GREENWOOD J
105 These proceedings are concerned with two appeals by the Commissioner of Taxation from orders of this Court setting aside objection decisions made by the Commissioner. The primary judge also made orders remitting each matter to the Commissioner to re-determine each assessment in accordance with his Honour's reasons for judgment published in support of the orders.
106 The two originating proceedings in this Court were commenced by each respective respondent under s 14ZZ and Div 5 of Pt IVC of the Taxation Administration Act 1953 (Cth) (the "TAA"). In those proceedings each applicant (each respondent to each appeal) had the burden by operation of s 14ZZO of proving that each assessment was excessive.
107 I have had the benefit of reading in draft the judgment of Edmonds J. For the sake of consistency, I will adopt the same abbreviations for describing each respondent and other relevant entities as his Honour. Edmonds J has set out the statutory provisions relevant to the questions to be determined and has also set out the relevant provisions of an Asset Sale Agreement (the "Agreement") dated 12 October 1997 which is central to the claims for deductions by the respondents in each income year. I will seek to avoid unnecessary duplication as to those matters in these reasons.
108 Before turning to the questions in issue, it seems to me that it would be helpful to first identify the elements of the statutory regime engaged by the questions in issue in each appeal.
109 In each income year from 1998 to 2006, the respondent to the first appeal, AusNet Transmission Group Pty Ltd formerly SPI PowerNet Pty Ltd ("SPI PowerNet") claimed deductions for expenditure of a capital nature on the purchase of copyright in particular materials as part of the acquisition of a particular bundle of assets. In the 1998 income year, the claim for a deduction was made under Div 10B of Pt III of the Income Tax Assessment Act 1936 (Cth) (the "1936 Act"). In the subsequent years the claim was made under Div 373 of Pt 3-45 of the Income Tax Assessment Act 1997 (Cth) (the "1997 Act") and then under Div 40 of Pt 2-10 of the 1997 Act. It seems to be common ground that SPI PowerNet's claim for deductions in each of the tax years from 1998 to 2006 depended upon the terms of Div 10B of the 1936 Act and that any entitlement obtained under those provisions might then continue in subsequent years through subsequent provisions together with the operation of transitional provisions. The primary judge observes that in the 1999 to 2002 years of income (up to 30 June 2001) any entitlement to a deduction would continue under Sub-div 373B of the 1997 Act and the Income Tax (Transitional Provisions) Act 1997 (Cth). That seems to follow because Div 10B of the 1936 Act was replaced with Div 373 of the 1997 Act and the replacement provisions enabled deductions to be made for un-recouped expenditure for items of copyright which had been acquired before the 1999 income year.
110 The primary judge also observes that the terms of Div 373 were not the same as those in Div 10B of the 1936 Act but SPI PowerNet's claim for the 1999 to 2002 income years depended upon the claim first coming within the terms of Div 10B as they stood in the 1936 Act. SPI PowerNet's claims for deductions for the income period from 1 July 2002 to 30 June 2005 arose under s 40-25 of the 1997 Act and transitional provisions. Div 373 of the 1997 Act was replaced with Div 40 of the 1997 Act with effect from 1 July 2001. The primary judge observes at [4]:
SPI PowerNet's accounting period ended 31 December and its claims for the 2002 year were, therefore, under Division 373 for the period to 1 July 2001 and under Division 40 for the period to 31 December 2001. Its claims under Division 40 for capital allowance deductions were for the original un-recouped expenditure under the earlier provisions. In each case, however, the deduction claimed for the periods up to the 2006 year depended upon Division 10B (and s 124R(5) in particular) of the 1936 Act in the 1998 year of income.
111 These propositions are not contested on appeal.
112 Accordingly, I propose to examine the statutory provisions in the form in which they stood relevant to the claims made by SPI PowerNet in the 1998 income year.
113 I will then return to questions relating to the second appeal and the question of the 25% penalty imposed by the Commissioner, later in these reasons.
114 Division 10B of the 1936 Act addresses the topic of "Industrial Property". Section 124L(1)(b) is an application of laws provision. It provides that Div 10B applies to the owner of "a unit of industrial property" who incurred "expenditure of a capital nature on the purchase" of the unit of industrial property and, in the year of income (or a previous year of income), the owner has "used the unit of industrial property" for the purpose of producing assessable income. A unit of industrial property is defined to mean, relevantly for present purposes, by s 124K(1) as (among other things) "rights possessed by a person under a law of Australia as the owner of a copyright; or a licensee under such a copyright; and includes equitable rights in respect of such a copyright or in respect of a licence under such a copyright".
115 Section 124M provides for annual deductions on the following footing.
116 Where, at any time during the year of income, a taxpayer is the owner of a unit of industrial property (to whom Div 10B applies), an amount equal to the "residual value" of the unit of industrial property calculated according to the formula contained within that section "shall, subject to this Act, be an allowable deduction in respect of the unit" [emphasis added]. The allowable deduction is an amount equal to the "residual value" of the unit of industrial property at the end of the year of income divided by a number equal to the number of whole years in the effective life of the unit at the commencement of the year of income. The formula uses the term "residual value". Section 124S provides that the residual value of a unit of industrial property at any time shall, for the purposes of Div 10B, be ascertained by deducting from the cost of the unit to the owner, the sum of any deductions allowed or allowable under Div 10B in respect of the unit in assessments in respect of income of the owner of a year or years of income which ended prior to that time and the consideration receivable by the owner in respect of any disposal by the owner of the unit, in part, prior to that time.
117 The formula in s 124M is applied under the section to determine the relevant amount which shall be an allowable deduction in respect of the unit of industrial property to which Div 10B applies.
118 As mentioned, s 124L(1)(b) applies Div 10B to an owner of a unit of industrial property who has "incurred expenditure of a capital nature" on the purchase. Section 124R addresses the topic of "cost of a unit of industrial property" and provides that the cost of such a unit to the owner shall, subject to s 124S(2), be taken to be, in the case of an owner referred to in s 124L(1)(b), the cost ascertained in accordance with subsection (3) or (5) of s 124R if either subsection is applicable, and if neither subsection is applicable, the expenditure referred to in s 124L(1)(b). Relevantly for present purposes, if subsection (5) is applicable, the cost of the unit of industrial property so determined by operation of that subsection for the purposes of s 124R(1)(b) is taken to be the amount of the expenditure of a capital nature incurred by the owner on the purchase of the unit of industrial property for the purposes of s 124L(1)(b).
119 The parties to each appeal accept that s 124R(3) has no application.
120 However, the primary judge in part relied upon the terms of s 124R(3) in construing the proper operation of s 124R(5). Section 124R(3) is concerned with circumstances in which the Commissioner, in the case of an owner referred to in s 124L(1)(b), is satisfied having regard to particular statutory considerations that the owner (buyer) and the seller were not dealing with each other at arms-length in relation to the purchase and the expenditure of a capital nature incurred by the owner (buyer) either exceeds the cost of the unit to the last preceding owner or does not exceed that cost, but exceeds the "value of the unit" at the time of the purchase. In those circumstances, the cost of the unit to the owner (buyer) for the purposes of Div 10B shall be taken to be the cost to the last preceding owner or the value at the time of the purchase, whichever is the less.
