Federal Commissioner of Taxation v. Bivona Pty. Limited
90 ATC 4168
Full Federal Court
Judgment date: Judgment handed down 22 March 1990.
Bowen C.J., Lockhart and Einfeld JJ.
The question in this case is whether the principal business of the respondent, Bivona Pty. Limited, in the year of income ended 30 June 1982 consisted of the lending of money. If it did, then interest derived by it on certain loans made by it constitute ``income from personal exertion'' as defined in sec. 6(1) of the Income Tax Assessment Act 1936 (``the Act''); if it did not, the interest is ``income from property'' as defined in the same section. The significance of the distinction in the 1982 year of income is that there were different retention rates for private companies applicable to income from property and income from personal exertion which affected the calculation of the retention allowance under sec. 105B of the Act. The rate
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applicable to income from personal exertion was more beneficial to taxpayers.
The respondent sought to have the interest derived by it classified as income from personal exertion, but the Commissioner assessed the appellant to Div. 7 tax on the basis that the interest was income from property. In a reference to the Administrative Appeals Tribunal (``the Tribunal'') of the disallowance by the Commissioner of the respondent's objection the Tribunal found that the respondent's principal business consisted of the lending of money and upheld its objection [reported at 87 ATC 808]. The Commissioner appealed to this Court and the appeal was heard by a single Judge (Burchett J.) who upheld the Tribunal's findings and dismissed the appeal [reported at 89 ATC 4183]. The Commissioner now appeals to the Full Court of this Court from his Honour's judgment.
The appeal from the Tribunal to the Federal Court lies only on a question of law (sec. 44(1) of the Administrative Appeals Tribunal Act 1975). The question of law in this case identified by Burchett J., correctly in our view, was whether the Tribunal erred in law in finding that the respondent's principal business consisted of the lending of money.
The relevant provisions of the Act are the definitions, so far as material, of the expressions ``income from personal exertion'' and ``income from property'', each contained in the definition section of the Act, sec. 6(1), which defines the expressions as follows:
```income from personal exertion' or `income derived from personal exertion' means income consisting of earnings, salaries, wages, commissions, fees... the proceeds of any business carried on by the taxpayer..., but does not include -
- (a) interest, unless the taxpayer's principal business consists of the lending of money, or unless the interest is received in respect of a debt due to the taxpayer for goods supplied or services rendered by him in the course of his business; or
- (b) rents or dividends;
`income from property' or `income derived from property' means all income not being income from personal exertion;''
Whether the respondent's ``principal business consists of the lending of money'' within the meaning of the definition of ``income from personal exertion'' is a mixed question of law and fact. Whether the Act uses the expression ``... the taxpayer's principal business consists of the lending of money'' in a sense different to that which it has in ordinary speech is a question of law. If this question is answered in the negative, as in our view it should be, then the determination of what Kitto J. described as ``the common understanding of the words'' is a question of fact: see
N.S.W. Associated Blue-Metal Quarries Ltd. v. F.C. of T. (1956) 94 C.L.R. 509 per Kitto J. at pp. 511-512; and cited with approval in
Hope v. The Council of the City of Bathurst 80 ATC 4386 at pp. 4389-4390; (1980) 144 C.L.R. 1 per Mason J. at pp. 7-8, with whose reasons for judgment the other members of the High Court agreed. Kitto J. went on to say in the Associated Blue-Metal Quarries case at p. 512, again in a passage approved by Mason J. in the reference cited above (at p. 4389):
``The next question must be whether the material before the Court reasonably admits of different conclusions as to whether the appellant's operations fall within the ordinary meaning of the words as so determined; and that is a question of law... If different conclusions are reasonably possible, it is necessary to decide which is the correct conclusion; and that is a question of fact...''
The question whether the evidence before the Tribunal ``reasonably admits of different conclusions'' as to whether the respondent's activities fall within the ordinary meaning of the words ``... the taxpayer's principal business consists of the lending of money'' is a question of law; and it is the question on which the present case turns, as it did in Hope v. The Council of the City of Bathurst: see per Mason J. at 80 ATC pp. 4390-4391; 144 C.L.R. 1 at pp. 8-9.
