FEDERAL COURT OF AUSTRALIA

Ashwick (Qld) No 127 Pty Ltd v Commissioner of Taxation [2008] FCA 853

ASHWICK (QLD) NO 127 PTY LTD & ORS v THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

VID 861 OF 2006

and those matters listed in the attached Schedule

RYAN J

4 june 2008

MELBOURNE

and those matters listed in the attached Schedule

REASONS FOR RULING ON ADMISSIBILITY

OF EXPERT EVIDENCE OF DR LANGE AND MR BARTLE

1                          The respondent, the Commissioner of Taxation (“the Commissioner”), has sought to introduce into evidence in these proceedings two affidavits by expert witnesses, Dr Helen Patricia Lange, and Mr James Bartle.  Dr Lange’s affidavit, sworn on 30 November 2007, exhibits as annexure A, a report of some 29 pages, together with appendices.  She has expertise in economics, econometrics, and business management, particularly financial management, and is currently the Dean, Business Management Programs, for Universitas 21 Global.  Objection has been taken by Counsel for the applicants to the admission into evidence of the whole and any part of each of Dr Lange’s report and Mr Bartle’s report.

2                          As I understand it, that evidence is directed to the issues of whether, at any time to which the taxation assessments in question relate, EFG Australia Pty Ltd carried on “a business of lending money,” and whether loans made to Elfic Pty Ltd (“ELFIC”) and EFG Securities Pty Ltd (“Securities”) were made in the ordinary course of such a business.  The phrase “business of lending moneys” to be found in s 25-35(1) of the Income Tax Assessment Act 1997 (Cth) (“the 1997 Assessment Act”) which provides;

‘You can deduct a debt (or part of a debt) that you write off as bad in the income year if –

… …

(b)       it is in respect of money that you lent in the ordinary course of your business of lending money.’

3                          The way in which the Commissioner seeks to use the expert evidence of Dr Lange and Mr Bartle is illustrated by this passage from the Commissioner’s written submissions;

‘21.      The applicants use labels, such as “treasury business” or “treasury activities” to describe the nature of EFGAs activities, and the Commissioner agrees that such expressions are commonly used to describe the types of business operation conducted by EFGA.  The use of a company or division within a corporate group to facilitate and manage the funding requirements of the group had started to become relatively common in Australia by the mid-1980s, and had substantial commercial benefits for the group as a whole if run properly.  Centralised borrowings and the on-lending of such funds to other companies within the corporate group was a key role of the corporate treasurer (report of Dr Helen Lange dated 30 November 2007, paragraphs 19, 25 and 26;  report A of James Bartle dated 18 February 2008, paragraphs 12 and 14.)  The functions that EFGA had been set up by FGL to perform were fairly standard for a corporate treasurer.’

4                          That suggests that the Commissioner relies on the expert evidence as a description of the typical activities of corporate treasuries during the latter half of the 1980s.  However, it is far from clear how a finding of whether the activities of Elders Finance Group Australia Ltd (“EFGA”) conformed with that type can bear on the ultimate question of whether it was engaged in a business of lending money.  As I put to Ms Davies SC for the Commissioner in the course of argument this morning, that expression in the relevant provisions of the Income Tax Assessment Act 1936 (Cth) (“the 1936 Assessment Act”) and the 1997 Assessment Act has a wide general application, capable of describing activities as diverse as those of a small pawnbroker with no treasury activities and those of a major national or international banking institution with a complex treasury, perhaps much more sophisticated and intricate than anything which the evidence suggests was engaged in or contemplated by EFGA.

5                          In these circumstances, I have concluded that the expert evidence is not relevant to the ultimate question of whether EFGA was engaged in “a business of lending money” within the meaning of the relevant provisions of the 1936 Assessment Act and the 1997 Assessment Act.  Dr Lange’s evidence was directed to answering nine questions posed to her in a letter of instructions from the Commissioner’s solicitor, dated 1 November 2007, and three supplementary questions posed in a further letter of 28 November 2007.  Those questions were;

‘1.        Did the expressions “treasury business” or “treasury activities” have an accepted or generally understood meaning in the financial services industry in the period from 1 July 1986 to 31 December 1989 (the relevant period)?

2.         If your answer to question (1) is yes:

(i)        explain what was meant by the description “treasury business” or “treasury activities”.  You should include an explanation of the role of a “treasury business” or “treasury activities” within an organisation;

(ii)       from a financial services industry perspective, would the activities which EFGA conducted through Finance Group Treasury, as described in the applicants’ evidence, be regarded as “a treasury business” or “treasury activities”?

3.         If, in your opinion, the activities which EFGA conducted through Finance Group Treasury, as described in the applicants’ evidence, would be regarded as “a treasury business” or “treasury activities”, explain from a financial services industry perspective:

(a)        the role and scope of EFGA’s treasury business and activities in:

(i)         the Finance Group;

(ii)       the Foster’s Group –

in relation to the five main groups or teams into which Finance Group Treasury was divided.

