Federal Court of Australia

Charles Apartments Pty Limited v Commissioner of Taxation [2025] FCAFC 180

ORDERS

THE COURT ORDERS THAT:

1.    The appeal be dismissed.

2.    The appellant pay the respondent’s costs of and incidental to the appeal in a lump sum, to be fixed by the registrar if not agreed.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

THE COURT:

1    During the 2011 income year, Charles Apartments Pty Ltd (CAPL) was a member of a group of companies controlled by a Mr Demian (the Demian Group).

2    One claim which CAPL made in respect of the 2011 income year was that it had incurred an interest expense in the total amount of $1,870,223.34, which was said to be an allowable deduction under s 8-1 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997). The Commissioner of Taxation disallowed that deduction and confirmed that position on objection. CAPL then sought the review of the objection decision by the then Administrative Appeals Tribunal. There were other issues at large in the Tribunal but it is not necessary to detail all of these.

3    The Tribunal concluded that CAPL was entitled to an interest deduction in that amount under s 8-1 of the ITAA 1997: WCVB v Commissioner of Taxation [2024] AATA 1259. CAPL then instituted in the Court’s original jurisdiction the statutory appeal for which s 44 of the Administrative Appeals Tribunal Act 1975 (Cth) (AAT Act) then provided. CAPL claimed that it was entitled to a further $946,000 by way of deduction under s 8-1. The Commissioner cross-appealed claiming that no deduction under s 8-1 was allowable.

4    The result in the original jurisdiction was that CAPL’s appeal was dismissed and the Commissioner’s cross-appeal was allowed such that the objection decision was confirmed: Charles Apartments Pty Limited v Commissioner of Taxation [2025] FCA 461. It is the correctness of the conclusion of the primary judge that CAPL was not entitled to an interest deduction under s 8-1 of the ITAA 1997 in the amount of $1,870,223.34 which is controversial in this appeal.

5    Many but not all facts were uncontroversial between the parties before the Tribunal, and the Tribunal made findings accordingly in relation to those uncontroversial facts. Some facts were controversial and depended upon the acceptance by the Tribunal of Mr Demian’s testimony and on the reliability of CAPL’s accounts.

6    It is necessary to remember that, unlike in many administrative review proceedings in the Tribunal where the importation of concepts of a formal onus of proof is impermissibly to “[borrow] from a universe of discourse which has civil litigation as its subject” (Minister for Immigration and Ethnic Affairs v Wu Shan Liang (1996) 185 CLR 259, at 282), a taxation review proceeding is, and always has been, different. Even in the days when the like jurisdiction was exercised by a Board of Review, and to this day in the Tribunal and its successor, the Administrative Review Tribunal, an onus of proof does fall on an applicant. Relevantly, it was CAPL which had the onus of proving that the assessment confirmed by the objection decision was excessive and what the assessment should have been: s 14ZZK(b)(i), Taxation Administration Act 1953 (Cth) (and note the analogue former s 190(b) of the Income Tax Assessment Act 1936 (Cth) – ITAA 1936). Thus, although the formal rules of evidence did not apply in the review proceeding before the Tribunal (Sullivan v Civil Aviation Safety Authority (2014) 226 FCR 555), it was nonetheless necessary for CAPL to adduce, or point to some material already before the Tribunal, which provided a rational foundation for a conclusion supporting its claimed deduction insofar as uncontroversial facts did not do so.

7    By the time when the statutory appeal was heard and determined in the Court’s original jurisdiction, the AAT Act had been repealed, and the Administrative Review Tribunal Act 2024 (Cth) (ART Act) was in force. But the position before the Court was no different in relation to the status of findings of fact made by the Tribunal insofar as those findings were not affected by an error of law. Findings which were not so affected stood. And so did the absence of any findings. If the result was an insufficiency of proof of eligibility for the claimed deduction then the inevitable result before the Tribunal, and on the statutory appeal to this Court, should or would be that the statutory onus of proof had not been discharged. The only power which the Court had to make other findings of fact was insofar as they were not inconsistent with findings of fact made by the Tribunal (other than findings made by the Tribunal as the result of an error of law): s 177, ART Act (and the former s 44(7), AAT Act). It will be necessary later in these reasons for judgment to return to this subject.

