ATO Loses BHP Tax Case

by Mary Swire, Tax-News.com, Hong Kong

22 March 2010

The Australian Taxation Office (ATO) has lost its appeal in the Federal Court, in which it had been claimed that more than AUD2.1bn (USD2bn) of bad debts write-offs arising from two loans made to related companies by BHP Billiton Finance (Finance), the BHP group’s finance company, could not be claimed as deductions against corporate income tax.

The claims go back to 2000, when BHP wrote off Finance’s AUD1.8bn loan to BHP Billiton Direct Reduced Iron Pty Ltd, a failed attempt to produce iron briquettes in Western Australia, and an AUD0.3bn loan to Titanium Minerals Pty Limited, a titanium venture in New South Wales.

The ATO had argued that the bad debts could not be written off against tax by Finance as it was not carrying on the business of lending money and the relevant loans were not made in the ordinary course of its business.

However, the court found that, over an extended period, Finance not only borrowed and lent-on money on numerous occasions to a variety of entities at rates of interest (which the ATO did not suggest were less than commercial) but did so on loan terms stipulated by Finance and where the rates of interest payable on the money lent were significantly higher than the rates payable on the money borrowed, thereby generating a substantial profit.

The appeal judge concluded that “the submission that, in the face of this undisputed evidence, Finance was not, during the whole of this period, carrying on a business of lending money is, in my view, perverse.” He found that: “There is no error in the primary judge’s finding that, in the relevant years of income, Finance was carrying on a business of lending money and had been for many years.”

In addition, contrary to the ATO’s view, he also found that there was no error in the primary judge’s findings that both loans were made by Finance in the ordinary course of its business of lending money. For example, each loan had been made in accordance with Finance’s standard lending terms for inter-company loans; and “the loans were made using a practice and procedure that was entirely consistent with and similar to that adopted by Finance in respect of virtually all of its other loans and which had generated very large profits for Finance (and which the ATO taxed in its hands).”

Not only was the ATO’s appeal rejected, but the court also decided that it must pay BHP’s costs. There is, however, the possibility that the ATO may still make a further appeal; and it was said to be considering its position.

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