(b)        the objectives which Finance Group Treasury sought to achieve.

4.         Can you, from a financial services industry perspective, identify by reference to the applicants’ evidence the predominant role of Finance Group Treasury? If so, what was the predominant role in your opinion?

5.         Did the expression “profit centre” have an accepted or generally understood meaning in the financial services industry in the relevant period?

6.         If your answer to question 5 is yes,

(i)        explain what was meant by the description “profit centre”.  You should explain what differentiated a “profit centre” from something else;

(ii)       from a financial services industry perspective, would the activities conducted by EFGA through Finance Group Treasury, as described in the applicants’ evidence, be regarded as a “profit centre” or as something else?

(iii)      what activities of EFGA would cause it to be regarded as a profit centre?

(iv)      are there any activities that would fall outside the description of profit centre activities?  If so, how would they be classified?

7.         If, from a financial services industry perspective, the activities conducted by EFGA through Finance Group Treasury would be regarded as a “profit centre”:

(i)         how was “profit” measured or evaluated?

(ii)       can you express any opinion with regard to the applicant’s evidence, in respect of how the performance of Finance Group Treasury as a “profit centre” was measured or evaluated?

(iii)      in particular would the interest charge on the on-loans by EFGA to its subsidiaries, calculated at a margin on the applicable bank bill rate rather than the actual cost of funds to EFGA and the creditworthiness of the borrowing companies, have contributed to the measurement or evaluation of “profit” generated by the activities conducted by EFGA through Finance Group Treasury and if so how?

8.         In your opinion, in the relevant period what measures would a reasonably prudent company, carrying on treasury activities within a group of companies, have taken to manage its loans to external borrowers?

9.         In your opinion, in the relevant period, would a reasonably prudent company carrying on treasury activities within a group of companies, have applied the same measures to manage inter-company loans to its subsidiaries as it did to manage its loans to external borrowers?  If not, why not?’

6                          The supplementary questions were:

‘1)       In respect of the relevant period, why did corporate groups have centralised treasuries?

2)         With reference to the applicants’ evidence, explain from a financial services industry perspective the nature of Finance Group Treasury’s function within the Foster’s Group.

3)         How did Finance Group Treasury make its profits and what was the main way in which it could improve its profitability?’

7                          It will be noticed immediately that many of those questions are directed to matters of usage within the “financial services industry”, or as the framer of the questions chose to put it, “from a financial industry services perspective”.  However, neither Act erects either of those concepts as a criterion for the resolution of any relevant question.  Moreover, the tenor of the questions suggests that they were directed to eliciting an expert opinion as to the meaning of expressions like “treasury business,” “treasury activities” and “profit centre,” when used as technical terms by participants in the financial services industry.

8                          Evidence is receivable as to the meaning of a technical term, but the ultimate resolution of what the term connotes will be a question of law for the Court.  As Sir Frederick Jordan put it in Australian Gaslight Company v Valuer-General (1940) 40 SR NSW 126, at 137;

‘The question, what is the meaning of an ordinary English word or phrase as used in the statute, is one of fact, not of law.’

9                          This question is to be resolved by the relevant tribunal itself, by considering the word in its context with the assistance of dictionaries and other books, and not by expert evidence and further authority, although evidence is receivable as to the meaning of technical terms, and the meaning of a technical legal term is a question of law. 

10                        I accept, therefore, that if the Court were required to establish the meaning of an expression like “treasury business,” “treasury activities,” or “cost centre,” and those were concededly technical terms, the evidence of Dr Lange and Mr Bartle would be admissible as tending to assist in that task.  However, as presently advised, I am quite unable to see how the meaning of any of those expressions can bear on the resolution of any of the ultimate questions which arise for determination in this case. 

11                        Similar considerations apply to the questions (8) and (9) reproduced at [5] above on which Dr Lange was invited to express an opinion about whether certain measures would have been taken by a reasonably prudent company.  I do not perceive any prudence or lack of it by EFGA to be relevant to the resolution of any question of statutory construction, or to the application of the statute properly construed to the primary facts in this case.  In the course of discussion this morning it emerged as common ground that the activities of EFGA in the latter part of the 1980s were not unique, but were commonly engaged in by corporations of a similar size and structure.  To the extent that it was directed to that matter, which has now ceased to be in issue, if it ever was, the expert evidence is, for that additional reason, unnecessary.  Accordingly, I rule that the evidence of Dr Lange in response to the questions set out at [5] of these reasons and of Mr Bartle in Annexure A to his affidavit of 18 February 2008 responding to questions 1 to 9 of the same questions is not admissible and will not be received.

12                        After making the ruling noted at [11] above, I was referred to the further body of evidence contained in Annexure B to Mr Bartle’s affidavit of 18 February 2008.  That evidence was in response to the following ten further questions posed by the solicitor for the Commissioner by letter dated 13 December 2007;

‘1.        In relevant period what factors were relevant to:

1.1.      the decision on whether or not to lend to a corporate borrower?

