We continue our exploration into the question: can a journal entry constitute a payment? While last week’s case (DFC of T v Black) addressed the limits of unilateral forgiveness and the meaning of “payment” in the context of accounting entries, this week we consider how structured transactions, particularly those involving round-robin journal entries, are treated by the courts. The distinction between legal form and economic substance becomes critical in schemes that appear to effect payment through documentation alone.
In Equuscorp Pty Ltd v Glengallan Investments [2004] HCA 55, the High Court squarely addressed whether transactions involving no physical transfer of cash only internal book entries, can nonetheless satisfy a contractual obligation to make a payment. Contrary to earlier findings by lower courts, the High Court held that the loan arrangements, although structured and circular, were legally effective. This decision has enduring significance for pre-30 June planning and structured tax arrangements.
Case Summary
Equuscorp Pty Ltd v Glengallan Investments [2004] HCA 55
In this case, investors entered into a tax-effective investment in a crayfish farming project, funded by loans from Rural Finance (later assigned to Equuscorp). The “loans” were executed through a series of internal journal entries among associated entities, with no cash changing hands. The High Court rejected the argument that these arrangements were a sham or lacked legal effect. It held that the book entries were sufficient to constitute valid payments under the loan agreements. The Court also found that the written agreements were binding, overriding any alleged prior oral understandings. Misrepresentation claims and issues regarding the validity of the loan assignments were remitted for further consideration.
Discussion Focus
- Whether journal entries or circular funding arrangements can satisfy legal definitions of “payment”
- The High Court’s approach to distinguishing sham from legally effective structured finance
- Reinforcement of the parol evidence rule in disputes over commercial arrangements
- Practical implications for tax advisers in managing pre-30 June schemes and documentation
- When courts prioritise legal enforceability over perceived economic substance
Please see below link to case materials which is assumed reading in order to participate in the discussion:
Equuscorp Pty Ltd v Glengallan Investments [2004]
Discussion led by Adrian Cartland.