121 The parties accept that s 124R(5) is the applicable provision for the purposes of s 124R(1)(b). That subsection is in these terms:
Where, in the case of an owner referred to in paragraph 124L(1)(b), the unit of industrial property was purchased by the owner of the unit with other property and no separate price was allocated to the unit, the amount of the expenditure of a capital nature incurred by the owner on the purchase of the unit for the purposes of this Division shall be taken to be so much of the purchase price of the unit and the other property as the Commissioner determines.
[emphasis added]
122 Thus, in circumstances where an owner of a unit of industrial property has incurred expenditure of a capital nature on the purchase of that unit together with other property and no separate price is allocated to the unit, the s 124L(1)(b) expenditure of a capital nature incurred by the owner on the purchase of the unit shall be taken to be an amount represented by so much of the purchase price of the unit and other property as the Commissioner determines. Subsection (5) of s 124R is not expressed to operate upon any state of satisfaction of the Commissioner. Nor does the subsection adopt language such as "as the Commissioner may determine", emblematic of a statutory discretion. Should the Commissioner determine (once subsection (5) is properly engaged), in the exercise of the statutory power, that no part of the undistributed or non-separate price is attributable to the unit of industrial property, it would follow that no amount of expenditure of a capital nature was incurred by the owner on the purchase of the unit of industrial property for the purposes of Div 10B (and in particular s 124L(1)(b)), in which event the Division would have no application to SPI PowerNet as the owner of the unit and no entitlement to a deduction would arise.
123 In each income year from 1998 to 2006, SPI PowerNet claimed deductions under Div 10B of the 1936 Act (or the equivalent provisions as earlier described) for expenditure of a capital nature incurred by it on the purchase of a collection of assets including a "unit of industrial property" comprising the copyright subsisting in a range of materials which, for the purposes of the resolution of these issues, were treated by the parties as works in which copyright could subsist for the purposes of the Copyright Act 1968 (Cth). Those assets were, prior to the purchase, owned by a Victorian government owned corporation, Power Net Victoria, which conducted the substantial commercial undertaking of the transmission of electricity in the State of Victoria. The purchase of the assets by SPI PowerNet relating to the transmission undertaking was effected pursuant to an Asset Sale Agreement (the "Agreement") dated 12 October 1997. The purchase price of the Assets recited in the Agreement is $2,502,600,000 ($2.502 billion). One of the 12 classes of Assets (as defined in cl 1.1 of the Agreement) purchased by SPI PowerNet under cl 2.1 of the Agreement is "the Intellectual Property Rights" which, in turn, are defined to mean, relevantly, "all copyrights"; "rights under each licence in respect of such copyrights"; and "equitable rights in respect of such copyrights". The purchase price of $2.502 billion for the defined Assets is described in cl 2.1 as the "Total Purchase Price" payable to the seller for "the Assets". The term "Total Purchase Price" is defined by cl 1.1 to mean the "sum of the price" of the Assets (including land) but "net" of particular liabilities (and "Creditors" as defined), "assumed under the Agreement" (but not including "Estimated Duty"). The reference to the "sum of the price" in defining the term Total Purchase Price might suggest that each of the 12 classes of Assets purchased under the Agreement had, either, in the Agreement, or otherwise by arrangements made between the parties to the Agreement, a price attributed to each asset and the Total Purchase Price represented the sum of those attributed prices.
124 The primary judge found that no such attribution had occurred in respect of any of the Assets and nor was there any aggregation of distributed prices so as to reach the total price agreed by the parties to the Agreement. There was simply an agreed price for the total bundle of assets acquired for the Total Purchase Price. Moreover, the Total Purchase Price is described in the definition of that term as "fixed" notwithstanding that the "components referred to above" (which seems to be a reference to the components making up "the sum of the price" of the Assets) may be shown collectively to have a different value.
125 One of the other Assets within the 12 defined asset groups acquired under the Agreement is "the Business Records" and that term is defined to mean, relevantly, "all of the Seller's financial and business data, employee data, technical data and all the Seller's other records, data, information and documents, with the exception of any documents relating to the Specified Assets". The term Specified Assets has a defined meaning which does not bear on the questions in issue.
126 The copyright acquired by SPI PowerNet from Power Net Victoria comprised of the copyright subsisting in drawings and various procedures manuals (which I will call "works") relating to the electricity transmission undertaking described at [18] of the primary judge's reasons in these terms:
1. Some 90,000 drawings saved in electronic form on a laptop
2. Easement plans - lines and stations
3. Standard maintenance instructions
4. Plant and equipment policy documents
5. Plant defects report
6. Primary practices and procedures
7. Standard oil procedures
8. Secondary practices and procedures, and relay test instructions (including in secondary practices and procedures)
9. Secondary circuit isolation
10. Solid state principles
11. Electrical instrumentation manual
12. Transducers
13. Demand recording equipment
14. Power system protection
15. Line practices and procedures
16. Live line procedures
17. Transmission field work procedures
18. Electrical plant and equipment - descriptive manual
19. Asset manual strategy
20. Standard lab test procedures and instructions
21. Training materials - TTO training protection
22. Vision 2020
23. Environmental manuals
24. Earthing code for stations
25. Plant and equipment training slides & manuals
26. Bushfire mitigation manual
27. Authority to receive - electrical access permits
28. Lab relay test instructions
29. Wholesale metering manual test procedures
30. GPU PowerNet Yarraville Quality Management Manual
31. NATA Laboratory Quality Management Manual
32. Relay settings software (RESIS).
127 Four other classes of subject matter seem to have been taken into account as falling within the notion of works in which copyright would subsist for the purposes of the Agreement, namely: 33. Lines On line rating software; 34. Transformer On line rating software; 35. Cables On line rating software; and 36. Secondary Equipment Doble Test Routines & Data.
128 In the proceedings before the primary judge, there seemed to be considerable confusion between the parties (focussing on the first appeal for the moment) as to the precise scope of the permissible enquiry to be undertaken by SPI PowerNet in seeking to discharge the burden of demonstrating that the Commissioner's assessment was excessive. That confusion was also bound up with a question of construction of s 124R(5). The primary judge observes at [9] that SPI PowerNet had initially contended that in making a determination under the subsection, the Commissioner had fallen into error in the exercise of a discretion "rather than that the Commissioner had failed to determine the objectively ascertainable correct amount which was allowable under s 124R(5)" [emphasis added]. However, at the hearing SPI PowerNet abandoned that conception of its case and contended, as the primary judge understood the new case, as described at [9], that:
... it was sufficient to establish, in accordance with the decision in [WR Carpenter Holdings Pty Ltd v Federal Commissioner of Taxation [2007] FCAFC 103; (2007) 161 FCR 1 (Full Federal Court) and WR Carpenter Holdings Pty Ltd v FCT (2008) 237 CLR 198], that the assessment was excessive as considered in Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 [see Brennan J at 621, 622] without the need first to establish reviewable error as described in Avon Downs Pty Ltd v Federal Commissioner of Taxation (1949) 78 CLR 353 [see, Dixon J at 360].
