. 117 a; [1558-1774] All ER Rep 612, to the observation of Brian CJ in the 1455 Year Book case of Anon (1455) YB 33 Hy VI f 48 pl 32 reproduced in Cheshire & Fifoot's "Law of Contract" (6th Australian Edition) at p 144: 'The action is brought for Ł20, and the concord is that he shall pay only Ł10, which appears to be no satisfaction for the Ł20, for payment of Ł10 cannot be payment of Ł20. But if it was of a horse which was to be paid according to the concord, this would be good satisfaction, for it does not appear that the horse be worth more or less than the sum in demand.' 102 The descendants of these cases are often assigned to the categories of accord and satisfaction, election or consideration. But I think waiver can claim the same parentage. 103 In my opinion, whether or not this case is to be characterised as a total discharge of the whole of the obligations of the obligor, if ACE had, after the conversion transaction, sued ACE USA in Texas for the debt which the parties had agreed to convert into further equity capital, its case would have been dismissed. The dismissal would have been because under Texan law, as indicated by Professor Ragazzo's evidence (which I accept) and as reflected in the relevant authorities in Exhibit A15, the circumstances gave rise at the very least to a waiver by ACE of its rights to recover what had previously been a debt owing to it. 4. Was there a disposal of the traditional securities within the meaning of section 70b(2) of the act? The Applicant's Submissions 104 The applicant relied upon the width of the words used to define "dispose" in s 26BB(1) of the Act i.e. "… sell, transfer, assign or dispose of in any way …". It relied upon a line of authorities which included Henty House Pty Ltd (in voluntary liquidation) v Federal Commissioner of Taxation (1953) 88 CLR 141 at 151; Federal Commissioner of Taxation v Wade (1951) 84 CLR 105; Benwerrin Developments Pty Ltd v Federal Commissioner of Taxation (1981) 39 ALR 229; and Inland Revenue Commissioners v Buchanan [1958] 1 Ch 289 at 296. It also referred to Ashton Mining Ltd v Federal Commissioner of Taxation (2000) ATC 4307 where Merkel J at 4,313, referred to the terms "disposal" or "redemption" of a debt requiring, for the purposes of s 70B(2) the discharge of any legal obligation on the part of the debtor to repay the debt. The Respondent's Submissions 105 The respondent's written submissions on this point ran to only two paragraphs under the heading "Whether extinction of a debt is a disposal", which were in these terms: '47. The Commissioner considers that he may not in proceedings before the Court make submissions which might be viewed as inconsistent with a published ruling or statement of the Commissioner which has not been withdrawn. 48. Annexed is an extract (paragraphs 48-60) of Income Tax Ruling TR96/14, which has not been withdrawn. The Commissioner asserts the correctness of the extract.' 106 Income Tax Ruling TR96/14 was in response to the question whether a traditional security could be disposed of by forgiving or waiving the debt of the issuer of the security. 107 In summary, the Taxation Ruling answered that question – no, because the words "dispose of in any way" should be confined by the ejusdem generis principle. The genus was said to be found in the words "sell, transfer, assign," being an alienation of the security or the right to payment from the holder. At the very least, the security or right to payment should continue to exist after the action taken. Extinguishment of a debt would not satisfy the definition of "disposal" for the purposes of s 70B. my reasoning 108 I have some doubt whether the mere fact that the words "sell, transfer, assign" fall within a genus of transactions (being transactions which involve alienation), means that the ejusdem generis rule must be applied to the words "or dispose of in any way". There is relatively modern authority to suggest that it is not sufficient simply to identify a genus before the rule must be applied; there needs to be some other basis for construing an intention that general words are used in a sense limited to the genus identified – see the cases discussed in The King v Regos and Morgan (1947) 74 CLR 613 at 623; Gas & Fuel Corporation (Vic) v Comptroller of Stamps [1964] VR 617 at 620-621; and Mattinson v Multiplo Incubators Pty Ltd [1977] 1 NSWLR 368. It is for the party proposing the application of the rule to justify the restriction of what would otherwise be words of general application. The source of these citations is "Statutory Interpretation in Australia" (Fifth Edition) by D C Pearce and R S Geddes at pp 103-108. The authors suggest that the courts should think carefully before rejecting the ejusdem generis principle as a canon of construction. 109 I do not think that the respondent has demonstrated any justification for applying the ejusdem generis rule to restrict the general words "or dispose of in any way". In my opinion, the language of s 70B(2) is sufficiently clear not to require resort to that rule for the purposes of construction. The general words are very wide indeed. I am not persuaded to restrict them in the manner suggested, somewhat half-heartedly, by the respondent. 