8    Insofar as facts were uncontroversially found by the Tribunal, the position was as follows.

9    Within the Demian Group, CAPL was a special purpose entity, established in 2001. The special purpose for which it carried on business was the acquisition and development for post-development sale of three contiguous properties at 6, 8 and 10 Charles Street, Parramatta (the Charles Street Properties). It was a feature of the Demian Group that such a special purpose entity was used for particular property development purposes.

10    CAPL and another company in the Demian Group, Demian Holdings Pty Ltd, purchased the Charles Street Properties in February 2002 for $3,125,000 as tenants in common (Demian Holdings having a 1/20th interest, CAPL a 19/20th interest). The acquisition of the Charles Street Properties was funded by a loan facility from St George Bank in the amount of $3 million. The Tribunal did not in terms find that CAPL was the only borrower under this loan facility, but it did find that the Charles Street Properties were security for the borrowing. Both in the Tribunal and before the primary judge, the case was conducted on the basis that CAPL was the entity which borrowed the funds from the St George Bank (and thus incurred the liability to pay interest on the borrowed funds). We have approached the determination of the appeal on that basis.

11    By June 2003, various entities within the Demian Group with borrowing facilities with St George Bank were either in default or otherwise under pressure by that bank. CAPL was one. St George Bank wrote to CAPL on 23 June 2003 to warn that the facility was due to expire at the end of that month. The interest due under that loan was not being paid by St George. Instead, it was being capitalised.

12    Against this background, Mr Demian decided to approach a new banker and seek a more global solution to the overall financing needs of the Demian Group. The group had several developments underway or in prospect through different group companies in addition to the development of the Charles Street Properties, so it needed capital. Mr Demian approached Suncorp to establish a new facility under which a group company would obtain a loan of $27 million to consolidate and pay out existing facilities (including the St George facility secured by the Charles Street Properties) and fund new developments.

13    Eventually, in December 2003, a group financing facility for the Demian Group was obtained from Suncorp. Under this facility, Suncorp lent another entity within the Demian Group, West Apartments Pty Ltd, $27 million (Suncorp Facility) for the purpose of funding new developments and consolidating and paying out the existing borrowing facilities of the Demian Group, including CAPL’s St George Bank facility secured by the Charles Street Properties. The Tribunal described West Apartments as “the Group Borrowing Company” of the Demian Group.

14    Suncorp required the provision of various securities for the Suncorp Facility. One was a registered first mortgage over the Charles Street Properties; another was a guarantee by various companies within the Demian Group, including CAPL, under which each unconditionally and irrevocably guaranteed the indebtedness of West Apartments under the Suncorp Facility.

15    For CAPL to offer such mortgage security, it was necessary to pay out CAPL’s facility with St George Bank and with that remove that bank’s mortgage security over the Charles Street Properties which secured that loan. This was achieved by several internal transactions within the Demian Group with the use of some of the funds available under the Suncorp Facility. Thus, on or about 24 December 2003, West Apartments lent Demian Investments Pty Ltd, another Demian Group entity (described by the Tribunal as the Group Treasury company), $3 million and Demian Investments in turn lent $3 million to CAPL, which CAPL used to pay out its loan from St George Bank, to discharge the related mortgage over the Charles Street Properties in favour of that bank and thus provide that property as a first mortgage security for the Suncorp Facility.

16    An agreement in writing evidencing the making and terms of the asserted intragroup loan from Demian Investments to CAPL was not adduced in evidence before the Tribunal by CAPL, if indeed there ever was an agreement in writing. The Tribunal accepted that the internal affairs of the Demian Group were conducted with great informality by Mr Demian. He was the ultimate controller of the entities within the group.

