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[2006] HCA 35
High Court of Australia
2006-07-20
Crennan J, As Crennan J, Merkel J, Gleeson CJ, Crennan JJ
Original judgment source is linked above.
Commissioner of Taxation v Citylink Melbourne Limited [2006] HCA 35
B J Shaw QC with I B Stewart for the appellant (instructed by Australian Government Solicitor)
A C Archibald QC with M M Gordon SC, M N Connock and S H Steward for the respondent (instructed by Freehills)
Notice: This copy of the Court's Reasons for Judgment is subject to formal revision prior to publication in the Commonwealth Law Reports.
Commissioner of Taxation v Citylink Melbourne Limited
Income tax - Allowable deductions - Respondent entered into contracts with the State of Victoria to design, construct, operate and maintain a major system of roads - The State conceded to the respondent rights to do all that was necessary to complete those tasks, with a view to transferring the infrastructure and all associated rights back to the State at the expiry of the concession period - Respondent paid concession fees as consideration for those rights - Whether concession fees were allowable deductions - Whether concession fees which accrued semi-annually were outgoings incurred in, and referable to, the relevant years of income, where the fees were "owing" but "not due for payment" - Whether payment was contingent or theoretical - Whether concession fees were on revenue or capital account - Whether concession fees were an outgoing in gaining or producing the taxpayer's assessable income - Whether the concession fees conferred a benefit on the taxpayer of an enduring nature - Whether acquisition of the benefit essential to the taxpayer's business - Whether concession fees were the purchase price paid for the road system as a capital asset - Whether concession fees were akin to a share of profits with the State or a dividend payable to a joint venturer - Whether payment of concession fees analogous to the payment of rent.
(1) The capital characterisation issue: Are the concession fees outgoings incurred in the performance of a promise given by Transurban as consideration for the acquisition of a capital asset, namely, the grant of the concession for the Project ("the Concession")? Are there circumstances where such payments are not of a capital nature, given the object and purpose for which the payments are made?
(2) The incurring of the obligation issue: If the first issue is determined against the Commissioner and the concession fees are characterised as being on revenue account, where the contract provides that an obligation may be satisfied by the issue of Concession Notes which are subject to identical conditions for presentation as the conditions which allow the deferral of payment, does the issue of such Notes mean that the obligation was "incurred" in the relevant income years or at some other time?
(3) The proper referability issue: If the first issue is determined adversely to the Commissioner and the second issue in favour of Transurban, where the outgoing is "incurred" in the income years but will not fall due for payment until some uncertain time in the future, can the full amount of the outgoing nevertheless be said to be "properly referable" to the income years, and thus deductible in respect of those years?
The propounded deduction was an outgoing on capital account
"There have been many cases which fall on the border-line. Indeed, in many cases it is almost true to say that the spin of a coin would decide the matter almost as satisfactorily as an attempt to find reasons. But that class of question is a notorious one, and has been so for many years."
The comments of Starke J in Hallstroms Pty Ltd v Federal Commissioner of Taxation[31] were to like effect. Despite these remarks, it is useful to turn to some of the judicial explanations.
"The solution to the problem is not to be found by any rigid test or description. It has to be derived from many aspects of the whole set of circumstances some of which may point in one direction, some in the other. One consideration may point so clearly that it dominates other and vaguer indications in the contrary direction. It is a commonsense appreciation of all the guiding features which must provide the ultimate answer. Although the categories of capital and income expenditure are distinct and easily ascertainable in obvious cases that lie far from the boundary, the line of distinction is often hard to draw in border line cases; and conflicting considerations may produce a situation where the answer turns on questions of emphasis and degree. That answer 'depends 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' (per Dixon J in Hallstrom's Case[33]). As each new case comes to be argued felicitous phrases from earlier judgments are used in argument by one side and the other. But those phrases are not the deciding factor, nor are they of unlimited application. They merely crystallize particular factors which may incline the scale in a particular case after a balance of all the considerations has been taken."
"Where a taxpayer incurs loss or expense in raising funds by issuing promissory notes at a discount to their face value, its entitlement to a s 51 deduction for that loss or expense depends on the use to which the funds are to be put. If the funds are to be used as working capital, the cost of the discounts will be deductible as a revenue expense. If the funds are to be used to strengthen 'the business entity, structure, or organisation set up or established for the earning of profit', the cost of the discounts will generally not be deductible because they will be a capital, and not a revenue, expense. But sometimes the raising of capital may be such a recurrent event in the business life of a taxpayer that the cost of raising the capital will qualify as a revenue expense."