110 However, even assuming the application of the rule and the genus identified above, I consider that the conversion transaction falls within that genus. By the conversion transaction ACE can, in my opinion, be seen to have sufficiently divested itself of the relevant traditional securities or the right to receive payment under those securities as to be characterisable properly as an alienation. ACE exchanged that personal property for a bundle of rights arising through the application of those moneys as additional capital in ACE USA. 5. was there any loss on the disposal? The Applicant's Submissions 111 The applicant submitted that the total amount of each of the traditional securities was to be assessed at its face value: Burrill v Commissioner of Taxation (1996) 67 FCR 519 at 523-525. The relevant loss, in respect of which the applicant was entitled to a deduction was the face value of the traditional securities (AUD$6,335,780) less the value of the equity in ACE USA received in exchange for converting that debt into capital. It quantified the value of that equity at US$566,000 or AUD$736,000 (and the loss at AUD$5,599,780). 112 There is a dispute between the parties about that value. There is no dispute about the liabilities of ACE USA, but the value of the assets of ACE USA is in contest. The main item disputed is the value of the FIB Tower which, it will be recalled, was sold in September 1991 (with settlement taking place in November 1991) for US$170,250,000, a figure much below the amount at which it was previously recorded in the accounts of ACE USA. As I understand the position, there is also a less substantial dispute about the value of one other item of real estate owned by ACE USA at the relevant time. It was common ground that the relevant time was 25 June 1991, being the effective date of the second capitalization of debt, or the conversion transaction. The Respondent's Submissions 113 The respondent submitted that, in the context of s 70B, loss was a net loss not a gross amount. It was the difference between what was outlaid and what was obtained as a result of ("on") the disposal. 114 The respondent accepted that ACE had outlaid AUD$6,335,780. 115 But, so it was put, as a result of the disposal ACE obtained an increase in the value of the 1,000 shares held by it in ACE USA because the liabilities of ACE USA which were a claim on its assets ranking ahead of the share capital were reduced by the amount released, and the net assets of ACE USA were correspondingly increased. As ACE was the sole shareholder, the whole of the increase accrued to it. Prima facie, the increase in value in the shares equalled the amount by which the debts were reduced, so that the value of the investment of ACE in ACE USA did not change in consequence of the release. As a result, so the respondent argued, no loss was realised. 116 The respondent relied on the following figures shown in the accounts of ACE USA. Surplus assets (assets less liabilities, being shareholders funds or "total capital") were US$4,279,810. This was based on a book value of the FIB Tower of US$175,392,828. 117 The capital contributed (being the agreed outlay referred to above) increased the surplus assets of the company by the same amount. ACE's "investment" in ACE USA, so the respondent contended, did not change in value in consequence of the disposal. No loss was realised on the disposal of the debt. 118 Alternatively, so the respondent submitted, the applicant had failed to discharge its obligation of demonstrating that it had incurred a loss as a result of the conversion transaction. In essence, the respondent put the applicant to proof of the values upon which it relied. 119 The respondent's position was that a relatively small increase in the value of, for example, the FIB Tower, would increase the value of the net assets of ACE USA and negate the loss on disposal of the loan. my reasoning 120 From the above it can be seen that there is no dispute that the face value of the total of the debts, namely, $A6,335,780.61 is the starting point for any calculation of loss. 121 The applicant's case is that the value of the equity which it received in exchange by reason of the conversion transaction was less than the face value of the debt. An essential part of the applicant's case was that before the conversion transaction its shares had a nil value whereas after the conversion transaction those shares became worth US$566,000 or AUD$736,000. 122 In its statement of facts, issues and contentions the respondent asserted that:- '…the calculation of the purported loss is not supported by the contemporaneous evidence of the value of the FIBT at the time of the disposal of the security.' 