17    Such informality is, in itself, unremarkable in small business in Australia, especially when control is so closely held: Electrical Enterprises Retail Pty Ltd v Rodgers (1988) 15 NSWLR 473, at 489 (Kearney J); VL Finance Pty Ltd v Legudi (2003) 54 ATR 221, at [30] (Nettle J); Melbourne Corporation of Australia Pty Ltd v Federal Commissioner of Taxation [2022] FCA 972, at [44] (Logan J). Eligibility to claim a deduction under s 8-1 of the ITAA 1997 is not conditioned upon the existence of evidence in writing to prove that a liability was incurred in the amount claimed. It is singularly important that the Commissioner brings to bear this understanding of small business and of s 8-1 in his administration of the ITAA 1997 and other taxation legislation. Great injustices can be done if he does not do so. All this said, an absence of evidence in writing supporting the existence and terms of a loan can present real challenges for a taxpayer in discharging the statutory onus of proof mentioned above. Sometimes the existence of a loan and even the incurring of a related interest liability may be evident enough from a taxpayer’s accounts. But such accounts may not, and often will not, disclose the terms of the loan concerned. In this case, the detailing of the terms of the intra-group loan to CAPL and its assignment depended upon the acceptance of Mr Demian’s oral evidence by the Tribunal.

18    As to this, the Tribunal accepted Mr Demian’s evidence (Tribunal reasons at [113] – [115] and [132]). What the Tribunal found (Tribunal reasons at [115] and [132]) was that “interest accrued on the amount advanced under the intragroup arrangement but WCVB [CAPL] was not liable to pay the interest as it accrued. It would instead pay the capitalised interest when it sold the Astoria property [Charles Street Properties] (he said) ‘and then only to the extent there was sufficient sale proceeds from the sale of the [Astoria] properties to pay the interest’”. The Tribunal also accepted that the prevailing rate of interest on the intra-group loan matched that for which West Apartments was liable to Suncorp. Given the nature of the statutory appeal to this Court in its original jurisdiction, these findings of fact by the Tribunal stood, in the absence of the upholding of any challenge alleging that they were affected by an error of law. There was no such challenge. To the contrary, each party’s submissions in the original jurisdiction and on the appeal to this Court depended upon their correctness.

19    The Tribunal also found that, in 2005, the benefit of intragroup loan from Demian Investments to CAPL was assigned to another member of the Demian Group (Assignee) such that CAPL became indebted to Assignee.

20    Suncorp had, as the Tribunal found, become “nervous over its exposure to the group around the time of the global financial crisis”. West Apartments was in default under the terms of the Suncorp Facility. Suncorp was considering withdrawing that facility or taking enforcement action. To forestall that prospect, Mr Demian signed, on 9 June 2009, in various capacities, a “Deed of Forbearance” (Forbearance Deed). One such capacity was personal, another was on behalf of CAPL, yet others were on behalf of various other companies in the Demian Group. Each became obligors under the Forbearance Deed. The Tribunal observed that the Forbearance Deed “included what amounted to an action plan that required additional security, guarantees and asset sales from companies in the group”. The Tribunal observed (Tribunal reasons, at [118]), “The intent of the deed was clear: whereas WCVB’s Astoria properties [CAPL’s Charles Street Properties] were originally mortgaged to secure the debt owing under the facility established in December 2003, WCVB [CAPL] was acknowledging that it and the other obligors would be responsible for all the debts under all the facilities” (emphasis by the Tribunal). Correctly, the parties to the appeal accepted the accuracy of this observation. Further, given the nature of the statutory appeal in the original jurisdiction, the various findings of fact made by the Tribunal concerning the existence and terms of the intra-group loans and their terms stood, unless affected by an error of law.

