FEDERAL COURT OF AUSTRALIA Chevron Australia Holdings Pty Ltd v Commissioner of Taxation (No 2) [2014] FCA 707 Citation: Chevron Australia Holdings Pty Ltd v Commissioner of Taxation (No 2) [2014] FCA 707 Parties: CHEVRON AUSTRALIA HOLDINGS PTY LTD v COMMISSIONER OF TAXATION File numbers: NSD 569 of 2012 Judge: ROBERTSON J Date of judgment: 4 July 2014 Catchwords: PRACTICE AND PROCEDURE – tax appeals – application by Commissioner to amend his Further Amended Appeal Statement Legislation: Income Tax Assessment Act 1936 (Cth) ss 136AA, 136AD Cases cited: General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 Date of hearing: 27 June 2014 Place: Sydney Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 26 Counsel for the Applicant: Mr SH Steward QC with Ms LA Hespe Solicitor for the Applicant: King & Wood Mallesons Counsel for the Respondent: Mr GR Kennett SC with Ms C Burnett Solicitor for the Respondent: Maddocks Lawyers IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 569 of 2012 BETWEEN: CHEVRON AUSTRALIA HOLDINGS PTY LTD Applicant AND: COMMISSIONER OF TAXATION Respondent JUDGE: ROBERTSON J DATE OF ORDER: 4 JULY 2014 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The respondent have leave to amend his Further Amended Appeal Statement in the form annexed to the affidavit of Stephen John Jones sworn 17 June 2014. 2. The applicant file and serve any additional affidavit evidence on which it intends to rely by virtue of those amendments on or before 18 August 2014. 3. Costs be reserved. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 569 of 2012 BETWEEN: CHEVRON AUSTRALIA HOLDINGS PTY LTD Applicant AND: COMMISSIONER OF TAXATION Respondent JUDGE: ROBERTSON J DATE: 4 July 2014 PLACE: SYDNEY REASONS FOR JUDGMENT Introduction 1 These reasons concern the respondent Commissioner's application to amend his Further Amended Appeal Statement. 2 The appeals themselves involve, relevantly, Pt III Div 13 of the Income Tax Assessment Act 1936 (Cth). In particular, the parties are at issue, both in terms of the facts and the law, as to whether, broadly, the interest expense in respect of an advance of USD 2,450,000,000 to Chevron Australia Holdings Pty Ltd (CAHPL) by its subsidiary, ChevronTexaco Funding Corporation (CFC), exceeded the arm's length consideration in respect of the acquisition, within the meaning of s 136AD(3), having regard to the meaning of "arm's length consideration in respect of the acquisition of property" in s 136AA(3)(d). That provision states that a reference to the arm's length consideration in respect of the acquisition of property is a reference to the consideration that might reasonably be expected to have been given or agreed to be given in respect of the acquisition if the property had been acquired under an agreement between independent parties dealing at arm's length with each other in relation to the acquisition. 3 Broadly, it is each of the 2004 to 2008 years of income which are in question. 4 The trial of these applications or appeals is set down for 13 days beginning on 29 September 2014. Interlocutory orders made on 22 October 2013 presently provide that the applicant file and serve any further affidavits on which it intends to rely, by way of reply, on or before 25 July 2014. 5 The Commissioner's Further Amended Appeal Statement, so far as presently relevant, states as follows: 50. The property acquired by CAHPL under an international agreement was USD 2,450,000,000. 51. In the alternative to [50], CAHPL acquired property being rights, benefits or facilities provided under an agreement for or in relation to the lending of moneys. 52. CAHPL and CFC were not dealing with each other at arm's length in relation to CAHPL's acquisition of property from CFC. 53. The interest paid to CFC by CAHPL, in respect of the property acquired, exceeded the arm's length consideration in respect of the acquisition. 54. Without restricting the generality of [53], in determining the arm's length consideration in respect of the acquisition, it is necessary to consider the functions, assets and risks of CFC. 55. Without restricting the generality of [53], if the applicant's contention, which the respondent disputes, that CAHPL would have a sub-investment grade credit rating if it borrowed USD 2,450,000,000 or its AUD equivalent is accepted, then CAHPL would have borrowed a lesser amount which enabled it to maintain an investment grade credit rating. 6 By an interlocutory application filed on 17 June 2014 the Commissioner seeks an order granting him leave to file and serve a Second Further Amended Appeal Statement to renumber the present [55] as [58] and to add the following new paragraphs: 55. Without restricting the generality of [53], if CAHPL had acquired the property under an agreement between independent parties dealing at arm's length, CAHPL would not have acquired that property on the terms of the Credit Facility Agreement in one or more of the following respects: (a) it would have borrowed in US$ and incurred a liability to pay interest and repay principal in US$; (b) the terms of the loan would have required the provision by CAHPL of financial covenants and/or security acceptable to a prudent lender. 56. Without restricting the generality of [53], in determining the arm's length consideration in respect of the acquisition of the property, the interest rate would have been determined having regard to the credit rating of CAHPL which would have been an investment grade credit rating. 57. Without restricting the generality of [53], if the applicant's contention, which the respondent disputes, that CAHPL would have a sub-investment grade credit rating if it borrowed USD 2,450,000,000 or its AUD equivalent is accepted, CAHPL would not have been able to acquire the property on the terms of the Credit Facility Agreement. 