Commissioner of Taxation v Visy Industries USA Pty Ltd (Australia)
28 January 2013
Posted by: SAIT Technical
The Full Federal Court of Australia delivered its judgment in the matter between Commissioner of Taxation v Visy Industries USA Pty Ltd.
Visy Industries USA Pty Ltd ("the taxpayer")was a member of the Pratt Group of companies whose business included waste collection, paper and cardboard manufacture, primary packaging and property and share investments. The taxpayer was the Australian holding company of the Pratt Group's overseas manufacturing division which operated in the United States.
The matter concerned whether an indemnity fee of $27.05 million paid by the taxpayer to a Pratt Group company was an allowable deduction in the 1999 income year under s 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997). The fee was for the taxpayer to be indemnified against any losses that it might incur under a foreign currency internal hedging arrangement with Pratt Finance Pty Ltd, another Pratt Group company.
In 1997 Pratt Finance borrowed USD $400 million from a syndicate of 18 US financial institutions by issuing bonds with maturity dates ranging from 15 to 20 years. Pratt Finance entered into external hedges to cover its foregin exchange risk as to USD $200 million and an internal hedge (the forward exchange contract) to cover the risk on the remaining USD $200 million of borrowings. The internal hedge, for which the taxpayer was not paid a fee , required it to deliver USD currency to Pratt Finance on dates in 2015, 2016 and 2017 at an exchange rate of 0.775. As the taxpayer was the holding company of Pratt group subsidiaries that conducted the operations in the US and held US dollar denominated assets, the internal hedge was said to equate to a 'natural hedge' against adverse movements in the USD/AUD exchange rate.
By the middle of 1998, the Australian dollar had fallen against the US dollar and the taxpayer, as a result of the forward exchange contract, had an unrealised loss of AUD 80 million. This raised issues about the ability of the taxpayer to meet the liability if it was called on to do so. The taxpayer did not have direct access to US dollars and the only way it could meet its liability would be to raise US debt itself or sell some of its US assets. At about the same time, the external auditors questioned the effectiveness of the forward exchange contract as an internal hedge. The internal hedge was important to Pratt Finance's ability to satisfy its borrowing covenants and avoid accounting exposures.
The main issue to decide was whether the taxpayer could claim a deduction for the indemnity fee paid to a related party in relation to a Forward Exchange Contract. The Australian Tax Office submitted thatit was not commercial or made with a view to profit.
Judgment - Federal Court
The Federal Court held that the indemnity fee was deductible.
Appeal to Full Federal Court
The Full Federal Court rejected the Commissioner's challenge to specific findings of secondary fact that underpinned the Federal Court's conclusion thatthe taxpayerentered into theFEC with a not insignificant purpose of profit-making.
The Full Federal Court found no error in the Federal Court's finding that a business activity may be carried on notwithstanding that the activity may be dependent, in part, on chance.
The Full Federal Court held that:
1. The appeal be dismissed.
2. The appellant pay the respondent's costs.
Please click here for the full judgment.
Please click here for a decisionimpact statement issued by the Australian Tax Office.