City Link Melbourne Limited (ACN 070 810 678) v Commissioner of Taxation

Federal Court of Australia (Full Court)|2004-07-01|Before: Allsop JJ

THE COURT ORDERS THAT:

The appeal be allowed.
The decision of the primary judge be set aside and in lieu thereof the objection should be allowed and the matter be remitted to the respondent Commissioner for assessment in accordance with these reasons.
The respondent Commissioner pay the appellant's costs of the appeal and at first instance. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

VICTORIA DISTRICT REGISTRY No V 181 OF 2004

BETWEEN: CITY LINK MELBOURNE LIMITED (ACN 070 810 678)

REASONS FOR JUDGMENT THE COURT: 1 The Appellant, City Link Melbourne Limited, formerly named Transurban City Link Limited ("Transurban") appeals against the decision of a Judge of this Court dismissing its application to the Court concerning the disallowance by the Respondent Commissioner of Taxation of objection decisions applicable to the three years of income ending on 30 June 1996, 1997 and 1998. At issue before the learned Primary Judge and in the appeal was whether amounts of $31.25 million said to have been incurred by Transurban in the 1996 year of income and $95.6 million in each of the 1997 and 1998 years of income were allowable deductions to Transurban under either s 51(1) of the Income Tax Assessment Act 1936 ('the 1936 Act"), applicable to the first two years of income or s 8-1 of the Income Tax Assessment Act 1997 ('the 1997 Act"), applicable in the 1998 year of income. 2 Section 51(1) of the 1936 Act and s 8-1 of the 1997 Act are concerned with the deductibility for income tax purposes of what may be described as general business losses or outgoings. Although there is some difference in language between the two sections, it is not suggested that this difference is material. Indeed, s 8-1 of the 1997 Act was intended to be merely a rewritten version of s 51(1) of the 1936 Act, but using to some extent more modern language. Accordingly there is no need to set out both sections. It suffices for present purposes to set out only the terms of s 51(1). It provides that: "All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income."