"The distinction between expenditure and outgoings on revenue account and on capital account corresponds with the distinction between the business entity, structure, or organization set up or established for the earning of profit and the process by which such an organization operates to obtain regular returns by means of regular outlay, the difference between the outlay and returns representing profit or loss."
"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."
"What is an outgoing of capital and what is an outgoing on account of revenue depends 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."
"[W]hen the matters stated by Dixon J in Sun Newspapers[42] 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 … 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'[43]. Accordingly, it must also follow that the concession fees are outgoings on capital, rather than revenue, account[44]."
"the fact that payments are made or received in performance of a promise given as part of the consideration for the acquisition of a capital asset does not necessarily mean that the payments are themselves of a capital nature".
"the ... payments should properly be regarded as expenditure necessary for the acquisition of property or of rights of a permanent character, the possession of which was a condition of carrying on the business … at all".
"In my opinion, if the expenditure can be truly characterized as the payment of consideration for a capital asset or advantage, it will be of a capital nature notwithstanding that the payments are recurrent and are continued for an indefinite period."
"It does not matter how they are calculated, or how they are payable, or when they are payable, or whether they may for a period cease to be payable. If they are paid as parts of the purchase price of an asset forming part of the fixed capital of the company, they are outgoings of capital or of a capital nature."
Concession fees were not incurred in the income years
"[Y]ou have been allowed a deduction of $95 million which you do not pay until [2013 on the base case] …
[T]he words of section 51 … talk[] about an outgoing …
[A]rguably, this is a case of form triumphing over substance.
[W]hen you talk about 'present liability' you are putting a gloss on the words of the section. … [H]ere you have a situation where you pay rent, $95 million, you discharge the liability by issuing a note, and the concession note, on one theoretical view, may never be payable at all."
"The employees were entitled to leave, but they were not entitled to payment. The entitlement to payment would not arise until the employees took leave (or died or left the employment). The event on which the entitlement … to payment depended had not occurred. There was a certainty that a liability to make payments in respect of leave would arise in the future, but it had not arisen. The present is not a case in which there was an immediate obligation to make payment in the future, or a defeasible obligation to pay, or a present obligation which as a matter of law was unenforceable - there was no accrued obligation to make any payment at all. There was no loss or outgoing 'incurred' within s 51(1)."
Similarly, Barwick CJ in Nilsen Development said[66]:
"[T]here can be no warrant for treating a liability which has not 'come home' in the year of income, in the sense of a pecuniary obligation which has become due, as having been incurred in that year. Sir John Latham's language in Emu Bay Railway Co Ltd v Federal Commissioner of Taxation[67] clearly enough indicates that to satisfy the word 'incurred' in s 51(1) the liability must be 'presently incurred and due though not yet discharged'. The 'liability' of which Sir John speaks is of necessity a pecuniary liability and the word 'presently' refers to the year of income in respect of which a deduction is claimed. It may not disqualify the liability as a deduction that, though due, it may be paid in a later year. That part of Sir Owen Dixon's statement in New Zealand Flax Investments[68] which presently needs emphasis is that the word 'incurred' … 'does not include a loss or expenditure which is no more than pending, threatened or expected': and I would for myself add 'no matter how certain it is in the year of income that that loss or expenditure will occur in the future'."
"The words 'to the extent to which' contradict a complete divorce between [the assessable income and the incurring of 'losses and outgoings']. The word 'in' also suggests the necessity of a connection between the 'losses and outgoings' in question and the real possibility of 'assessable income'. Further, the very notion of 'allowable deductions', so described, suggests a relationship of some kind between the 'losses and outgoings' in question and 'the assessable income'."
"Where the reason for allowing a deduction is that it is a normal or recurrent expenditure or an expenditure which is fairly incident to the carrying on of the business, it is evident that it can seldom be associated with any particular item on the revenue side against which to set it, and, as the ground of its allowance is that it is an incident or accident, something concomitant to the conduct of the business, it follows that to deduct it in the year when it falls to be met is consistent with the reason for deducting it and conforms with business principles."
