Commissioner of Taxation v Citylink Melbourne Limited

Commissioner of Taxation v Citylink Melbourne Limited - [2006] HCA 35 - HCA 2006 case summary — Zoe

[9]

Before the primary judge: The primary judge[11] (Merkel J), whose orders were reversed by unanimous decision of the Full Court of the Federal Court of Australia[12], concluded that Transurban incurred a loss or outgoing in respect of the concession fees because the liability in respect of them arose unconditionally[13], and was satisfied by Transurban's electing to issue the Concession Notes, under which there was a present liability to pay the amounts due at a future time[14]. The primary judge also concluded that the fees were "referable to the period in respect of which the liability for the fees is incurred"[15]. However, he reached these conclusions notwithstanding an intuitive opinion, which he expressed, as to their artificiality and unreality. Indeed, he suggested that such an outcome could normally only be expected in "a taxpayers' heaven"[16].
Despite the foregoing findings, the primary judge held that the concession fees were not deductible because they were akin to a promised share of profits or payment of a dividend to the State in return for the advantage flowing to capital which the State had contributed to the Project[17]. The concession fees were thus outgoings expended "on the structure within which the profits were to be earned". They were not "part of the money earning process"[18]. They were outgoings on capital and not on revenue account[19].
It was on this basis that the primary judge rejected Transurban's "appeal" to the Federal Court against what it claimed was the erroneous decision of the Commissioner of Taxation ("the Commissioner") disallowing Transurban's objection to the Commissioner's disallowance of deductions claimed by Transurban in respect of concession fees for the income years.
In the Full Court: In allowing Transurban's appeal, the Full Court found that Transurban had incurred the concession fees in the income years although they were years during which the tollway was still under construction and therefore not generating (as it later did) substantial revenues from vehicular tolls. Moreover, the Full Court found that the concession fees were referable to the income years and that the State and Transurban were not joint venturers and did not, in any legal sense, share profits[20]. Finally, the Full Court concluded that the concession fees were payable for use and operation of, or the right to conduct, the Project. They were therefore a cost of conducting the business operation rather than a cost of acquiring a profit-making enterprise[21]. On this footing, the Full Court rejected the primary judge's conclusion that the concession fees were outgoings on capital account.
By special leave, this appeal is now brought to this Court to permit the Commissioner to propound his arguments defensive of the orders made by the primary judge.

[10]

Primacy of the legislation: Problems of income tax law, such as the present, cannot be resolved by generalities. In each case, it is the duty of the decision-maker to apply the relevant legislation to the facts as found. Income tax law is not a mystery unto itself, to be preserved separate from other parliamentary law as a legal canon reserved to a specialised priestly caste[22]. It is a law enacted by the Federal Parliament and, in its new form especially, it is intended to be generally understood by taxpayers, most of whom do not have ready access to countless decisions, many of them contradictory, written on the legislation these past seventy years.
In deriving the meaning and application of income tax law, as in other areas of the written law, wisdom lies in maintaining fidelity to the statutory text and the purpose of the legislation as found in its language and elucidated by authority and admissible material[23]. This has been a constant, and unanimous, theme of decisions of this Court, in many fields, in recent years[24]. Where the outcome is governed by legislation, the starting point is always the legislative text. Income tax law is no different. We sit here to apply the legislation, not judicial approximations of it.
The legislation: The applicable legislation, in its successive forms in the 1936 Act and the 1997 Act, is set out in Crennan J's reasons[25]. It is unnecessary for me to repeat the provisions. Effectively, both enactments allow the taxpayer to deduct from its assessable income any losses or outgoings to the extent that (relevantly) they were necessarily incurred in carrying on a business for the purpose of gaining or producing its assessable income. No such loss or outgoing may be deducted if (relevantly) it is a loss or outgoing of capital, or of a capital nature[26]. Here are the two sides of the legislative coin. In the case of the income of a business (such as Transurban) the statutes envisage a division of the world between losses or outgoings on revenue account and on capital account. In the case of revenue account, the deduction is available only to the extent that it is "incurred" in "gaining or producing … assessable income" or "necessarily incurred" in "carrying on a business for the purpose of gaining or producing" assessable income. The statutory language is relatively simple. It is expressed in ordinary, not technical, language. Courts should not burden it with undue elaboration. I say this whilst acknowledging that the application of the legislation will often require explanation and justification so as to make its meaning clear and to ensure a consistency and accuracy of approach[27].
From the remarks of successive judges, explaining the application of the legislation to particular facts, have come observations that have sometimes hardened into supposedly fixed rules[28]. Every now and again, it is necessary to pause and return to the legislation itself so as to ensure that decision-makers are applying its provisions as enacted by the Parliament. This is especially necessary where, as here, there are very complex commercial arrangements involving novel transactions for a major public-private infrastructure project.