THE FACTUAL BACKGROUND 3 Transurban was what the learned Primary Judge described as "the project vehicle" for the City Link Project, the largest urban infrastructure project in Australia. The project involved the design and construction of a road link connecting three of the four main Melbourne freeways which then ended at the City fringe, those being the Monash Freeway (formerly the South Eastern Freeway), the Tullamarine Freeway and the West Gate Freeway. As originally devised the City Link involved only the Western Link and the Southern Link. Subsequently a third element known as "the Elizabeth Street Extension" was added. That addition was the subject of a separate agreement made in April 1998. Once the road links were completed the project contemplated that the road links would be operated with toll being collected at certain points using an electronic toll collection system until ultimately the road links would be surrendered to the State of Victoria. 4 The Victorian government called for bids for the project in 1994. A consortium of Transfield Holdings Pty Limited ("Transfield") and Obayashi Corporation ("Obayashi") was the successful tenderer. On 20 October 1995 a Concession Deed was executed between Transurban, the State and other parties. It was under this Deed that the amounts claimed to be deductible arose. Between the date of the Concession Deed and 28 June 2002 there, were, as the learned Primary Judge noted, 17 further deeds executed amending the concession agreement. Most are irrelevant to the present appeal. 5 The western links and parts of the Exhibition Street extension opened to traffic during 1999 but tolling only commenced in respect of the western link on 3 January 2000. Tolling commenced on the west bound sections of the southern link on 26 April 2000 and on the in-bound end of the Elizabeth Street Extension on 1 July 2000. Under the Concession Deed the concession period commenced from the date on which there was "financial closing", namely 4 March 1996 and continued unless otherwise determined for 33 years and 6 months after the "City Link Expected Completion Date" which was 14 July 2000. Accordingly, in the normal course, the concession period would be expected to continue until 14 February 2034. 6 It was the responsibility of the State of Victoria, inter alia to contribute land for the purposes of the project, and to coordinate approvals from State authorities to enable the link to be constructed and operated. This involved, inter alia, the State acquiring land for the project which would, upon acquisition become Crown Land and then be made available to Transurban under licences which were to be issued by the Melbourne City Link Authority. Importantly the State was obliged to provide the necessary legislative framework for the project. The legislation provided for the levy of tolls and created an offence of evading payment of tolls, which offence became subject to penalty. The legislation enacted was the Melbourne City Link Authority Act 1994 and the Melbourne City Link Act 1995 (Vic). The latter Act received the Royal Assent on 12 December 1995. In summary that Act ratified the Concession Deed, as if enacted and provided what may be referred to as legislative support for various aspects of the City Link project. 7 It is necessary now to summarise the relevant provisions of the Concession Deed. Many of these provisions are set out in greater detail in the judgment of the learned Primary Judge. It is unnecessary to repeat them here except to the extent that they are relevant to the issues in the appeal. 8 The objectives of the Concession Deed are set out in Clause 2. Among these, which include the integration of the road link project into Melbourne's road system, is the intention that project debt be repaid in accordance with lending documents and that equity investors in the project derive at least a base case equity return. The obligation of Transurban was to finance design and construct the Link and to operate, maintain and repair it. 9 By virtue of Clause 2.8 of the Concession Deed the State granted to Transurban the right to design, construct, commission and operate the Link road, to impose and collect a toll, maintain and repair the roads and raise revenues from other lawful uses of the Link as approved by the State. The Concession was to be continued, but subject to the Concession Deed until the end of the Concession Period. This was, essentially, 33 ½ years, although that period could in certain events be reduced to 25 ½ years or in the event of the happening of a materially adverse circumstance it could be increased to 53 ½ years. 10 Critical to the present appeal is clause 3 of the Concession Deed. The clause provides, relevantly, as follows: (a) (i) "The Companyshall (provided the Concession Period then continues), in consideration of the State granting the concession rights set out in clause 2.8, pay to the State in the period from the date of the commencement of the Concession Period until the end of the twenty-fifth year after the date which is 6 months earlier than the Link Expected Completion Date an annual concession fee of $95,600,000, payable in equal instalments semi-annually in arrears, on the last Business Day of each June and December in that period and on the date of termination of this Deed (should termination occur in that period) with each such payment being adjusted on a pro rata basis for any period of less than 6 months. (ii) The Company shall (provided the Concession Period then continues), in consideration of the State granting the concession rights set out in clause 2.8, pay to the State in the period from the date of the commencement of the twenty-sixth year after the date which is 6 months earlier than the Link Expected Completion Date until end of the thirty fourth year after that date an annual concession fee of $45,200,000, payable in equal instalments semi-annually in arrears, on the last Business Day of each June and December in that period and on the date of termination of this Deed (should termination occur in that period) with each such payment being adjusted on a pro rata basis for any period of less than 6 months; (iii) The company shall (provided the Concession Period then continues), in consideration of the State granting the concession rights set out in clause 2.8 pay to the State in the period from the date of the commencement of the thirty fifth year after the date which is 6 months earlier than the Link Expected Completion Date until the date of termination of this Deed, an annual concession fee of $1,000,000 payable in equal instalments semi-annually in arrears on the last Business Day of each June and December in that period and on the date of termination of this Deed, with each such payment being adjusted on a pro rata basis for any period less than 6 months. (b) The Company shall pay to the State rent under the Company Leases and the Trustee shall pay to the State rent under the Trust Leases and the Trust Concurrent Leases, as provided for in those Leases. (c) The Company and the Trustee shall pay to the State on demand reasonable costs and expenses incurred or payable by the State: (i) in exercising powers under clause 9.11; (ii) in it or any Victorian Government Agency taking reasonable measures outside the Project Land or to manage traffic outside the Project Land, to the extent required under arrangements approved under clause 7.13(a), to be taken by it or a Victorian Government Agency under the Project Scope and Technical Requirements; (iii) in it or any Victorian Government Agency taking measures to deal with the effects of any interference with the flow of traffic on roadways in the vicinity of the Project Land, the Lay Down Areas or the Off-Site Areas caused by the Works or the operation or maintenance of the Link being measures reasonably taken if the State has been (or should have been), in accordance with this Deed, requested by the Company or the Trustee to deal with the interference; (iv) in making a payment pursuant to the Contractors' Deed of Novation to remedy or overcome the consequences of a Construction Contract Default (as that expression is defined in the Contractors' Deed of Novation). (d) The Company shall pay to the State as an additional concession fee a proportion of the amount by which the aggregate revenue derived by the Company (or any of its subsidiaries), in any relevant period exceeds that projected in the Base Case Financial Model. Such a payment need only be made if the actual cumulative real after tax return which a Notional Initial Equity Investor would be considered to have derived on its investment in Project Securities up to the end of that period exceeds the cumulative real after tax return which a Notional Initial Equity Investor was projected by the Base Case Financial Model to have received on its investment in Project Securities up to the end of that period." 11 Clause 3.4 provided that at the end of the Concession Period Transurban and the party referred to as "the Trustee" under the Agreement were to surrender the Link and deliver to the State all plant and equipment in essence relevant to the project. 12 By virtue of Clause 7.8, Transurban was bound to construct the Link so that it was fit for its intended purposes. Completion was to take place by the "Link Expected Completion Date". Clause 9 set out the obligations of Transurban during the Concession Period to operate each section of the Link including the tolling system. Clause 10 dealt with the obligations of Transurban during the Concession Period to maintain and repair the Link. Land of or acquired by the State was to be the subject of licences in the construction period or crown leases in the operation period, either to Transurban or the Trustee and in the latter case sub-leased to Transurban. Rental was payable at the nominal rate of $100 per annum. 13 Under Clause 15 of the Concession Deed the State could, in certain events, which may generally be described as events of default, terminate the Concession Deed. 14 As may be expected, the financing details of the project were very complicated. It suffices here to state that the State had a deed of charge imposed by what was referred to as "the Master Security Deed" to secure the obligations to the State under the various agreements. Following an amendment to the charge documents, clause 1.9 of the Master Security Deed provided: " 1.9 Payments by the Company or Trustee For so long as any Project Debt is owing and notwithstanding the express terms of any Project Document to the contrary, any payment to be made by the Company or the Trustee to the State under, or for breach of, any Project Document (other than payment of the State's Priority Amount) (the "State Payment Amount") shall be owing to the State but shall not be due for payment until sufficient money is available for withdrawal from the Distributions Account (as defined in the Security Trust Deed) to meet that payment in full and each of the Company and the Trustee undertakes not to apply any amounts held in the Distributions Account maintained in its name for any purpose other than payment of that State Payment Amount until the balance of the Distributions Account maintained in its name equals or exceeds that State Payment Amount to the extent that it is not in dispute and all or part of the balance has been applied by it to pay that State Payment Amount in full to the extent that it is not in dispute. …" 15 Clause 18.5 of the Master Security Deed provided that the obligation of Transurban to pay an amount payable under paragraph 3.1(a) of the Concession Deed, that is to say the Concession Fee could, at the election of Transurban "be satisfied" by Transurban issuing to the State (on or before the due date for payment of the amount) Concession Notes having a face value of the amount payable. The contemplation seems to be that such notes would be issued in multiples of $100,000. A Concession Note was to be in the form set out in an exhibit to the Concession Deed. That Exhibit, as amended in 1996 provided, relevantly: "Part 2 Amount of Concession Note Upon presentation for payment in accordance with this Concession Note, the Company in its own capacity and for valuable consideration promises to pay the Crown in right of the State of Victoria the sum of $ ("Payment Amount") being the liability of the Company incurred under Article 3.1(a) of the Concession Deed in respect of the Concession Fee payable for the semi-annual period ending on for the financial year ended 30 June . Part 3 Payment of Concession Notes (a) The Payment Amount must be paid under this Concession Note notwithstanding paragraphs (b) and (c), on the date which is 33 years and 6 months after the Link Expected Completion Date ("the Expiry Date") and this Concession Note may be presented for payment to the Company at any time after 32 years and 6 months after the Link Expected Completion Date. (b) If the following conditions have been satisfied at any time prior to the Expiry Date: (i) the Equity Return (determined as at a date not earlier than 4 months before presentation of this Concession Note and as if the Concession Period ended on that date) must be 10% per annum or more; and (ii) the payment of the Payment Amount under this Concession Note must not result in the aggregate of the amounts paid by the Company under the Concession Notes, and of the amount payable under this Concession Note, presented in the financial year in which this Concession Note is presented, exceeding 30% of the Distributable Cashflow for the preceding financial year. This Concession Note must be paid on the later of the date which is 30 days after presentation by the State for payment and the date which is the earlier of: (A) 30 days after the finalisation of the financial accounts of the Company and Trust for the financial year preceding the financial year in which this Concession Note is presented; and (B) 3 months after the end of the financial year preceding the financial year in which the Concession Note is presented. (c) If the Concession Period ends prior to the Expiry Date: (1) due to the operation of paragraph (a) of the definition of Concession Period, then this Concession Note must be paid on the Expiry Date; or (2) otherwise, and if the conditions of paragraph (b) above have been satisfied, this Concession Note must be paid within 30 days after presentation by the State for payment. Part 4 Manner of Presentation (a) This Concession Note may only be presented for payment by the State or its delegate appointed under clause 1.5 of the Concession Deed at Level 2, 437 St Kilda Road, Melbourne or such other address in Melbourne notified in writing for this purpose by the Company to the State. (b) Unless clause 1.9 of the Master Security Deed is then applicable to this Concession Note, then for so long as any Project Debt is owing and notwithstanding any express terms of this Concession Note to the contrary any payment to be made by the Company under, or for breach of, this Concession Note shall be owing but shall not be due for payment until sufficient money is available for withdrawal from the Distributions Account (as defined in the Security Trust Deed) to meet that payment in full after paying all amounts owing to the State under, or for breach of, a Project Document (other than any Concession Note) or owing under or for breach of, any Concession Note having a prior number to this Concession Note. Part 5 Concession Note transferable This Concession Note is transferable and does not bear interest." The expression "Equity Return" was defined in the Concession Deed to be "the expected real after tax internal rate of return which a Notional Initial Equity Investor is projected to receive on its investment" (using a model provided for in the Deed) of 10 per cent per annum or more. 16 The "distributions account" referred to both in Clause 1.9 of the Concession Deed and in the Concession Notes was an account required to be maintained by Transurban. A similar account was required to be kept by the Trustee for investors. The sources of the funds to be channelled into the account were funds that had reached a clearing account and funds in an excess cash flow account. The Deed provided that Transurban could transfer funds from the clearing account to the distributions account for the purpose of paying amounts to the State and from the excess cash flow account to the distribution account subject to debt ratios being maintained. Tolls and other project revenue, as well as loan draw downs were ultimately to be deposited in the clearing account. Certain amounts such as funding costs, mandatory repayments, operating, maintenance and construction costs were permitted to be transferred out of the clearing account. What was ultimately to be transferred to the distributions account was, generally speaking, therefore, project cash receipts less outgoings associated with the operation and maintenance of the Link. The purpose of the distribution account was to faciliate payment of amounts owing first to the State and then to any other person to whom an amount was owing under a Concession Note. It was only when these obligations were met that the funds in the distribution account could be used by Transurban. 17 Accordingly, all outstanding Concession Notes were redeemable by the State within 33 years and 6 months after the "Link Expected Completion Date." In fact Transurban issued Concession Notes to the State of Victoria for the concession fees payable in each of the years of income and indeed for all subsequent concession fees. It may be assumed that this provided a mechanism for the State to assign the notes to investors should it desire to do so and thus obtain an earlier but no doubt discounted, return. 18 As noted by the learned Primary Judge the effect of the provisions of the agreement was that presentation of the Concession Notes could not occur while Project Debt was outstanding unless there was sufficient money in the Distributions Account to meet the payment in full. Under the Base Case Model used in the agreements, redemption of the Concession Notes was expected to commence in November 2013 and Project Debt was expected to be repaid by 2023. The earliest day on which payments were likely to commence was 2013. A model prepared by financiers expected payments to commence in 2017. In fact, as events have happened traffic volumes on which both models were based fell short of projections with the consequence that currently redemption was not expected to commence until closer to 2034. 19 The Master Security Deed also dealt with matters of priority as between the "Security Trustee" which acted on behalf of financiers of the project and obligations owed to the State. Other priority provisions are to be found in a Security Trust Deed entered into between Transurban and the City Link Project financiers. It suffices to say that the State generally had priority in respect of amounts owing to it. However the Concession Notes were excluded from state priority.