"In the present case we are concerned with rival methods of accounting directed to the same purpose, namely, the purpose of ascertaining the true income. Unless in the statute itself some definite direction is discoverable, I think that the admissibility of the method which in fact has been pursued must depend upon its actual appropriateness. In other words, the inquiry should be whether in the circumstances of the case it is calculated to give a substantially correct reflex of the taxpayer's true income … Speaking generally, in the assessment of income the object is to discover what gains have during the period of account come home to the taxpayer in a realized or immediately realizable form."
(1) No amount would be derived through the operation of the Project until some time after the income years;
(2) The Concession Notes were not interest-bearing. The true cost to Transurban was thus far less than the face value of the Concession Notes. In fact, that cost decreased the longer the period of time for which they were to be held before being presented for payment. The Project documents forecast that the payment of Concession Notes would not be a demand on revenues in the income years because it would be many years before the preconditions for presentation of the Concession Notes would probably be satisfied;
(3) By contrast, the value of the benefits enjoyed by Transurban, from the grant of the Concession, was projected to increase in later years; and
(4) The expected source of funds for payment of the concession fees was the returns enjoyed by Transurban in the later years of the Project.
"In the context of project finance, [a concession] is usually granted by a governmental or quasi‑governmental authority. The concession is the cornerstone of the 'BOT' ('build, operate, transfer') project finance model. In this model, a concession is granted to a concession holder who is required to build the relevant project facilities or piece of infrastructure, operate them or it for a fixed period and, at the end of such period, transfer them (or it) back to the person who originally granted the concession."
"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."
"(1) You can deduct from your assessable income any loss or outgoing to the extent that:
(a) it is incurred in gaining or producing your assessable income; or
(b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.
(2) However, you cannot deduct a loss or outgoing under this section to the extent that:
(a) it is a loss or outgoing of capital, or of a capital nature; or
(b) it is a loss or outgoing of a private or domestic nature …"
(v) impose and collect a toll for the use of Vehicles (within the meaning of the Toll Calculation Schedule) on;
(vii) raise revenues from other lawful uses of the Link approved by the State under clause 9.4(c) and (d) in respect of,
the Link until the end of the Concession Period, subject to and upon the terms of this Deed."
"The [respondent] 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 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."
"(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 [respondent] 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."
"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 [respondent] 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 [respondent] 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."
Were the concession fees incurred in the years of income?
"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 application. But it does not include a loss or expenditure which is no more than impending, threatened, or expected."
It has long been recognised that an outgoing may be "incurred", but not "discharged"[120], in the relevant year of income. In Federal Commissioner of Taxation v James Flood Pty Ltd[121] Dixon CJ, Webb, Fullagar, Kitto and Taylor JJ considered commercial and accounting practice and the test for deductibility and said of s 51(1)[122]:
"The word 'outgoing' might suggest that there must be an actual disbursement. But partly because such an interpretation would produce very strange and anomalous results, and partly because of the use of the word 'incurred', the provision has been interpreted to cover outgoings to which the taxpayer is definitively committed in the year of income although there has been no actual disbursement." (emphasis added)
The Court went on to say "outgoings" could only have been "incurred" if "in the course of gaining or producing the assessable income or carrying on the business, the taxpayer has completely subjected himself to them"[123].
"[T]he weight of authority supports the conclusion that, depending upon the circumstances, a liability to pay money can constitute, or give rise to, a 'loss or outgoing' which is 'incurred' within the meaning of that sub-section notwithstanding that the money is not payable until a future time and that the obligation to pay it is theoretically defeasible or contingent in that it is subject to a condition which remains unfulfilled." (footnotes omitted)
Non interest bearing long term debt represented by the Concession Notes has been included in the financial statements at the present value of expected future repayments. The present value of expected future repayments is determined using a discount rate applicable to the [respondent's] other borrowing arrangements. The present value of expected future repayments will be reassessed periodically."
Were the concession fees referable to the years of income?
"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." (footnote omitted)
Were the concession fees on capital account having regard to the advantage they secured?
"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."