129 The primary judge also observes at [9] that the Commissioner had initially contended that the determination by the Court in Pt IVC proceedings of the "amount allowable under s 124R(5) did not depend upon the finding of error in the exercise of the power" [emphasis added] (in the context of the challenge to the Commissioner's determination under the subsection) by the Commissioner in determining so much of the non-separate price of the Assets which represented the amount of the s 124L(1)(b) expenditure. However, at the hearing, the Commissioner contended that s 124R(5) engaged the exercise of a discretion and that SPI PowerNet had failed to show error in the exercise of the discretion.
130 As a result of these changes of position, the primary judge gave leave to the parties to amend their respective Appeal Statements to reflect the changed position.
131 Relevantly for present purposes, in SPI PowerNet's Amended Appeal Statement it puts its central contentions leading to the conclusion that the assessment is excessive, in this way.
40A. The Respondent's determination under section 124R(5) of the capital cost of acquiring the copyright acts like an averment clause in a contract and the Respondent is therefore able to establish the true cost of acquisition by evidence, without also needing to establish legal error: WR Carpenter Holdings Pty Ltd v FCT (2007) 161 FCR 1
132 And further:
40B. If it is necessary to demonstrate an error of law by the Respondent in making his determination under section 124R(5), the Respondent's determination under section 124R(5) should be set aside for one or more of the following reasons -
(e) The Respondent relied upon an incorrect valuation of the copyright.
(f) The Respondent wrongly assumed that allocating an acquisition cost to the copyright would result in "double counting".
(g) The Respondent's determination to allocate an acquisition cost of $Nil to the copyright was so unreasonable that no reasonable person could have made it
(h) The Respondent misdirected himself on the legal nature of copyright.
133 Relevantly for present purposes, in the Commissioner's Amended Appeal Statement, the central contentions are put in this way:
23. The Commissioner contends that the assessments are not excessive.
24. The applicant did not incur expenditure of a capital nature on the purchase of any items of copyright within the meaning of s 124L(1)(b) …
25. If the applicant did incur expenditure of a capital nature on the purchase of items of copyright under the [Agreement] (which is denied), there is no basis for setting aside the Commissioner's determination under s 124R(5) that that amount should be taken to be $Nil for the purposes of Division 10B. In amplification:
(a) any reliance by the Commissioner on an incorrect valuation of items of copyright would not be a basis for setting aside the said determination;
(b) to the extent the Commissioner assumed that allocating an acquisition cost to items of copyright would result in "double counting", that assumption was reasonable
(c) the determination was not so unreasonable that no reasonable person could have made it.
134 In other words, SPI PowerNet contended that, in seeking to prove the assessment was excessive, it was entitled (and was sufficient) to challenge in Pt IVC proceedings whether the Commissioner's determination was correct that the amount of expenditure of a capital nature incurred by it on the purchase of the copyright was nil, having regard to evidence of the "true cost" of acquisition, without needing to show legal error in the exercise of the power in the Avon Downs sense. If, however, SPI PowerNet was required to show legal error, then the Avon Downs errors were said to be those recited at para 40B.
135 SPI PowerNet's reference in para 40A to the Commissioner's determination standing in the analogous position of a contractual averment clause is a contention, in effect, that the s 124R(5) determination stands in the same position as the Commissioner's s 136AD(4) (of the 1936 Act) determination the subject of the Full Federal Court's observations at [32] in W R Carpenter 161 FCR 1. On that footing, the Commissioner's determination would not be "irrebuttable" and would operate only as "one means of proof" of the subject matter of the determination with the result that the taxpayer would be entitled to seek to prove that the assessment was excessive by proving to the relevant standard the actuality of the relevant fact (in this case the proportion of the non-separate price paid for the copyright asset) notwithstanding the statutory deeming of the fact (as nil) by operation of the determination (characterised as an averment).
136 SPI PowerNet's reference to the Dalco and W R Carpenter cases and the re-formulation of its case (ultimately expressed as para 40A) raised the question of the intersection between the taxpayer seeking to prove in Pt IVC proceedings that the assessment was excessive by challenging the determination as wrong, that is, objectively incorrect on all the evidence (or otherwise challenging the determination) on the one hand, and the role of ss 175 and 177 on the other hand in precluding a challenge to the determination.
137 In FCT v Futuris Corp Ltd (2008) 237 CLR 146; 69 ATR 41, Gummow, Hayne, Heydon and Crennan JJ re-asserted the well-established principle that Pt IVC meets the requirements of the Constitution that a tax may not be made incontestable, as doing so would place beyond examination the limits of legislative power (MacCormick v Federal Commissioner of Taxation (1984) 158 CLR 622 at 639-640; Deputy Commissioner of Taxation v Richard Walter Pty Ltd (1995) 183 CLR 168 at 221-222), with the result that in Pt IVC proceedings the contestability of assessments made by the Commissioner is not confined to those grounds of judicial review for jurisdictional error provided by s 75(v) of the Constitution and s 39B of the Judiciary Act 1903 (Cth): Futuris at [10]; W R Carpenter Holdings Pty Ltd v FCT (2008) 237 CLR 198 at 203 [5].
138 However, although a taxpayer dissatisfied with an assessment may object against it in the manner set out in Pt IVC, the validity of an assessment is not affected by reason of any of the provisions of the 1936 Act not having been complied with: s 175. Moreover, a notice of assessment is conclusive evidence of the "due making of the assessment" and except in Pt IVC proceedings relating to the assessment, the notice of assessment is conclusive evidence that the amount and all the particulars of the assessment are correct: s 177(1). Reading s 175 and ss 175A and 177(1) together, the statutory scheme renders the validity of an assessment unaffected by a failure to comply with any provision of the 1936 Act although in Pt IVC appeal proceedings in the Court's original jurisdiction, the assessment and all particulars of the assessment may be challenged by the taxpayer, with the taxpayer bearing the s 14ZZO burden of proof. Given the presence of Pt IVC of the TAA in the statutory scheme and the recognition that, "in those proceedings the 'conclusive evidence' provision does not apply" (Futuris at [64] and [65]; at least within the limits of the language of s 177(1)), ss 175 and 177(1) of the 1936 Act do not operate by deeming the existence of an ultimate fact. Section 177(1) does no more than give evidentiary effect to s 175 (Deputy Commissioner of Taxation v Richard Walter Pty Ltd (1995) 183 CLR 168 at 222-223; Futuris at [67]) which renders the validity of an assessment unaffected by a failure to comply with any provision of the 1936 Act. The first evidential effect of s 177(1) is that the notice of assessment shall be conclusive evidence of the due making of the assessment. The second evidential effect is that the notice of assessment is conclusive evidence that the amount and all the particulars of it are correct although the second matter is open to challenge in Pt IVC proceedings.