123 It would appear that this reflects the position adopted by the respondent in his reasons for disallowing the applicant's objection. Paragraphs 30 and 31 of those reasons read as follows:- '30. In its valuation report Coopers & Lybrand adopted the sale price of the FIBT as the market value as at 25 June 1991. Apparently no other evidence of market value was considered, and in particular there was no attempt made to work back from the sale price to the value as at 25 June 1991. I do not regard the report as establishing a reliable value for the FIBT, particularly given the indications of a higher value set out in the paragraph above [The indications of a "higher value" referred to in paragraph 30 above comprised: · an assessment by Messrs Goldman, Sachs & Co ("Goldman Sachs"), who had been engaged as agents to sell the FIB Tower, that a price of not less than US$220,000,000 was a "reasonable expectation"; · a memo dated 7 May 1991 from ACE USA noting that Goldman Sachs had introduced a potential buyer with a "strong interest in the building" and that a company called Chubb "reintroduced the notion of their purchase of FIBT" and that "their offer could be improved; and · a letter dated 9 May 1991 from a Chubb subsidiary (Bellemead Development Corporation) to ACE, stating that Chubb was "willing to discuss a possible purchase of the property for [US]$181,000,000".] 31. The Australian Valuation Office (AVO) was engaged by the ATO to provide a market valuation of the FIBT as at 25 June 1991 and a trend analysis of the Dallas market during the period 1 May 1991 to 30 September 1991 on a monthly basis. In its report dated 15 May 1997 the AVO was unable to provide a market valuation or the trend analysis requested due to the difficulty of obtaining the necessary information.' 124 As part of the interlocutory processes in this appeal, orders were made for the filing of affidavits by each party. It must have been apparent to the respondent from the applicant's affidavits that the applicant was not aware that the value of, amongst other things, the FIB Tower was still a live issue in the appeal. There was very little, if any, admissible evidence relating to that issue in the applicant's affidavits filed before the trial. 125 About a month before the hearing, so I was told from the bar table, senior counsel for the respondent drew the attention of senior counsel for the applicant to the fact that the applicant had not filed any evidence of asset values. 126 At the trial there was an argument about the admissibility of some evidence of the value of the FIB Tower. The applicant's position was that the respondent should not be allowed to put the value of the building in issue. 127 I ruled that the respondent had put the value of the FIB Tower in issue to the extent of putting the applicant to its proof. I also ruled that the evidence to which objection had been taken was inadmissible. That was one of the reasons why the hearing of this appeal was adjourned part heard. The other reason was to enable further evidence of Texan law to be adduced. 128 During that adjournment (of about three months), the applicant obtained and filed affidavit evidence from experts in the United States of America going to the question of the value of the assets of ACE USA. 129 I mention these matters to make quite clear the context of the valuation dispute. In particular, the context is that over 7 years ago the respondent attempted, unsuccessfully, to obtain a market valuation, was well aware of the sale of the FIB Tower at US$170,250,000 in a contract entered into about 3 months after the relevant date, chose to reject that sale as being evidence of value and put the applicant to proof. The respondent did not make any further efforts to obtain expert evidence of value for the purposes of the appeal but, as I say, chose to put the applicant to proof and attack (I might say quite vigorously) the evidence of Ms Randi Sue Rosen an expert valuer called by the applicant to give evidence about the value of the real estate assets of ACE USE at the relevant time. Ms Rosen was subjected to vigorous but, of course, fair cross-examination when she appeared by video link from the United States of America to give her evidence. 130 I now turn to the expert valuation evidence adduced on behalf of the applicant. The first witness was Mr Robert Van Ling a valuer from Houston, Texas. Mr Ling is a partner in the economic and valuation services division of KPMG LLP, an accounting firm. KPMG LLP was engaged to prepare a valuation of the equity in ACE USA as of 25 June 1991 after capitalisation of the debt previously owed to ACE. 131 Mr Ling valued that equity at US$566,000. Mr Ling's evidence shows that he considered various alternative valuation approaches. He noted that ACE USA had incurred substantial losses in the years before 30 June 1991. Principally for that reason, Mr Ling chose to use a valuation method which adjusted the balance sheet of ACE USA. In brief summary, Mr Ling adjusted the value for real estate on the basis of valuations prepared by Ms Rosen, and made his own adjustment in respect of the value of oil and gas properties – an area in which Mr Ling had expertise. 132 Mr Ling freely acknowledged that valuation was not an exact science and that the substituted values were estimations (in respect of the oil and gas assets) and were otherwise based on Ms Rosen's opinion. He also agreed (in cross-examination) that his figure of US$566,000 was an estimated valuation based upon the estimates of asset value. That was the extent of the cross-examination of Mr Ling. 133 Ms Rosen was the second expert valuer called on behalf of the applicant. 