21    In 2010, Mr Demian sought Suncorp’s consent for the sale of the Charles Street Properties. As the Tribunal observed, such consent was necessary because Suncorp at that stage held registered mortgages over those properties as part of its securities in respect of the Suncorp Facility. It is not necessary to decide this appeal to detail the exchanges with Suncorp about the giving of this consent or the evidence which Mr Demian gave about arrangements which led to the purchase of those properties. It is only necessary to note that the Tribunal found (Tribunal reasons at [41]) that Suncorp’s consent was eventually forthcoming and that the Charles Street Properties were sold with the proceeds thereof being paid in this way:

The contracts all settled on 12 August 2010 after the purchaser paid over $5 million (being the total purchase price inclusive of GST). The settlement statements prepared by the lawyers who handled the transaction were in evidence… . They each record instructions to draw cheques in favour of Suncorp (amongst others) at the time of settlement under each contract. The cheques to Suncorp added up to $4,870,223.34 which reflected the whole of the proceeds of the sale less GST and adjustments in respect of lawyer fees and the like which were recorded in the settlement statements. On 13 August 2010, those cheques were apparently deposited into the Suncorp loan account that was conducted by the group’s lead borrower under the facilities.

The “lead borrower” in the Demian Group was West Apartments.

22    Inconsistently with these findings, and the contemporaneous settlement documentation in evidence to which the Tribunal referred, the Tribunal later stated (Tribunal reasons at [119]):

When the Astoria properties [the Charles Street Properties] were sold, the entirety of the proceeds of the sale under the three contracts were ultimately paid to Suncorp via Assignee and the group borrowing company. $3 million of the amount paid to Suncorp was a repayment of principal (ie the amount advanced to WCVB to pay out the St George facility in 2003). The balance – an amount of $1,870,223.34 – was presumably referable to interest on the Suncorp facility.

23    The primary judge found that the presumption as to interest and the consequential conclusion that CAPL was entitled to a deduction under s 8-1 of the ITAA 1997 in amount of $1,870,223.34 was tainted by an impermissible adoption by the Tribunal of “but for” reasoning. We agree. To the contrary of a submission made on behalf of CAPL, the essence of the Tribunal’s reasoning was that the assessable income which CAPL derived via the sale of the Charles Street Properties would not have been derived without the procuring of the consent of Suncorp to that sale with the price of that consent being the remission of the net proceeds (including the presumed interest) to it. The following passage from the reasoning of the primary judge (at [116]) exactly encapsulates the error in this:

With this focus on the entire net settlement proceeds and the necessary consent of Suncorp to provide clear title to the Properties for the sale to actually take place, the Tribunal engages in the reasoning at D at [139]. Of course, a particular paragraph of the Tribunal’s reasons should not be read in isolation or with an “eye keenly attuned to error”: see Collector of Customs v Pozzolanic Enterprises Pty Ltd (1993) 43 FCR 280 at 287; [1993] FCA 456, cited with approval in Minister for Immigration and Ethnic Affairs v Wu Shan Liang (1996) 185 CLR 259 at 272; [1996] HCA 6. The Tribunal’s reasons must be read as a whole. Approaching the Decision in this way and considering D at [139], it is clear that the Tribunal has erred. The Tribunal does not consider the use of the borrowed funds to ascertain whether any amount claimed to be interest on those funds would be deductible. The focus is regarding the net proceeds of sale and that the entirety of those proceeds were paid to Suncorp for release of its mortgage, which in turn meant that the Applicant earned assessable income. This is clear from the Tribunal’s reasons stating “… Suncorp required [the Applicant] to pay the entirety of the net proceeds of the sales …” and “[the Applicant] would not have derived any of the assessable income it subsequently returned without agreeing to pay the net proceeds of the sale to Suncorp in reduction of the debt due under the facility”. Applying the previous presumption regarding the balance amount of $1,870,223.34 (D at [119] and [132]) the Tribunal applies the incorrect test and finds that the “The net proceeds [the Applicant] ultimately remitted included $3 million in principal and the balance in respect of interest”.

[Emphasis added]

24    “But for” reasoning in relation to whether a deduction claimed under s 8-1 of the ITAA 1997 can have Siren-like attraction, and it is apt to lure those who sail on fiscal waters onto the rocks of failing to apply the language of the statute to the facts.