139 At [11] of the reasons, the primary judge notes the observations of the Full Federal Court in W R Carpenter at [42] where the Court sought to explain why s 177(1) does not prevent examination by the taxpayer of the "due formation by the Commissioner of his [or her] state of mind or satisfaction whereas it does prevent examination of the due making by the Commissioner of his [or her] [s 136AD(4)] determination" [emphasis added]. The point of departure is to be found in the circumstance that due formation by the Commissioner of a statutory state of satisfaction or a statutory state of mind goes to a substantive liability to tax whereas the due making of the subsection (4) determination was merely procedural. The Full Court put it this way (quoted by the primary judge at [11]):
Where Parliament intended that the criteria for liability should include the due formation by the Commissioner of his [or her] state of mind, opinion or judgment, either in lieu of objective criteria, or as an addition to incomplete objective criteria, s 177(1) has never denied the ability of a taxpayer to examine the due formation of that state of mind on judicial review grounds. But where Parliament has exhaustively set out the criteria for liability by reference to objective matters, but has made the application of those criteria dependent upon a step being taken by the Commissioner, the step is procedural in the sense that it is not a step which forms part of the criteria for liability. The due making of such a determination is not subject to examination on judicial review grounds.
[emphasis added]
140 In this passage, the Court makes two references to "judicial review grounds" (the Avon Downs grounds of review). In W R Carpenter the Full Federal Court was addressing a contention that the Commissioner's determination under s 136AD(1)(d) that subsection (1) of s 136AD apply in relation to the taxpayer's supply of property under an international agreement made between parties not dealing at arms-length with each other, involved the exercise of a discretion which must necessarily, it was said, be free of errors of law of the Avon Downs type; was thus reviewable; and, s 177(1) did not operate to foreclose judicial review of such errors. The taxpayer similarly challenged the Commissioner's determination under s 136AD(4) which deemed the arms-length consideration to be a particular amount. Under that subsection, the Commissioner was entitled to make a determination where "it is not possible or not practicable for the Commissioner to ascertain the arm's length consideration in respect of the supply or acquisition of property". The Full Federal Court observed that the statutory scheme of Div 13 of the 1936 Act (s 136AD) identified a number of objectively ascertainable criteria the satisfaction of which would create a liability to tax including the objectively ascertainable fact (the s 136AD(1)(c) factor) that the consideration received by the taxpayer for supply of property was less than the arms-length consideration for that supply. The consideration either was or was not an arms-length consideration.
141 In Pt IVC proceedings, the taxpayer was entitled to challenge by evidence and argument the existence of the relevant fact being a matter going to a liability to tax. The Full Court characterised s 136AD(4) as analogous to an averment clause in the sense that if the Commissioner avers or asserts that it is not possible or practicable for him (or her) to ascertain the arms-length consideration, the Commissioner is entitled to rely on the averment and determine the arms-length consideration. Having that character (and being "simply" one means of proof of a fact available to the Commissioner rather than an irrebuttable presumption of the arms-length consideration: [32] W R Carpenter) the taxpayer would remain entitled to adduce evidence of the arms-length consideration in Pt IVC proceedings going to the objectively ascertainable s 136AD(1)(c) factor.
142 The Court at [33] observed that, logically, the tax liability must turn on whether the taxpayer had managed to displace the Commissioner's deemed s 136AD(4) figure. In seeking to do so, the taxpayer would be entitled to challenge the existence of any of the statutory pre-conditions necessary to the exercise of the power to make a determination without being foreclosed from doing so in Pt IVC proceedings by s 177(1).
143 These preliminary matters (including the averment analogue at [32] adopted by SPI PowerNet) led to the passage at [42] quoted by the primary judge. The point of that passage is to make clear the Full Court's view, in principle, as to two matters.
144 First, s 177(1) (having regard to its relationship with ss 175 and 175A) does not operate to prevent examination on judicial review grounds of the due formation of the Commissioner's state of mind, state of satisfaction or opinion concerning the particular statutory subject matter in issue where the criteria for liability to tax includes, as an integer of that liability, the due formation by the Commissioner of his or her state of mind, opinion or judgement as to that subject matter.
145 Second, the Court emphasised that where a step such as the s 136AD(1)(d) step by the Commissioner of applying subsection (1) (that is, applying the objectively ascertainable factors at s 136AD(1)(a), (b) and (c)) to the taxpayer in relation to the supply in question does not go to the criteria for liability (and thus the liability of the taxpayer to tax), that step is procedural in the sense that it does not go to the statutory criteria selected by the Parliament for liability to tax. The due making of a determination characterised as such a procedural step is not examinable.
146 These observations are consistent with the well-known remarks of Dixon CJ, McTiernan, Williams, Webb and Fullagar JJ in George v Federal Commissioner of Taxation (1952) 86 CLR 183 at 206 and 207, and the remarks of Mason CJ in Deputy Commissioner of Taxation v Richard Walter Pty Ltd (1995) 183 CLR 168 at 184. In the High Court decision in W R Carpenter Holdings Pty Ltd v FCT (2008) 237 CLR 198 at 203, the Court (Gleeson CJ, Gummow, Kirby, Hayne, Heydon, Crennan and Kiefel JJ) expressed these observations:
5 Section 14ZZO appears in Pt IVC of the [TAA] and provides that the appellant has the burden of proving that the assessment in question is "excessive" (s 14ZZO(b)(i)). But, as Gyles J pointed out in Syngenta Crop Protection Pty Ltd v Federal Commissioner of Taxation, in discharging that burden the appellant is not limited to grounds of judicial review for jurisdictional error and in an "appeal" under Pt IVC disputed matters of fact may fall for decision by the Federal Court.
6 The selection of the term "excessive" in a provision which preceded the enactment of s 14ZZO (namely s 190(b) of the Act in its original form) was said by Dixon CJ, McTiernan and Webb JJ in McAndrew v Federal Commissioner of Taxation to be "perhaps not a good choice", but their Honours emphasised that "'excessive' relates to the amount of the substantive liability". The adjective "substantive" is used in this field of discourse to contrast those provisions of the Act which relate to what is characterised as the procedure or mechanism of assessment. An error or slip by the Commissioner in following that procedure or in the operation of that mechanism does not necessarily produce any error in the amount of the substantive liability of the taxpayer, a point made by Brennan J in Federal Commissioner of Taxation v Dalco.