The Issues in the Appeal 20 The issues which arose before the learned Primary Judge and were raised before us in the Appeal can be briefly summarised as follows: · Whether the concession fees claimed to be deductible in the relevant years of income were incurred by Transurban in those years of income? · If so, whether the amounts were referable to the years of income in which they were claimed so as to be deductible in those years? · Whether the concession fees were properly to be characterised as consideration paid for a monopoly or other anti-competitive right granted to Transurban by the State and thus on capital rather than revenue account? · Whether, if the last issue is answered in the negative the concession fees were a sharing of profit or akin to a dividend and so not allowable deductions. · Whether, otherwise, the concession fees were precluded from deduction because they were losses or outgoings of capital or of a capital nature.

The Judgment Appealed from. 21 The learned Primary Judge addressed the issues set out above in the order in which they are here set out. His Honour was of the view that the Concession Fees were, in the relevant statutory sense, "incurred" by Transurban in each year of income. His Honour found that Transurban had "completely subjected and committed itself to paying the amounts due in respect of the concession fees, notwithstanding that the time for payment of the amounts had not arrived. The fees represented a present liability to make payment at a future time. The quantum of the liability was ascertained and was not defeasible. Nor was the amount of Transurban's liability subject to any contingency other than what his Honour referred to as the "theoretical contingency" that the requirements of clause 1.9 of the Master Security Deed would not be satisfied. Further, in his Honour's view the case law had the result that uncertainty as to when amounts owing would fall due for payment and that such uncertainty would continue long into the future did not affect the claim for deductibility provided there was a present or accrued liability to pay the amount due. 22 Further his Honour was of the view that the claimed amounts in each year were referable to the relevant years of income in which the claim was made. His Honour discussed Coles Myer Finance Limited v Commissioner of Taxation of the Commonwealth of Australia (1993) 176 CLR 640 where it had been held that there should be brought to account over two years of income the cost to the taxpayer of discounting bills of exchange or promissory notes where the bills or notes were drawn or discounted in the one year and became payable in the next year. However, his Honour distinguished that case because in the present case it would not be appropriate to bring the Concession Fees to account in the years of payment but rather, they were referable or attributable to the year in which the liability was incurred. 23 His Honour rejected the argument of the Commissioner that the Concession Fees were consideration for the grant by the State of a monopoly or exclusive or preferential rights attaching to the City Link Project. Likewise his Honour held that the Concession Fees were not payment for the right to establish the City Link Project as a business in respect of which the State ensured freedom from competition until termination of the Concession. In his Honour's view the Concession Fees were not paid for any such rights, benefits or advantages. The rights and advantages which Transurban gained under the Concession Deed and other agreements were not monopoly entitlements or any other entitlement to be free from competition. 24 His Honour held, however, that the Concession Fees were "in truth and substance" "akin to a sharing of profit or a dividend" and thus not allowable deductions cf United Energy Ltd v Federal Commissioner of Taxation (1997) 78 FCR 169. His Honour in reaching this conclusion had regard to documents prepared in the period leading up to the execution of the Concession Deed being precontractual negotiations as well as the Concession Deed itself. His Honour held that a consideration of the whole "matrix of facts" demonstrated that there was a "joint venture" between the State and Transurban which involved the State sharing in profits in excess of the base case projected returns. The expression "Profit Sharing Arrangements" had been adopted by Transurban's financial advisers during the course of negotiations. It was, his Honour held apt and appropriate from a business point of view. His Honour noted that no person relevantly involved in the negotiations on behalf of Transurban had given evidence. This enabled his Honour more easily to draw the inference of joint venture and profit share: Jones v Dunkel (1959) 101 CLR 298. 25 Finally, his Honour concluded that if he was wrong in characterising the Concession Fees as being "akin to a sharing of profits" then in his Honour's view the Concession Fees were on capital account and not deductible. From a practical and business point of view the fees were really paid for the services, facilities and entitlements, that is to say the advantages actually contributed by the State of Victoria. These were of critical importance because they enabled the State to grant the concession and "were necessary prerequisites for City Link to be established and to operate as a viable business". Those advantages were of a permanent and enduring character and formed part of the profit yielding structure of City Link. The consideration for them was, accordingly, of a capital nature and not deductible. 26 His Honour summarised his reasons for finding for the Commissioner in the following passage: "The above conclusions mandate that the questions stated in [122] be answered as follows:

the State's contribution to the City Link Project is to be properly characterised as equivalent to an advantage or advantages enuring to capital in a form other than the provision of financial capital;.
the concession fees are akin to profit sharing with the State or to the payment of a dividend to it as a joint venturer in return for the advantages enuring to capital that the State has contributed to the City Link Project. Accordingly, it must follow that the concession fees are not outgoings expended in gaining or producing Transurban's assessable income or expended in carrying on a business for the purpose of gaining or producing such income. Alternatively for the following reasons I have concluded that, when the matters stated by Dixon J in Sun Newspapers at 363 are considered, the concession fees are of a capital nature. The advantages sought by the payment of the concession fees are to be characterised by reference to the services, facilities and entitlements contributed by the State. Those contributions, which have been described in detail above, have lasting qualities, are of enduring benefit, are of a 'once and for all' nature and form part of the profit yielding structure of City Link. The services, facilities and entitlements contributed by the State, when considered cumulatively, are not contributed, and are not used, relied upon or enjoyed, on a periodic or recurrent basis. Rather they, and the advantages derived from them, are to be used, relied upon, enjoyed and not derogated from throughout the term of the Concession. Finally, the means adopted to obtain the services, facilities and entitlements (ie payment of concession fees) is not a periodic reward or outlay for the use and enjoyment of City Link for periods commensurate with the payment. Rather, payment of the fees is in fixed amounts payable at the end of the Concession Period with provision for earlier payment if certain financial conditions are satisfied. In summary, the concession fees are outgoings expended 'on the structure within which the profits were to be earned' and were not 'part of the money earning process': see B P Australia at 398 and 403-404. Accordingly, it must also follow that the concession fees are outgoings on capital rather than revenue, account: cf United Enregy at 182 per Lockhart J"

Were the Concession Fees incurred in the relevant years of income? 27 A convenient starting point for determining whether a loss or outgoing is incurred for the purposes of s 51(1) is, as the learned Primary Judge recognised, the classic statement of Dixon J in New Zealand Flax Investments Limited v Federal Commissioner of Taxation (1938) 61 CLR 179 at 207 where his Honour said: "To come within [the] provision there must be a loss or outgoing actually incurred. 'Incurred' does not mean only defrayed, discharged, or borne, but rather it includes encountered, run into or fallen upon. It is unsafe to attempt exhaustive definitions of a conception intended to have such a various or multifarious applications. But it does not include a loss or expenditure which is no more than impending, threatened, or expected."

