FEDERAL COURT OF AUSTRALIA

Australian Securities and Investments Commission v Administrative Appeals Tribunal [2011] FCAFC 114

FEDERAL COURT OF AUSTRALIA

Australian Securities and Investments Commission v Administrative Appeals Tribunal [2011] FCAFC 114

CORRIGENDUM

1.    In paragraph 37 of the Reasons for Judgment, “as shown in most the recent balance sheet” should read “as shown in the most recent balance sheet”.

2.    In paragraph 111 of the Reasons for Judgment, “Fullager J” should read “Fullagar J”.

3.    In paragraph 113 of the Reasons for Judgment, “Fullager J” should read “Fullagar J”.

4.    In paragraph 114 of the Reasons for Judgment, “Fullager J” should read “Fullagar J”.

Associate:

Dated:    1 November 2011

THE COURT ORDERS THAT:

1.    The decision of the Administrative Appeals Tribunal (“the Tribunal”) in the matter of Re Opus Capital Limited and Australian Securities and Investments Commission [2010] AATA 723 be set aside.

2.    The matter be remitted to the Tribunal for further consideration in accordance with law.

3.    The Second Respondent pay the Appellant’s costs of the appeal.

Note:    Settlement and entry of orders is dealt with in Rule 39.32 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court’s website.

REASONS FOR JUDGMENT

Introduction

1        Opus Capital Limited (“Opus”) is the responsible entity of 12 managed investment schemes. In that capacity, Opus is required by the provisions of Part 5C.2 of the Corporations Act 2001 (Cth) (“the Act”) to hold an Australian financial services licence authorising it to operate the schemes: see s 601FA of the Act.

2        Condition 9 of the licence held by Opus required it to hold a pre-determined level of net tangible assets as defined by the terms of the licence. Importantly, the effect of the definition in the licence of the term “net tangible assets” is to exclude from the calculation any assets which constitute intangible assets.

3        On 26 August 2010, the Australian Securities and Investments Commission (“the Commission”) decided to cancel the Australian financial services licence held by Opus. The Commission came to that decision because it considered that Opus did not hold the requisite level of net tangible assets. The essential reason for this was that the Commission was of the view that two items in Opus’ financial accounts, in particular an item recorded as a deferred tax asset, were intangibles and hence excluded from the amount of Opus’ net tangible assets.

4        The deferred tax asset consisted of carry forward tax losses arising from the writing down of certain units in unit trusts which were the vehicle for investment of funds managed by Opus in its capacity as responsible entity of the relevant managed investment schemes.

5        On 20 September 2010, the Administrative Appeals Tribunal (“the Tribunal”) set aside the Commission’s decision to cancel Opus’ licence: see Re Opus Capital Limited and Australian Securities [2010] AATA 723. The Tribunal did so because it was of the view that the deferred tax asset, which comprised an amount slightly in excess of $2.3m, was not an intangible, and therefore formed part of Opus’ net tangible assets. This was sufficient to satisfy the Tribunal that Opus’ net tangible assets exceeded the required level.

6        The Commission appeals from the decision of the Tribunal under s 44(1) of the Administrative Appeals Tribunal Act 1975 (Cth). The Commission contends that the Tribunal’s decision raises a question of law as to the proper construction of Condition 9 of Opus’ licence. The question of law stated in the Commission’s Notice of Appeal is whether, on the proper construction of Condition 9 of Opus’ licence, in determining the value of the net tangible assets held by the licensee, a deferred tax asset must be treated as an intangible.

7        Two essential issues arise in the appeal. The first is whether the Tribunal’s decision involves a question of law or whether, as contended by Opus, the Tribunal’s decision that the deferred tax asset was not an intangible, was premised upon, and raises only a question of fact.

8        The second issue is whether the Tribunal erred in concluding that the deferred tax asset was not an intangible. This issue only arises if the question is one of law and not a question of fact.

9        The Tribunal’s decision was based, at least in part, upon its consideration of the legislative framework under which the licence was issued and accounting standards issued by the Australian Accounting Standards Board (“AASB”), as well as the Commission’s policy statement about the financial requirements of licensing contained in Regulatory Guide 166: Licensing: Financial Requirements (“RG 166”).

10        We will set out the legislative framework, the relevant provisions of the licence, and the accounting standards and the policy statements in RG 166 before turning to the two essential issues raised by the appeal.

The legislative framework

11        Opus’ licence was granted by the Commission under s 913B of the Act. That section is to be found in Part 7.6 which was introduced by the Financial Services Reform Act 2001 (Cth) (“the Reform Act”).

12        Part 7.6 replaced licensing requirements contained in Chapters 7 and 8 of the Act as well as licensing requirements then contained in the Insurance (Agents and Brokers) Act 1984 (Cth) and the Superannuation Industry (Supervision) Act 1993 (Cth).

13        Section 601FA of the Act is not contained in Part 7.6 but it was amended by the Reform Act to introduce the requirement that a responsible entity of a managed investment scheme must hold an Australian financial services licence authorising it to operate the scheme.

14        The amendments introduced by the Reform Act treated a responsible entity as a person who provides financial services: see s 766A(1)(d) of the Act. Hence the responsible entity is required by s 601FA of the Act to hold an Australian financial services licence.

15        What may therefore be seen from these amendments is that the licensing of the operators of managed investment schemes is one of the regulatory tools given to the Commission to enable it to regulate the operators of such schemes as a part of the Commission’s regulation of the financial services sector. Needless to say, the licensing regime contained in Part 7.6 of the Act is an important regulatory tool.

16        The requirement for a person or entity to be licensed is found in s 911A which appears in Division 2 of Part 7.6 of the Act. It provides that, subject to certain exceptions which are not relevant to the present proceeding, a person who carries on a financial services business in Australia must hold an Australian financial services licence covering the provision of the financial services.

17        Division 3 of Part 7.6 addresses the obligation of financial services licensees. One of the obligations of a financial services licensee is that it comply with the conditions of the licence: see s 912A(1)(b).

