The Commissioner of Taxation has lost an appeal against a decision at first instance that 20 News Corp group companies were entitled to deductions for over $2bn in foreign exchange losses. The foreign exchange losses arose from the repayment of foreign currency loans following a decline in the value of the Australian dollar at the time under intercorporate loans.
It should be noted that the claims for deductions were made under the former Division 3B. This has now been replaced by a new regime in relation to currency gains and losses in Division 775. In addition the tax consolidation regime has since come into effect.
There was effectively an exchange of liabilities between two companies in the group through the issue of promissory notes. One company (first company) issued to another company (second company) two interest-free demand promissory notes, one in Australian dollars and the other in US dollars in satisfaction of an Australian dollar liability of the first company to the second company. The second company then handed the US dollar promissory note back to the first company in satisfaction of the whole of the second company’s US dollar debt to the first company. The US dollar promissory note was then discharged by operation of law without funds changing hands. In effect the second company had converted an amount of debt in Australian dollars owed by the first company to the second company into a US dollar discharge of the second company’s US dollar debt to the first company which amounted to conversion of a liability in one currency into a liability in another currency without any exchange of cash or money.
The Commissioner argued that there was no currency loss incurred because there was no physical exchange of currency.
The Court held that the former Division 3B did not require there to have been a physical exchange of currency in order for the loss to have been incurred. In particular, the Full Court upheld the decision at first instance that, in order for a deductible foreign exchange loss to arise, it did not matter if a taxpayer funds the discharge of their existing foreign currency debt by supplying a promissory note obtained in return for an increase in its Australian currency borrowings rather than borrowing Australian money as such and using that money to discharge the debt. The Full Court said that what mattered was that the taxpayer had used an asset denominated in Australian dollars (the debt owing to it by another company) to obtain a promissory note which the creditor was prepared to accept in discharge of the taxpayer’s US dollar debt.
The Full Court also held that if because of an adverse movement in the exchange rate, the relevant sum was more than the Australian dollar benefit which had been originally derived from obtaining the funds on loan, the excess was a relevant deductible loss.