7 What is at stake in the Pt IVC appeals by the appellants are the amounts of income tax otherwise due and payable under s 204 of the Act and s 255-5 of the [TAA] as debts due to the Commonwealth and payable to the Commissioner. The phrase "substantive liability" which appears in the case law does not appear in the statutory provisions, but it is to be understood as epexegetical [see George v FCT at 204] or explanatory of them. It is with this in mind that the issues for determination in Pt IVC appeals are to be seen.
…
10 References, such as that by Mason and Wilson JJ in the earlier decision of F J Bloemen Pty Ltd v Federal Commissioner of Taxation, to the protection to the taxpayer afforded by what is now Pt IVC, by enabling the taxpayer to contest, within the framework of the taxpayer's objection, substantive liability to an amount of tax, are strengthened if read with an appreciation of the constitutional underpinning of Pt IVC. But where the formation of an opinion by the Commissioner is a criterion of liability, the area of the authority of the Commissioner is "guided and controlled by the policy and purpose of the enactment" [Deputy Federal Commissioner of Taxation v Truhold Benefit Pty Ltd] and the exercise of that authority is examinable in the way explained by Dixon J in Avon Downs Pty Ltd v Federal Commissioner of Taxation.
[citations omitted]
147 The primary judge concluded at [13] as a matter of construction of s 124R(5) that the subsection applies "where the parties to the transaction had not allocated part of an overall purchase price to the unit [of industrial property] in question but have otherwise dealt with the purchase at arms-length". Thus, the primary judge concluded that the precondition to the application of the subsection was satisfied and that SPI PowerNet was not seeking to challenge a procedural step characterised as part of the due making of the assessment. Rather, it was seeking in Pt IVC proceedings to prove that the assessment was excessive by contesting, within the framework of the taxpayer's objection, substantive liability to an amount of tax by testing whether the Commissioner's determination of that part of the un-dissected purchase price of the Assets under the Agreement, objectively referable to the purchase of the unit of industrial property, was the amount "properly attributable" to the purchase of that unit. The primary judge at [13] observes that s 124R(5) operates within the following construct:
The purpose of s 124R(5) is to enable the Commissioner to determine what the section presumes to be the objectively ascertainable portion of the total purchase price which the buyer of a unit of industrial property must be taken to have paid for the unit of industrial property. … The task may involve questions of judgment similar to those which go to determining the arm's length consideration in provisions like s 136AD(4), but it is a task directed to determining objectively that part of an un-dissected sum which was the cost for the purchase of a deductible asset.
148 Thus, it followed for the primary judge that SPI PowerNet was entitled to seek to prove that the assessment was excessive by challenging in Pt IVC proceedings whether the Commissioner's determination was "objectively correct" because that determination relates to the amount of the taxpayer's substantive liability in the sense in which that term is understood in this field of discourse as a contrast to the procedure or mechanism of assessment itself. It follows from the discussion at [9] to [13] of the reasons that the primary judge did not regard ss 175 and 177(1) as foreclosing SPI PowerNet's challenge to the Commissioner's determination under s 124R(5) as an impermissible examination of a procedural step forming part of the "due making of the assessment". In George v Federal Commissioner of Taxation, the plurality said this at 206-207:
The clear policy of s 177 is to distinguish between the procedure or mechanism by which the taxable income and tax is ascertained or assessed on the one hand and on the other hand the substantive liability of the taxpayer. The former involves the due making of the assessment.
149 The plurality in George regarded the following notion as axiomatic at 207:
Obviously the "due making of the assessment" was intended to cover all procedural steps, other than those if any going to substantive liability and so contributing to the excessiveness of the assessment, the thing which is put in contest by an appeal.
150 At [13] of the reasons, the primary judge adds this observation as to the construction of the language of s 124R(5):
It operates where it is assumed that something was paid for the unit of industrial property but that its amount (that is, its cost) was not separately identified.
[emphasis added]
151 Although the primary judge makes no express reference to the guiding principles of statutory construction at [9] to [13] of the reasons, applying the principles established in Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (2009) 239 CLR 27 at 46 [47]; Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355; and FCT v Consolidated Media Holdings (2012) 250 CLR 503, s 124R(5) applies and is engaged where the parties to a s 124L(1)(b) transaction for the purchase of a unit of industrial property, purchased together with other property (in this case assets), have not allocated a separate price to the unit. In that event, the amount of expenditure of a capital nature incurred by the owner on the purchase of the unit shall be taken to be so much of the purchase price of the unit, and the other property, as the Commissioner determines, for the purposes of Div 10B, by the Commissioner identifying the objectively ascertainable portion of the total price the buyer must be taken to have paid for the unit in the circumstances of the transaction and taking into account (where put to the Commissioner) any relevant conduct of the parties in isolating (if at all) a portion of the purchase price referable to the unit.
152 That step is not simply a procedural step.
153 It is a step which goes to the substantive liability of the taxpayer. In Pt IVC proceedings, the taxpayer is entitled having regard to s 124R(5) to call into question and seek to prove to the relevant standard that the assessment is excessive by seeking to prove that there is no proper objective foundation for the determination. It may be that upon proper analysis of the objective foundation for an allocation, the parties will be taken to have made no allocation of any part of the purchase price to the purchase of the unit of industrial property. In that sense, I would respectfully depart from the observations of the primary judge at [13] of the reasons that s 124R(5) according to its language taken in conjunction with the statutory purpose and function of Div 10B, operates upon a presumption that some part, other than nil, of the total purchase price is to be taken as a part allocated by the buyer to the purchase of the unit of industrial property.
154 Because, as a matter of construction, s 124R(5) involves a step taken by the Commissioner which is one going to substantive liability and so contributing to the excessiveness of the assessment, being the thing which is put in contest by the application (appeal) to the Federal Court under Pt IVC, the taxpayer's entitlement to challenge the objective foundation for the making of the determination is not, in my view, foreclosed by ss 175 and 177(1) read together with s 175A.
155 Moreover, the Commissioner did not contend at the hearing or as part of its case that ss 175 and 177(1) foreclosed the taxpayer's challenge to the making of the determination. Rather, the Commissioner's position was that s 124R(5) engaged the exercise of a discretion and that SPI PowerNet had failed to show error in the exercise of the discretion. In my view, that analytical foundation of s 124R(5) is incorrect but nevertheless, the Commissioner did not conduct the case on the footing that ss 175 and 177(1) operated as a complete answer to any challenge to the making of the determination under s 124R(5). In that sense, I would respectfully disagree with the observations of Edmonds J that ss 175 and 177(1) preclude an examination of the objective grounds upon which the Commissioner's determination was made under s 124R(5).
156 If s 124R(5) is characterised as the exercise of a discretion, the exercise of such a discretion might be called into question in Pt IVC proceedings having regard to the Avon Downs grounds and, as to the proper basis for demonstrating that the exercise of a statutorily conferred discretion has miscarried on the grounds of unreasonableness, Minister for Immigration and Citizenship v Li (2013) 249 CLR 332.