18        Another obligation placed on a licensee is that it have adequate resources, including financial resources, to provide the financial services covered by the licence: see s 912A(1)(d).

19        A financial services licensee is required, as soon as practical, and in any case within 10 business days of becoming aware of a breach or likely breach of a condition of its licence, to lodge a written report on the matter with the Commission: see s 912D(1)(a)(1) and s 912D(1B).

20        Division 4 of Part 7.6 deals with the grant of licences and the power of the Commission to vary, suspend or cancel a licence.

21        Sections 913A and 913B empower the Commission to grant a licence. Section 913B sets out the circumstances in which a licence may be granted.

22        Section 914A(1) authorises the Commission to impose conditions or additional conditions on the licence and to vary or revoke existing conditions.

23        Section 915C(1) authorises the Commission to suspend or cancel a licence where, inter alia, the licensee has not complied with its obligations under s 912A and where the Commission has reason to believe, that the licensee will not comply with its obligations under s 912A. The power conferred on the Commission under s 915C(1)(a) therefore includes the power to cancel a licence for failure of the licensee to comply with a condition of its licence.

24        The power of suspension or cancellation may only be exercised after the licensee has been given an opportunity to appear or be represented at a private hearing before the Commission and to make submissions to the Commission on the matter: see s 915C(4).

Regulatory Guide 166

25        The Commission’s regulatory guide, RG 166, commences by stating that it sets out the financial requirements that a licensee will have to meet as the holder of an Australian financial services licence.

26        The underlying principles are set out in RG 166.11 to RG 166.13.

27        RG 166.11 states that the Commission is not a prudential regulator and the guide is not intended to ensure that a licensee will meet its financial commitments.

28        RG 166.12 states:

We impose financial requirements to help ensure that:

(a) you have sufficient financial resources to conduct your financial services business in compliance with the Corporations Act (including carrying out supervisory arrangements);

(b) there is a financial buffer that decreases the risk of a disorderly or non-compliant wind-up if the business fails; and

(c) there are incentives for your owners to comply through risk of financial loss.

29        RG 166.13 states that in setting licence conditions for financial requirements, the Commission seeks to set minimum standards that are framed as clearly and simply as possible so as to provide certainty.

30        RG 166 sets out base level financial requirements which apply to all licensees except for certain market participants including bodies regulated by APRA.

31        A summary of the Commission’s base level financial requirements is set out as RG 166.22 which provides, relevantly:

You must:

(a) at all times be solvent—that is, be able to pay all your debts as and when they become due and payable;

(b) have total assets that exceed total liabilities (as shown in your most recent annual balance sheet lodged with us), and at all times have no reason to suspect that total assets would no longer exceed total liabilities on a current balance sheet;

(c) meet our cash needs requirement by complying at all times with one of Options 1 to 5 (see RG 166.23–RG 166.41); and

(d) meet the audit requirement in RG 166.43–RG 166.44.

(Notes omitted)

32        It is unnecessary to set out the details of the options referred to in RG 166.22(c). They were discussed by a Full Court in Norman v Forest Enterprises Australia Ltd [2011] FCAFC 99 at [51]–[57].

33        RG 166 contains a separate section which addresses the additional financial requirements which apply to a responsible entity of a managed investment scheme.

34        These requirements are set out in RG 166.63 as follows:

If you are a responsible entity, you must hold at all times a minimum net tangible assets (NTA) of 0.5% of the value of:

(a) the assets; plus

(b) any other scheme property not counted in calculating the value of the assets,

of the registered schemes you operate, with a minimum requirement of $50,000 and a maximum requirement of $5 million.”

35        The underlying principles in respect of the financial requirements imposed on a responsible entity are set out at RG 166.68 and RG 166.69 as follows:

RG 166.68 The financial requirements for responsible entities take into account:

(a) the financial requirements set out in the old Corporations Act;

(b) the diversity of the types of schemes;

(c) the need for investor protection; and

(d) comparable regulatory regimes, such as the Superannuation Industry (Supervision) Act 1993 (SIS Act) for public offer superannuation funds.

RG 166.69 … NTA is a measure of general financial standing. It includes non-current assets and is not specifically a measure of capacity to meet financial obligations.

The Licence

36        The licence issued to Opus authorised it to carry on a financial services business to, inter alia, operate a number of specified managed investment schemes in its capacity as responsible entity of those schemes. The critical conditions of the licence were expressed in language which reflected the explanations set out in RG 166.

37        Condition 8 of the licence specified “base level financial requirements” to be met by Opus as licensee. These included the requirement that Opus must be able to pay all of its debts as and when they became due and payable and that it have total assets that exceeded total liabilities as shown in most the recent balance sheet.

38        One of the base level financial requirements specified in Condition 8 was that Opus meet the “cash needs requirement” by complying with one of five options. The terms of the options were identical to those referred to in RG 166.

39        Condition 9 is the critical condition for the purposes of this appeal. It required Opus to hold at least $5m of net tangible assets (“NTA”) unless at least one of the terms stated in paras (a), (b) or (c) of Condition 9 was satisfied.

40        It was common ground before the Tribunal that one or other of paras (a), (b) or (c) was satisfied. What therefore fell for consideration before the Tribunal was whether the balance of Condition 9 was satisfied. That part of Condition 9 was stated in the following terms which are virtually identical to RG 166.63:

[T]he licensee must hold NTA of 0.5% of the value of:

…

(d)    assets (including mortgages held by members of a mortgage scheme and managed as part of the scheme); plus

(e)    any other scheme property not counted in calculating the value of assets;

of the registered scheme(s) operated by the licensee with a minimum NTA requirement of $50,000 and a maximum NTA requirement of $5million.

41        A number of definitions in the licence are relevant to the construction of the portion of Condition 9 set out above. The starting point is “net tangible assets” or NTA. This was defined to mean “adjusted assets minus adjusted liabilities”.