1 2.      the setting of terms and conditions for a loan to a corporate borrower?

1.3.      the setting of the interest rate for a loan to a corporate borrower?

2.         What consideration did lenders give in the relevant period to the state of the borrower’s balance  sheet and the equity or shareholders’ funds available to enable losses to be absorbed?

3.         In relevant period was 'creditworthiness' a commonly understood concept in relation to corporate lending, and, if so, what did it mean?

3.1.      What practical significance did creditworthiness have in the context of corporate lending?

4.         In the relevant period was the term 'credit risk' commonly used in relation to corporate lending and, if so, how was it understood?

4.1       What was the significance of the assumption of the credit risk in respect of a loan to an independent company borrower?

4.2.      What was the significance of a party providing debt funding to a related party for the purpose of making loans to independent third parties but not assuming the credit risk in relation to the on lending to an independent third party?

5.         In the relevant period how did lenders take account of the risks:

5.1       In respect of making a loan to a company?

5.2.      In respect of building and managing a portfolio of loans to a range of companies?

5.3       In respect of the amount of debt funding it would provide to any one company?

6.         In the relevant period how was the risk of default or non-payment by a borrower taken into account:

6.1.      In deciding whether or not to lend to the borrower?

6.2.      In setting the interest rate?

6 3.      In setting loan terms and conditions?

7.         In the relevant period what risks were associated with the lending of funds surplus to the daily requirements of a company group in the short term money market:

7.1       If such lending was restricted to the top 500 global banks and prime corporations with a credit rating of AA or above, what were the risks? What were the returns on such lending?

8.         What was the significance of use of the 90 day bank bill in the setting of interest rates?

8.1       How was the 90 day bank bill rate used in the relevant period to calculate an interest rate at which a company could borrow?

9.         Would lenders calculate profit in the relevant period before or after provisioning for bad debts and doubtful debts? Why?

9.1.      How would such an approach compare with the approach of measuring the difference between earned and interest paid?

9.2       How does it compare with the statement of Gerald John van Wyngen (see Transcript at Tab 6) that funding profit was measured by the net interest margin plus/minus the profit/loss from hedging?

10.       How were overheads accounted for in the way lenders calculated profits in the period?’

13                        For reasons substantially similar to those for which I declined to admit the earlier evidence of Dr Lange and Mr Bartle in response to the original nine questions directed to each of them, I rule as inadmissible the evidence given by Mr Bartle in response to the ten further questions addressed to him.  It is accepted that all of the matters of industry practice of which Mr Bartle treats in his report are capable of being formulated as submissions on the evidence already admitted or the absence of probative evidence.  For that additional reason as well as those already outlined, I regard Mr Bartle’s additional evidence as unnecessary and, therefore, inadmissible. 

Associate:

Dated:              6 June 2008

SCHEDULE

VID 123 of 2007 Ashwick (Qld) No 127 Pty Ltd (ACN 010 577 456) v Commissioner of Taxation of the Commonwealth of Australia;

VID 124 of 2007 Ashwick (Qld) No 127 Pty Ltd (ACN 010 577 456) v Commissioner of Taxation of the Commonwealth of Australia;

VID 125 of 2007 Ashwick (Qld) No 127 Pty Ltd (ACN 010 577 456) v Commissioner of Taxation of the Commonwealth of Australia;

VID 126 of 2007 Nexday Pty Ltd (ACN 003 621 681)v Commissioner of Taxation of the Commonwealth of Australia;

VID 127 of 2007 EFG Investments Pty Ltd (ACN 006 169 955) v Commissioner of Taxation of the Commonwealth of Australia;

VID 128 of 2007 Amayana Pty Ltd (ACN 006 908 737) v Commissioner of Taxation of the Commonwealth of Australia;

VID 129/07 Fosters Group Ltd (ACN 007 620 886) v Commissioner of Taxation of the Commonwealth of Australia;

VID 130 of 2007 Elfic Pty Ltd (ACN 007 606 206) v Commissioner of Taxation of the Commonwealth of Australia;

VID 131 of 2007 EFG Treasury Pty Ltd (ACN 050 431 699) v Commissioner of Taxation of the Commonwealth of Australia;

VID 132 of 2007 EFG Australia Pty Ltd (ACN 006 357 035) v Commissioner of Taxation of the Commonwealth of Australia;

VID 133 of 2007 Elfic Pty Ltd (ACN 007 606 206) v Commissioner of Taxation of the Commonwealth of Australia;

VID 134 of 2007 Elfic Pty Ltd (ACN 007 606 206) v Commissioner of Taxation of the Commonwealth of Australia;

VID 135 of 2007 EFG Securities Pty Ltd (ACN 005 489 029) v Commissioner of Taxation of the Commonwealth of Australia.