157 SPI PowerNet sought to prove the objectively ascertainable portion of the total purchase price referable to the purchase of the unit of industrial property by undertaking a valuation of the copyright as an analogue for that part of the purchase price to be attributed to the purchase of the copyright. At [16], the primary judge observed that the statutory task required by s 124R(5) is, in effect, that of allocating or apportioning part of a known purchase price to a part of that which was purchased "but the basis of allocation and the relevance of value, is not easy" [emphasis added].
158 The primary judge also said this at [16]:
The section is directed to allowing the taxpayer a deduction for that part of a known larger amount which is to be taken to be the cost of the deductible item rather than allowing a deduction for the independent value of the item in question.
[emphasis added]
159 The primary judge considered at [16] that "the task is not in terms, that of valuing the relevant part of what was acquired". However, the primary judge observed that the value of the copyright may be relevant to the process of allocation required by s 124R(5). The question of the relevance of value troubled the primary judge further at [16] when his Honour observed that the individual market value of an item purchased with others for a composite amount may not be the "appropriate portion of the total purchase price" which is to be taken to have been "paid" for the item. Moreover, the primary judge observed at [16] that the value of the unit of industrial property which was acquired may not produce the "outcome intended by the section". The primary judge also observed at [16] that s 124R(5) assumes that part of the total purchase price was a taxpayer's "actual cost" of acquiring the unit of industrial property and that "the amount to be allocated can be determined". That proposition may be true if it is accepted that the part of the total purchase price might be nil as, transactionally, the parties may have attributed no part of the purchase price to the acquisition of the unit of industrial property in question.
160 At [17], the primary judge notes that the experts in the case had not been asked to express an opinion on the methods by which "part of an actual total purchase price might be taken to be the cost of the copyright in question" but rather, had been asked whether there was a "generally accepted methodology or methodologies for valuing copyright in drawings and documents for a transmission system". The primary judge at [17] notes, however, that "[t]hat is not the question to which s 124R(5) directs attention" and observes that the section is directed to the allocation of a known total amount to part of the composite assets for which the total purchase price was paid. Thus at [17], "it is not directed to valuing the relevant asset except to the extent that the value may inform the task of allocation or apportionment" [emphasis added].
161 The primary judge made this further observation at [17]:
The dispute between the parties, however, was largely conducted upon the basis that the question posed by s 124R(5) was to be answered by valuing the copyright; although the parties reached radically different outcomes on that basis. Senior counsel for [SPI PowerNet] submitted in final submissions that it should be inferred that the experts had agreed, and had assumed, that the allocation of part of the total amount of the price paid for the transmission assets was to be undertaken on the basis of valuing the copyright. The Commissioner did not entirely disavow that approach and, indeed, relied upon the views of one of the valuers to maintain the position that no part of the total purchase price was to be allocated to the copyright because, as a matter of valuation, it had, in his opinion, no ascertainable separate value.
[emphasis added]
162 After that observation, the primary judge returned to the relationship between value and the question posed by s 124R(5) and observed at [17] that the "independent value of the copyright" may be relevant to the question upon which the application of s 124R(5) depends, and in many cases "will suggest or inform" the answer to the question posed by the section where, for example, there is a ready market for its purchase.
163 I have already identified the field of the materials or works which were the subject of the valuation exercise. The Commissioner contended before the primary judge that the taxpayer's case ought to be rejected because the number of items which had been valued was not consistent and therefore the valuations could not be relied upon by the Court. The primary judge rejected that contention and accepted at [19] that there was shown to be "sufficient identity in the subject matter and the number of drawings in that subject matter, which was valued" by two particular valuers, SKM and PriceWaterhouseCoopers ("PWC"). Put simply, SKM valued 105,410 documents relevant to the transmission system. PWC undertook its valuation exercise in relation to 95,910 documents. The primary judge considered that the taxpayer had discharged the burden of proof on the balance of probabilities by probative evidence in demonstrating that there were "about 105,410 documents falling within the 36 categories acquired by SPI PowerNet".
164 At [20], the primary judge observes that the SKM valuation was undertaken primarily by Mr Toohey an Engineer in the Electrical Works Section for SKM. He valued the copyright at $171 million using the replacement cost methodology. Mr John Studley of PWC was retained to comment upon the reasonableness of that valuation. The primary judge at [20] observes that a key assumption in Mr Studley's report was that in "estimating the cost to recreate the critical copyright it was not possible to copy the drawings and produce manuals". Mr Studley estimated the range of value as between $173 million and $262 million and concluded that the SKM value of $171 million was reasonable. Two other experts gave evidence before the primary judge. Mr Lonergan was retained by SPI PowerNet and agreed generally with the PWC methodology. Mr Samuel was retained by the Commissioner and expressed the view that the copyright had no value separate from the other assets which were acquired.
165 At [21], the primary judge observes that both the taxpayer and the Commissioner contended that the drawings were significant to the operation of the electricity transmission business "but, in part for the same reason, they reached opposite conclusions about their value". The primary judge observes that Mr Ficca, an Electrical Engineer, who had spent his professional working career in the energy industry gave evidence of the critical importance of the drawings to the transmission business for such purposes as:
… responding to emergency situations, augmenting works, maintaining and modifying works, replacing and refurbishing works, isolation works, proximity works, decommissioning, to satisfy contractual obligations to other entities in the electricity industry, and to satisfy technical regulators and various workplace safety and bushfire mitigation laws.
166 As to the criticality of the documents to the transmission undertaking, the primary judge said this at [26]:
Indeed, the evidence of those engaged in SPI PowerNet's business, which I accept, was that the copyright was critical to the proper operation of the business. The information conveyed in the drawings and documents, and the ability to reproduce the drawings and documents, was essential to the operations of the transmission system. The tasks for which the documents were created typically required reproduction of the documents by display on computer screens or portable hand-held devices, or as printouts for staff to take for use on-site. Reproduction with tracing paper was used before photocopying became possible, as was microfiche. The drawings and documents have been digitized since the 1980s and imported to a management system called "Objective".
[emphasis added]
167 At [39], the primary judge said this:
The evidence was that the value of the drawings to the business lay in the expression of the information they contained. It may be that the information could be expressed differently but the expressions in the drawings were vital to the operations of the business which SPI PowerNet acquired. It was the expression of that information which SPI PowerNet needed to acquire and did acquire.
[emphasis added]
168 The three expert witnesses, Mr Lonergan, Mr Studley and Mr Samuel agreed that there were three generally accepted methodologies for valuing intellectual property but could not agree about a generally accepted methodology for valuing copyright in drawings and documents for a transmission system. The three methodologies were an income approach, a market approach and a cost approach. A replacement cost methodology was also appropriate but the experts could not agree about its application in the circumstances the subject of these proceedings. Mr Samuel was of the view that a market approach was relevant because there had been "contractor agreements" which had provided evidence of the amount a willing buyer was prepared to pay for the relevant copyright from a willing seller. The primary judge notes that Mr Samuel expressed the view that the copyright "could not possibly be sold separately from the transmission business". The other two experts were of the view that the market approach was not appropriate for valuing the copyright in drawings and documents for a transmission system "because of the unique nature of the copyright assets and that there was no readily observable market for such assets".