42        The term “adjusted assets” was defined to mean the value of total assets as they would appear on a balance sheet made up for lodgement as part of a financial report under Chapter 2M of the Act “minus the value of excluded assets”

43        The expression “adjusted liabilities” was also defined by reference to the calculation required in the preparation of a balance sheet in accordance with Chapter 2M. It was defined to mean the amount of total liabilities as they would appear on a balance sheet made up for lodgement as part of a financial report under Chapter 2M of the Act, plus or minus certain items specified in the definition.

44        The term “excluded assets” was defined relevantly to mean “intangible assets (ie non-monetary assets without physical substance)”. As the Tribunal observed, the expression “intangible assets” was not otherwise defined in the licence.

45        The “value of assets” for the purposes of Condition 9 is to be determined, in the case of assets that would be recognised in preparing a balance sheet for members under Chapter 2M of the Act, by reference to their value as if at that time such a balance sheet was being prepared.

Accounting Standards

46        Accounting standards are relevant to the question of what constitutes Opus’ assets because the terms of its licence require the value of assets to be calculated as the value they would have in a balance sheet prepared in accordance with Chapter 2M of the Act.

47        The effect of ss 296 and 334 of the Act is that a financial report prepared under Chapter 2M must comply with accounting standards made by the AASB by legislative instrument.

48        Two accounting standards made by the AASB were therefore referred to by the Tribunal, and in argument on the appeal. The first was AASB 138 which is entitled “Intangible Assets”. The second was AASB 112 which is entitled “Income Taxes”.

49        The stated objective of AASB 138 is to prescribe the accounting treatment for intangible assets that are not dealt with specifically by another accounting standard.

50        Deferred tax assets are specifically excluded from AASB 138 by para 3 of that standard which states that:

If another standard prescribes the accounting for a specific type of intangible asset, an entity applies that Standard instead of this Standard. For example, this standard does not apply to:

….

(b)    deferred tax assets

(See AASB 112 Income Taxes).

51        AASB 138 defines an asset as a resource controlled by an entity as a result of past events from which future economic benefits are expected to flow to the entity.

52        An “intangible asset” is defined in AASB 138 in terms which are similar to the definition in Opus’ licence, as “an identifiable non-monetary asset without physical substance”.

53        “Monetary assets” are defined in AASB 138 as money held and assets to be received in fixed of determinable amounts of money.

54        AASB 138 contains the following explanation of what constitutes an intangible asset:

Intangible Assets

9 Entities frequently expend resources, or incur liabilities, on the acquisition, development, maintenance or enhancement of intangible resources such as scientific or technical knowledge, design and implementation of new processes or systems, licences, intellectual property, market knowledge and trademarks (including brand names and publishing titles). Common examples of items encompassed by these broad headings are computer software, patents, copyrights, motion picture films, customer lists, mortgage servicing rights, fishing licences, import quotas, franchises, customer or supplier relationships, customer loyalty, market share and marketing rights.

10    Not all the items described in paragraph 9 meet the definition of an intangible asset, that is, identifiability, control over a resource and existence of future economic benefits.

55        AASB 112 states that the objective of this standard is to prescribe the accounting treatment for income taxes. It requires an entity to recognise a deferred tax asset (or a deferred tax liability) with certain limited exceptions.

56        “Deferred tax assets” are defined in AASB as, relevantly, the amounts of income taxes recoverable in future periods in respect of the carry forward of unused tax losses.

57        Paragraph 34 of AASB 112 states that a deferred tax asset shall be recognised for the carry forward of unused tax losses to the extent that it is probable that future taxable profits will be available against which the unused tax losses can be utilised.

Background facts

58        The relevant background facts are set out in the Tribunal’s reasons. The proceedings have their genesis in the so called “global financial crisis” which adversely affected the values of properties in a number of managed investment schemes managed by Opus.

59        Opus had invested some of its own funds in unit trusts for investment in the managed investment schemes. The values of the units were recorded as an asset in Opus’ balance sheet. When the value of properties in the underlying schemes were adversely affected by the crisis, there was a corresponding fall in the value of Opus’ units and therefore in the value of Opus’ net tangible assets.

60        In April 2009 Opus reported to the Commission that it was in breach of Condition 9 of its licence because the value of its net tangible assets had fallen below the required level.

61        In April and May 2009 there were discussions between Opus and the Commission about the breach of the condition and its consequences. On 24 May 2010, the Chief Executive Officer of Opus, Mr Dean Palmer, informed the Commission that Opus was of the view that the breach had been rectified as a consequence of an alteration in the accounting treatment of deferred tax losses.

62        On 19 July 2010, the Commission held a hearing before a delegate at which Opus was given the opportunity to show cause why its licence ought not to be cancelled for breach of the condition. Opus contended at the hearing that the deferred tax asset, and another asset described as sales and performance fees, ought to be treated as part of Opus’ net tangible assets.

63        On 26 August 2010, the Commission’s delegate made the decision to reject Opus’ contentions and to cancel the licence. Notice of cancellation of the licence was given to Opus on 31 August 2010 and the cancellation took effect on that date.

64        The licence which was in evidence before the Tribunal bears the notation that it was effective on 21 July 2010. Although the hearing before the Commission’s delegate took place before that date, it would appear that this was the licence which was the subject of the proceeding.

65        The Tribunal held an urgent hearing and, on 20 September 2010, made the decision to set aside the cancellation of Opus’ licence. The Tribunal dealt with the matter most efficiently, publishing its reasons on 23 September 2010.

The Tribunal’s reasons

66        The Tribunal noted that there were two elements of the Commission’s argument concerning the deferred tax asset. First, the Commission submitted that the deferred tax asset fell within the definition of an intangible asset and therefore could not be taken into account in calculating net tangible assets. Second, the Commission submitted that some doubt existed as to whether sufficient profit would be earned by Opus so as to utilise the deferred tax asset, with the result that it could not be recognised as an asset on the balance sheet.