Victoria, Legislative Council, Parliamentary Debates (Hansard), 28 November 1995 at 841. ↑
Vinter, Project Finance, 3rd ed (2006) at 86. ↑
Victoria, Legislative Council, Parliamentary Debates (Hansard), 28 November 1995 at 841. ↑
Transurban City Link Ltd v Commissioner of Taxation (2004) 135 FCR 356 at 361ff. ↑
Section 14(1) of the Melbourne City Link Act 1995 (Vic). ↑
Sections 1 and 4 of the Melbourne City Link Act 1995 (Vic). ↑
cf Coles Myer Finance Ltd v Federal Commissioner of Taxation (1993) 176 CLR 640. ↑
Australia, House of Representatives, Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2006, Exposure Draft, December 2005. ↑
Burrill v Commissioner of Taxation (1996) 67 FCR 519 at 524 per Jenkinson, Olney and Sundberg JJ. See also J Rowe & Son Pty Ltd v Federal Commissioner of Taxation (1971) 124 CLR 421 at 448-449 per Menzies J; Federal Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199 at 216-217 per Mason ACJ, Wilson, Brennan, Deane and Dawson JJ; Federal Commissioner of Taxation v Orica Ltd (1998) 194 CLR 500 at 531-532 [72] per Gaudron, McHugh, Kirby and Hayne JJ. ↑
Cliffs International Inc v Federal Commissioner of Taxation (1979) 142 CLR 140 at 148 per Barwick CJ. ↑
Coles Myer Finance Ltd v Federal Commissioner of Taxation (1993) 176 CLR 640 at 660-661 per Mason CJ, Brennan, Dawson, Toohey and Gaudron JJ and 672-673 per Deane J. ↑
Commissioner of Taxes (SA) v Executor Trustee and Agency Co of South Australia Ltd (1938) 63 CLR 108 at 154 per Dixon J. ↑
(2004) 135 FCR 356 at 380 [81]; (2004) 141 FCR 69 at 82 [37]. ↑
Provided for in cl 3.1(d) of the Concession Deed. ↑
Nilsen Development Laboratories Pty Ltd v Federal Commissioner of Taxation (1981) 144 CLR 616 at 623 per Barwick CJ. ↑
Amalgamated Zinc (De Bavay's) Ltd v Federal Commissioner of Taxation (1935) 54 CLR 295 at 303 per Latham CJ, 306-307 per Starke J and 309 per Dixon J; Ronpibon Tin NL and Tongkah Compound NL v Federal Commissioner of Taxation (1949) 78 CLR 47 at 57 per Latham CJ, Rich, Dixon, McTiernan and Webb JJ; Commissioner of Taxation v Finn (1961) 106 CLR 60 at 68 per Dixon CJ; Federal Commissioner of Taxation v Smith (1981) 147 CLR 578 at 585 per Gibbs CJ, Stephen, Mason and Wilson JJ. ↑
Australia, House of Representatives, Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2006, Exposure Draft, December 2005; and cl 3.4 of the Concession Deed. ↑
Armco (Australia) Pty Ltd v Federal Commissioner of Taxation (1948) 76 CLR 584 at 618 per Dixon J. ↑
(1993) 176 CLR 640 at 661, 663 and 665-666 per Mason CJ, Brennan, Dawson, Toohey and Gaudron JJ and 673 per Deane J. ↑
Commissioner of Taxation
Citylink Melbourne Limited
[2005] HCATrans 304
(2004) 141 FCR 69
(2004) 135 FCR 356
(1965) 112 CLR 386
(2000) 201 CLR 109
(1999) 197 CLR 459
(1998) 194 CLR 355
(2001) 207 CLR 72
(2003) 77 ALJR 1019
(2005) 220 CLR 592
(2005) 79 ALJR 956
(2005) 79 ALJR 1337
(2005) 80 ALJR 247
(2005) 80 ALJR 341
(2005) 80 ALJR 444
(1949) 78 CLR 47
(1946) 72 CLR 634
(1996) 185 CLR 66
(1938) 61 CLR 337
(1997) 78 FCR 169
(1979) 142 CLR 140
(1953) 89 CLR 428
(1938) 61 CLR 179
(1981) 144 CLR 616
(1944) 71 CLR 596
(1938) 61 CLR 263
(1959) 101 CLR 30
(1961) 106 CLR 60
(1975) 132 CLR 175
(1979) 28 ALR 425
(1991) 173 CLR 1
(1993) 176 CLR 640
(1938) 63 CLR 108
(1998) 194 CLR 500
(1981) 148 CLR 182
(1996) 67 FCR 519
(1971) 124 CLR 421
(1987) 163 CLR 199
(1953) 88 CLR 492
(1984) 2 FCR 483
(1990) 95 ALR 663
(1952) 85 CLR 306
(1977) 32 FLR 210
(1935) 54 CLR 295
(1981) 147 CLR 578
(1948) 76 CLR 584
(1990) 170 CLR 124