169 The primary judge at [25] observes that the approach adopted by Mr Samuel upon which the Commissioner relied did "not accord with the task to be undertaken under s 124R(5)". The primary judge at [25] said this:
However, the task contemplated by the section assumes that some part of the purchase price for the total assets has been paid for the unit of industrial property constituted by the drawings in the same way that it may be assumed that some part of an amount to purchase a car with a key may pay an amount for the car and an amount for the key to operate it. It is not a sufficient answer to the application of the section that the unit of industrial property may not be capable of independent sale in a hypothetical market. It may be that little of the total purchase price is to be taken as having been paid for the item of industrial property but that conclusion will not necessarily follow just because items which are sold together could not be sold separately.
[emphasis added]
170 After that passage, the primary judge returned to the difficulty of the relationship between the statutory question posed by s 124R(5) and the valuation exercise and said this:
Similarly, as a matter of general principle, the task required by s 124R(5) is not answered by determining the separate value of one of a number of assets which were acquired together with the payment of one un-dissected purchase price. It may well be that the separate value of the copyright may best be determined by the replacement cost methodology, and that value may inform the answer to the question posed by s 124R(5), but it does not necessarily determine how much of the price actually paid is to be taken as the amount paid for the copyright. The application of any methodology for valuing an asset for the purposes of s 124R(5) will be of assistance only to the extent that it informs the inquiry required by that section: namely, how much of the actual agreed total sum is to be taken to have been paid for the item in question.
[emphasis added]
171 At [26], the primary judge observes that there may be cases in which the value of a unit of industrial property compositely acquired may not be relevant. His Honour further observes that for value to be irrelevant, "it must be clear that no part of the purchase price was paid for the unit of industrial property". The primary judge observes that the acquisition of the copyright by SPI PowerNet in these proceedings is not such a case. His Honour observes that Mr Samuel had taken the view that the copyright had no separate value because, like his car key example, it could not be sold separately. The primary judge observes that the evidence of the other experts was to the effect that the copyright had value; its separate value was capable of determination; and that it had been purchased.
172 At [27], the primary judge observes that the preponderance of the expert evidence was that the separate value of the copyright acquired by SPI PowerNet was properly to be determined and able to be determined by the replacement cost methodology and the application of that methodology produced a value for the copyright at the date of acquisition of $171.8 million according to SKM. At [28], the primary judge observes that the exercise undertaken by SKM involved determining the "replacement cost of the intellectual property contained in the copyright" and further observes:
The basis of the assessment included an estimate of the time it would take similarly qualified personnel to undertake the necessary work to replace the intellectual content of the drawings and other documents. The report produced by SKM in 1999 [the valuation having been undertaken between November 1998 and January 1999] included a detailed explanation of the work undertaken to produce the estimated value of the intellectual property acquired as at 6 November 1997.
[emphasis added]
173 Applying that method, PWC concluded that the $171.8 million value adopted by SKM was reasonable. Mr Lonergan also supported the valuation. However, Mr Samuel did not accept that the replacement cost methodology was an appropriate method to apply.
174 At [32], the primary judge returned to the relationship between the evidence of value and the statutory task and said this:
The evidence that the value of intellectual property acquired by SPI PowerNet at the relevant time was $171.8 million does not, however, of itself necessarily determine the amount of the deduction to be allowed under s 124R(5). The value of the unit of industrial property, in this case the copyright acquired by SPI PowerNet, might not be the amount which is to be taken as that part of the total purchase price which is to be taken to be the cost for its acquisition. The replacement cost method does not seek to determine the actual cost of the copyright sold by the vendor, and may produce an amount which differs from that which should be taken to be that part of the total price actually agreed between the parties.
[emphasis added]
175 At [32], the primary judge again observes that:
… it is not the independent value of the copyright that is required to be determined for the purposes of s 124R(5): what is to be determined is what part of the total amount paid is properly to be regarded as the amount paid for the copyright (even though it might not be capable of independent sale). The replacement cost methodology as employed by SKM seems best able to capture the amount required by [s 124R(5)] to be determined. The replacement cost approach was explained [in a particular text] as seeking 'to measure the future benefits of ownership by quantifying the amount of money that would be required to replace the future service capability of the subject intellectual property'. The copyright in contention in this proceeding was necessary to the operation of the transmission business and had to be acquired with other assets. The cost of acquisition of the copyright is likely to be reflected in the cost to create the copyright as the replacement cost method aims to determine.
[emphasis added]
176 At [33], the primary judge finds that the task undertaken by SKM in 1999 establishes with sufficient probability the cost of the copyright as acquired by SPI PowerNet on 6 November 1997. The primary judge finds that the copyright was a necessary incident of what was acquired and that had it not been acquired, "it would have had to be created to enable the business to function": [33]. At [33], the primary judge also says this:
The parties expressly provided for the acquisition by SPI PowerNet of the copyright and in doing so acquired something which was reliably estimated to have the separate value of $171.8 million at the time of acquisition. That amount can be taken as that part of the Total Purchase Price paid by SPI PowerNet for the copyright for the purposes of s 124R(5) unless there is some aspect of the calculation of the amount that requires modification to make it accord with the purpose of the section.
[emphasis added]
177 The primary judge then considers the role of deprival costs in reaching a final valuation figure.
178 Before the primary judge, the Commissioner contended that no amount of the total purchase price could be allocated to the copyright in part because the copyright was limited to the right to reproduce the drawings and that this right was relatively worthless independently of the information to be reproduced or would be worthless because SPI PowerNet would enjoy an implied licence to use the works in the transmission business. The Commissioner also contended that the experts had valued the wrong thing by seeking to identify the time value of replacing the materials and ought to have sought to value the right to reproduce or modify the drawings as an aspect of use of those drawings.
179 The primary judge at [40] rejects those submissions on the part of the Commissioner and concludes that the SKM valuation "did not value the wrong asset when seeking to determine the cost to replace the drawings".
180 The unit of industrial property in this case is the copyright said to subsist in a range of materials which are said to qualify as original works for the purposes of the Copyright Act 1968 (Cth). The materials have been described in these reasons and they represent either literary works or artistic works for the purposes of the Copyright Act. The computer works also represent literary works. The bundle of rights subsisting in those works are those rights conferred by s 31(1) of the Copyright Act and relevantly for present purposes, in respect of the literary works, the nature of the copyright in original works includes the right to reproduce the work in a material form; publish the work; communicate the work to the public; and make an adaptation of the work. In the case of the artistic works, the copyright comprises the right to reproduce the work in a material form; publish the work; and communicate the work to the public. Some of the works may be unpublished works. I do not propose to examine the provisions of the Copyright Act which govern all of the relevant "connecting factors" concerning the subsistence of copyright in particular works. The case before the primary judge seemed to proceed on the footing, for the purposes of the Div 10B issue, that the works in question were regarded as original works in which copyright subsisted.