We shall state the facts as found by the Tribunal which are material for present purposes. Companies within a group, the holding company of which is Noel F. Mitchell Pty. Ltd., wished to borrow moneys from outside Australia. Negotiations with the overseas lender were conducted on behalf of the relevant member or members of the group
90 ATC 4171
and it was originally intended that the loan be made to the holding company, but later it was decided that a company should be incorporated in the A.C.T. to be the borrower from the overseas lender. The evidence does not show why this decision was made, but the selection of the A.C.T. as the place of incorporation may have been prompted by perceived stamp duty advantages which then existed in certain circumstances where companies were incorporated there. Whatever the reason, the respondent was incorporated in the A.C.T. on 17 June 1981. The intention at the time was that once the respondent had borrowed the money from the overseas lender it would, amongst other things, lend moneys to another company or other companies in the group. It was not until August 1981 that the loan was in fact made by the overseas lender to the respondent. The loan was raised in Geneva, Switzerland, in Swiss francs and the lender was European Asian Bank of Singapore. The interest rate payable by the respondent to the overseas lender was to be assessed twice yearly by reference to the ```interbank' offered rate for Swiss francs... quoted in Singapore'' at particular times. The amount of the loan was $4m. and its terms were recorded in writing, the agreement being dated 13 August 1981. The parties to the agreement were the overseas lender, the respondent as borrower and other companies within the group as guarantors which supported their covenants by granting mortgage of real estate in favour of the lender.
It is not very clear from the evidence what the respondent did with the $4m. after it received it from the overseas lender, but it appears that on the day it received the moneys it lent $3,289,961 of the $4m. to the holding company with interest. The respondent deposited the balance of the moneys with Australian United Corporation (a merchant bank associated with the Commonwealth Bank of Australia) pending the making of subsequent advances within the group. Once the holding company received the moneys from the respondent it advanced them to certain of its subsidiaries which were used by them in the carrying on of their respective businesses. They appear to have been engaged in the development of caravan parks and shopping centres in the Muswellbrook-Scone area of N.S.W. The respondent invested some of the moneys received from the overseas lender in the purchase of a block of partly equipped and furnished flats during the 1982 year of income.
Some months after the loan was made by the overseas lender to the respondent the loan was restructured within the group of which the respondent was a member in a way which is not at all clear from the evidence, but which the Tribunal described in these terms (at p. 811):
``At later dates, by a novation, the loans within the group were reorganised so that instead of one company within the group being liable to borrower [the respondent] for the whole of the moneys borrowed and interest thereon, individual companies in the group became liable in varying amounts for both principal and interest. Later still the available balance of the original $4,000,000 was advanced on loan to individual borrowers within the group.''
By deed dated 8 July 1982 a second loan was made by the same overseas lender to the respondent in Swiss francs of an amount equivalent to $A5m., but this was in the year of income following the year with which this case is concerned. This second loan was also supported by guarantees from other members of the group. The Tribunal found that the $5m. was ``on-lent'' within the group at interest.
The respondent has an issued and paid-up capital of $2. One share is held by the holding company and the other by Mr N.F. Mitchell who holds his share as nominee for the holding company.
The memorandum of association of the respondent is relevant. One of the objects stated in the objects clause is in these terms:
``To carry on any of the following business:
- (ii) Brokers insurance real estate land and mercantile agents financiers moneylenders and factors.
- (iii) Investors and dealers in all kinds of securities.''
During the 1982 year of income the gross income of the respondent was $478,691.27 comprising $432,615.63 interest and rents from the flats of $46,075.64. Eighty-three per cent of the gross income represented interest received by the respondent from the borrower or borrowers within the group, 7.4% represented
90 ATC 4172
interest from ``unrelated corporations'', presumably Australian United Corporation, and 9.6% was rent from the flats. Interest paid by the respondent on the moneys borrowed overseas was $455,567.24. There was a substantial loss shown in the respondent's profit and loss statement for the 1982 year after taking into account an unrealised exchange loss, but the respondent accepted later that the exchange loss was not deductible for income tax purposes. The respondent's return showed a taxable income of $6,167.08. The details furnished by the respondent to the Commissioner showed that the amount invested in real estate represented 21.85% of the total moneys borrowed by the respondent from the overseas lender. On this basis the interest paid by the respondent was apportioned by the respondent as to $99,541.44 as an expense against income from rents and as to $356,025.80 as an expense against income from interest, thus showing a surplus in respect of loans and a loss in respect of the letting of property.
The Tribunal analysed the return obtained from the investments, as revealed by the accounts, and pointed out that the relatively small real estate investment returned 5.3% in the period while the interest received on moneys lent returned 13%. The learned primary Judge was of the view that it was 13.8%. His Honour noted that, although the Tribunal did not expressly advert to the fact, the interest paid in respect of the borrowing of $4m. by which the activities were funded was just under 11.4% for the period which was not quite one year.