134 Ms Rosen is a managing director in the economic and valuation services division in the Los Angeles and San Diego offices of KPMG LLP. She prepared valuations of real estate assets owned directly or indirectly by ACE USA as of 25 June 1991. Those assets, with her respective valuations shown in brackets, comprised: · the FIB Tower (US$170,363,000); · 2 units in a condominium building in Beaver Creek, Colorado (US$342,074 and US$3,856,736 respectively); · a partnership interest in approximately 1.58 acres in Dallas, Texas (US$100,000); · a partnership interest in approximately 1 acre of land in Washington D.C. (US$750,000); and · approximately 428 acres in Hillsborough, New Jersey (US$12,000,000). 135 In relation to the FIB Tower, Ms Rosen noted that there were three generally accepted approaches to value i.e. sales comparison, cost, and income. She did not use the income approach because the financial information as at the date of the valuation was not available. Ms Rosen was able to identify what she considered to be two comparable sales in the city of Dallas. She then prepared an estimate of what it would have cost to replace the FIB Tower as at 25 June 1991. That estimate was US$162,800,000 for the building plus US$10,019,735 for the land, or US$143.97 per square foot. Analysis of the two comparable sales reflected sale proceeds ranging from US$111.27 per square foot to US$132.92 per square foot. Ms Rosen's report indicates that she consulted three local real estate brokers familiar at the relevant time with the FIB Tower. She formed the opinion that the sale proceeds per square foot for the two comparable properties were not truly comparable "due to their inferiority in terms of quality of improvements when compared to the [FIB Tower]". The local real estate brokers informed her that the FIB Tower had been regarded as a prestigious quality office building in the Dallas CBD. 136 In all of those circumstances Ms Rosen formed the opinion that based on a replacement cost approach the value of the FIB Tower was $172,800,000. The sales comparison approach indicated a value of US$146,500,000. But, in Ms Rosen's opinion, the best indication of value would be the sale which took place pursuant to the contract of September 1991 which was completed in November 1991 and in which the purchase price at completion was US$170,363,000. 137 The respondent made various criticisms of Ms Rosen's evidence. He went so far as to assert that the only exercise of expertise in Ms Rosen's report was that involved in making calculations based on assumed facts. The focus of the respondent's attack upon Ms Rosen's report was in relation to the FIB Tower and the larger of the two units in Colorado. 138 The respondent pointed to the fact that Ms Rosen and her associate were described in her report as being located, based and certified in California and Nevada. The disclaimer to the report indicated that Ms Rosen had relied on information obtained from ACE USA and the public record and garnered from interviews with other persons whose location and experience was undisclosed, and had "not relied on any experience as a realtor or valuer of land or buildings in Dallas in or about 1991". Then there was a complaint that Ms Rosen had not inspected the FIB Tower. 139 I deal with the latter complaint first. The valuation date was almost 13 years ago. I do not lessen the weight which I give to Ms Rosen's report by the fact that she did not inspect the property. If she had inspected the property, enquiries would have had to have been made about whether it had been refurbished in the intervening years and the extent of such refurbishment. If there had been no such refurbishment, then Ms Rosen would have had to make some kind of notional adjustment for wear and tear. On balance, I do not think that any current inspection was called for. Ms Rosen had recourse to recorded information (some of which is referred to below) for her assessment of the situation as it was in June 1991. 140 I reject also the assertion that all Ms Rosen did was to make calculations based on assumed facts. In my opinion, Ms Rosen brought to bear her extensive qualifications and experience to the task of making a valuation of the FIB Tower. In her report she identified three real estate brokers, whom she consulted, who had experience in the Dallas Central Business District at the relevant time. The other enquiries which she made were, in my view, quite conventional and non-controversial. They included gathering and reviewing relevant property information, including site plans and property tax records, and having recourse to a commercial real estate transaction database for the Dallas metropolitan area. 141 I acknowledge that Ms Rosen's task was a difficult one, given how much time had elapsed since the relevant date. But I think that she carried out that task in a manner which required her professional skills to be exercised and I place considerable weight on her evidence. 