181 The question of whether a person is engaging in infringement of the copyright is, relevantly for these proceedings, governed by s 36 of the Copyright Act. Section 36(1) provides that subject to the Act, the copyright in a literary or artistic work (drawings, plans, maps, computer software) is infringed by a person who, not being the owner of the copyright, and without the licence of the owner of the copyright, does in Australia, or authorises the doing in Australia of, any act comprised in the copyright. I will return to the relevance of s 36(1) later in these reasons.
182 To the extent that undertaking a valuation of the copyright is relevant to or might properly inform the statutory task of allocation required by s 124R(5), the relevant valuation exercise is one of determining the value of the particular bundle of rights so described within s 31 of the Copyright Act comprised in the copyright and exercisable by the owner of the copyright. The statutory task of allocation is one of attributing so much of a known un-dissected (non-separate) purchase price of the copyright and other property, to the copyright asset. That, however, is not the task the experts undertook. First, the experts failed to answer the precise question asked by the section, as the primary judge has observed. That question might have been: What are the objectively identifiable considerations going to determining the proper basis upon which, as to method (and the facts relevant to method), a part of an agreed non-separate price for a collection of assets might be allocated, to the copyright subsisting in the various categories of works in question? Second, to the extent that the value of the relevant bundle of rights comprised in the copyright informs either the allocation task under s 124R(5) or the question which might have been asked of the experts, the relevant rights must be valued taking into account the following circumstances.
183 First, SPI PowerNet by operation of the Agreement has ownership of all of the physical (and electronic) versions of the documents necessary to conduct the transmission business. The primary judge found that there are thousands of documents relating to the conduct of the transmission undertaking. For the purposes of the copyright argument in relation to Div 10B, the primary judge found that there were about 105,410 documents falling within 36 separate categories of documents and all of those documents were "vital" and "essential" to the conduct of the electricity transmission undertaking.
184 Second, as a function of ownership of the physical and electronic versions of the documents and the copyright in the documents, SPI PowerNet is in an unconstrained position to use the documents as it may choose in the conduct of the transmission undertaking. Let it be assumed, however, that SPI PowerNet had not acquired the copyright subsisting in the relevant documents under the Agreement, a question would then arise as to the extent to which SPI PowerNet was subject to any constraint in its use of the documents (in particular, reproduction rights and the capacity to port drawings and other documents to hand-held devices) derived from the Copyright Act.
185 Third, any exercise by SPI PowerNet of any of the rights comprised in the copyright would only amount to an infringement of the copyright (had SPI PowerNet not acquired the ownership of the copyright under the Agreement) if SPI PowerNet exercised any of those rights without the licence of the owner of the copyright. Let it be assumed that SPI PowerNet had not acquired the copyright subsisting in the 105,410 documents. Could it be reasonably inferred in such a case, having regard to the terms of the Agreement under which SPI PowerNet acquired all of the relevant assets necessary to conduct the electricity transmission undertaking, that Power Net Victoria (the Victorian government owned corporation which formerly owned the copyright in the documents), would have been the source of an implied licence in favour of SPI PowerNet to use all of the documents in connection with that undertaking in a way which included exercising any and all rights falling within the rights comprised in the copyright? The answer to that question seems plainly enough yes, in which event any exercise of any of the rights subsisting in the copyright would have occurred with the licence of the owner of the copyright.
186 Fourth, in those circumstances, it is not necessary to undertake a time-based analysis of the value of work which would have been necessary to recreate the 105,410 documents in a way which could have expressed the information contained in those documents in a non-infringing form. Such a valuation exercise does not aid or inform the statutory task under s 124R(5). I respectfully disagree with the finding of the primary judge at [33] that had the copyright not been acquired, SPI PowerNet would have had to create the field of documents in which copyright subsisted in a way which conveyed the same information but in a non-infringing way to enable the business to function.
187 Since SPI PowerNet, upon the hypothesis that it had not acquired the copyright under the Agreement, would have been entitled to exercise without infringement all of the relevant rights comprised within the copyright subsisting in the documents, the statutory question is: What portion of the known and actual un-dissected purchase price is to be attributed to the acquisition of the ownership of the copyright having regard to the circumstances in which SPI PowerNet found itself by reason of having entered into the Agreement?
188 For my part, I respectfully depart from the conclusions of the primary judge on the question of the extent to which determining the value of the copyright, according to the methodology adopted by the experts, informs the answer to the statutory question. Once it is seen that upon the hypothesis that SPI PowerNet had not acquired the copyright but was in the position to meaningfully exercise all of the rights necessary to conduct the electricity transmission undertaking (and to that end deal with the documents in a way which would otherwise involve exercising rights comprised in the copyright), the question to be determined is what part of the non-separate purchase price is to be attributed to the acquisition of the legal ownership of the copyright as part of the Agreement. It seems to me that the answer to that question is either nil, or alternatively if not nil, for the purposes of these proceedings the taxpayer has failed to prove its case and has failed to discharge the burden under s 14ZZO of showing that the assessment is excessive. That follows because the analytical exercise undertaken by the experts engaged the wrong question and thus the taxpayer has failed to show error on the part of the Commissioner in making the determination and has thus failed to show that the assessment is excessive.
189 It follows that the first appeal must be allowed.
190 I agree with the orders proposed by Kenny J.
191 As to the second appeal, the claims for deductions by AusNet Services (Transmission) Ltd, formerly SP Australia Networks (Transmission) Ltd ("SPANT") are made in respect of the period from 19 October 2005 to 31 March 2006 and for the years ended 31 March 2007 to 2011 inclusive. On 19 October 2005, SPI PowerNet became part of a tax consolidated group. SPANT was the head company for that group. Under the tax cost setting rules in Div 705 of the 1997 Act, SPANT was required to reset the tax costs of SPI PowerNet's assets including the copyright it had previously acquired under the Agreement. For the purposes of determining the tax cost setting amounts of the assets, it was necessary to value them as at 19 October 2005. For the purposes of the second appeal, the question of value of the copyright was directly relevant.
192 The question of the value of the copyright as at 19 October 2005 was the subject of an expert report from PriceWaterhouseCoopers dated 26 February 2007. That report was not admitted into evidence although Mr Studley gave oral evidence of a value range of $230 million to $323 million.
193 I have had the benefit of reading the reasons for judgment in draft of Edmonds J in relation to the second appeal. I respectfully agree with the conclusions reached by his Honour in relation to the second appeal and generally agree with the reasons in support of those conclusions.
194 I agree with the orders suggested by Kenny J in relation to the second appeal.
I certify that the preceding ninety (90) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Greenwood.