25    The true position as the Tribunal itself had earlier correctly found, and as the primary judge correctly recognised (at [144(h)]), was that “the entire net sale proceeds under the three sale contracts, being $4,870,223.34 was paid to Suncorp and into the Group’s Credit Facility on 13 August 2010 to reduce the overall amount owing by the Group”.

26    The sale of the Charles Street Properties had to be consented to by Suncorp given the terms of the Suncorp Facility, the guarantee given by CAPL, the Forbearance Deed and the mortgage over the Charles Street Properties forming part of the securities for the Suncorp Facility, not in either case as a security for any loan to CAPL by Demian Investments as later assigned to Assignee. Suncorp was indeed able to dictate what occurred with the sale proceeds. The consent to the sale was given expressly on the basis that the cumulative net proceeds of sale were required to be applied, and were on 13 August 2010 directly applied, to the Demian Group’s Suncorp Facility.

27    Against this background, the primary judge considered that there could be but one outcome in law. The payment of an undissected lump sum by CAPL, one of the guarantors of the Suncorp Facility, in the reduction of overall indebtedness of the borrower under that facility, West Apartments was properly characterised for the purposes of s 8-1 of the ITAA 1997 as an affair of capital.

28    The primary judge considered that this outcome was dictated by the application on the facts of observations earlier made in this Court concerning payments under guarantees. Her Honour expressly cited the following passage from the judgment of the Full Court in Federal Commissioner of Taxation v Email Ltd (1999) 42 ATR 698; [1999] FCA 1177 at 708 [45]:

Generally, although not invariably, money paid by a taxpayer pursuant to guarantees the taxpayer has given has been held to be on capital account, notwithstanding that the guarantee is given in the course of some business activity of the taxpayer. A typical example is the recent decision of Hely J in Bell & Moir Corp Pty Ltd v Commissioner of Taxation (unreported) [1999] FCA 1009 which refers to a number of decisions of Taxation Boards of Review which have so held, but cf Commissioners of Inland Revenue v Huntley & Palmers Ltd (1928) 12 TC 1209. We do not think it desirable in the present case to enter into a discussion of the circumstances where the occasion for the giving of a guarantee will result in moneys paid under it being on revenue account.

29    A distinction which CAPL sought to draw before the primary judge, which was repeated before us on the appeal, was that, unlike in Email and other such guarantee cases, it was not a “true guarantor” but rather a “true borrower”.

30    Acceptance of that proposition was an essential plank in the claim for a deduction by CAPL, because CAPL relied upon what the primary judge described as the “refinancing principle”. The essence of that principle is found in the following explanation offered by Hill J, Jenkinson J agreeing, in Federal Commissioner of Taxation v Roberts; Federal Commissioner of Taxation v Smith (1992) 37 FCR 246, at 255 and 257 with reference to the earlier analogue of s 8-1 of the ITAA 1997 namely, s 51(1) of the ITAA 1936:

The mere act of borrowing money, burdened with the obligation to pay interest, does not of itself gain or produce assessable income. The amount borrowed is not assessable income. What operates to gain or produce assessable income is the manner in which those moneys are used, so that the necessary connection between the outgoing for interest and the activities which more directly gain or produce assessable income will be found, in the ordinary case, in the use to which the borrowed funds are put. That is not to say that there may not be cases where motivation or subjective purpose will play a part in the question of characterisation. …

…

In principle, such a case is no different from the borrowing from one bank to repay working capital originally borrowed from another; the character of the refinancing takes on the same character as the original borrowing and gives to the interest incurred the character of a working expense. Both these cases would equally satisfy the second limb of s 51(1). …

31    CAPL’s argument was that its original borrowing of working capital from St George Bank to fund the development of, and related derivation of assessable income from, the Charles Street Properties had been refinanced by an intra-group borrowing sourced in the Suncorp Facility and used to pay out its liability to St George Bank. The new intra-group borrowing, so the argument went, took on the same character as the original borrowing such that, upon the sale of the Charles Street Properties and remission of the proceeds to Suncorp, that should be treated as a repayment of the principal and interest it owed under the intra-group refinancing.