142 I found Ms Rosen to be a credible witness. She was prepared to agree to propositions which were potentially unfavourable to the applicant when those were put to her in cross-examination. I considered that her experience was such that she was well qualified to review evidence required for valuation purposes and to form a reliable opinion on the value of real estate in Dallas, Texas and Avon, Colorado, notwithstanding that her Real Estate Appraiser's licences were issued for the States of Colorado and Nevada. 143 My impression of Ms Rosen, gained both from her report and from her presentation as a witness, was that she was a seasoned valuer with sufficient experience whom I could trust to give me a reliable opinion as to the value of an office building in Dallas, Texas. I think that her decision to place reliance on the actual sale in September 1991 was well placed. 144 I interpolate to note that the respondent, in his written submissions, insisted upon describing the actual sale as being in November 1991. It is true that settlement took place in November 1991, but the evidence shows that that contract of sale was made in September 1991 i.e. within about 3 months of the relevant date. I note that a draft "Sale-Purchase Agreement" between the relevant ACE USA subsidiary as vendor and the relevant Chubb subsidiary as purchaser, showing the purchase price of US$170,500,000, was in existence as early as 24 June 1991. 145 I do not accept the respondent's submission that that transaction was not a reliable foundation for an assessment of fair market value as at 25 June 1991. The respondent submitted that some of the evidence suggested that there had been a deterioration in the relevant market in July 1991. I was referred to Exhibit R3 Document 92 for that proposition. I do not think that the evidence establishes such a rapid or sudden deterioration. If anything, the evidence suggests that the Dallas commercial real estate market had, by that time been in a decline since 1984 or 1986. I refer also to Mr Gammell's unchallenged evidence that the ACE USA subsidiaries purchased the FIB Tower from a mortgagee in possession on 9 September 1988 for a price of US$167 million. 146 I have had regard to the authorities regarding events subsequent to a date of valuation including Cannane v Official Trustee (1996) 65 FCR 453, but I think that the present case is a very unusual one. The task of the court here, assisted by the expert valuer, is to go back nearly 13 years in time and form a view about a matter of valuation. In that context, I regard the actual sale of the property at a particular price, taking place within about 3 months of the relevant date, as being clearly relevant evidence. Furthermore, the evidence shows that as at 25 June 1991 ACE USA and Chubb had in contemplation the sale of the FIB Tower at a sale price of US$170,500,000. In my view, Ms Rosen was correct to regard that sale as being the best evidence of the value of the FIB Tower some three months earlier, provided that there are no other factors (i.e. other than the fact that the sale was post the relevant date) which warrant rejection of her assessment. As will be seen, the respondent submits that the sale was not at arm's length. But in my view that is another issue altogether, to which I now turn. 147 The sale in question was between two subsidiaries of ACE USA (the Freeman Ross limited partnership) and a subsidiary in the Chubb group of companies (Bellemead/Fountain Place Inc). As a matter of convenience I shall usually refer to the vendor as ACE USA and the purchaser as being Chubb. 148 The respondent contended that this sale was not a dealing between a willing but not anxious purchaser and a willing but not anxious vendor. Nor was it, so the respondent submitted, unaffected by collateral transactions or prior relationships. 149 First, the respondent referred to evidence which showed that another company in the Chubb group, Chubb Realty Inc, held a second mortgage over the FIB Tower. In the mortgage documentation there was an option for Chubb Realty Inc to acquire the FIB Tower by converting its loan to a 50% equity in the property. That option could have been exercised on 1 February 1995 and 1 February in each subsequent year to the date of maturity (23 March 2000). The amount secured by the second mortgage was US$46,000,000. The evidence shows that the principal amount secured by the first mortgage was US$113,500,000 with periodical principal payments at the rate of US$12,500 per month initially but escalating to US$41,700 per month from 10 January 1995. The respondent submitted that the effect of the second mortgagee's option was that Chubb Realty Inc could acquire a half interest for US$46,000,000 at a time after ACE USA had repaid the first mortgage and thus at much less than the market value of the interest acquired. 