The Federal Court has held that an accruals basis of accounting for the interest accruing to a company (SRC Holdings Limited, which was owned by News Limited) provided the correct reflex of the company’s true income and that the taxpayer applicant in the case (News Australia Holdings Pty Ltd) was to be assessed on SRC’s interest income which accrued in the 2010 year.
Interest income in the sum of US$66,023,141 (A$75,028,696) accrued to SRC as a debt in the 2010 year of income under the terms of a loan agreement dated 28 April 2006 between News Limited and SRC (“the News loan agreement”). That interest, however, was not paid until the 2011 year of income on 2 July 2010, and on 8 July 2010, SRC paid Australian withholding tax of A$7,502,870 in respect of that interest. The Commissioner contended that SRC was to be assessed on an accruals basis for the interest income which accrued in the 2010 year notwithstanding that the interest was not received by SRC until the 2011 income year.
The Court said the issue in the appeal was whether the taxpayer, SRC Holdings Limited (“SRC”), derived interest income due to it from News Limited during the year of income ended 30 June 2010. The issue arose in the context of the controlled foreign corporation (CFC) provisions o f the ITAA 1936. The Court said the interest income will be assessable to the applicant in the proceeding, News Australia Holdings Pty Ltd, because the applicant was the provisional head company of a multiple entry consolidated group which included News Limited and SRC. News Limited was a wholly owned subsidiary of News Australia Holdings Pty Ltd and owned all of the shares in SRC between 2003 and 2011. During that period, SRC, a company incorporated in the Cayman Islands, was a controlled foreign corporation in relation to that group. The effect in this case of the CFC provisions is to attribute to the applicant the income derived by SRC in the 2010 year o f income, Pagone J said.
After reviewing in great detail the history of SRC and the transactions it conducted, the Court found that “an accruals basis of accounting for the interest accruing to SRC provided the correct reflex of SRC’s true income and the applicant [News Australia Holdings Pty Ltd] is to be assessed on SRC’s interest income which accrued in the 2010 year. That the interest income had been derived upon accrual, in the sense that the interest income had come home when due, is not denied by the fact that, as was submitted, ‘SRC made only 2 loan advances [to News Limited] in 10 years, and occasionally provided other financial accommodation in other forms'”. The 2 loan advances were for A$151,483,216 as part of a step in a pre-planned series of steps to make repayments under a financing structure, and a loan advance to News Limited in June 2006 of A$339,941,195 on the terms of the News loan agreement. (News Australia Holdings Pty Ltd v FCT [2017] FCA 645, Federal Court, Pagone J, 8 June 2017.)
[LTN 108, 9/6/17]