28 There are a number of principles that are well settled by the numerous cases that have considered when a loss or outgoing is incurred. They are summarised in the judgment of Hill J in Ogilvy and Mather Pty Ltd v Federal Commissioner of Taxation (1990) 95 ALR 663 at 700-701 to which the learned Primary Judge referred. Relevantly these are as follows:

It is unsafe to attempt an exhaustive definition of a term such as "incurred": New Zealand Flax Investments Ltd at 297 per Dixon J; Hooker Rex Pty Ltd v FCT (1988) 88 ATC 4392 at 4400.

In considering whether a loss or outgoing is incurred the Courts in Australia have adopted what is described as a "legal" or "jurisprudential approach" and not what may be described as a "commercial approach": Coles Myer Finance Ltd v Commissioner of Taxation (1993) 176 CLR 640 at 662-3.

An outgoing may be incurred notwithstanding that the amount is not paid in the year of income: Commissioner of Taxation v James Flood Pty Ltd (1953) 88 CLR 492 at 507.

An outgoing may be incurred notwithstanding that at the end of the year of income it represents a present liability then due although payable in the future: Federal Commissioner of Taxation v Australian Guarantee Corporation Ltd (1984) 2 FCR 483. However, it will be important that the liability is "presently existing" during the year of income.

It will be necessary that the taxpayer has completely subjected itself to the loss or outgoing, that is to say definitively committed itself to it in the year of income: Merrill Lynch International (Australia) Ltd v Commissioner of Taxation (2001) 113 FCR 79 per Lindgren J. It will not be sufficient if the loss or outgoing is no more than pending, threatened or expected, no matter that it may be certain that the loss or outgoing will occur in the future: Flood at 507-8, Hooker Rex at 4400.

However, a loss or outgoing may be incurred in the year of income notwithstanding that the obligation to pay it is theoretically defeasible: Flood at 506-7, Coles Myer at 670 or, perhaps, even contingent: Coles Myer at 670 per Deane J, citing Commercial Union Assurance Co of Australia Ltd v Federal Commissioner of Taxation (1977) 32 FLR 32 at 42-43, but see, however, Flood at 507-8.

29 Federal Commissioner of Taxation v Australian Guarantee Corporation was a decision of the Full Court of this Court. It held that interest on debentures issued by the taxpayer where the interest was to be paid or credited on maturity or earlier redemption was incurred by the taxpayer in the year of income in which the taxpayer had subjected itself to a liability to pay the interest. There was a present or accrued liability to pay interest at some uncertain time in the future which could, in that case, have been up to 20 years from the date of issue of the debentures. A similar conclusion had been arrived at by Woodward J in Alliance Holdings Ltd v Federal Commissioner of Taxation (1981) 37 ALR 430. In the former case Toohey J said at 493:

"Taxpayers are required, by the terms of the Act, to make returns on an annual basis. This Court should be slow to disallow a method of calculating the amount of an outgoing if what is claimed is fairly referable to the year in question. In my view, the amount claimed by the taxpayer as interest on deferred interest debentures for the year ended 30 September 1978 was an outgoing incurred by the taxpayer in the relevant year. It was calculated in accordance with sound accounting practice, designed to give a true picture of the taxpayer's financial operations, and it was an approach not precluded by the language of the Act. It is insufficient objection to that approach to say that it is not known when interest will in fact be paid. The amount claimed as a deduction was, in terms of s 51(1), incurred in the relevant year in the sense that the taxpayer subjected itself to a liability which it addressed according to a method fairly designed to reflect the extent of the liability of the year in question." 30 It was not submitted to us that the Australian Guarantee Corporation case was wrongly decided or even that it was distinguishable. 31 We agree with the learned Primary Judge that Transurban completely subjected and definitively committed itself to paying the amount of the Concession Fees which accrued in each of the relevant years of income. There is no suggestion that the amount in question was defeasible. It was subject to no contingency other than the requirements of clause 1.9 of the Master Security Deed that there be adequate funds in the Distributions Account. The fact that it was payable well into the future did not result in the conclusion that the liability to pay the Concession Fee was not incurred. 32 Even if it were the case that either because the amounts in question were payable far into the future or because payment would depend then upon there being funds in the Distribution Account the Concession Fees would, on the facts of the present case have been incurred by Transurban. This comes about because the Concession Notes operated to "satisfy" the underlying liability (that is to say the yearly Concession Fees) and thus brought about the result that the holder of the notes, that is to say, at least initially, the State of Victoria became entitled to sue upon the notes themselves rather than upon the Concession Agreement which created the obligation to pay the Concession Fees. 33 It is trite law that a bill or promissory note operates as a conditional payment of the underlying liability: Curry v Misa (1875) LR 10 Ex 153 at 163-164. Hence the holder of a note will be obliged to sue on the note, rather than to sue for the original debt which the note satisfied unless there is default in payment of the note. However, it is clear that the Concession Notes, although in form promises to pay a sum of money are not within the definition of "promissory notes" in the Bills of Exchange Act 1909 (Cth). To be a promissory note there must be an unconditional promise engaging to pay a sum certain and the engagement must be either to pay on demand or at a fixed or determinable future time : Bill of Exchange Act 1909 (Cth), s 89. Not only may it be said that the present notes are conditional and thus not promissory notes but also there is an uncertainty as to the actual date for payment and for this reason also the notes would not be promissory notes in the defined sense: Gore v Octahim Wise Ltd [1995] 2 Qd R 242. However, although the notes would not therefore be negotiable, it is clear from the terms of the Concession Notes, that once they are issued they would operate in satisfaction (or in other words, discharge) of the liability which they replaced. This being the case, there was in the year of income both the undertaking of a liability created by the Concession Deed pursuant to which the Concession Fees became owing and the discharge of that presently existing debt by the issue to the State of Victoria of the Concession Notes. On any view of the matter it would follow that the obligation to pay the Concession Fee was incurred in the year of income.

