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.
DETAILS OF THE DECISION
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
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  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
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
The income tax treatment of any property lease incentive will vary, depending on the nature of the inducement provided.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).