[32]

The evidence shows that the advantages for which the concession fees were payable were clearly of a permanent and enduring character. Those advantages, secured by the obligation to pay the concession fees, comprised the grant of the Concession for a period of approximately 38 years. Clearly, that was a capital asset because it was the indispensable part of the profit-yielding structure of Transurban. The Concession was relied upon and enjoyed by Transurban in the building of the infrastructure and then in operating it, as intended, over the concession period. Transurban obtained the Concession by undertaking the obligations provided in the Concession Deed and in the other Project documents. Those obligations included the performance of Transurban's promise to build and operate the tollway and to collect tolls and other revenue and to make payments to the State, including (relevantly) the concession fees.
Self-evidently, Transurban acquired the Concession in order to generate profits for its business through the operation of the tollway. This was an important capital asset so long as the Concession operated. With respect, the Full Court erred in concluding that the concession fees were "ultimately payable"[45] for the right to operate the tollway. Rather, the concession fees were payable so as to secure the right to establish the essential business structure, which was a capital asset.
Unsurprisingly, the Full Court felt obliged to express the extent to which the concession fees were paid for the rights to design, construct and commission the tollway. The judges in the Full Court acknowledged that such rights "may be seen to confer an advantage of an enduring kind and therefore be capital"[46]. However, the Full Court ignored the significance of this conceded impression in reaching its conclusion on whether the concession fees were on income or capital account (or, perhaps, partly income and partly capital).
Without any supporting reasoning, the Full Court proceeded to conclude that "[t]he concession fee can thus be seen to be paid for the right to operate the ring road system to be constructed by Transurban and to impose and collect tolls for the use of the system by motorists in accordance with the toll schedule"[47]. Obviously there is a missing link here in the Full Court's reasoning. Its use of the word "thus" was never explained or elaborated. With respect, the Full Court was also wrong to conclude that the obligation was not to be viewed as a single "concession fee", payable in instalments, as provided. Such, in my view, was the correct characterisation of the facts. These errors justify, and require, a fresh characterisation by this Court of the concession fees in substitution for that adopted by the Full Court. Performing that re-characterisation, I prefer the analysis of the primary judge. It adheres more closely to the discrimen explained by Dixon J in Sun Newspapers and Hallstroms and to the dichotomy expressed in the legislation.
This conclusion is still further reinforced by the nature of the Concession that Transurban secured under its agreements with the State. It is impossible to disaggregate those rights and to divide them up. Clearly, in composite, they were undifferentiated, both in their operation and in their character. The concession fees which Transurban was bound to pay to the State were paid "in consideration of the State granting the concession rights set out in clause 2.8"[48]. Those rights were to design, build and operate the tollway. They were not incurred in consideration of the right to operate the tollway separately from the other rights.
The recurrent concession fees payable by Transurban are thus no more than the method agreed upon by Transurban and the State for payment by Transurban for a significant capital asset indispensable to the Project. It follows that the fees constitute an outgoing of capital or of a capital nature.
Expenditure necessary to the Project: It is true that in Cliffs International Inc v Federal Commissioner of Taxation[49], Barwick CJ remarked that:

[39]

