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Tax Telegraph, August Issue

CasesMessenger Press Proprietary Limited v Commissioner of Taxation [2012] FCA 756 (17 July 2012)

In a case involving numerous entities within the News Corporation Ltd group (News Group), the Federal Court has held that the entities were entitled to a deduction of approximately $2 billion in the 2001 and 2002 income years for currency exchange losses. The currency exchange losses claimed by the taxpayers related to the repayment of intercompany loans by the Australian company, News Publishers Holdings Pty Ltd (NPHP) of US$1bn in the 2001 income year and a repayment of the balance of its US dollar indebtedness in the 2002 income year.  The intercompany loans had been entered into by NPHP during 1991 as part of a restructure of the News Group to alleviate its “severe liquidity crisis”. Broadly, in order to reduce the News Group’s foreign related party debt, NPHP borrowed US currency from News Publishers Investment Pty Ltd (NPIP) to reduce its debt to other entities within the group.  These loans were then discharged in the 2001 and 2002 income years by NPHP by way of the delivery of promissory notes.

The principal issue for the Federal Court was whether the former Division 3B of Part III (Division 3B) of the Income Tax Assessment Act 1936 (ITAA 1936), as it applied during the relevant years, was limited in its operation to losses which arose from exchanges of foreign and Australian ‘money’, or whether it was sufficiently broad to encompass losses arising from exchanges of liabilities denominated in foreign currency and Australian dollars. The Commissioner contended that Division 3B was concerned with gains or losses arising from exchanges of actual money or liabilities otherwise exhibiting the qualities of money, which did not include the discharge of a pre-existing book debt denominated in Australian dollars by the delivery of promissory notes denominated in foreign currencies which were never presented for payment, or the corresponding reverse transaction.

In rejecting the Commissioner’s argument, the Federal Court found that an exchange of actual ‘currency’ or ‘money’ was not necessary to satisfy Division 3B. Instead, Division 3B could be satisfied where losses arose from exchanges in liabilities denominated in a foreign currency for a liability denominated in Australian currency where neither liabilities otherwise qualified as ‘money’. In this case, the Court considered the delivery of a promissory note was “certainly an exchange of liabilities”. The Federal Court further found that the currency exchange losses were incurred under an ‘eligible contract’ and that the currency exchange losses were ‘of a capital nature’ as required under Division 3B. As such, the Federal Court held that each of the taxpayers were entitled to a deduction for transferred losses under section 36-17 of the Income Tax Assessment Act 1997 (ITAA 1997).

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