150 It is difficult, on the limited evidence available, to make an assessment about whether this option gave such a substantial benefit to Chubb Realty Inc. Much probably depends upon the state of the market at the time it chose (had it so chosen) to exercise the option and how much had been repaid to the first mortgagee. There is some evidence that Chubb Realty Inc's option was not "in the money" as late as 24 June 1991. The same document discusses a range of values for the FIB Tower of between US$140 million and US$172.5 million (according to an appraisal which the author expresses confidence in obtaining), with a median of US$156 million. The median value was for the purposes of selecting a figure which might be acceptable to the Court which would administer a reconstruction in bankruptcy proceedings which ACE USA had in mind as part of its tactics in dealing with Chubb. Another contemporaneous memorandum, written by an adviser to ACE USA on 24 June 1991, assumes the value of the FIB Tower to be $140 million. 151 In my view it is not necessary to make an assessment of the value of the option to Chubb. If the option held by Chubb Realty Inc had an effect upon the proper value to be allocated to the FIB Tower in ACE USA's books as at 25 June 1991, it must have been a negative effect. It was a fact of life, whether the putative buyer was a Chubb company or anyone else. If the option was worth something to Chubb another buyer would have had to buy that option as well. But, of course, the money would go to Chubb, not to ACE USA. In my view, if that option should have been made known to Ms Rosen and if it should have been taken into account, it would have to have been taken into account as something in the nature of an encumbrance, reducing or at least putting a ceiling on the amount which ACE USA might reasonably have been expected to realise from its sale. 152 The respondent suggested that the evidence established that: · Companies in the ACE USA group were subject to financial obligations to companies in the Chubb group and were, or were asserted to be, in default of those obligations in relation to ventures in Washington, New Jersey and Dallas; · It was "an absolute priority" for the ACE group to eliminate funding obligations and the FIB Tower was running at a cash deficit; · There were extensive negotiations between ACE and Chubb in relation to a joint compromise or renegotiation of the several obligations and rights arising out of the ventures; · ACE asserted an entitlement to damages for breach of agreements said to have been made in the course of the negotiations, and formulated them in terms of claims for usury and fraud in procuring payment of instalments in respect of the various ventures; and · ACE examined the possibility of seeking Chapter 11 bankruptcy protection and exerting "cramdown" on Chubb to diminish the value of its debt in reliance of a decision known as Greystone. 153 The respondent contended that the disposal of the FIB Tower was part of a resolution of all of these obligations, pursuant to a deal, performance of which was the subject of an agreement for concurrent settlement of disposals of interests and discharges of liabilities in respect of all of them. Hence, the disposal was not a transaction between unrelated parties dealing with each other at arm's length in respect of it, unaffected by other relationships and dealings, and was not indicative of the fair market value of the property. 154 The respondent referred to further matters which, so it contended, showed that the price nominated in the June 1991 sale was lower than fair market value: · Goldman Sachs were instructed in September 1990 that the desired sale price was US$220,000,000; · In November 1990 Chubb had valued the property at US$185,000,000 and ACE had sought US$190,000,000 for it; · In January 1991 Chubb had offered to purchase the FIB Tower for US$177,000,000 which ACE had rejected, whereupon Chubb increased its offer to US$180,000,000; · In April 1991 Chubb proposed a purchase of the FIB Tower for US$180,000,000 which ACE again rejected; · In May 1991, despite agreements as to the extent to which the parties were committed to a different agreement, Chubb was "willing to discuss a possible purchase of the property for US$181,000,000 if you should wish to consider it" independently of resolution of the parties' interests in the other properties; · On 17 June 1991 an executive of Chubb agreed that the "US$181,000,000 offer would always be on the table" notwithstanding that a sale document was in the course of preparation nominating a price of US$170,500,000; · Other purchasers had evinced an interest in the FIB Tower, namely Danielli Bondini and C. Itoh; and · Proposals were formulated for the sale of an interest in the Freeman Ross partnership on a basis which valued the FIB Tower at US$200,000,000. 155 The respondent pointed to the fact that for the purposes of making her valuation, Ms Rosen had not been informed of and did not take into account any of the above matters. All of those matters, so the respondent submitted would affect the extent to which reliance could be placed on the June 1991 transaction as an indicator of the fair market value of the property in June 1991. 156 Ms Rosen's valuation, so the respondent submitted, should not be accepted because it was founded on a transaction which was not an independent arm's length purchase and further because she was not informed of the relevant facts. 