As in those cases, so in this. The payments of the concession fees formed part of the purchase price to secure an asset forming part of Transurban's fixed capital essential to the conduct on Crown land of the Project. As such, they were outgoings of capital or of a capital nature. The primary judge was correct to so hold.
No analogy to rent: The Full Court came to its conclusion that the concession fees represented outgoings on revenue account by suggesting that those fees were akin to rental payments, to be treated separately from the other elements in the Concession giving rise to Transurban's investment in the Project[54]. In fact, an actual identified rent of $100 per annum was payable[55]. However, the question is whether the analogy to rent, which would normally be an outgoing on revenue account, was a valid one. Certainly, it played an important part in the Full Court's reasoning.
In my respectful view, the Full Court's rental analogy is unpersuasive. Transurban uses the tollway, designed, constructed, commissioned, operated, tolled, maintained and repaired by it, to raise revenue. It was also authorised by the Concession Deed to "raise revenues from other lawful uses of the Link approved by the State … until the end of the Concession Period, subject to and upon the terms of this Deed"[56]. The range of functions assigned to Transurban makes it clear that it was acquiring a distinct integrated intangible asset that did not, as such, attach to property (as does a lease to land).
Nor were the concession fees expressly payable only to allow Transurban possession of the land from time to time or to obtain an income flow from the use of the land. Clause 2.8 of the Concession Deed not only granted rights with commensurate obligations. It also ensured the support of the State for a project that included the many identified governmental acts necessary for its successful implementation. The State's control over the infrastructure denied to Transurban any right to use the asset constituting the Project in the same way as a lessee usually enjoys the use of property under a lease. Unlike in a lease, there was no pre-existing distinct property right held by the State that was made the subject of use or enjoyment by Transurban. The consideration given for the Concession was given for the conveyance of new rights and not merely for their use and enjoyment. Accordingly, on the facts, the analogy between the concession fees and rent is not sustained.
Additionally, an inherent feature of rent is that it typically involves a (generally regular) periodical payment. It is not a deferred payment payable over time. By way of contrast, the concession fees in the present case are, effectively, the deferred consideration payable by Transurban to secure the grant of the Concession essential to constituting the Project. The concession fees are not a series of periodic payments payable for the periodic use or enjoyment of the asset. It is true that periodic accrual, accounted for semi-annually and secured by the issue of Concession Notes, comprised the mechanism adopted for the quantification of the consideration given for the rights conferred. However, what Transurban acquired was a capital asset and an advantage of a capital nature. The concession fees were thus to be classified as the instalment payments for securing that asset and advantage.
The Commissioner submitted that, if any analogy to an outgoing on revenue account was needed for the concession fees, a more accurate one was a promise by a lessee to pay a premium in instalments on entering into the lease. Such a payment has been described as "a cash payment made to the lessor, and representing, or supposed to represent, the capital value of the difference between the actual rent and the best rent that might otherwise be obtained"[57]. The Commissioner argued that, if a lease analogy were applicable, the consideration for the Concession (the concession fees) picked up the shortfall between the annual rent and a proper commercial rent for the land. On this view, the promise to pay concession fees fits comfortably with the concept of a premium.
I do not find it necessary to decide whether the payment of concession fees was analogous to some other form of payment incidental to a lease. It is enough to conclude that rent is fundamentally the consideration for the right to use property. The concession fees in this case were never payable simply for Transurban's right to use land. The integrated benefits acquired and the inter-related obligations assumed future payments by Transurban for the acquisition of the Concession, which was incontestably a capital asset. They themselves therefore displayed the character of capital. The analogy to rent generally, or to rent specifically payable for a parking station lease (as the Full Court thought[58]), is unpersuasive. It led the Full Court to its erroneous classification of the concession fees as being on revenue account.
Conclusion: on capital account: It follows that a correct application of the statutory provisions, explained in this Court's past authority, produces the conclusion that the characterisation adopted by the primary judge was the correct one.
I acknowledge that dicta can be found in the cases that appear to support Transurban's argument. On this issue, there have been so many judicial remarks that one feels embarrassed to add to them. Usually they are peppered with invocations as to how the expenditure can be "truly characterised". Characterisation, in every branch of the law, is problematic and usually disputable. Different minds categorise payments on different sides of the income and capital divide. That is why, in new and unusual circumstances such as the present case, it is necessary to return to the statutory text and to the novel means adopted to acquire the Concession and thereby to secure, fund, establish, maintain and ultimately operate this major project of capital infrastructure.
To be accepted as the Project controller, Transurban had, at the one moment, to accept a series of interlocking agreements that represented an integrated payment for the capital asset it acquired for the designated period. Each part of the interlocking agreements was integral to, and dependent on, the others. The capital asset would not have been provided without the carrying out of each part. The concession fees are thus to be viewed, together, as the payment of consideration for this capital asset. This conclusion makes practical and business sense. And that is the approach proper to such questions, as this Court has repeatedly affirmed[59].
Therefore, whilst accepting that on such issues different minds may reach different conclusions, a return to the statutory language, and the differentiation it accepts, persuades me that the primary judge's conclusion was the better one. It disclosed no error on this point. The Full Court's analysis was faulty and unpersuasive. The primary judge's conclusion should be restored.

[46]

