Orica Ltd v Commissioner of Taxation [2008] FCA 906

FEDERAL COURT OF AUSTRALIA

Orica Ltd v Commissioner of Taxation [2008] FCA 906

Hepples v Federal Commissioner of Taxation (1992) 173 CLR 492 cited Queensland v JL Holdings Pty Ltd (1997) 189 CLR 146 cited ORICA LIMITED (ACN 004 145 8689) v THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

VID 232 of 2005

SUNDBERG J

17 JUNE 2008

MELBOURNE

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY VID 232 of 2005

BETWEEN: ORICA LIMITED (ACN 004 145 8689)

Applicant

AND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Respondent

JUDGE: SUNDBERG J

DATE OF ORDER: 17 JUNE 2008

WHERE MADE: MELBOURNE

THE COURT ORDERS THAT:

1. The respondent have leave to file and serve an amended appeal statement in the form or to the effect of the document headed Respondent's Proposed Amended Statement of Facts Issues and Contentions emailed to the Court on 28 May 2008. 2. The respondent pay the applicant's costs of the motion notice of which was filed on 21 April 2008. 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 VID 232 of 2005

BETWEEN: ORICA LIMITED (ACN 004 145 8689)

Applicant

AND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Respondent

JUDGE: SUNDBERG J

DATE: 17 JUNE 2008

PLACE: MELBOURNE

REASONS FOR JUDGMENT 1 The Commissioner seeks leave to amend his appeal statement in the manner appearing in a document headed Respondent's Proposed Amended Statement of Facts Issues and Contentions emailed to the Court on 28 May 2008 (the Statement). Orica opposes the grant of leave. 2 The factual background to the contentions in the Statement begins with the execution in June 1993 of a Distribution Agreement between Orica (under an earlier name) and Zeneca Limited (Zeneca), by which Zeneca appointed Orica its exclusive processor and distributor of pharmaceutical products in Australia and other territories. Article 13 dealt with termination of the agreement. Article 13.3 entitled either party, by sixty days notice in writing, to terminate the agreement if there was "a substantial change in ownership or control of [the other party's] pharmaceuticals business". By Article 14 the parties agreed that termination was to "give rise to obligations on the part of both parties". One of the obligations was contained in Article 14.1, by which Zeneca agreed to make a payment to Orica equal to the value of Orica's pharmaceuticals business. The value of the business was to be determined in accordance with a valuation process that was then described. 3 On 8 December 1997 Zeneca gave Orica notice that the Distribution Agreement was to terminate on 6 February 1998. The notice drew attention to the parties' obligations to activate the valuation process. Subsequently there was a dispute between them about details of the process. This was resolved in the Chancery Division of the High Court in London in July 1998. The valuation process was then completed. 4 On 3 September 1998 the parties agreed that "despite" the December 1997 notice of termination, the Distribution Agreement "continues in full force and effect". 5 On 4 September 1998 a Sale of Business Agreement was entered into between Orica and two of its subsidiaries of the one part and Zeneca and three of its subsidiaries of the other. One of the Zeneca subsidiaries was Zeneca bv. The Orica subsidiaries agreed to sell their pharmaceuticals business to Zeneca bv for $328,500,000. The purchase price was to be paid to Orica "for and on behalf of the Vendors". At "completion", which was 4 September 1998, Zeneca bv was to deliver to the vendors "a counterpart of an assignment of the Distribution Agreement duly executed by Zeneca bv": cl 5.2(f)(vii). 6 On the same day Orica, Zeneca bv and Zeneca executed an Assignment Deed. The deed recited the Distribution Agreement, the Sale of Business Agreement, and that as part of the latter Orica had agreed to assign "the rights and obligations" under the Distribution Agreement to Zeneca bv, and that Zeneca bv had agreed "to assume Orica's obligations under" the Distribution Agreement. Clause 2 of the Assignment Deed is in part as follows: 2 ASSIGNMENT 2.1 Assumption of benefits and obligations With effect on and from the Effective Date [Zeneca bv] shall be bound by and comply with the provisions of the [Distribution] Agreement binding on Orica and shall enjoy all the rights and benefits of Orica under the [Distribution] Agreement. 2.2 Release of Orica With effect from the Effective Date [Zeneca] releases Orica from all its obligations and liabilities under the [Distribution] Agreement and all actions, claims or proceedings that it may have against Orica under or in respect of the [Distribution] Agreement …. 7 On those facts Mr Wheelahan SC for the Commissioner put the case under Part IIIA of the Income Tax Assessment Act 1936 as follows. (a) The notice of termination effected a disposal of the right under Article 14 of the Distribution Agreement to receive payment in accordance with the terms of the agreement. The contractual rights in the agreement were disposed of and were replaced by a different chose in action, a debt, the quantity of which was to be ascertained in accordance with Article 14. (b) The debt created as a result of the notice of termination was disposed of by Orica when the parties entered into the new transaction represented by the Sale of Business Agreement and certain correspondence immediately preceding that agreement. (c) The Sale of Business Agreement constituted the disposal of an asset by Orica, namely the subject matter of the agreement. (d) The Assignment Deed was a disposal by Orica of its rights and obligations under the Distribution Agreement. The effect of the deed was to "novate" the Distribution Agreement so that Zeneca bv became a party in place of Zeneca. 8 The Commissioner's Statement is intended to reflect the disposals summarised at [7]. The Statement differs considerably from the original, which contended simply that the rights under the Distribution Agreement were disposed of by Orica under the Assignment Deed. This disposal appears in the Statement at par 34. 