157 The respondent submitted that it was more likely than not that the value of the FIB Tower at 25 June 1991 was in the order of US$181,000,000. If that were the case then the shares in ACE USA would have a value (on Mr Ling's approach) at that date of some US$5,000,000 before and US$10,000,000 after the capitalization of the debt due to ACE i.e. they would increase in value by the amount claimed to be waived and there would on the applicant's case be no loss. 158 Alternatively, the respondent submitted that the difference between book value at 25 June 1991 and the amount of the agreed sale price was insufficient to result in a loss on disposal of the debt of the amount claimed. The shares increased, so it was argued, in value by the amount released (US$5,128,782) and decreased in value by the amount by which the FIB Tower was written down. 159 The applicant submitted that the sale of the FIB Tower in conjunction with the sale of ACE USA's interest in some adjacent land and real estate in Washington DC and New Jersey was a sale at arm's length. The applicant pointed out that, despite extensive marketing efforts, ACE USA had been unable to obtain an offer to purchase the FIB Tower from any person other than Chubb. 160 The applicant and the respondent, in their respective written submissions, referred me to numerous documents (there were 107 of them which filled three lever arch files and became collectively Exhibit R3) which had been produced pursuant to a subpoena issued at the request of the respondent and served upon ACE. The documents spanned virtually the whole of the calendar years 1990 and 1991. In summary, they comprised memoranda, letters of advice and other documentation relating to ACE USA's dealings and proposed dealings with its interest in the FIB Tower and, to a lesser extent, its other commercial real estate interests in the United States of America. 161 I found it difficult, simply from reading those documents, to make the assessment whether, as the respondent contended, Chubb was able to extract a below market price for the FIB Tower or whether, as the applicant contended, the contracting parties were indeed at arm's length. 162 Doing the best that I could, my assessment from perusing all of the documents to which I was referred was that the parties were in fact bargaining at arm's length. The documents disclosed that ACE USA had some prospects of instituting proceedings in a Texas court against Chubb on a range of grounds. They included usury in respect of the transaction which I have described at paragraph [116] above. Part of ACE USA's legal advice was that if the usury claim were successful Chubb ran the risk of forfeiting the principal amount of their loan of US$46 million. There were other claims of breach of fiduciary duty, negligent misrepresentation and fraud. My impression of the legal advice given to ACE USA was that these claims were not particularly strong ones, but that there was a reasonable prospect of successfully defending a motion by Chubb for summary judgment. A draft document, in the nature of a statement of claim, had been prepared. This was part of a strategy with the aim of achieving an overall settlement of the disputes between ACE USA and Chubb. The two parties had interests, of varying sorts, in each of the real estate ventures which eventually formed the contract of sale. 163 The documents also show that ACE USA had what might be described as a "fall-back" strategy of filing for Chapter 11 bankruptcy with a proposed reconstruction. The reconstruction, so it was hoped, might lead to a substantial dilution in the value of Chubb's security over the FIB Tower. 164 I infer from the documentation that ACE USA made known to Chubb that there was a real threat of litigation, including the claims which I have summarised above, and also a real threat that ACE USA would cause the bankruptcy proceedings to be instituted. 165 All in all, I am satisfied that the settlement reached and documented in the agreement of 23 September 1991 was between parties who were at arm's length. Accordingly, I accept Ms Rosen's valuation of the FIB Tower based on the consideration expressed in the sale document, the first draft of which emerged on or about 24 June 1991. 166 If I am wrong in that assessment, and that sale should not have been taken into account, then I accept Ms Rosen's evidence that she would have valued the FIB Tower as at 25 June 1991 in the range of US$146,500,000 to US$150,000,000 instead. I accept that, on the materials to which she referred, she would have been justified in taking that course. The result would have been that the loss suffered by ACE would have been even higher. The respondent obtained some admissions from Ms Rosen that her cost calculations did not include funding or holding costs of the developer or any development profit. I take that into account, but the respondent made no effort to quantify these amounts either in further cross-examination or by way of adducing evidence. I am not prepared to reject that portion of her evidence on the basis of those omissions. I accept that part of her evidence as simply being a further indication that the value of the FIB Tower at the relevant time was not likely to be more than US$170,363,000. I do not need to find whether the precise figure fell within the alternative range of US$146,500,000 to US$150,000,000 posited by Ms Rosen. 