These remarks were stated tentatively. They did not represent considered judicial conclusions and doubtless they reflect various imperfections. However, they highlight the intuitive oddity of the outcome upheld by the decision of the Full Court. They require this Court to scrutinise that outcome closely, to ensure that it accords with the text and purposes of the legislation. On the face of things, that seems unlikely. But have we, by judicial glossing of the legislation, reached such an outcome?
The Commissioner's submissions: On the assumption that liability for the concession fees was "incurred", the Commissioner submitted that nonetheless such fees were not outgoings incurred in the years of income, within the applicable provisions. He submitted, first, that the payments were not due until the conditions stated in cl 1.9 of the Master Security Deed and the conditions in Pt 3 of the Concession Notes were satisfied. He argued that these conditions had not been satisfied in the income years. He further submitted that the payments were not "properly referable" to the years of income. He also argued that for the concession fees to be deductible in full in the income years, long before they would fall due for payment, was truly an anomalous outcome. This was particularly so given the large discrepancy between the face value and the net present value of the concession fees in the respective years of income.
The Commissioner argued that this Court should hold that, where a contract provides that a contractual obligation to make a payment in the year of income is subject to conditions which defer payment indefinitely, or for a very long time in the future, at nil or negligible present cost, the obligation is not "incurred" in the relevant sense. He urged that the applicable statutory provisions contemplated that only the actual expenses of carrying on an income-earning activity in the year of income would be deductible in that year. This submission was made on the footing that the words "loss or outgoing" include debts but only if they have "come home" as a loss or outgoing and are "properly referable" to the income year. The concession fees, he suggested, did not answer to these descriptions.
Looking afresh at the language of the legislation and its apparent purpose and assuming, contrary to my primary conclusion, that the concession fees are to be characterised as payable on revenue account, I would accept these submissions and uphold the Commissioner's arguments.
Concession fees were not incurred: The trial judge, with apparent reluctance[61], and the Full Court with more enthusiasm[62], concluded that Transurban did "incur" a loss or outgoing in respect of the concession fees in the income years. Clause 3.1(a) of the Concession Deed arguably provides that the liability to pay the concession fees was unconditional. However, in fact, the obligation to pay was subject to conditions in cl 1.9 of the Master Security Deed and Pts 3 and 4(b) of the Concession Notes. While the Project Debt remains owing, the concession fees are owing but not due for payment, unless sufficient money is in the Distributions Account to meet the payment in full. The State thus had no absolute right to payment of the concession fees or to present the Concession Notes for payment.
The practical effect of these conditions was that the State's entitlement to demand payment was dependent upon the traffic levels, revenue and available cash flows arising from the operation of the tollway.
Transurban elected to issue Concession Notes with respect to the amounts of concession fees in the income years. However, the State can demand payment only when the conditions for presentation in Pt 3 of the Concession Notes are satisfied. In the absence of satisfaction of the conditions in Pt 3(b) or (c) of the Concession Notes, the State is entitled, under Pt 3(a), to present the Concession Notes within one year of the Expiry Date for payment on the Expiry Date. Like any claim for payment under Pt 3(b) and Pt 3(c)(ii), if the relevant conditions are satisfied, it is subject to cl 1.9 of the Master Security Deed. It is uncertain whether these conditions will be satisfied either by this time or before the end of the Concession (be that at the Expiry Date or another time).
In New Zealand Flax Investments Ltd v Federal Commissioner of Taxation[63], Dixon J said that the concept of loss or outgoing actually incurred "does not include a loss or expenditure which is no more than impending, threatened, or expected". By the application of this test, the conditions for payment in the present case indicate that any loss or outgoing in respect of the concession fees was at best "impending, threatened, or expected". It was not "actually incurred".
In Nilsen Development Laboratories Pty Ltd v Federal Commissioner of Taxation[64], the question arose as to whether an employer's provision for employees' leave entitlements was deductible for income tax purposes from the employer's income. This Court held that such provisions were not deductible in that case because there was no liability to make the payment either due or payable by reference to the year of income. The Court concluded that, if at all, such liability did not arise until the time when the period of leave was entered upon by an employee. Until then, the amounts were not "incurred".
In his reasons in Nilsen Development, Gibbs J explained that an actual entitlement to payment was necessary to sustain the conclusion that an obligation was "incurred"[65]. His Honour said:

[63]

My conclusion is that the concession fees, on the assumption that they were incurred in the income years and were properly referable to those years, were not deductible because they were capital in nature. If, however, the concession fees were to be classified as an outgoing on revenue account they were not deductible because, on the evidence, they were not outgoings "incurred" in the income years. Any future obligation was neither satisfied in, nor properly referable to, those years.
On this basis, the conditions for deductibility stated in the applicable income tax legislation for the income years were not established. The Commissioner was therefore right to disallow the claims. The Full Court erred in upholding Transurban's objections to the Commissioner's assessments.
To give effect to these conclusions the following orders should be made. The appeal should be allowed with costs. The judgment of the Full Court of the Federal Court of Australia should be set aside. In place of that judgment, this Court should order that the appeal to the Full Court be dismissed with costs.
CALLINAN J. I agree with Crennan J.
HEYDON J. I agree with Crennan J.
CRENNAN J. Citylink Melbourne Limited (formerly Transurban City Link Limited) ("the respondent") is the concessionaire of the State of Victoria ("the State") pursuant to a concession agreement in respect of a major infrastructure project. The main issue in this appeal is whether concession fees paid by the respondent pursuant to that concession agreement are allowable deductions at their full face value under s 51 of the Income Tax Assessment Act 1936 (Cth) ("the 1936 Act"), applicable to the 1996 and 1997 years of income, and s 8-1 of the Income Tax Assessment Act 1997 (Cth) ("the 1997 Act"), applicable to the 1998 year of income (together "the sections").
Concession agreements are familiar in circumstances where a government, seeking to minimise public sector debt, retains private sector interests to build new infrastructure[82]. Charters or concessions to private sector interests, for the building and operating of infrastructure such as canals or railways, were common in nineteenth century Britain, as were municipal charters or franchises for similar purposes in the United States of America[83]. In Vinter, Project Finance[84], it is said:

