Group Treasury May Deduct Bad Debts to Group Members

BHP Billiton Finance Limited v FCT [2009] FCA 276, (2009)72 ATR 746

Corporate treasury services were provided by the taxpayer to a group of related companies. The taxpayer sought to deduct as bad debts various loans to members of the group which it deemed to be irrecoverable. The Commisssioner challenged the write-off on several grounds including that the taxpayer, as a group treasury services provider, was not in the business of lending money. The sums deducted were very large, totaling some AU$2bn.

In March 2009 the Federal Court held that a company such as the taxpayer could write off the debts if it was engaged in moneylending and it was sufficiently independent in its decision making.

The essential characteristics of moneylending include the acquisition of finance at a lower rate that that charged to a third party, borrowing on revenue account and the use of borrowed funds as working capital.

Absent fraud or a sham the Court held that the separate legal personalities of group companies must be recognised. The taxpayer was independently registered as a finance company. Board connections between the company and its parent did not detract from its legal independence or make the taxpayer an alter ego of its parent. The acquisition and onlending of money at commercial rates of interest was sufficient to amount to moneylending even if the taxpayer's activities and borrowing programme were set by the parent.

This decision is being appealed to the full Federal Court.

Ashwick (Qld) No 127 Pty Ltd v FCT [2009] FCA 1388

In the meantime in November 2009 a similar set of facts affecting the Fosters group of companies was also decided in the taxpayer's favour. The case involved deductions of some AU$2.3bn.

The Federal Court was satisfied that the taxpayer's business was carried on with a degree of system, continuity and repetition, and with a view to making a profit (shown by the fact that the money was on-lent at a margin).  This finding was reinforced by the fact that the arrangements were clearly not shams, as money actually passed from the debtors to the finance company.