167 The respondent submitted that Ms Rosen's valuation of the larger of the two units in Colorado ("Unit 500") at US$3,856,736 should be rejected as being based on assumptions which did not correspond to the established facts and was not founded on relevant expertise. 168 The objections made by the respondent were that Ms Rosen had relied on contact with "local government" to verify zoning and use restrictions, an appraisal by one S F Ebert dated 15 June 1992 and certain unspecified enquiries of "Vail Associates". The respondent noted that neither S F Ebert nor Vail Associates had been called to give evidence. Further, the respondent argued that Ms Rosen had not been shown to have any expert knowledge of the value of real estate in Colorado in 1991 and had not inspected the subject property or the putative comparable properties so as to be in a position to express an opinion as to the extent of any material comparability. 169 In my view, the contacts and enquiries made by Ms Rosen were, once again, of a conventional and uncontroversial type. For example what better source can there be for verifying zoning and use restrictions than the local government? It was not put to Ms Rosen that the position in America was any different from Australia where such enquiries are standard practice. The other enquiries were the sorts of enquiries which a valuer would be expected to make, particularly given the lapse of time. 170 I find, on the evidence, that Ms Rosen did have sufficient expert knowledge to review the information available and to provide a valuation which was of assistance to the Court. 171 I accept her valuation of Unit 500 as being one upon which I can rely, and I do rely upon it. 172 It does seem a little strange that the respondent complained about the quality of the valuation evidence produced by the applicant when his own efforts, some 7 years ago, failed to produce any evidence. It would appear that the respondent made no further subsequent efforts to establish the facts. Even if that is not correct, he chose not to tender any expert evidence to support his contentions. 173 As I have accepted the applicant's expert evidence about the value of the assets of ACE USA at the relevant time, the figures put forward by the respondent in his submissions are not to the point. 174 The valuation evidence which I have accepted shows that ACE's shares in ACE USA were worth nothing at the time of the conversion transaction. As a result of the conversion transaction the shares became worth $US566,000. 175 I find, on the basis of that evidence, that the value of what ACE obtained by the conversion transaction was US$566,000. The difference between the nominal value of the debt and the Australian equivalent of US$566,000 (AUD$736,000) as at 25 June 1991 was the loss which it sustained. In other words ACE gave up AUD$6,335,780 for shares worth AUD$736,000. 176 I reject the balance of the respondent's submissions on the question of loss, because the question is not, in my opinion, whether the value of ACE's overall "investment" in ACE USA increased or decreased as a result of the conversion transaction. The respondent's submission requires ACE's "investment" in ACE USA to be regarded as a combination of loans and capital investment and to be treated as a composite unit. That approach leads to the wrong question. The question is not whether ACE's overall "investment" in ACE (USA) increased or decreased as a result of the conversion transaction. The question is whether ACE incurred a loss when it disposed of the relevant traditional securities i.e. the loans or the right to receive repayment thereunder. In my view, the evidence shows that it incurred the loss referred to in paragraph [111] above, namely AUD$5,599,780. Conclusion 177 For the foregoing reasons, I have decided that the relevant assessment by the respondent was excessive and his objection decision of 14 June 2000 should have been made differently. The appeal will be allowed. The respondent's objection decision, made on 14 June 2000, will be varied by allowing the applicant's objection in full, excluding the sum of $2,336,810 from its taxable income for the year ended 30 June 1992 and reducing the tax payable accordingly. The respondent must pay the applicant's costs of the appeal. I certify that the preceding one hundred and seventy-seven (177) numbered paragraphs are a true copy of the Reasons for Judgment herein of Justice Carr. Associate: Dated: 14 July 2004 Counsel for the Applicant: Mr D H Bloom QC (with him Mr J H Momsen) Solicitors for the Applicant: Messrs Norton & Smailes Counsel for the Respondent: Mr A H Slater QC (with him Ms L B Price) Solicitors for the Respondent: Australian Government Solicitor Date of Hearing: 9,10,11 March, 9,10 June 2004 Date of Judgment: 14 July 2004