[66]

The Melbourne City Link Project ("the Project") was a major infrastructure project. The State contracted with the respondent to design, construct and maintain a major system of roads ("the Link") which was to be operated using tolls. The respondent's tasks were to be undertaken during a period when the State conceded to the respondent the right to do all that was necessary to complete those tasks, with a view to ultimate transfer to the State of the completed infrastructure, and all other rights (including relevant intellectual property rights), at the expiry of the concession period. At the point of "surrender back"[87], the State will resume its right to operate the roads system, by tolling if it wishes.
After a competitive bidding process in 1995, the respondent, as part of the successful consortium, and the State entered into a suite of contracts ("the Project Documents") governing the Project, some of which are discussed in more detail in the judgment at first instance[88].
The Melbourne City Link Authority Act 1994 (Vic) and the Melbourne City Link Act 1995 (Vic) ratified relevant Project Documents. Thus the document central to this appeal, the Concession Deed, took effect as if enacted as law[89]. The legislation also empowered the State to contribute Crown land for the purposes of the Project, with the necessary planning approvals, and permitted the respondent to construct and maintain the infrastructure, and to impose tolls upon the users of the infrastructure[90].
The respondent (together with Perpetual Trustee Company Limited, the trustee of the Transurban City Link Unit Trust ("the Trustee")) was the special purpose corporate vehicle for the Project. The respondent, the Trustee, the State and City Link Management Limited (the manager of the Trust) signed the Concession Deed on 20 October 1995. Between that date and 28 June 2002 there were 17 further deeds amending the Concession Deed[91].
As consideration for the rights conferred through the Concession Deed the respondent was required to pay concession fees to the State "from the date of the commencement of the Concession Period until the end of the twenty-fifth year after the date which [was] 6 months earlier than the Link Expected Completion Date"[92]. The base concession fee of $95.6m was payable semi-annually in arrears in June and December. The Link was first opened to traffic on 15 August 1999, with tolling commencing on 3 January 2000.
The Commissioner of Taxation ("the Commissioner") appeals from a unanimous decision of the Full Court of the Federal Court of Australia[93] allowing an appeal by the respondent from the decision at first instance[94]. The trial judge dismissed an appeal from the Commissioner's disallowance of deductions claimed in respect of the concession fees.
The respondent claimed concession fees paid by it as deductions in the financial years ending 30 June 1996, 1997 and 1998. These were amounts of $31.25m (said to have been incurred in the 1996 year of income) and $95.6m (said to have been incurred in each of the 1997 and 1998 years of income).

[76]

As the Full Court observed, the difference between the sections is not material[95]. The same observation may be made about s 51(1) and its predecessor[96].
In New Zealand Flax Investments Ltd v Federal Commissioner of Taxation[97] Dixon J noted that the words of the income tax legislation give rise to particular difficulties when a transaction takes more than a year to complete, because it is the words of the section (which may not apply comfortably to certain economic or commercial practices), rather than general principles, which contain the test for deductibility[98]. The infinite variety[99] of factual situations which have fallen to be considered since New Zealand Flax[100] have led to continuing elucidation of the test for deductibility and how it applies to different facts.
In dealing with the positive limb of the test for deductibility, it is necessary to ask whether the concession fees were outgoings incurred in, and referable to, the relevant years of income. In dealing with the negative limb of the test, it is necessary to ask whether the concession fees are an expense on capital account having regard to the advantage they secure.
In summary, the Commissioner contended that the Full Court erred in holding that the concession fees represented outgoings which had been incurred in gaining or producing the taxpayer's assessable income in the respective years of income.
Alternatively, it was contended the Full Court should have held that if the concession fees were incurred in each of the years of income, they were incurred only to an extent to be ascertained by straight line apportionment over the concession period.
In the further alternative, it was contended that the net present value of the liability to pay the concession fees should be used to calculate allowable deductions. The Commissioner applied for leave to amend the grounds of appeal to raise this point. This was opposed, particularly as the Commissioner had not raised the point at trial (or in the Full Court) and, accordingly, there was no evidence of the full implications of adopting that accounting practice[101]. Leave to amend was refused. Present value discounting of outgoings, payable in the future, is currently under consideration, together with other methods for assessment and deduction, spread over the life of certain financial arrangements[102]. However, the accounting basis used to date in Australian tax law for the purposes of assessment and deductions has been historical cost accounting, rather than economic equivalents[103].
Further, the Commissioner submitted that the Full Court, having held that the relevant outgoings had been incurred, erred in holding that the outgoings were on revenue account and that it should have held that each concession fee was an outgoing of a capital nature.
In brief, the respondent contended that each of the concession fees was an outgoing incurred in gaining or producing its assessable income. The basis of this argument was that the respondent was definitively committed to make payment of those concession fees as liability arose, and that they were referable to the relevant years of income. It was submitted that the Commissioner's claim for some apportionment in any deduction ran counter to established jurisprudence in respect of the sections. It was also submitted that in all the circumstances, the concession fees had the indicia of an outgoing on revenue account, rather than an outgoing of a capital nature.
The result in this matter is "peculiarly dependent upon the particular facts and circumstances"[104] of the concession agreement. Brief reference to certain Project Documents must be made to understand the context and the commercial and legal features[105] of the concession fees.
The primary determinants for the commercial arrangements for the Project, as embodied in the relevant Project Documents (including the Concession Deed), are the allocation of risk and the provision of finance primarily by loans, to be repaid out of revenues produced by the Project during the period of the concession.