7 The Commissioner submitted that the proposed additional propositions did no more than particularise the broader contention in [53]; were already the subject of debate in the evidence and submissions filed; and were already explicitly the subject of contentions in the appeal statement with respect to the appeals, being heard concurrently with the present matters, which concern determinations under Sub-div 815-A of the Income Tax Assessment Act 1997 (Cth) in respect of the same transaction. 8 The Commissioner accepted that the applicant may wish to contend that, on a proper construction of Pt III Div 13, these proposed contentions did not go to the ascertainment of the relevant arm's length consideration but submitted that that question of construction was properly a matter for the final hearing. 9 The applicant submitted that leave should be refused on the ground of futility in the sense that the amendments, if permitted, were bound to fail. In particular it was submitted that the language of s 136AD(3) did not permit the Commissioner: (a) to substitute and then price different property supplied under another international agreement with different terms, as he sought to do in proposed [55]; (b) to substitute a different taxpayer with a different credit rating as he sought to do in proposed [56]: the taxpayer's credit rating, if relevant, turned upon its actual financial circumstances as at the date of the entry into of the international agreement; (c) to contend that an actual international transaction would not have taken place if the taxpayer had dealt at arm's length with an independent party, as a means of defending his s 136AD(3) determinations. Division 13 assumed that the international transaction can be priced, even if it be one which finds no comparisons outside of a wholly owned group. 10 The applicant submitted that to allow the amendments would require the taxpayer to lead evidence not only on the transaction which was entered into but also in relation to a hypothetical transaction that did not occur in posited circumstances which did not in fact exist. 11 The applicant said that the opposition to the amendment was not based on procedural fairness. It maintained that the proposed amendments were new but did not oppose the amendments on that ground. Neither did the applicant taxpayer submit that the Commissioner should be denied leave to amend because of a lack of notice. It was submitted that because the proposed amendments were futile the applicant taxpayer should not be put to the inconvenience and expense of further evidence to meet them. 12 The Commissioner submitted that an extension of time for the applicant taxpayer to file and serve evidence relevant to the proposed amendments would not be warranted. He submitted that the proposed amendments were directly referable not only to his written outline of submissions but also to the evidence already filed and extensive cross references were given to both the applicant's filed evidence and to the Commissioner's. Consideration 13 In my opinion, insofar as the differences between the parties turn on questions of statutory construction, it is not appropriate to attempt to decide those questions on the hearing and determination of this interlocutory application which was listed for argument for half a day. Further, I do not accept the submission on behalf of the applicant that there is a discrete question of law which is whether Pt III Div 13 permits reconstruction of more than the price. That is not a question directly posed by the terms of the legislation and my provisional view is that the question is not purely a question of statutory construction and that, if it is, I should not decide it divorced from the facts. 14 Similarly, both parties accepted for the purposes of the present interlocutory application that, although the Appeal Statement was not strictly a pleading, a General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 test was appropriate. I am not persuaded that the amendments proposed are so clearly untenable that they cannot possibly succeed. I also bear in mind the need for caution, to which Barwick CJ referred in that case. 15 Further, I note the form of the proposed amendments which, by their language, seek to explain or explicate the proposition already existing in [53] of the Further Amended Appeal Statement that the interest paid in respect of the property acquired exceeded the arm's length consideration in respect of the acquisition. I accept that the proposed amendments are addressed to the proper identification of the hypothetical transaction in order to ascertain the arm's length consideration for the relevant property. It follows that I do not accept, for present purposes, the applicant's submissions which I have set out at [9]–[10] above. Plainly, for the purposes of the final hearing, the parties disagree on what is the correct statutory hypothesis and on the scope of that hypothesis. What appears fundamentally to divide the parties for present purposes is the extent of the matters which bear upon the statutory arm's length consideration, as defined in s 136AA(3)(d). 16 Given that the applicant taxpayer opposed the amendment only on the ground of futility, it is strictly unnecessary to go further. 17 Nevertheless, I note that on 16 September 2013 the Commissioner filed a 71 page outline of submissions to which the proposed amendments were referable. No separate complaint has been or is made by the applicant about the Commissioner's outline of submissions. 