32    The best way of dealing with the merits, if any, of CAPL’s argument is to test it against first principles in relation to the meaning and effect of s 8-1 of the ITAA 1997.

33    The root authority for determining whether an outlay qualifies as a deduction under s 8-1 or is not allowable, because it is an outgoing of capital or of a capital nature, is generally considered to be the judgment of Dixon J (as his Honour then was) in Sun Newspapers Ltd and Associated Newspapers Ltd v Federal Commissioner of Taxation (1938) 61 CLR 337. His Honour there referred to three indicators of deductibility. This exposition and those indicators were later identified and expressly approved in a unanimous joint judgment of the High Court in Mount Isa Mines Ltd v Federal Commissioner of Taxation (1992) 176 CLR 141 at 147:

… (1) the character of the advantage sought and, in this respect, its lasting qualities and recurrence may play a part; (2) the manner in which the advantage is to be used, relied upon or enjoyed and, in this respect as well, recurrence may play a part; and (3) the means adopted to obtain the advantage, that is, whether a periodical reward or outlay is provided to cover its use or enjoyment for periods commensurate with the payment or whether a final provision or payment is made so as to secure future use or enjoyment.

Federal Commissioner of Taxation v Sharpcan Pty Ltd (2019) 269 CLR 370 at [18] – [24] per Kiefel CJ, Bell, Gageler, Nettle and Gordon JJ offers a recent illustration that this understanding of s 8-1 of the ITAA 1997 continues to command the approval of the High Court.

34    Also relevant is this observation made in GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124 at 137, with reference to Sun Newspapers:

The character of expenditure is ordinarily determined by reference to the nature of the asset acquired or the liability discharged by the making of the expenditure, for the character of the advantage sought by the making of the expenditure is the chief, if not the critical, factor in determining the character of what is paid.

[Emphasis added]

35    What then is the character of the advantage sought or the liability discharged by CAPL?

36    The facts found include that by the time of the sale of the Charles Street Properties, the borrower, West Apartments, was in default under the Suncorp Facility. Suncorp was applying pressure to the Demian Group to reduce its West Apartment’s indebtedness under that facility. One of the securities Suncorp held for the facility was the mortgage over the Charles Street Properties; another was a guarantee of the indebtedness of West Apartments under the facility by CAPL. Contrary to a submission made by CAPL it really is immaterial in terms of characterisation whether Suncorp had or had not made a formal demand of it under the guarantee. In relation to CAPL, the character of the advantage sought by it, by the sale of the Charles Street Properties and the remission of the net proceeds to Suncorp, was the forestalling of any action to enforce the guarantee, or for Suncorp to take possession of and sell as mortgagee the Charles Street Properties. Further, in terms of liabilities discharged, the payment of the net sale proceeds to Suncorp resulted in the discharge of the mortgage security over the Charles Street Properties and in the reduction accordingly of CAPL’s potential liability as guarantor in respect of the Suncorp Facility. These advantages for CAPL mean that the whole of the payment made was either an outgoing of capital or of a capital nature (or both). In relation to Suncorp, and that is the entity to which the net sale proceeds were paid, CAPL was not a borrower of any description; it was a guarantor and mortgagor.

37    Correctly understood, the outcome in Email is but an example on particular facts of a characterisation of the expenditure by reference to the liability discharged. But there is no general principle that payments under guarantees are always expenditures of capital or of a capital nature. We respectfully agree with this observation made by Hely J in Bell & Moir Corp Pty Ltd v Federal Commissioner of Taxation (1999) 99 ATC 4738; [1999] FCA 1009, at [30], which preceded an analysis by him of various guarantee cases:

The fact that the liability in question arose as a result of the giving of a guarantee cannot be determinative of the character of the payments made under it, although the fact that the liability arose in that way may be relevant to the third of the factors identified by Dixon J in Sun Newspapers.