67        The Tribunal considered whether the deferred tax asset should be recognised as an asset before turning to the question of whether the deferred tax asset was an intangible.

68        In considering whether the deferred tax asset should be recognised, the Tribunal referred to AASB 112 and, in particular, to para 34 which we have set out above. The Tribunal observed that this paragraph of AASB 112 deals explicitly with recognition of a deferred tax asset.

69        The Commission submitted that it was not probable that Opus would have future taxable profits. The effect of this submission was that there was reason to doubt the view of Mr Palmer, that the company would return to profitability, so that the requirements for recognition under para 34 of AASB 112 were not satisfied.

70        However, the Tribunal observed that there was no evidence to the contrary of that given by Mr Palmer who expressed a view about the likelihood of future profit which was supported by calculations put forward by officers of Opus. The Tribunal held at [27]–[28] that it had no reason to doubt Mr Palmer’s opinion.

71        The Tribunal was therefore satisfied, at [29], that it was proper to recognise the deferred tax asset as an asset for the purposes of calculating the value of total assets.

72        In considering whether the deferred tax asset was an intangible, the Tribunal commenced its discussion, at [30], by noting that the definition of an intangible asset in the licence is similar in content to the definition of an intangible asset in AASB 138.

73        Notably, the Commission said at [31] that it is open to doubt the extent to which definitions in AASB 138 (and some other standards) can govern the meaning to be given to a term in Opus’ licence. However, the Tribunal accepted the Commission’s submission that the standards perform that task.

74        The Tribunal accepted, at [32], the Commission’s submission that the deferred tax asset was “without physical substance”. But the Tribunal went on to consider whether the deferred tax assets were a “non-monetary asset” within AASB 138.

75        The Tribunal accepted that there were only two possible alternatives. A deferred tax asset was either a monetary asset, as defined in AASB 138, or a non-monetary asset. The Commission argued that a deferred tax asset was not a monetary asset because it was not an asset to be received in a fixed or determinable amount of money. The Tribunal, at [32], rejected the Commission’s argument on this question.

76        The critical reasons why the Tribunal found that the deferred tax asset was a monetary asset (that is to say, on the Tribunal’s approach, not a non-monetary asset) were set out in [33] as follows:

We accept that the reference to “money held” is a reference to currency however we think the Commission’s argument reads “received” too narrowly. There will be no physical receipt of money: the Commissioner of Taxation will not ever be paying the amount of the deferred tax asset to Opus. But where a judgment has been made that it is probable that there will be future taxable profits, on which income tax would otherwise be payable, the amount required to be paid will be reduced by the amount of the deferred tax asset. The deferred tax asset will reduce the liability that would otherwise exist to pay income tax. The amount to be received in this way is determinable; the amount of the losses has been determined and the value of the asset is calculated by applying the company tax rate to the amount of those losses.

77        The Tribunal went on to refer to other portions of AASB 138 to support this conclusion. It referred, inter alia, to the examples of intangible resources set out in para 9 of AASB 138 including scientific or technical knowledge and intellectual property. It said that these assets fall within the definition of intangible assets, in part because they lack precise value. But by contrast, a deferred tax asset

[has] a precise and determinable value once the judgment has been made that there is a probability of future taxable profits. A deferred tax asset is, in our opinion, a monetary asset and, thus, not an intangible asset required to be excluded from the calculation of net tangible assets.

78        The Tribunal went on at [37] to say that it was comforted in reaching this conclusion by the opinion of an experienced chartered accountant, Mr David Holland, who gave evidence for Opus.

79        Mr Holland’s evidence was that a deferred tax asset was not an intangible, although he recognised that other minds might reasonably come to a different conclusion. The Tribunal preferred Mr Holland’s evidence to that of the Commission’s expert accountant, Mr Niven.

80        Mr Niven would not regard a deferred tax asset as an amount receivable in a fixed or determinable sum (see definition of “monetary assets” in AASB 138), because it is contingent upon the entity having future taxable income against which the asset can be utilised. As to this, the Tribunal said at [37]:

That contingency, in our view, determines whether the asset is recognised. Once recognised, that is, once it is determined that it is probable that there will be future taxable profits that can be set off against the losses carried forward, we accept Mr Holland’s view that it can legitimately be regarded as a monetary asset.

81        Having concluded that the deferred tax asset was not an intangible, the Tribunal did not find it necessary to consider the proper characterisation of sales and performance fees.

Question of fact or law

82        It is well established that the jurisdiction of the Court under s 44 of the AAT Act is not enlivened unless the decision of the Tribunal involves a question of law: TNT Skypak International (Aust) Pty Limited v Commissioner of Taxation (1988) 82 ALR 175 at 178; Birdseye v Australian Securities & Investments Commission (2003) 76 ALD 321 at [11] and [16]; Australian Securities & Investments Commission v Saxby Bridge Financial Planning Pty Ltd (2003) 133 FCR 290 at [42] and [107].

83        In our opinion, the Tribunal’s decision that the deferred tax asset was not an intangible involves a question of law. This is because the Tribunal’s decision raises the question of whether, upon the proper construction of Condition 9 of the licence, the deferred tax asset, as found by the Tribunal to exist, is properly to be characterised as a tangible asset.

84        This can be seen from the structure and content of the Tribunal’s reasons. What must be borne in mind is that no challenge is made to the Tribunal’s finding that it was proper to recognise the deferred tax asset as an asset for the purpose of calculating the value of Opus’ total assets.

85        That was a finding of fact which was based upon the Tribunal’s acceptance of Mr Palmer’s evidence that it was probable that Opus would have future taxable profits against which the unused tax losses could be applied.

86        But the ultimate question which the Tribunal determined was that the deferred tax asset formed part of Opus’ net tangible assets because it was an “adjusted asset”. What was required to make that determination was to calculate the value of Opus’ assets as they would appear on its balance sheet and to deduct from this the value of “excluded assets”, that is to say, intangible assets.