9 Orica urged that the amendments should not be allowed on the ground that the three new ways in which the case was sought to be put, namely (a), (b) and (c) in [7], are "futile", that is to say, bound to fail. 10 The key paragraphs of the Statement pertaining to the new formulations are: 33A The distribution asset (and/or a part thereof, being the article 14 right) was cancelled, released, discharged, surrendered, forfeited or abandoned under and by reason of the Sale Agreement. There was thereby a disposal of the distribution asset (and/or a part thereof) by the applicant within the meaning of s 160M(1), s 160M(3)(b) and/or s 160R …. 33B In the alternative, ownership of the distribution asset was transferred from the applicant to Zeneca under the Sale Agreement. There was thereby a disposal of the distribution asset by the applicant within the meaning of s 160M(1) and s 160M(2) …. 33C In the alternative, the distribution asset was cancelled, released, discharged, surrendered, forfeited or abandoned under and by reason of the Assignment Deed. There was thereby a disposal of the distribution asset by the applicant within the meaning of s 160M(1) and s 160M(3)(b) …. New pars 38A and 38B proceed on the basis that the article 14 right was a separate asset 38A Alternatively to the foregoing, the article 14 right … was cancelled, released, discharged, surrendered, forfeited or abandoned on the giving by Zeneca of the notice of termination, which was thereby a 'disposal' for the purposes of Part IIIA. 38B In the alternative, the article 14 right was cancelled, released, discharged, surrendered, forfeited or abandoned by reason of the facts set out in pars 17 to 20, or one or more of them. There was thereby a disposal of that asset by the applicant for the purposes of Part IIIA. Paragraphs 17 to 20 plead the correspondence referred to in [7(b)], the 3 September 1998 restoration agreement, the Sale of Business Agreement, the Assignment Deed (see [4]‑[6] above) and the giving of the final valuation under Article 14 of the Distribution Agreement. 11 Mr Steward for Orica drew attention to obstacles he maintained the Commissioner will need to overcome in order to establish some of the alternative formulations of his case. However, I do not regard any of the new bases upon which the Commissioner desires to proceed as bound to fail. Because I will in due course have to hear full argument on the various points, I do not propose to say any more about the Commissioner's prospects of success on the various alternatives. The argument on the merits of the proposed new paragraphs occupied only 40 minutes or thereabouts. It is more appropriate that the merits be ruled on after more sustained submissions at trial. In this connection Mason CJ's observations in Hepples v Federal Commissioner of Taxation (1992) 173 CLR 492 at 497 are pertinent: The provisions of s 160M(5)(6) and (7) … and provisions to which they are related are extraordinarily complex. They must be obscure, if not bewildering, both to the taxpayer who seeks to determine his or her liability to capital gains tax by reference to them and to the lawyer who is called upon to interpret them. 12 Other parts of the Statement were attacked on the basis of form or lack of particularity. These complaints are best dealt with, not by disallowing the amendments or giving leave subject to the Commissioner accommodating the complaints, but by Orica requesting clarifications or particulars. 13 Many of the amendments and additions to the "Facts" paragraphs of the Statement are useful clarifications and particularisations which will assist the parties and the Court more readily to understand the way the Commissioner's case is put. 14 I have taken into account the discretionary considerations Orica has relied on, in particular the Commissioner's failure to provide an explanation for the delay in seeking to amend, and Orica's ongoing liability to general interest charge. On the other hand, I bear in mind what was said in the joint judgment in Queensland v JL Holdings Pty Ltd (1997) 189 CLR 146, and the desirability of permitting a litigant to raise the issues he wishes to pursue even though, by doing so at a later stage, it causes inconvenience and expense to his opponent. I have also taken into account the complex nature of the provisions of Part IIIA that are involved in the case. See [11]. Unlike some of the cases relied on by Orica, the amendments are not sought shortly before trial. The Commissioner has always contended that Orica's rights under the Distribution Agreement are an asset for the purposes of Part IIIA, that Orica disposed of that asset in circumstances where there was a capital gain, and that the disposition of that asset was a taxable event. The proposed changes do not alter that stand. Rather they amplify the ways in which the Commissioner will contend that the events that happened, most of which are not controversial, gave rise to a taxable event. In this connection I note that the "Facts" paragraphs of the Statement ([1] to [29]) are not significantly altered. Apart from the added particularisations to which I have referred, and cosmetic changes to make certain paragraphs accord more closely with the underlying documents, only pars 17 and 20A are new. Those two paragraphs are, however, of no particular significance, and neither of them will disclose to Orica anything of which it was not already well aware. 15 I will give the Commissioner leave to file the Statement. However, he may wish to consider whether, in view of the new paragraphs dealing with the separate asset ([38A] to [38E]), par 33A should retain its present form. 16 The Commissioner must pay Orica's costs of the motion notice of which was filed on 21 April 2008. I certify that the preceding sixteen (16) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Sundberg.