[83]

Clauses 3.1(a)(ii) and (iii) are expressed in similar terms to cl 3.1(a)(i) and provided for fees payable in equal instalments semi‑annually in arrears of $45.2m per annum for years 26 to 34 of the scheduled operations, and of $1m per annum from the 35th year of the scheduled operations, if extended to this time.
Under the Concession Deed, only the respondent had the right to impose tolls upon the roads built as a part of the Project. No tolling of the Project roads occurred during the 1996, 1997 and 1998 years of income, as their construction was still in progress. Nonetheless, the concession fees were payable by the respondent to the State during both the construction and the operation phases of the concession period.
If the deductions claimed are allowed, they will reduce to nil the respondent's taxable income under assessment for the relevant years of income[106].
The concession fee arrangements refer to a base concession fee determined by a "Base Case Financial Model", formulated in respect of projected traffic flows and tolling, as well as referring to the potential for a higher rate of return to the State by way of additional concession fees if the assumed projections are exceeded[107]. Under the Concession Deed, the respondent might, at its option, satisfy the obligation to pay the base concession fees by issuing to the State "Concession Notes"[108]. All outstanding Concession Notes are redeemable by the State within the concession period. Concession Notes can be factored, and are transferable. They do not bear interest and are not supported by letters of credit.
The respondent issued Concession Notes to the State for the base concession fees payable for the years of income ended 30 June 1996, 1997 and 1998. In the Base Case Financial Model it was anticipated, or assumed, that the State would commence redemption of the Concession Notes in the year 2013, and that this would continue until the end of the concession period.
Part 3 of each Concession Note provided that certain conditions precedent must be met before presentation of the Concession Note for payment. These were:

[91]

The trial judge determined that the respondent had incurred an outgoing in respect of the concession fees in the years of income because the liability in each of those years of income arose unconditionally under cl 3.1 of the Concession Deed and was satisfied when the respondent elected to issue Concession Notes giving rise to a present liability to pay the amounts in the future[113]. His Honour also found that the fees were referable to the period in respect of which the liability for the fees was incurred. However, his Honour went on to find that the concession fees were outgoings of a capital nature rather than on revenue account[114].
The Full Court agreed with the trial judge's findings that the respondent had incurred an outgoing, namely the concession fees, in the years of income and that they were referable to those years[115]. However, the Full Court went on to find that the concession fees were payable for the right to conduct the business operations of the respondent in respect of the Project during the concession period[116]. The Full Court then concluded that the concession fees were characterised properly as an outgoing on revenue account rather than as an outgoing of a capital nature[117]. In my opinion, the Full Court was correct in the conclusions reached and in the orders which it made.
The commercial arrangements embodied in the relevant Project Documents are that the respondent encountered a liability for, and was definitely committed to, the payment of each concession fee as it became due, in each of the years of income. The terms concerning the time at which those liabilities are to be discharged do not affect the respondent's liability for concession fees in the years of income, nor do they render that liability, in any realistic or practical sense, contingent or uncertain. The subordination of the respondent's debt and the conditions precedent to commencement of the discharge of that debt were driven by the State's desire to have publicly accessible infrastructure for the Victorian community, without incurring new public sector debt, and not by any desire of the respondent's to avoid or postpone its liability to taxation. Each of the questions raised needs to be considered in more detail.