87        The calculation was therefore a two-step process which was reflected in the Tribunal’s reasoning process. The first step was the factual finding that the deferred tax asset was an asset which would appear on the balance sheet made up in accordance with Chapter 2M. The second was that the deferred tax asset was not an intangible.

88        It was the second step which involved a question of law, namely whether the asset which the Tribunal found to be properly recognised on the notional balance sheet was to be characterised as an intangible.

89        This step involves a question of whether the facts fully found by the Tribunal fell within the definition of an “excluded asset” in Condition 9 of the licence, when properly construed. This is a question of law: Vetter v Lake Macquarie City Council (2001) 202 CLR 439 at [24] (“Vetter”).

90        As Gleeson CJ, Gummow and Callinan JJ said in Vetter at [24], whether facts as found answer a statutory description will very frequently be a question of law. Or, as their Honours went on to say “whether the facts found by the trial court can support the legal description given to them by the trial court is a question of law”.

91        This proposition is subject to the qualification that the process of construction may, in some cases, involve a question of mixed fact and law, but where on the facts as found, only one conclusion is open, the question is exclusively one of law: Vetter at [27]; see also Commissioner of Taxation v Cooper (1991) 29 FCR 177 at 194–195 (Hill J) and the review of the authorities by McKerracher J in Commissioner of Taxation v Swansea Services Pty Limited (2009) 72 ATR 120 at [47]–[58].

92        That is the position in the present case. It is not, as was submitted by Opus, a question of the meaning of an ordinary English word or phrase used in a quasi-statutory enactment. Nor is it a question of whether, on the facts found by the Tribunal, different conclusions were reasonably open as to whether the deferred tax asset was an intangible.

93        Opus sought to support its submission by pointing to the Tribunal’s construction of the word “received” in the passage at [33] of its reasons which we have set out above. In Opus’ submission, this shows that the question is one of the meaning of an ordinary English word because the Tribunal concluded that the deferred tax asset was received; although not received physically, the amount of tax otherwise required to be paid will be reduced by the amount of the deferred tax asset.

94         There are three answers to Opus’ submission. First, the question of whether the deferred tax asset was “received” was merely a step in the Tribunal’s process of determining the ultimate question, namely, whether the asset was an intangible. That question did not involve the meaning of an ordinary English word or whether the facts as found fell within the ordinary meaning of the word “received”.

95        The Tribunal construed the word “received” as part of the process of determining whether the deferred tax asset was an intangible. It adopted that approach because it accepted the Commission’s submission that the meaning to be given to the term “intangible” could be governed by the terms of AASB 138. But this does not detract from the conclusion that the ultimate question which the Tribunal considered was whether the deferred tax asset was an intangible.

96        That question was one of law, because it involved the meaning of a technical legal term, or because it involved a judgment about whether the deferred tax asset was an “intangible”, and therefore an excluded asset under the licence, having regard to the regulatory purpose for which that term was included in Condition 9 of the licence: Collector of Customs v Pozzolanic Enterprises Pty Limited (1993) 43 FCR 280 at 287 (see proposition 3), 288–289 (“Pozzolanic”).

97        The technical legal nature of the term is revealed by the requirement of the licence that the starting point for calculating the value of net tangible assets is the value of assets as they would appear on a balance sheet made up in accordance with Chapter 2M of the Act. This includes the requirement of s 296 that the financial report must comply with accounting standards. Any consideration of the meaning of an intangible asset is therefore, on the Tribunal’s approach, to be seen in light of the relevant accounting standard, AASB 138, by virtue of the provisions of s 296 of the Act.

98        The terms “intangible”, “monetary asset” and “received”, in so far as they are made applicable through AASB 138, therefore involve a consideration of those terms in a technical legal sense.

99        The regulatory purpose for the exclusion of intangible assets from the calculation of “adjusted assets” in determining the value of Opus’ net tangible assets under Condition 9 of the licence is explained by the provisions of RG 166 to which we referred above.

100        What is revealed by the relevant provisions of RG 166 is that a licensee must have sufficient financial resources to conduct its business and that there is a financial buffer that decreases the risk of disorderly winding up if the business fails. It is those underlying purposes which show that what is an intangible asset is not a process of fact finding but a value judgment about the meaning of that term to be made in light of the policy and purpose of the regulatory provision expressed in condition 9 of the licence.

101        Second, the question which the Tribunal determined was not the construction of the word “received” considered in isolation. Rather, what the Tribunal did was to determine whether the deferred tax asset constituted an intangible by considering the component elements of the definition of an intangible asset in AASB 138.

102        The Tribunal approached this question by looking at the definition of “monetary asset” because it considered that if the asset was a monetary asset, as defined in AASB 138, it could not be a non-monetary asset, and hence, not an intangible within the definition of the term “intangible asset” in AASB 138.

103        Thus, in determining whether the deferred tax asset was an intangible asset, the Tribunal asked itself whether the deferred tax asset fell within the composite expression comprised in the definition of “monetary assets” in AASB 138; that is to say, whether it was money held or an asset to be received in a fixed or determinable amount.

104        It is true that in [38] of its reasons the Tribunal said that the Commission’s argument reads the word “received” too narrowly. Also in [34] of its reasons the Tribunal stated that support for a broad approach to the meaning of “received” is to be found in AASB 138.

105        However, those observations of the Tribunal are to be read in their full context. This may be seen in the conclusion reached by the Tribunal at [36] that the deferred tax asset was a monetary asset, and hence not an intangible.

106        The Tribunal’s decision therefore meets the test stated by Heerey J in AMI Toyota Ltd v Chief Executive Officer of Customs (2000) 43 ATR 743 at [53] as follows:

there is a question of construction as to the meaning of the compound expression in the context of the Act. This case did not turn on a single ordinary English word susceptible of a range of meanings and its application or otherwise to proved facts, such as the word "insulting" considered in Brutus v Cozens.