The Tribunal found that the lending of money by the respondent was the principal source of its assessable income. The Tribunal considered whether the respondent's lending of money was a ``business'' and whether it could be regarded as its ``principal business'' within the meaning of the definition of ``income from personal exertion'' in sec. 6(1). The Tribunal referred to the respondent's position as a separate legal entity serving the needs of other companies within the group, considered the scale and nature of the respondent's activities, and applied the test expounded by Dixon J. in
Commercial Banking Co. of Sydney Ltd. v. F.C. of T. (1950) 81 C.L.R. 263 at pp. 303-304. The Tribunal concluded that the respondent's principal business consisted of the lending of money. The primary Judge analysed the findings of the Tribunal and the path by which they were reached and concluded that the Tribunal was correct.
It is impossible to define fully the precise meaning of the words in sec. 6(1) of the Act: ``the taxpayer's principal business consists of the lending of money''. Some help is given by the moneylending legislation of Australia, New Zealand and the United Kingdom and the decisions of the courts with respect to the definition of a ``moneylender'' when considering the expression ``the taxpayer's principal business consists of the lending of money'' in sec. 6(1); but care must be exercised because the relevant expressions in the moneylending legislation and sec. 6(1) of the Act are not the same and the aims and purposes of the legislation are different. The basic aim of legislation dealing with moneylending is to regulate the activities of moneylenders to prevent injustice to borrowers and to limit the activity of the kind of moneylender described in
Gordon v. Street (1899) 2 K.B. 641 by A.L. Smith L.J. at p. 648 as the ``extortionate and usurious money-lender with about a gross of aliases and the hottest and bitterest of creditors''. Section 6(1) is directed to the definition of income from personal exertion for income tax purposes. With these reservations in mind the cases under the Moneylenders Acts furnish some guide. Webb J. said that they were helpful in
X v. F.C. of T. (1939) 1 A.I.T.R. 486 which concerned in all material respects the same definition of ``income from personal exertion'' as appears in sec. 6(1), though it then appeared in sec. 4 of the Act; so did Bowen C.J. (with whose reasons for judgment Jenkinson J. agreed) in
F.C. of T. v. Marshall and Brougham Pty. Ltd. 87 ATC 4522 at pp. 4528-4529; (1987) 17 F.C.R. 541 at p. 549.
Speaking generally, to find that a ``taxpayer's principal business consists of the lending of money'' in a year of income suggests a degree of system and continuity or repetition in the conduct of a commercial activity. In
Edgelow v. MacElwee (1918) 1 K.B. 205 McCardie J. considered the definition of ``moneylender'' in the definition section of the English Money-lenders Act 1900. His Lordship said at p. 206, in a passage which has been often cited:
90 ATC 4173
``A man does not become a money-lender by reason of occasional loans to relations, friends, or acquaintances, whether interest be charged or not. Charity and kindliness are not the bases of usury. Nor does a man become a money-lender merely because he may upon one or several isolated occasions lend money to a stranger. There must be more than occasional and disconnected loans. There must be a business of money-lending, and the word `business' imports the notion of system, repetition and continuity... The line of demarcation cannot be defined with closeness or indicated by any specific formula. Each case must depend on its peculiar features. It is ever a question of degree.''
Hyde v. Sullivan & Ors (1956) S.R. (N.S.W.) 113 Street C.J., Roper C.J. in Eq. and Herron J. said at p. 119, with respect to the definition of ``money-lender'' in sec. 3(1) of the Money-Lenders and Infants Loans Act 1941 (N.S.W.):
``Speaking generally, the phrase `to carry on business' means to conduct some form of commercial enterprise, systematically and regularly, with a view to profit, and implicit in this idea are the features of continuity and system.''
Kirkwood v. Gadd (1910) A.C. 422, especially per Lord Loreburn L.C. at p. 423 and Lord Atkinson at p. 431. Each member of the House of Lords stressed, however, that the inquiry was one of fact in each case.
The necessity for the repetition of acts or continuity is perhaps clearer from the phrase ``carries on business'' than the word ``business'' standing alone in a definition section (see the judgment of Mason J. in Hope v. The Council of the City of Bathurst at 80 ATC 4386 at p. 4390; 144 C.L.R. 1 at p. 8); but for a business to exist there must be activity of the body concerned to constitute a commercial enterprise and generally one must look for system, regularity or recurrence.
Is it possible to carry on a business of lending money with only one borrower or a limited number of borrowers? In
Litchfield v. Dreyfus (1906) I K.B. 584 Farwell J., when considering the question of what amounts to carrying on a moneylending business for the purposes of the English Money-lenders Act 1900 said at p. 589:
``Speaking generally, a man who carries on a money-lending business is one who is ready and willing to lend to all and sundry, provided that they are from his point of view eligible.''