38    Jennings v Barfield & Barfield [1962] 1 WLR 997; (1962) 40 TC 365 offers a useful illustration of why there can be no general principle that payments under guarantees can never be on revenue account. The taxpayer was a firm of solicitors. The facts of that case disclosed that it had been the taxpayers’ practice for 30 years to guarantee loans for a client during a transaction until completion. In accordance with this practice, a guarantee was signed in respect of a client’s overdraft used to fund a property purchase in the belief that the overdraft would soon be repaid. The client concerned went bankrupt such that the lender called on the firm to make good under the guarantee the overdraft deficiency. The firm then claimed the amount it paid as a deduction. The claim was allowed by the Inland Revenue Commissioners with an appeal by the Crown being dismissed by Pennycuick J. The giving of guarantees and the related contingency of being called on to make a payment thereunder was an ordinary incident of the business model adopted by this particular firm. Hence the payment was on revenue account.

39    Overarchingly however, conceiving the question of whether a payment under a guarantee to be one of determining whether it falls in or is an exception to some “guarantee principle” is apt to distract from the application of the text of s 8-1 of the ITAA 1997 as explained in Sun Newspapers and later authorities such as those we have cited.

40    CAPL was always a “true guarantor” (and mortgagor for that matter), not a “true borrower”. That said, it is possible to find support for the proposition that, where a guarantor makes good under a guarantee the liability of a tenant for rent or of a borrower for interest, the resultant payment should still be characterised as rent or, as the case may be, interest, In re Hawkins, deceased [1972] Ch 714, at 728, although as Megarry J observed (ibid), neither side in that case explored the fiscal consequence of such a payment. In re Hawkins was followed and applied by Vinelott J in In re Amalgamated Investment and Property Co Ltd [1985] Ch 349 in which, at 391, his Lordship stated:

If the obligation is to pay a sum of principal which includes capitalised interest the loss suffered by the creditor for the breach of the obligation will stem from the failure of the principal debtor to pay a sum which includes interest and the damages recovered in respect of that loss will similarly include compensation for the loss suffered by the creditor from the failure of the principal debtor to meet his obligation to pay a sum representing capitalised interest.

41    However, even accepting, on the basis of these authorities, that the undissected lump sum paid to Suncorp by CAPL may have included capitalised interest, and that to this extent it could be characterised as a payment of interest, the liability being discharged or reduced was the liability of West Apartments under the Suncorp Facility not that of CAPL under the loan to it as assigned to Assignee. CAPL incurred the expenditure but any interest liability discharged was that of West Apartments to Suncorp. The character of the advantage obtained by CAPL remains that of reducing the extent of its overall liability as a guarantor of the Suncorp Facility and of forestalling a sale of the Charles Street Properties by Suncorp as mortgagee in possession.

42    At a factual level, CAPL faced an insurmountable difficulty in bringing its claim within the “refinancing principle”. As at August 2010, it was a borrower but the relevant lender was, by assignment, Assignee, not Suncorp. As between CAPL and Assignee, the Tribunal found that CAPL was “only liable to pay as much as it could” (Tribunal reasons, at [133]). On the facts it found, the Tribunal was correct to characterise the loan made to CAPL and assigned to Assignee as, in effect, a limited recourse loan (Tribunal reasons, at [131]). That being so, and as the Commissioner submitted, after CAPL made the payment of $4,870,223.34, there was nothing left to pay to Assignee. Yet further, the flow of funds was not from CAPL to Assignee (to repay principal of $3 million and interest of $1,870,223.34) to West Apartments and then to Suncorp. Contrary to CAPL’s submission, there was no “nexus” between the payment of the net proceeds to Suncorp and the original borrowing from St George Bank by CAPL. Suncorp, which was able to, and did, dictate the flow of funds upon the sale of the Charles Street Properties, required the net proceeds to be paid directly to it by CAPL. And they were so paid, and paid in reduction of an overall liability of West Apartments to Suncorp.

43    The result is that the appeal must be dismissed, with costs.

Associate:    

Dated:    11 December 2025