107        The error in Opus’ submission may be summed up by referring to the observations of Lord Hoffman in R v Brown [1996] 1 AC 543 at 561. His Lordship there said that lawyers often fall into the fallacy of treating the words of a statement as building blocks whose meaning cannot be affected by the rest of the sentence. But this is not the way language works because the unit of communication is the sentence and not the parts of which it is composed: see also Collector of Customs v Agfa-Gevaert Ltd (1996) 165 CLR 389 at 397 (“Agfa-Gevaert”).

108        Opus also submitted that the Tribunal’s decision involved a question of fact because it concerned the meaning of the words “intangible assets” and “received”. In putting this submission, Mr Sofronoff QC, who appeared for Opus, relied upon the remarks of Isaacs J in Life Insurance Co of Australia Limited v Phillips (1925) 36 CLR 60 at 78 (citing Lindley LJ in Chatenay v Brazilian Submarine Telegraph Co Ltd [1891] 1 QB 79 at 85) and the fourth proposition stated by the Full Court in Pozzolanic at 287.

109        Opus’ submission, based on those two authorities, was that the meaning of an expression is a question of fact but its effect is a question of law.

110        However, in Agfa-Gevaert, the High Court (Brennan CJ, Dawson, Toohey, Gaudron and McHugh JJ) said at 396–397 that this distinction is artificial, if not illusory and that it is one which is difficult to support: see also HP Mercantile Pty Limited v Commissioner of Taxation (2008) 143 FCR 53 at [84] per Stone J.

111        It seems to us therefore that we should not adopt the distinction between meaning and effect. The better, and more recent view, is as was pointed out by Stone J in HP Mercantile, to be found in the observations of the High Court in Vetter and in Hope, as well as in the observations of Fullager J in Hayes v Commissioner of Taxation (1956) 96 CLR 47 at 51 (“Hayes”).

112        The effect of those authorities is that the distinction to be drawn is between the factum probandum (that is, the ultimate fact in issue) and the facta probantia (the facts adduced to prove the ultimate fact). Where the factum probandum involves a term used in a statute (or a quasi-statutory instrument) the question whether the accepted facta probantia establish the factum probandum will generally be one of law.

113        This was the distinction drawn by Wigmore which was stated by Fullager J in Hayes at 51 and cited with approval by Mason J in Hope v Bathurst City Council (1980) 144 CLR 1 at 7 and by the plurality in Vetter at [25].

114        The decision of the Tribunal in the present case raises a similar question to that which arose in Hayes. There the question raised on an appeal under the Income Tax and Social Services Contribution Assessment Act 1936-1950 (Cth) concerned the determination by the Taxation Board of Review that the receipt of a number of shares by the taxpayer constituted income. Fullager J explained at [51] that this determination raised a question of law. For the same reasons, in the present case, the Tribunal’s determination that the deferred tax asset was not an intangible involves a question of law.

115        It follows in our view that the jurisdictional threshold for an appeal to the Federal Court under s 44 of the AAT Act is satisfied.

116        Nothing turns upon the submission made by Mr Sofronoff that the grounds of appeal are stated in terms which draw attention to the Tribunal’s finding that the deferred tax asset was “received”. We accept the submission of Dr Bell SC that the grounds of appeal are to be considered in light of what we said above about the composite nature of the expression in question.

117        That is to say, a proper reading of the grounds of appeal shows that the Commission contends that the error is not merely as to the construction of the word “received” but as to the construction of the composite phrase, considered in the light of the ultimate question which was whether the deferred tax asset was an intangible.

Whether the Tribunal erred

118        In our opinion, the Tribunal erred in coming to the view that the deferred tax asset was not an intangible asset and that it therefore formed part of Opus’ net tangible assets.

119        It seems to us that the error arose from the failure of the Tribunal to adopt an approach to the construction of the licence which promoted the regulatory purpose for which the licence was issued.

120        Instead, the Tribunal applied a literal approach to construction which led it into error by focusing upon the meaning of the word “received” in AASB 138. Not only did the Tribunal adopt a construction of that word which was contrary to the underlying purpose and object of the relevant statutory or quasi-statutory instruments, it also construed the word “received” as a single word without considering it as part of a composite phrase, and shorn of the context in which it appeared.

121        Before turning to the particular errors revealed in the Tribunal’s reasons, we should say that we have come to our conclusion without wishing to suggest any disrespect to the Tribunal which produced its reasons speedily, clearly and efficiently.

122        As we have said, the licence issued to Opus was an important regulatory tool in the hands of the Commission as the regulator of managed investment schemes. The Commission is not a prudential regulator but the terms of the licence are to be considered in light of the regulatory purposes revealed in the relevant instruments.

123        Whether or not the deferred tax asset constituted an intangible depended upon the proper construction of the licence and, in particular, the definitions contained in it, including the definition of “excluded assets” and “intangible assets” so far as the latter concept was defined in the terms of the licence, as well as the context in which those expressions appeared in the licence.

124        The proper approach to construction in matters such as this is stated by McHugh J in Kelly v The Queen (2004) 218 CLR 216 at [103] (“Kelly”). His Honour observed that the function of a definition is not to enact substantive law but to provide an aid in construing the statute. His Honour continued by saying:

Nothing is more likely to defeat the intention of the legislature than to give a definition a narrow, literal meaning and then use that meaning to negate the evident policy or purpose of the substantive enactment…I think the only proper – course is to read the words of the definition into the substantive enactment and then construe the substantive enactment – in its extended or confined sense – in its context and bearing in mind its purpose and the mischief that it was designed to overcome. To construe the definition before its text has been inserted into the fabric of the substantive enactment invites error into the meaning of the substantive enactment.

125        McHugh J was in dissent in Kelly but the approach to construction which he stated is unexceptional. It was referred to with approval by Basten JA in Hastings Co-operative Ltd v Port Macquarie Hastings Council (2009) 171 LGERA 152 at [16] (“Hastings”).