Was the Concession Fee referable to the year of income? 34 As the learned Primary Judge noted Mason CJ, Brennan, Dawson, Toohey and Gaudron JJ in Coles Myer Finance said at 663: "But it is not enough to establish the existence of a loss or outgoing actually incurred. It must be a loss or outgoing of a revenue character and it must be properly referable to the year of income in question." 35 It followed in Coles Myer Finance that although the liability of the company on the bills or notes arose immediately the bills or promissory notes were discounted, the deduction for the outgoings required to be paid on the bills or notes did not arise in the year of income but rather was referable to the period from the time the bills or notes were discounted until they were presented for payment. In other words although in the year of income in question there was a legal obligation to meet the bills or notes discounted in that year, the net loss or outgoing that was deductible as the recurrent cost of capital of the finance company arose during the period from the discounting to the time of payment, that is to say over the two years of income being the year in which the bill or notes were discounted and the year of income in which they fell due for payment. 36 The present case is quite different from that in Coles Myer Finance even if the matter of the Concession Notes is ignored. The accounting evidence before the learned Primary Judge made it clear that it was not in accordance with sound accounting practice to delay bringing to account as a liability of Transurban the Concession Fees until the year in which payment was made. To do so would massively distort the results of Transurban. No doubt it was the case that proper accounting principles would bring to account the net present value of the debt for the Concession Fees as a liability each year. That was not the view which the Commissioner took before his Honour as representing the true income tax position. 37 As his Honour pointed out the Concession Fee was a liability which arose semi-annually and was referable to the obligation of Transurban to operate City Link in the relevant six monthly period. The fee was referable to the period in which the liability arose and in which it derived income from operating City Link. Clearly, therefore, the liability was referable to the six monthly period in which it arose. Coles Myer Finance was a case where treating the liability as accruing over the two years of income produced a matching of the liability with the relevant income derived. To treat the liability here as only being incurred at the point of time at which it became payable would completely remove any possibility of matching income with the liability incurred in producing it. Coles Myer Finance thus points to the present as being a case where the liability for the Concession Fees should be treated as both incurred in the year of income in which the liability arose and as being referable to that year of income. 38 The Commissioner before us sought leave to argue that the liability for the Concession Fees should be taken to have been incurred throughout the whole period between the date the liability arose and the date when payment of it fell due. There may be some unfairness now to give leave to the Commissioner to so argue when the submission was not made below, as it may be that evidence could have been called by Transurban which might have been relevant to negating such an approach. However, if Coles Myer Finance is to be taken as having established a test of referability to the year of income for all deductible amounts whether outgoings or losses (and there is much to be said for the view that the case is one concerned with the deductibility only of losses - but this is not a matter we need here to decide) and whether the referability test is confined to finance companies or has a wider operation, (as to which see Commissioner of Taxation v Woolcombers (WA) Pty Ltd (1993) 47 FCR 561 where the decision in Coles Myer Finance was distinguished) we are of the view that on the present facts the Concession Fees were, in fact, referable to the period to which they related, namely each six months during which Transurban operated City Link. If the Concession Notes are taken into account, then, no other conclusion would be open. 39 It follows in our view that unless the Concession Fees are precluded from deduction because they involve a sharing of profits or are otherwise of a capital nature, Transurban would be entitled to a deduction for them as losses or outgoings incurred in the relevant years of income.

Were the Concession Fees a sharing of profits and thus not deductible? 40 The starting point of the analysis of the learned Primary Judge would seem to have been the classic statement of Dixon J in Hallstroms Pty Ltd v Commissioner of Taxation (1946) 72 CLR 634 where his Honour said at 648: "… What is an outgoing of capital and what is an outgoing on account of revenue depend on what the expenditure is calculated to effect from a practical and business point of view, rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process." 41 Alternatively his Honour had regard to what was said by Fullagar J, with whom Kitto and Taylor JJ agreed in The Colonial Mutual Life Assurance Society limited v Federal Commissioner of Taxation (1953) 89 CLR 428 at 454 : "The questions which commonly arise in this type of case are (1) What is the money really paid for? - and (2) Is what it is really paid for, in truth and in substance, a capital asset." 42 Both these quotations place emphasis upon what may be referred to as "practical reality". However, it does not follow that either of them requires questions of deductibility to be answered by seeking to characterise an outgoing by reference to whether it is like some other transaction which it is not. Economic equivalence is not the test of deductibility under s 51(1) of the 1936 Act or its successor, s 8-1 of the 1997 Act. In any event, the reference in Hallstroms to the need for a practical and business approach should not be taken as an instruction to disregard the legal relationships. So much was pointed out by Stephen and Aickin JJ in Commissioner of Taxation v South Australian Battery Makers Pty Ltd (1978) 140 CLR 645 at 662 43 The issue in Hallstroms was whether the legal and related costs of opposing the extension of a patent held by a trade competitor were deductible under s 51(1). The majority of the Court, Latham CJ, Starke and Williams JJ were of the view that they were deductible The taxpayer acquired no asset but rather the expenditure was made in order to promote the taxpayer's business. Dixon J on the other hand dissented. As his Honour pointed out the deductibility of legal expenses takes the quality of capital or revenue having regard to the purpose of incurring the expenditure. If the patent was not extended the taxpayer would be in a position to compete with the former owner of the patent. Accordingly the outgoing was not an incident of the company's profit-earning operation but rather it brought about the reform or more effective establishment of the business organisation by which the taxpayer's income was produced. It was thus on capital account. There is nothing in the judgment of his Honour which suggests that deductibility involves an exercise in economic equivalence such as was undertaken by the learned Primary Judge here. 44 While it will often be relevant to ask what the money the subject of a deduction is paid for, in order to conclude whether the outgoing has the character of capital, generally, however, that question will be answered where the amount in question is consideration for obligations which the payee undertakes in favour of the payee, by having regard to the legal agreements entered into. Generally in such a case it was be unnecessary to go outside the legal agreement to determine deductibility. So it would ordinarily be unhelpful to have regard to precontractual negotiations in characterising an outgoing as capital in the same way as such evidence would ordinarily be unhelpful in construing the legal agreement entered into between the parties. 45 The position may be different if it be asserted that the agreement does not record the true agreement of the parties - whether because it is a sham in the legal sense of that expression or because it does not record the whole of the legal arrangement between the parties. 46 There will be, it may be accepted, some cases where regard may be had to the matrix of facts which form the background to the entering into of a legal agreement to determine the character of an amount payable under that agreement: Reuter v Commissioner of Taxation (1993) 93 ATC 5030 at 5036, Commissioner of Taxation v Cooling (1990) 22 FCR 42 at 53 per Hill J. The surrounding circumstances may in such cases, cast light on the nature of the relationship between parties to the agreement or deny as relevant to the character of an outgoing a label which the parties have used to describe it. Merely to call in an agreement an outgoing "interest," for example, will not make it so. An example of such a case is the decision of the full Court of this Court in Commissioner of Taxation v Broken Hill Pty Ltd (2000) 179 ALR 593 at [36] - [40]. Likewise where parties in an agreement purport to exclude the relationship of employee/employer the surrounding circumstances may reveal that the true relationship is an employment relationship with the income taxation consequences which follow: AMP Fire and General Insurance Co Ltd v Allen (1978) 52 ALJR 407 at 409. 47 Clearly where a particular transaction or agreement is said to be a sham in law there will be a need to consider the surrounding circumstances to determine what the other and real relationship is for which the agreement entered into between the parties is a disguise: Snooke v London and West Riding Investments Ltd [1967] 2 QB 786. There is no suggestion in the present case that the agreement entered into between the State of Victoria and Transurban is a sham. Indeed the present does not seem to us to be a case where reference to the surrounding circumstances in which the City Link agreements were entered into assists at all in determining the character of the Concession Fees. What the Concession Fees were paid for appears clearly enough from the terms of the Concession Agreement. 48 No doubt it is possible in commercial or political speech to refer to the State of Victoria as sharing in the profit made by Transurban in that the Concession Fee falls ultimately, to be paid by Transurban from revenues which it collects by way of tolls. The balance in the distribution account after project finance is repaid and a percentage profit recouped may be seen to represent some sort of cash flow profit of Transurban, although not profit in a strict sense. But just because this may be so does not establish either that the relationship between the State of Victoria and Transurban is a joint venture as the learned Primary Judge held, or that the State of Victoria and Transurban are in some legal sense sharing profits. 49 So, for example, a lessor may be entitled to rental from a shopping centre leased to a lessee where the rental may be dependent upon profits earned by the lessee in carrying on business in that centre. It does not follow, however, that the lessor and lessee are conducting a joint venture. Nor does it follow that they are sharing profits except in a loose and colloquial sense. Their relationship is one of landlord and tenant. Further that relationship would not change even if, in the course of precontractual negotiations the parties used language which referred to profit sharing or the existence of a joint venture. The analogy with a lease is apt here. 50 In the present case, the relationship between Transurban and the State of Victoria is essentially one where Transurban is granted, inter alia, the right after the construction phase, to operate the City Link road system and collect tolls for a period of time with Transurban incurring an obligation to pay by reference to half yearly intervals a fee of a fixed amount. It is true that the time for payment is deferred until there are funds available for that purpose, that is to say after project debt has been repaid. However, nothing in the contractual relationship between the parties would in any way create the relationship of joint venturers in any legal sense between them even if the agreement had not specifically sought to negate the existence of a joint venture. The expression "joint venture" has no fixed legal meaning, although it is often used to describe the relationship of parties which share gross returns, for example, from the sale of oil or minerals: cf United Dominions Corporation Limited v Brian Proprietary Limited (1985) 157 CLR 1 at 10. The present is not a case which in our view would be appropriate to describe as a joint venture. Nor is it one which can be characterised as involving any sharing of profits between the State and Transurban. They are not joint venturers; nor do they in any relevant legal sense, share profits. 51 The learned Primary Judge relied in reaching his conclusion upon the judgment of Lockhart J in United Energy Ltd v Federal Commissioner of Taxation (1997) 78 FCR 169. In that case the appellant had been appointed a distributor of electricity in Victoria for the Victorian government. It became liable to an impost in favour of the State imposed by Order in Council but called "franchise fees" which represented the amount by which the income of the taxpayer derived from the sale of electricity exceeded certain costs including a reasonable return. It was held that the franchise fees were not an allowable deduction to the appellant. The majority judgment was that of Sundberg and Merkel JJ. Their Honours were of the view that the fees were outgoings of capital because the advantage sought and obtained for the payment was freedom until a specified time from competition from other distribution companies. While it was true, their Honours said, that the fee was a compulsory exaction imposed by the Victorian government to extract a share of the profits, the proper characterisation of the franchise fees was to identify the profits extracted as a monopoly rent, the monopoly being the immunity from competition granted by the government in respect of the taxpayer's franchise customers. It does not seem that the majority judgment really turned upon whether there was, in the circumstances, a sharing of profits which denied deductibility. 52 Lockhart J was also of the view that the fees were not deductible. However, his Honour noted that the fees were calculated by reference to the likely income that the appellant would derive. The government had surrendered its monopoly but in turn demanded through legislation that the residual profit derived became its profit. It was for this reason that his Honour said (at 180) that the fees were "in reality akin to the State of Victoria taking a share of the profits… leaving the applicant an amount determined by the Treasurer to be a reasonable return on the capital used". The State's return was similar to payment of a dividend to the State. His Honour held that the fees were compulsory exactions imposed to extract profits rather than a cost incurred by the appellant in deriving its income. It was for this reason that they were not deductible. It is not difficult to see on the facts of the case why Lockhart J saw the fee as "akin" to the State taking a share of profits but the conclusion reached by his Honour was not dependent upon there being some joint venture between the State and the distributor. Rather it depended upon the more orthodox analysis that the fee was not a cost of the distributor of deriving its income. 53 That case is quite different from the present case. Leaving aside the monopoly argument which will be considered later in these reasons the present is not a case where the State demanded some residual profit. Nor is it the case of a tax imposed upon a distributor, although it is hard to see why merely because the exaction was a tax it could not be deductible. There are many examples of taxes which are deductible. An obvious one was sales tax before its abolition. Another is council rates. Another is payroll tax. 54 The material admitted into evidence by the learned Primary Judge over the objection of Transurban and relied upon by his Honour was described by his Honour in the following paragraphs which are repeated here: "(a) Pre-contractual negotiations 131. Macquarie Corporate Finance Limited ("Macquarie Finance") acted as the financial adviser to the Project sponsors, Transfield and Obayashi, and formed part of the "Transurban Team" in negotiations with the State. A Memorandum by it dated 21 April 1995 to Transurban and "All Equity Participants" described the "Profit Share Arrangements" between Transurban and the State as follows: "Super Profit Sharing Arrangements Transurban proposes that the community have the following two means of sharing in profits of excess of the base case projected returns: 1. Concession Period of 34 years as previous with a possible reduction down to 24 years if 16% real after tax hurdle is achieved. 2. The sharing of excess nominal pre-tax cashflow distributions in any year as described in the table below is subject to the actual cumulative post tax real cashflow paid to a notional 33% tax paying initial investor exceeding the cumulative post tax real cashflow projected under the Base Case for that same investor. Excess Over Base Case Distribution in any Year Community Share Equity Investors Share Up to 20% Nil 100% 20.1% to 49.9% 20% 80% 50.0% to 74.9% 40% 60% 75.0% to 99.9% 60% 40% 100% upwards 80% 20%