This dictum has been cited since in many cases with approval: see, for example,
Austin Distributors Ltd. v. A.H. Paterson Car Sales Pty. Ltd. (1941) 65 C.L.R. 118 per Williams J. at p. 128;
Modern Permanent Building And Investment Society (in liq.) v. F.C. of T. (1958) 98 C.L.R. 187 per Williams J. at pp. 191-192. But in Edgelow v. MacElwee (above) McCardie J., after citing Farwell J.'s dictum, said at p. 207 that it ``may require future consideration''.
Hungier v. Grace & Anor (1972) 127 C.L.R. 210, which concerned the definition of ``money lender'' in sec. 3(1) of the Money Lenders Act 1958 (Vic.), Barwick C.J. said at p. 219: ``It is, of course, possible to carry on the business of a moneylender with only one borrower''; but Walsh J. said at p. 224:
``The fact that loans were made to one borrower only is not decisive against a finding that the making of them constituted the carrying on of a business of money-lending. But I think that it provides a very strong indication against that finding when it is accompanied by the circumstance that it was not the lender who stipulated the terms for repayment of the loans.''
The key to the passage from Farwell J.'s judgment lies in the introductory words ``speaking generally...''. Whether Farwell J.'s statement is consistent with modern authority is not a matter for us to consider because it is used in the context of moneylending legislation, whereas a different inquiry is involved in this case.
In the Commercial Banking Co. case the High Court considered the very definition with which the present case is concerned and Dixon J. said at p. 304:
``But the plain object of this particular provision of the definition is to allow a taxpayer the benefit of the rate for personal exertion where in truth the obtaining of the interest is the substantial purpose of his business, if the interest is obtained by the lending of money.''
As mentioned earlier this was the test applied by the Tribunal.
90 ATC 4174
The essence of the submission by counsel for the Commissioner was that the only conclusion reasonably open on the material before the Tribunal was that the respondent's activities in the 1982 year of income could not be characterised as its principal business consisting of the lending of money either because it was not a business at all and the respondent was a mere ``conduit'' for the borrowing of money and ``on-lending'' it to members of the same group of companies or because it was an ``investment'' business. It was argued that the Tribunal misapplied the tests expounded by Dixon J. in the Commercial Banking Co. case.
It is true that members of the group of companies to which the respondent belonged decided to borrow money from an overseas lender, that the respondent was incorporated as the vehicle for this borrowing and that immediately after borrowing the moneys it lent most of them to the holding company for use by the operating subsidiaries. But the fact is that the respondent did enter into the borrowing transaction with the overseas lender, borrowed a substantial sum of money at interest, the bulk of which it then lent to its holding company, again at interest. There was no suggestion that any of the interest rates, either on moneys borrowed or lent by the respondent, were not commercial rates. The loans by the respondent to the holding company yielded a profit to the respondent, if one puts to one side the loss realised on foreign exchange transactions. The primary Judge found that this loss did not prevent the Tribunal drawing ``the natural inference'' that the operations so conducted by the respondent were business operations intended to yield a profit and that this was sufficient to sustain the finding of the Tribunal. We agree with his Honour's statement. As mentioned earlier, 83% of the income received by the respondent represented interest on the loans by the respondent within the group, 7.4% represented interest from Australia United Corporation, leaving only 9.6% from sources other than interest, namely, rents from the block of flats. The return received by the respondent from moneys lent by it amounted to 13% (or perhaps 13.8%) and the interest paid in respect of the borrowing of the $4m. was a little under 11.4% for the relevant period.
The respondent's activities consisted principally of the borrowing and lending of money. By far the greatest proportion of its income consisted of interest on moneys lent and its largest outgoing was interest on moneys borrowed from overseas. There was no suggestion that any of the relevant transactions were shams. Even if it were right to describe the role of the respondent in its activities of lending money, as counsel for the Commissioner did, as a ``conduit'' for its parent company or other members of the group, that begs, not answers, the question whether the activities of the respondent are correctly characterised as its principal business consisting of the lending of money.
It is not correct to say that the only conclusion reasonably open on the material before the Tribunal was that the respondent's activities either did not constitute a business at all or that, if they did, it was a business of ``investment'' not a business consisting of the lending of money.
Nor, however, would the converse be correct that the evidence before the Tribunal reasonably admits only of the conclusion that the respondent's principal business consisted of the lending of money. The facts mentioned earlier could, in our view, reasonably support the conclusion either that the lending of money or ``investment'' constituted the respondent's principal business. But whether the respondent's principal business consisted of the lending of money or of some other business such as ``investment'' is a question of fact which the Tribunal resolved in favour of the respondent. Plainly there was evidence before the Tribunal to support this conclusion. Thus, it could not be said that there was no evidence upon which the Tribunal could reasonably have come to the conclusion which it did.
We would dismiss the appeal with costs.