126        The majority judgment in Kelly (Gleeson CJ, Hayne and Heydon JJ) at [43] accepted the purpose or object of the relevant statute but pointed out that the legislative response to the case showed that the object could be achieved in a number of ways. Thus, the identified purpose or object did not compel any particular construction of the detailed language of the statute and “the correct construction must depend on the particular words used.”

127        The caveat stated by the majority in Kelly must therefore be borne in mind in addressing the question of construction in the present case.

128        As Basten JA (with whom Allsop P and Handley AJA relevantly agreed) said in Hastings at [35], generally speaking, the purpose of an instrument will be promoted by giving effect to the definitions of defined terms. His Honour also warned against abstruse and complex arguments of construction which tend to depart from the purpose and ease of application of a statutory instrument.

129        In the present case, the purpose and object of the terms of the licence may be gleaned from RG 166. It is true that this is a policy statement and, as French and Drummond JJ observed in Minister for Immigration v Gray (1994) 50 FCR 189 at 208 (“Gray”), policies are not statutory instruments; they prescribe guidelines in general and not always very precise language so that to apply them with statutory nicety is to misunderstand their function.

130        In Gray at 208, French and Drummond JJ went on to say:

On the other hand, where the existence and content of such a policy is to be regarded as a relevant fact which the Tribunal is bound to consider, a serious misconstruction of its terms or misunderstanding of its purposes in the course of decision-making may constitute a failure to take into account a relevant factor and for that reason may result in an improper exercise of the statutory power.

131        Their Honours also pointed out at 208 that the jurisdiction to review decisions of the Tribunal is to be exercised with restraint, citing Pozzolanic at 286–287. We have taken this into account in the exercise of our jurisdiction.

The purpose and object of the licensing regime

132        It is clear from the terms of RG 166 that the financial services licence issued to Opus is a standard form document applicable to the responsible entities of managed investment schemes. Indeed, as pointed out above, the relevant terms of Condition 9 of the licence are virtually identical to the terms of the requirements stated in RG 166.63.

133        What must therefore be borne in mind in construing Condition 9 is the Commission has imposed the requirement that a licence holder have a stipulated minimum level of net tangible assets so as to achieve a number of purposes. In particular, as stated in RG 166.12, the financial requirements imposed on a licensee are to help ensure that it has sufficient financial resources to conduct its business and that there is a financial “buffer” to decrease the risk of disorderly wind-up if the business fails.

134        Also, in setting licensing conditions for financial requirements, the Commission seeks to set minimum standards that are framed clearly and simply, so as to provide certainty: see RG 166.13.

135        In addition, as stated in RG 166.68, the financial requirements for responsible entities of managed investment schemes take into account, amongst other things, the need for investor protection.

136        It should also be noted that the stated object of Chapter 7 of the Act, under which the licensing regime exists, includes the reduction of systemic risk: see s 760A of the Act.

137        The Tribunal referred to this provision at [16] but does not appear to have taken it into account in its reasoning process.

138        Reference may also be made to s 912A(1)(b) which, as stated above at [13], requires a licensee to have available adequate resources, including financial resources, to provide the financial services covered by the licence.

Failure to take account of object and purpose

139        In our view, the principal error in the Tribunal’s reasons is its failure to have regard to the object and purpose for which the financial requirements as stated in Condition 9 were included in the licence.

140        It is clear that the minimum level of net tangible assets required by Condition 9 was intended to achieve the purposes stated above including in particular “adequate resources”, a “financial buffer” in case the licensee’s business fails, and “investor protection”.

141        Of course, the definitions in the licence must be construed and applied. But it is plain that the starting point in the determination of net tangible assets is to calculate the value of “adjusted assets” which requires the value of “excluded assets” to be deducted.

142        “Excluded assets” include intangible assets but that term is not defined other than by reference to the words in parenthesis, that is, “non-monetary assets without physical substance”.

143        The Tribunal accepted that the deferred tax asset was without physical substance but it came to the view that the asset was a monetary asset. It did so not by reference to the terms of the licence but by reference to a definition of “monetary assets” in AASB 138.

144        What is immediately striking about this is that deferred tax assets are specifically excluded from the application of AASB 138. Indeed, para 3 of AASB 138 treats deferred tax assets as an intangible asset and provides for them to be covered by AASB 112.

145        It is true, as Opus pointed out, that para 3 of AASB 138 also excludes “financial assets” as defined in AASB 132, and thereby appears to treat financial assets as intangibles.

146        AASB 132 defines “financial assets” to include cash, shares, deposits and derivatives. Mr Sofronoff submitted that the matters included in the definition in AASB 132 are not intangible assets. Accordingly, in his submission, nothing turns upon the apparent treatment of deferred tax assets in para 3 of AASB 138 as intangibles which are excluded from the operation of that standard.

147        Plainly, cash, shares and deposits are not intangibles, but derivatives take many shapes and forms. It is not surprising that they are the subject of a different accounting standard.

148        It therefore seems to us that the exclusion of deferred tax assets from AASB 138, and the reference to it in that standard as an intangible asset, is a strong contextual indication that a deferred tax asset is an intangible.

149        In any event, to construe the meaning of an intangible asset by reference to a definition in a standard which specifically excludes deferred tax assets appears to us to be an incorrect approach. It may well be that the Tribunal was led into this error by the Commission which sought to rely on AASB 138 to govern the terms in Opus’ licence. Indeed, the Tribunal said at [31] that this approach was open to doubt yet it proceeded upon the basis that the Commission’s submission was correct, at least insofar as AASB 138 governed the meaning of the terms of Opus’ licence.

150         The effect of the Commission’s approach to the meaning of a monetary asset was, in our view, to depart from the language of Condition 9 of the licence, and to detract from a consideration of the object and purpose sought to be achieved by that condition.