State Profit Share in Base Case Profits Transurban proposes that the State have the following two means of sharing in base case profits: 1. Cash land lease rentals totalling $78m payable in preference to equity distributions. 2. Land lease rentals payable by way of promissory notes of $90 million per annum in semi-annual instalments commencing 6 months after Financial Closing. The State may present these promissory notes for payment once Upfront Equity investors have received a real after-tax internal rate of return of 10% per annum. The promissory notes can then be redeemed utilising up to a maximum of [40]% of available cashflow for equity distributions in any one year. Under the various design options payment of these promissory notes commence in 2012. Transurban projects that under the base case projections for all of the Solutions, all of the promissory notes will be redeemed by the end of the Concession Period." 132. A section of a "Transurban Melbourne City Link Project" document dated April 1995 set out part of the proposed consortium's "Commercial Offer" as follows: "7.1 Licence Payments/Lease Rentals Transurban proposes to pay the State licence payments of $95 million per annum payable semi-annually in arrears commencing six months after Financial Closing and through the Construction Phase for use of the Project Land. Lease payments will commence in the Operations Phase at $95 million per annum payable in semi-annually in arrears. The payments will reduce to $45 million per annum in semi-annual instalments from the 26th to 34th years of the Operations Phase. Transurban's obligation to make the licence payments will be satisfied by a mix of cash and promissory notes and the lease payments will be satisfied by the issue of promissory notes only. The State may present both the licence and lease promissory notes for payment once Upfront Equity investors have received a real after-tax internal rate of return of 10% per annum. The promissory notes can then be redeemed utilising up to a maximum of 30% of available cashflow for equity distributions in any one year. Under the various design solutions, payment of these promissory notes is projected to commence between 2012 and 2013 of the Operations Phase. Transurban projects that under all of the Solutions, all promissory notes will be redeemed by the end of the Concession Period as outlined in the following table." 133. The accompanying table, relevantly, recorded the total of the "Promissory Notes" to be issued as $3,104 million with a net present value of $233 million on the basis of commencement of payment of the Notes as from 2013. "Cash Licence Payments" were recorded in Year 1 ($23.5 million) and in Year 2 ($8.3 million) as totalling $31.8 million. The document proposed that "super profits be shared with the State" in the same proportions as were set out in the Table in the Memorandum of 21 April 1995. 134. The Funds Flow during the Operations Phase in the section of the April 1995 document entitled the "Finance Plan" was described in the text as follows: "It is proposed to allocate revenues earned from the Project's operation in the following priority: > Payment by the Company of the Tollway operating costs. > Payment by the Company into a Maintenance Reserve Account, Tag Sinking Fund and top-ups to the Debt Service Reserve Account until they have reached their minimum specified levels (refer to Section 11.9 for a more detailed explanation). > Payment by the Company of its debt service obligations on the Infrastructure Borrowing Facility for the first five years of the Operations Phase. > Payment by the Company of rentals to the Trust under the Trust Sublease. > Payment by the Trust of interest and fees on the Project Debt Facility, CPI Bonds and Floating Rate Notes. > Payment by the Trust of the scheduled principal repayments due under the Project Debt Facility, CPI Bonds Facility, and Floating Rate Note Facility. > Payment by the Company of the principal and interest outstanding under the Tag Funding Facility. > Redemption of land lease promissory notes (when applicable); and > Distributions to equity and State profit sharing arrangements subject to satisfaction of various loan coverage ratios." The last item concerns the payments that ultimately were to be made out of the "Distributions Account" for concession fees and the return to Equity Investors. 135. A Memorandum of Understanding between the Melbourne City Link Authority and Transfield and Obayashi dated 28 July 1995 recorded that the issue of notes was substituted for the "initially proposed cash licence payment of $32 million", which appears to be a reference to the "Cash Licence Payments" in the April 1995 document of $31.8 million. The Notes, which were to be called "Licence and Lease Rental Notes" were subject to deferral of payment substantially on the same terms as those that apply to the Concession Notes. The Memorandum stated: "The State accepts the licence and lease payment proposal (involving the issue of promissory notes) made by Transurban on 26 April 1995, as amended so as to substitute the issue of notes referred to below for the initially proposed cash licence payment of $32 million. The Trustee is to issue the notes, which will not carry interest and which will be called 'Licence and Lease Rental Notes'. The notes are to be transferable but only capable of encashment by the State. The conditions for encashment are to be endorsed on the notes and reflected in the Master Security Deed. Those conditions are that the IRR for upfront equity be at least 10% real after tax per annum and that the cash applied in payment of the notes in a financial year not to exceed 30% of the cashflow available for distribution to equity investors." 136. A subsequent Memorandum of "Transurban" dated October 1995, which set out the changes to the "Financial Model" since 18 July 1995, recorded that the changes included: "• Renaming Licence/ Lease Notes as Concession Fee Payments • Renaming Incentive Rentals as Additional Concession Fee Payments." 137. The Macquarie Finance memorandum dated 21 April 1995 stated that the financial returns to the State out of Project revenue for the State's contributions to, and participation in, the Project were to be obtained by means of "Profit Share Arrangements". The State's share in "Base Case Profits", which I take to mean the profits projected on the basis of Transurban's Base Case Model or an earlier form of that Model, was initially proposed in the form of "cash land lease rentals totalling $78 [million] payable in preference to equity distributions" and "Land lease rentals payable by way of promissory notes of $90 million per annum". The terms of payment of the promissory notes were substantially those that apply to the Concession Notes. On the basis of the Base Case Model the first payment was expected to commence in 2012 with all of the promissory notes being redeemed by the end of the Concession Period. 138. The State was to share in "profits in excess of the base case projected returns" by two means. The first was by the Concession Period of 34 years being reduced to 24 years if the specified real after tax hurdle rate of return was achieved. The second was an increasing share of the "super profits" that would be earned in the event that there was an excess in respect of the revenues that were expected to be derived under the Base Case Model. If that occurred the State and Transurban's Equity Investors were to share proportionately in the excess revenues with the State's share increasing progressively from nil (for up to a 20 per cent increase) to 80 per cent (for an increase in excess of 100 per cent). Although the calculation is based on revenue, rather than profit, it is clear that the excess was regarded by members of the "Transurban team" as a "super profit". That is not surprising as the Base Case Model required costs, expenses and returns to financiers and equity investors to be taken into account in a manner that meant "excess" revenues could be treated as akin to "super profits". 139. In a Transurban "Management Committee Report", dated 7 July 1995, the revenue arrangement offered to the State under the heading "Revenue Sharing with the State" proposed that where the "[a]ctual commutative post tax real cashflow to initial equity investors exceed Base Case expectations" the State was to share in the increase in tolling revenue with the State's share of the increase ranging progressively from nil to 70 per cent depending on the increase. The State's share, which was to be paid "by way of lease payments", was to rise over the period of the Concession. 140. Subsequent proposals also altered the cash and promissory notes amounts payable for the leases and for the licence fees, which were all to be payable by promissory notes under which payments were projected to commence as from 2012 or 2013." 55 With respect to his Honour it is difficult to see that the material in evidence in any way assisted in determining whether the Concession Fees payable under the Concession Deed were deductible or that the material provided a secure foundation for the conclusion that the Concession Fees were "akin to a share of profits" and should be taken as such for the purpose of determining whether the fees were deductible. In the Memorandum of 21 April 1995 the Concession Fee was said to be "Land Lease rentals" involving deferred payment until equity investors (not Transurban) received a specified rate of return. Perhaps the expression "land lease rental" represented a more apt expression for the rather neutral "Concession Fee". It seems that stamp duty considerations led to the change. However, the deductibility of the half yearly accrued liability falls to be tested not by reference to the name given to the liability under the agreement, but rather by reference to what the payment was for, that is to say, for the rights conferred upon Transurban in Clause 2.8 of the Concession Deed. 56 Further, the "sharing" to which reference is made in the Memorandum is rather the sharing of "cash flow" than the sharing of profits, save for what is referred to as "super profits" which would seem to refer to the payment ultimately required to be made by clause 3.2(d) of the Concession Agreement which is not presently a matter under consideration. It may be, it is unnecessary to decide, that a different result would follow if a question of the deductibility of such a payment arose for consideration. 57 In our view the material in question provides no assistance in characterising the Concession Fees. The fees were, as the Concession Deed made clear, payable by Transurban to the State for the rights granted to Transurban under Clause 2.8 of the Concession Deed. Whether they are deductible will depend upon the question whether they should be characterised as capital having regard to the rights for which they are paid and not upon whether in some loose commercial or other sense they may economically involve some sharing of profits between Transurban and the State. It is therefore unnecessary to consider the cases referred to by the learned Primary Judge which deal with the circumstances when payments out of profits will not be allowable as a deduction: Commissioner of Taxation (Western Australia) v Boulder Perseverance Limited (1937) 58 CLR 223, Federal Commissioner of Taxation v The Midland Railway Company of Western Australia Limited (1952) 85 CLR 306.