[100]

Deane J considered that the critical question was whether the taxpayer was, as a practical matter, definitively committed or completely subjected to discharge of the liability in the future[130]. His Honour recognised that on some facts it would be apparent that a condition giving rise to a theoretical contingency could be treated, for practical purposes, as certain to be satisfied[131].
A Full Court of the Federal Court in Federal Commissioner of Taxation v Australian Guarantee Corporation Ltd[132] held that a liability in respect of interest on debentures to be paid (or credited) on maturity or earlier redemption was incurred in the year of income in which the taxpayer subjected itself to the liability to pay the interest, although actual payment was to occur at some uncertain time in the future.
It was against these examples of the application of the test for deductibility, and such propositions of general application as can be derived from those authorities, that the deductibility of the concession fees fell to be assessed. Hill J essayed a synthesis of these authorities in Ogilvy and Mather Pty Ltd v Federal Commissioner of Taxation[133], which was relied upon by the Full Court below[134]. The synthesis demonstrated that accruals based tax accounting and the jurisprudence in respect of the test for deductibility could not always be reconciled with a commercial or accounting approach.
The Commissioner submitted that the concession fees were not incurred within the meaning of the sections, because payment was not possible until cl 1.9 of the Master Security Deed and the conditions in Parts 3 and 4 of the Concession Notes were satisfied, none of which conditions had in fact been satisfied in the relevant years of income.
The Commissioner submitted that the effect of Part 3 of the Concession Notes and cl 1.9 of the Master Security Deed (reflected in Part 4 of the Concession Notes) is to render the liability of the respondent to the State contingent. It was argued that the practical effect of both sets of conditions was that the State's entitlement to demand payment depended on traffic levels, revenue and available cash flow. It was conceded that the concession fees were intended and meant to be paid, but it was argued that the conditions imposed on payment took the concession fees outside the scope of the sections because any loss or outgoing could at best only be "impending, threatened, or expected"[135] and that liability for concession fees had not "come home"[136] in the years of income.
The respondent characterised the terms of cl 1.9 of the Master Security Deed as subordinating the payment of the concession fees to the payment of the Project Debt owed to the lenders. The respondent identified the essential terms as providing that for so long as any Project Debt is owing any payment to be made by the respondent or the Trustee to the State shall be owing to the State, but shall not be due for payment until the relevant criterion is satisfied. It was submitted that this clause expressly confirms the existence of a liability which shall be owing, but that it alters the sequence in which payments would be made. The respondent contended that its promise to pay the State in accordance with the sequence of subordination, and to discharge preferentially liabilities to secured creditors, did not interfere with or diminish the certainty of its commitment to pay the concession fees.
Whilst there were no funds representing reserves allowing for future payment of concession fees, the accounts of the respondent refer to:

[102]

The financial statements of the respondent also contain a section headed "Non-Current Liabilities" which is broken down to include "Borrowings − Non Current". An entry for "Concession fee[s]" is also recorded, as well as an entry accounting for the "Revaluation of Concession Note[s]".
In confirming the approach of the trial judge, the Full Court found that the respondent had completely subjected and definitively committed itself to paying the amount of the concession fees which accrued in each of the relevant years of income, and that the condition in cl 1.9 of the Master Security Deed that there be adequate funds in the Distributions Account did not lead to the conclusion that the liability to pay was not "incurred" within the meaning of the sections[137]. The Full Court went on to find that, in any event, the Concession Notes operated to satisfy the respondent's liability under the concession fees in the relevant years of income since the State could sue on the notes themselves[138].
The conclusion will be reached here that the concession fees were incurred in the years of income. On a semi-annual basis, the respondent was subjected to a contractual liability to pay the concession fees. The liability arose as and when each concession fee became due. That is when the outgoing was encountered or run into[139]. These facts exemplify a situation where a liability is "incurred" in the year of income but not "discharged" in that same year[140]. The circumstances are distinguishable from those in Nilsen Development Laboratories Pty Ltd v Federal Commissioner of Taxation[141] and Emu Bay Railway Co Ltd v Federal Commissioner of Taxation[142]. In Emu Bay interest on debenture stock was only payable, in respect of any year, if a certain amount of net income was achieved. No debt or liability could arise in years when no net income was earned. Accordingly, no liability to make any outgoing had come into existence[143] in the relevant year of income. Clause 1.9 of the Master Security Deed is directed at conditions precedent to the timing of the discharge of the liability, not to the coming into existence of the liability. Here the liability comes into existence in the year of income. The deferral of the time for its discharge cannot alter this conclusion, nor can the length of time of the deferral[144].
An agreement, as here, between secured creditors to subordinate the rights of one to the other, does not alter the purposive character of a debt[145], nor does it render the liability, in respect of the debt, a liability which is merely impending, threatened, or expected[146]. The Concession Notes are a mechanism which satisfies the liability, but the liability is a contractual obligation irrespective of that mechanism.
The respondent's obligation to discharge the debt is not conditional on the commercial operating risks of the Project. Those risks do no more than affect the date on which the discharge of the liability begins and the speed with which it is discharged. The Concession Notes had to be paid no later than a certain date, namely 33 years and 6 months after July 2000[147]. They may be paid earlier if certain conditions are satisfied. If the last possible date for payment was extended, there would still be an equally certain date for payment. A liability can be encountered in the year of income without the taxpayer knowing the precise date for satisfaction of the liability[148]. The only sense in which it could be said the liability on the Concession Notes is contingent is in the abstract sense that all events in the future are conditional or contingent[149].
In the relevant years of income, the respondent was definitively committed and had completely subjected itself to the losses or outgoings which the concession fees represent. A condition affecting the timing of the discharge of a liability (but not the creation of the liability) does not render the liability contingent in any business or commercial sense[150].

