Federal Commissioner of Taxation v. Energy Resources of Australia Ltd., 94 ATC 4923, [1994] FCA 924 (Full Fed. Ct.)

In order to refinance U.S.-dollar loans that it had received to finance the development of its mine, the Australian taxpayer negotiated a new Euronote facility pursuant to which it issued 90-day non-interest bearing U.S. dollar promissory notes which were sold at a discount to members of a banking consortium who were successful in tendering for the purchase of the notes to be issued, with the same procedure being repeated upon maturity of the notes. In finding that the taxpayer ("ERA") had not "made or realized gain or loss attributable to currency exchange rate fluctuations" at the time of the roll-over of the notes at the end of each 90-day period, Hill J. stated (p. 4958):

"Once ERA availed itself of the facility it became subject to a continuing obligation in respect of the face value of the notes reduced in accordance with the facilities agreement or payments which ERA at its option might make discharging the facility obligation ... ." [I]n the context of the agreement it is incorrect to see each roll-over as a discharge of indebtedness upon a new indebtedness arising from the issue in discounting fresh notes ... Second, and more fundamental for the present case, it seems to me that the relevant contract under which the notes were issued was the facilities agreement rather than the individual contracts arising out of the acceptance of tenders for purchase of notes and the issue and sale of those notes at a discount."

In order to refinance U.S.-dollar loans that it had received to finance the development of its mine, the Australian taxpayer negotiated a new Euronote facility pursuant to which it issued 90-day non-interest bearing promissory notes which were sold at a discount to members of a banking consortium who were successful in U.S. dollar tendering for the purchase of the notes to be issued, with the same procedure being repeated upon maturity of the notes. In finding that foreign exchange gains or losses were realized by the taxpayer on capital account, Hill J. stated (p. 4954):

"... [T]he funds borrowed were not used in or as an integral part of the profit-making activities of the taxpayer but in the financing of those activities. So seen, the exchange gains or losses were on capital account. The fact that the manner of borrowing, namely, through discounting of Euronotes, occurred with regularity so that, on the Commissioner's submissions, the exchange gains or losses occurred with the same frequency is not, of itself, sufficient, in my view, to characterise those gains or losses as being on revenue account. Ultimately, it is the purpose of the financing which will determine the character of the exchange gains or losses."

Hill J. stated, in obiter dicta (at p. 4950-4951):

"In my view, where a discounting transaction is conducted wholly in a foreign currency, the proper way of determining the amount of deduction to which a taxpayer is entitled by virtue of the discounting, will be to take the discount in the foreign currency and then translate the result into Australian dollars for the purpose of then computing the taxable income."

He further noted that the alternative method (of translating both the amount received and the amount repaid into Australian dollars at the then prevailing spot rate) was impractical (p. 4953):

"[I]t is obvious that it would normally be impractical to effect instantaneous translations into Australian dollars of every debit and credit arising in the course of business transactions."