Were the Concession Fees paid for a monopoly granted by the State? 58 It was submitted by Senior Counsel for the Commissioner that the Concession Fees were excluded from deductibility as outgoings of capital because they were payable for exclusivity or monopoly rights or to secure freedom from competition. It was said that the "intent" of the arrangements was that Transurban should have a monopoly on the provision of uninterrupted high speed travel on the roads forming part of the City Link project. This effect was said to arise "in practice" because motorists had to pay a toll or else incur a fine, they were provided with a quick and efficient means of travel and the use of alternative roads to avoid the toll was effectively prevented by traffic lights, speed restriction and because these roads were not as direct. 59 It may well be that it would be impossible for another supplier to establish an alternative link road system or to charge a toll. Indeed, it may well be that Transurban is, in a practical sense, free from any competition. However, it does not follow from this that the Concession Fees were payable so as to secure freedom from competition. It may be accepted here that a payment made to secure freedom from competition would be on capital account for the reasons given by Dixon J in Hallstroms discussed earlier. Reference may be made also to the decision of the Full Court of this Court in Jupiters Limited v Deputy Commissioner of Taxation (2002) 118 FCR 163 at 168-9. However, the present is not a case where the Concession Fees were payable to secure freedom from competition. Rather they were payable for the grant of the rights referred to in Clause 2.8 of the Concession Deed. 60 It is said that the present case was not relevantly distinguishable from United Energy discussed earlier. With respect, we agree with the learned primary Judge that it is. In the circumstances of that case the liability of the taxpayer granted a license for a period of years to distribute electricity to customers in a particular area, to pay the franchise fees in the form of a compulsory levy imposed by the Victorian government was found to be the securing of immunity from competition during the relevant period. In the present case the obligation to pay the Concession Fees arises as consideration for the rights granted to Transurban in Clause 2.8 of the Concession Deed. The advantage sought and obtained by the obligation was not the securing of immunity from competition but the rights conferred by that Clause. The Concession Fees are not, for that reason, on capital account.