18 Paragraph 95 of those submissions contained the proposition that a financing transaction by its very nature will be priced having regard to the creditworthiness and characteristics of the borrower and the lender's cost of funds and risks assumed. Reference is then made to a decision of the Supreme Court of Canada and to a decision of the Federal Court of Appeal of Canada. It is then submitted at [100] that by its very nature a loan must be priced having regard to the circumstances of the parties. That being so, it is submitted that all the circumstances of each party as they exist should be assumed save that they are treated as being independent of each other. It is then put that the applicant in its submissions dated 2 September 2013 accepted that the pricing of the loan must take into account the assets, risks and functions of CAHPL which informed the likelihood of CAHPL's repaying principal and interest but nothing was there said about the assets, risks and function of CFC, the party to whom the payment in respect of interest was in fact being made. 19 In summary, the Commissioner has made the following written submissions referable to the proposed paragraphs of the Further Amended Appeal Statement. 20 As to the proposed [55(a)], [103] of the Commissioner's written outline of submissions sets out four "independent" reasons why, in the Commissioner's submission, if the parties were independent and dealing at arm's length in respect of the transaction, the interest rate that would reasonably be expected to be paid was no more than USD LIBOR + 0.73% or no more than USD LIBOR + 1.5%. The second "independent" reason given is that the property acquired under the international agreement was in fact USD. It is then submitted that to the extent it is relevant to look at the obligation to repay, and assuming the correctness of the reconstruction of the transaction suggested by CAHPL, the obligation to repay had CAHPL and CFC been independent would have been in USD. That contention is expanded upon in [121] and following of the Commissioner's outline of submissions dated 16 September 2013. In my opinion the contention, as so expanded, is referable to proposed [55(a)] and I would allow the amendment in the interests of clarity. 21 As to proposed [55(b)], at [99] of the Commissioner's outline of submissions filed on 16 September 2013 it is submitted that the acquisition of the property should not be priced in accordance with the terms of the agreement in fact entered into as that would be to construe the legislation to permit a taxpayer simply to enter into a related party loan on disadvantageous terms to the lender in respect of gearing, covenants, repayments and currency which would lead to a loan that would be unattractive to a lender and would either not be made by an independent party or, if made, would involve a very high rate of interest. In my view, the submissions to which I have referred are referable to proposed [55(b)]. Again I would allow the amendment in the interests of clarity. 22 As to proposed [56], I refer again to [103] of the Commissioner's outline of submissions dated 16 September 2013. It sets out the Commissioner's third "independent" reason concerning the interest rate that would reasonably be expected to be paid. It states by way of submission that to the extent it is relevant to look at the rating which CAHPL might have been given, a ratings agency would give CAHPL a credit rating in the A range, and the corresponding interest margins for this range are 0.24% to 0.73%. In my opinion that contention, as expanded at [121] to [130] of the outline of submissions, is referable to proposed [56] and I would allow that amendment in the interests of clarity. 23 As to proposed [57], [104] of the Commissioner's outline of submissions dated 16 September 2013 contends that if a borrowing by CAHPL of USD 2,450,000,000 (or its equivalent) would have led the lender to assume a sub-investment grade rating, CAHPL would not have borrowed that amount but would only have borrowed consistently with maintaining an investment grade rating. In my opinion that contention, as further developed at [137] and following of the outline of submissions, is referable to proposed [57] and I would allow the amendment in the interests of clarity. 24 As I have said, the Commissioner submitted that the proposed amendments were directly referable to his written outline of submissions and to the evidence already filed. Nevertheless, and despite the force of the submission that the applicant's evidence filed and to be filed this year came after the Commissioner's outline of submissions dated 16 September 2013, I would permit the applicant a further short time to file any additional evidence, limited by reference to the Commissioner's amendments. I note that there was no affidavit read on this interlocutory application as to the extent or scope of this additional evidence. 25 I do not find it necessary to decide whether the proposed amendments were already explicitly the subject of contentions in the appeals which concern determinations under Sub-div 815-A in respect of the same transaction. Conclusion 26 For these reasons, I grant leave to the Commissioner to amend his Further Amended Appeal Statement in the form annexed to the affidavit of Stephen John Jones sworn 17 June 2014. I direct that the applicant file and serve any affidavits on which it intends to rely by virtue of those amendments on or before 18 August 2014. In so saying I do not vary order 3 made on 22 October 2013 that the applicant file and serve affidavits on which it intends to rely, by way of reply, on or before 25 July 2014. I shall reserve costs in light of the matters argued and the mixed success of the parties. I certify that the preceding twenty-six (26) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Robertson. Associate: Dated: 4 July 2014