[106]

The Commissioner submitted that the concession fees represented a future expense of the respondent's business operations because their payment fell to be met out of future assessable income. It was urged that the approach was consistent with observations made by Dixon J in Commissioner of Taxation (NSW) v Ash[152] to the effect that it conforms to business principles to match expenses and revenue. The Commissioner also contended that only so much of the concession fees should be referable to the relevant years of income as is calculated to give a substantially "correct reflex"[153] of the respondent's income. The respondent submitted that the criterion of referability is the advantage secured by the liability in question, not the source of funds from which the liability will be discharged.
At trial and before the Full Court, it was found that the concession fees were the consideration for the respondent's entitlement to establish and operate the roads system. It was this entitlement which enabled the respondent to derive its assessable income during the relevant income years. Accordingly, there was no connection between each of the concession fees and the income expected to be derived in later years[154].
Clause 3.1 of the Concession Deed stipulates that each concession fee is an annual liability payable semi-annually. For periods less than six months, the amount of the fee is adjusted pro rata. The amount of the liability for concession fees corresponds precisely to the period to which a concession fee relates. Furthermore, while the concession fees represent a base fee, the additional concession fees[155] were calculated on the basis of additional revenue which was generated within the particular period.
These particular aspects of the concession fee arrangements make it clear that the advantages or gains referable to each concession fee "come home"[156] in the relevant income years.
In any event, the legislation does not require that the purposes of an outgoing be the gaining or production of income in the year in which the outgoing is claimed as a deduction[157]. Concession agreements are sufficiently familiar not to require exploration by analogy. They are essentially licence agreements to use capital assets for the limited period of the concession. Here the capital assets of the Link are to be "surrendered" by the respondent to the State at the expiry of the concession period[158].

[111]

The characterisation of an outgoing depends on what it "is calculated to effect", to be judged from "a practical and business point of view"[163]. The character of the advantage sought by the making of the expenditure is critical[164].
The trial judge found that the concession fees were referable to "advantages enuring to capital"[165] (in a form other than the provision of financial capital) and "akin to sharing profit"[166], with the State as a joint venturer being paid a dividend. As an alternative finding, the trial judge held that the concession fees were of a capital nature because they were properly characterised as outgoings expended "on the structure within which the profits were to be earned", and not outgoings expended in gaining or producing the respondent's assessable income as a "part of the money earning process"[167].
The trial judge also characterised the concession fee arrangements as analogous to a large lump sum fee payable in instalments, placing an emphasis on the total rights acquired by the respondent to design, construct and establish the roads and toll business[168].
The Full Court recognised the danger in arguing by analogy[169] because the arrangements here are sui generis commercial arrangements specific to infrastructure projects. The Full Court also found the concession fees were a periodical and recurrent expense of conducting the respondent's business operations rather than an expense to acquire a profit‑making enterprise[170].
The Commissioner contended that even if the concession fees were incurred in the years of income and were properly referable to those years of income, they were not deductible because they were capital in nature. The concession rights in cl 2.8 of the Concession Deed were characterised by the Commissioner as a bundle of rights necessary to establish a profit‑yielding structure. Any analogy with lease payments was rejected.
Having regard to the criteria set out by Dixon J in Sun Newspapers[171], the respondent submitted that the concession fees do not secure for the respondent any enduring asset in terms of the roads built; rather, the grant of the concession resulted in the acquisition of the right to build, operate and earn a profit from the tolls charged for the use of those roads for the duration of the concession period.
The concession fees are only payable during the term of the concession period. The respondent does not acquire permanent ownership rights over the roads or lands used. All rights granted under the Concession Deed revert to the State at the expiry of the concession period[172]. Unlike periodic instalments paid on the purchase price of a capital asset, the concession fees are periodic licence fees in respect of the Link infrastructure assets, from which the respondent derives its income, but which are ultimately "surrendered back" to the State. Accordingly, they are on revenue account.

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Judgment (187 paragraphs)

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Cases Cited (47)