Are the Concession Fees on capital account having regard to the advantages sought and obtained by Transurban? 61 It is usual to commence any discussion of whether a loss or outgoing has the character of capital or whether it is on revenue account with the classic formulation of Dixon J in Sun Newspapers Ltd and Associated Newspapers Ltd v Commissioner of Taxation (Cth) (1938) 61 CLR 337 at 363 where his Honour said: "There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment." 62 As the full High Court more recently said in GP International Pipecoaters Pty Ltd v Commissioner of Taxation (1989) 170 CLR 124 at 137: "The character of expenditure is ordinarily determined by reference to the nature of the asset acquired or the liability discharged by the making of the expenditure, for the character of the advantage sought by the making of the expenditure is the chief, if not the critical, factor in determining the character of what is paid." 63 In the present case the character of the expenditure will be determined by reference to the rights secured as consideration for the liability to pay the Concession Fees. These are to be found in Clause 2.8 of the Concession Deed. As to the remaining factors discussed by Dixon J the advantages conferred upon Transurban by its obligation to pay the Concession Fees are used, relied upon or enjoyed by it for periods commensurate with the six monthly obligation incurred. The Concession Fee is, in the sense used in the cases, recurrent; it is at least prima facie, a periodic outlay incurred, not for a permanent advantage but rather as part of the cost to Transurban of conducting its income earning operation of operating a toll road. 64 As noted earlier the Concession Fee is said, by clause 3.1(a) to be payable in consideration of the State granting the concession rights set out in clause 2.8. Clause 2.8 is expressed to be the grant by the State to Transurban of rights, being rights to: "(i) design (ii) construct (iii) Commission (iv) Operate (v) Impose and collect a toll for the use of Vehicles (within the meaning of the Toll Calculation schedule) on; (vi) Maintain and repair; and (vii) Raise revenues from other lawful uses of the Link approved by the State …" These "rights" are granted subject to the terms of the deed, that is to say, inter alia, to compliance by Transurban of its obligations which include payment of the Concession Fee. 65 It might be said that the "rights" to design, construct and commission are more aptly described as obligations than rights, although no doubt the fact that construction takes place on land owned or acquired by the State would require permission on the part of the State. It may also be said that these rights to the extent that the Concession Fee is paid for them may be seen to confer an advantage of an enduring kind and therefore be capital. If this were right there would be a need for an apportionment of the Concession Fee or perhaps to treat the Concession Fee as not deductible during the construction phase and until commissioning. It is, however, not necessary for this matter to be considered as the Commissioner eschewed any possibility of apportionment and the case was argued upon the basis that either the whole Concession Fee was on capital account and thus non deductible, or alternatively the whole Concession Fee was on revenue account and thus wholly deductible. 66 The Concession Fee can thus be seen to be paid for the right to operate the ring road system to be constructed by Transurban and to impose and collect tolls for the use of the system by motorists in accordance with a toll schedule. 67 There is a danger in arguing by way of analogy if only because analogies are not perfect and may ignore matters which require the analogy to be distinguished. However, during the course of argument it was put to Senior Counsel for the Commissioner that the situation was not really distinguishable from the grant by the State of a right to conduct a parking station after it had been constructed on land owned by the State and to charge motorists for parking there. Such a grant would create an exclusive right in the operator of the station which would clearly be part of its costs of business commensurate with the period for which the fee payable by the operator would be used or enjoyed. There is no reason to conclude that such a periodical fee would be other than a cost of the business operations of the operator and allowable as a deduction under s 51(1) or s 8-1 as the case may be. 68 The learned Primary Judge saw the Concession Fees as being expenditure directed at establishing and maintaining the business entity or structure and thus expenditure of a capital nature. That seems, with respect, to concentrate on the initial "rights" to design and construct and to ignore the right for which the Concession Fee is ultimately payable, namely the right to operate the road system. 69 The learned Primary Judge reached his conclusion as well on the basis that the Concession Fee was appropriately seen as being "a single concession fee" rather than a fee accruing on a periodical basis. His Honour in a passage relied upon by Senior Counsel for the Commissioner said: "It is appropriate to view the advantages provided by the State cumulatively as, in real terms, a single concession fee was paid for them. The State's contributions were not temporary, periodic, or directly related to or concerned with the day to day operations of CityLink. Rather, those advantages, which were of a permanent and enduring character, formed part of the profit yielding structure of CityLink." 70 With respect to the learned Primary Judge the present is not a case where Transurban agreed to pay a lump sum in instalments, where it would, no doubt, be correct to describe the Concession Fee as being "a single concession fee". In the event that the State defaulted in its obligations there would be no obligation thereafter to pay further instalments. Further in certain situations Transurban would, if not itself in default, not be obliged to pay the Concession Fee. In essence the Concession Fee was no different from the rental that would be payable for the parking station lease to which reference was made. To say that if that lease continued the rental was a lump sum because (unless there were rental escalations) it would be possible to calculate the total amount payable does not convert periodic rental to a single lump sum amount having the character of capital. The rental, like the Concession Fee here is payable for the use and occupation of or the right to conduct the operation in periods commensurate with the obligation to make payment. It should, accordingly be seen to be periodical and recurrent and thus a cost of conducting the business operations rather than a cost of acquiring a profit making enterprise.

Jones v Dunkel 71 During the course of argument it was submitted for Transurban that the learned Primary Judge erred in applying the rule in Jones v Dunkel. It was said for the Commissioner that Transurban was on notice that the Commissioner proposed to contend that the Concession Fee represented a share of profits to the State and that if Transurban wished to refute that contention it had available witnesses who had participated in the negotiations with first hand knowledge of those negotiations whom it might have called to give evidence. Likewise it was said that Transurban could have called evidence on the question whether the negotiations had commenced with a lump sum fee which was later made payable by instalments and was called the "concession fee". 72 The rule in Jones v Dunkel is stated in two ways. The first is that the failure of a party to call evidence will lead, unless explained, to an inference that that evidence would not assist the case of the party failing to call the evidence. The second is that the failure permits the drawing of an inference otherwise available to be more confidently drawn. It does not permit the Court to drawn an inference which is not otherwise available on the evidence in fact led. 73 There was no material before the Court from which an inference could be drawn that the parties had first settled on a lump sum which was to be payable by instalments which became the Concession Fee. Hence the second limb of the rule has no application. No doubt it may be inferred that evidence otherwise available to be called would not have assisted Transurban, however, the present is not really a case where that inference has any relevance. 74 In our opinion the rule in Jones v Dunkel has no place in the present appeal.

Conclusion 75 In our opinion it follows that his Honour erred both in finding that the Concession Fee was not deductible because it was "akin to a sharing of profits" and because in his Honour's view it was on capital account. The appeal should thus be allowed, the decision of the Primary Judge should be set aside and in lieu thereof the objections should be allowed and the matter remitted to the Commissioner for assessment of the income tax of Transurban in the years of income in accordance with these reasons. The Commissioner must pay the costs of Transurban both a first instance and on appeal. I certify that the preceding seventy-five (75) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Hill, Stone and Allsop.

Associate: Dated: 12 October 2004 Counsel for the Appellant: A C Archibald QC & M N Connock

Counsel for the Respondent: Chris Maxwell QC & Ian Stewart

Solicitor for the Respondent: Australian Government Solicitor

Melbourne City Link Authority Act 1994(Vic)

Bills of Exchange Act 1907(Cth)

Bill of Exchange Act 1909(Cth)

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