151        Condition 9 contains no definition of an intangible other than as a non-monetary asset without physical substance. But what is important is that intangibles are “excluded assets” and their value must be excluded from the value of total assets as they would appear on a balance sheet.

152        An intangible asset will be included on a balance sheet but Condition 9 of the licence requires its value to be deducted from the total value of assets on the balance sheet. The purpose of this is revealed in RG 166. An intangible will not provide, inter alia, “a financial buffer” that decreases risk of a disorderly wind-up if the business fails, “certainty” or “investor protection”.

153        The language of Condition 9, and in particular the concept of an intangible asset, insofar as it was defined, was to be interpreted in light of the object and purpose stated above.

154        The fact that a deferred tax asset was without physical substance went part way toward the conclusion that it was an intangible. All that was left was to determine whether it was a non-monetary asset.

155        It may be accepted that a non-monetary asset is the opposite of a monetary asset. The most obvious example of a monetary asset is cash. In Foody v Horewood (No 2) [2004] VSC 222 at [183]–[185] (“Foody”), Hansen J accepted expert evidence as to the nature of a deferred tax asset. His Honour accepted that it was not able to be exchanged into cash or a cash equivalent.

156        In our view, this approach to the characterisation of a deferred tax asset is correct. It fits comfortably within the proper construction and application of Condition 9 and has the effect that a deferred tax asset is an intangible, and therefore an excluded asset, the value of which must be deducted from the value of total assets as they would appear on Opus’ balance sheet.

157        The deferred tax asset in Foody represented timing differences in the accounting and tax profits of the business. This is a different form of deferred tax asset from that which is the subject of the present case. It is nevertheless within the definition of a deferred tax asset in AASB 112. In our view, nothing turns upon the difference. Both forms must be characterised as intangibles.

158        The essence of a deferred tax asset as defined in AASB 112 is that it may be used to off-set the amount of tax payable in future tax years if and when a profit is made. Its accounting treatment as an asset is dependent upon an assessment by the directors that it is probable that the entity will earn taxable profits in future years.

159        Although the deferred tax asset is recognised, as in the present case, once the necessary opinion is formed, a deferred tax asset does not entitle an entity to a payment from the Australian Tax Office, either when it is recognised or when, in some future year, it is able to set off the relevant amount against taxable profits.

160        A deferred tax asset is therefore an accounting concept which is entirely dependent upon the relevant opinion being formed as to future profits. It cannot be converted into cash or its equivalent. It cannot be used to acquire goods or services. It is not a chose in action that is capable of assignment, or to adopt the language of accounting treatment, a “receivable” which is capable of being factored.

161        It follows in our view that the deferred tax asset in the present case was a non-monetary asset without physical substance. It was therefore an excluded asset which was to be deducted from the value of Opus’ total assets in calculating the value of its net tangible assets.

Deferred tax asset not “received”

162        Even if the meaning of a non-monetary asset was to be determined by reference to the meaning of “monetary assets” in AASB 138, it seems to us that the Tribunal adopted an incorrect construction of that term.

163        As stated above, the Tribunal focused upon the meaning of the word “received” but what was required was for the Tribunal to consider the meaning of the composite phrase set out in the definition. Thus, the question was whether the deferred tax asset was money held and assets to be received in fixed or determinable amounts of money.

164        The Tribunal concluded that, whilst there will be no physical receipt of money, once the necessary opinion is formed for the accounting treatment of the losses, the amount of tax required to be paid in future years will be reduced by the amount of the deferred tax asset.

165        In our view, this approach to construction is not correct. It wrongly characterised a deferred tax asset as a monetary asset. A deferred tax asset is an item which exists on a company’s balance sheet at a particular point of time for accounting purposes. It is not an asset to be received in the future, whether in a fixed or determinable amount of money, or at all.

166        The essence of the definition of monetary assets in AASB 138 is that there will be money or assets, that is to say, new assets, to be received by the entity in a fixed or determinable amount. Examples would be receivables or goods purchased.

167        By contrast, a deferred tax asset is an economic benefit which may be realised at a future point of time. It is not money or a new asset to be received. Instead, it represents the accounting treatment of a set-off against future income tax upon an assumption that the entity will make a profit in the relevant tax year.

168        The Tribunal considered that a deferred tax asset was to be contrasted with the examples of intangibles, such as technical knowledge, listed in AASB 138 at para 9. In the Tribunal’s view, those assets lacked precise value but a deferred tax asset has a precise and determinable value once the opinion has been formed as to the probability of future taxable profits.

169        For the reasons set out above, we cannot agree with this analysis. The accounting treatment of the value of a future set-off is dependent upon the accuracy of the opinion as to future profits. It is of no different character than the value of technical know-how which is dependent upon the opinion of the directors as to the value of the economic benefit to be achieved.

170        In any event, for reasons set out above, to treat a deferred tax asset as a tangible asset, in contrast to the character of intangibles such as know-how, would be contrary to the purposive construction of Condition 9 of the licence.

171        We do not think that anything turns upon the Tribunal’s preference of the expert evidence of Mr Holland over that of Mr Niven. As the Tribunal observed, Mr Holland recognised that other minds might reasonably come to a different conclusion to his opinion that a deferred tax asset is not an intangible asset.

172        In any event, the question is one of law, not a question to be determined by expert evidence as to the character of a deferred tax asset.

173        We should add that although the Tribunal accepted Mr Holland’s evidence, it does not follow that the decision of the Tribunal involved a question of fact. The Tribunal merely referred to Mr Holland’s evidence to support the view which it reached as to the proper construction of the licence.

Orders

174        We propose to order that the decision of the Tribunal dated 20 September 2010 be set aside.

175        The matter is to be remitted to the Tribunal for further consideration in accordance with law. This order is necessary because the Tribunal did not find it necessary to deal with the question of whether the sales and performance fees were intangible assets to be excluded from the calculation of the value of Opus’ total assets.

176        We will order that Opus pay the Commission’s costs of the appeal.

Associate:

Dated:    31 August 2011