Australia: High Court Tax Win for Special Purpose Vehicles - Particularly Resources and Infrastructure Sectors: Limited Recourse Debt ‘Claw Back’ Provision - Div 243

Last Updated: 7 June 2011
Article by Jock McCormack, Louise Boyce and James Newnham

In a significant win for taxpayers, the High Court has held that the Commissioner could not assess BHP for capital allowances previously claimed after a debt owed by a special purpose project vehicle was written off. The Commissioner sought to argue that BHP was assessable because the original capital expenditure was never ultimately paid, as the loan was written off.

The Commissioner tried to argue that Division 243 applied as he considered the loan was "limited recourse" because the project was undertaken by a special purpose company, and funded by related party debt.

The High Court held that BHP should not be assessed as the debt financing was not "limited recourse" either legally or contractually at the time it was advanced.


Division 243 of the Income Tax Assessment Act operates to recoup capital allowance deductions (and effectively make adjustments to assessable income) where a capital asset is purchased using limited recourse debt financing, and that debt is not repaid in full. A limited recourse debt is one where the terms of the arrangement provide that the financier may have recourse only to specific assets of the debtor (or guarantor), being predominantly the assets acquired with the debt and the related cash flows from those assets.

The Commissioner had previously considered that finance provided to a special purpose vehicle, particularly from related parties, will be limited recourse debt on the basis that the rights are "capable of being limited" having regard to the assets of the debtor. BHP Billiton had claimed deductions for capital allowances in respect of an unsuccessful project which had subsequently been abandoned, and the loan facilities partially written off. The Commissioner tried to assess BHP for recouped capital allowances in respect of the unpaid portion of the loan. The amount of tax and penalties at issue was $540 million.

On 1 June 2011, the High Court in Commissioner of Taxation v BHP rejected the Commissioner's approach. It held that Division 243 would only apply if there are express contractual limits on the creditor's rights of recourse, or where those rights are "capable of being limited" at the time the loan arises; for example due to a particular arrangement, circumstance or conduct. Most importantly, the High Court said that "possibilities of what might happen if certain contingencies arose" or mere conjecture, including involving parent/subsidiary relationships, weren't sufficient to apply section 243-20(2).

That section provides that a debt will be limited recourse if it is reasonable to conclude that the rights of the creditor are capable of being limited having regard to the assets of the debtor, whether all of the assets of the debtor would be available to discharge the debt, and whether the debtor and creditor were dealing at arm's length.

The Commissioner tried to argue that there was the capacity for BHPB to change the contractual terms so that the financier's right to recover was limited to the specific debt funded acquired assets (because they were related parties). The court rejected this argument, and said that the section did not apply to possibilities for a limitation of the creditor's rights which may arise in the future, rather the power or capacity to limit the recourse should exist at the time of the inception of the loan.

The Court approved the Full Federal Court's concern that the ATO's interpretation would force companies to undertake projects in established companies putting other assets at risk. Edmonds J considered "That would place business in this country, particularly those involved in resources and infrastructure projects in a "tortuous straight jacket"..." 1


The decision is a significant win for taxpayers, especially those financing projects through special purpose vehicles in the resources and infrastructure sectors. However, it highlights the importance of carefully considering the terms of loan facilities to ensure they are not considered to be "limited recourse". If a loan is considered to be "limited recourse", capital allowance deductions may be recouped if part or all of the debt is not fully repaid.

Finally, this decision will likely have favourable consequences for the application and interpretation of the limited recourse debt test in section 250-115 and determining who has the predominant economic interest in the relevant assets in accordance Division 250 (tax preferred / exempt asset financing provision).

1 Federal Commissioner of Taxation v BHP Billiton Finance Ltd [2010] FCAFC 25, paragraph 10

2 All section references are to the Income tax Assessment Act 1997

This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this publication.

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