Dolby v Commissioner of Taxation

THE COURT ORDERS THAT: 1. The objection decision of the Commissioner of Taxation dated 1 June 2001 be set aside. 2. The objection be allowed in full. 3. There be no order as to costs. THE COURT DECLARES THAT: 1. The index number under Subdivision 960-M of the Income Tax Assessment Act 1997 (Cth) to be used in respect of the Final Telstra Instalment Payment is 120.0 (December quarter 1997), not 121.9 (December quarter 1998). Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT 1 This is an appeal pursuant to s 14ZAZA of the Taxation Administration Act 1953 (Cth) ("the TAA Act") as amended against an objection decision dated 1 June 2001 disallowing an objection dated 3 April 2001 to a Notice of Private Ruling dated 2 March 2001. The applicant taxpayer applied for a private ruling on 23 November 2000 regarding the way in which the capital gains tax laws applied to the applicant in calculating the cost base of 100 shares in Telstra Limited purchased by the applicant from the Commonwealth pursuant to the first Telstra public share offer dated 29 September 1997, and disposed of by the applicant in the financial year ended 30 June 2001. 2 The applicant applied for a private ruling that the final of two instalments for the purchase of the Telstra shares be indexed from November 1997 (which is when the applicant contends the expenditure was incurred) in cases where the applicant elects the cost base include indexation; whereas the Commissioner of Taxation ("the respondent") ruled that the final instalment be indexed from November 1998 (which is when it became payable and was paid). 3 The issue in dispute, then, is in which quarter the expenditure on the final of those two instalments was incurred for the purchase of the shares in Telstra Limited by the applicant from the Commonwealth under the first Telstra public share offer. The quarter in which that expenditure was incurred determines the indexation factor used in calculating the cost base of the shares in accordance with Subdivision 960-M of the Income Tax Assessment Act 1997 (Cth) ("the 1997 Act"). 4 I have been informed from the bar table that the amount actually involved in this appeal is the princely sum of about $2. I offered to pay to either party or to both parties that amount, which offers have not been taken up. Apparently this is regarded as a test case and involves a significant number of taxpayers. 5 By s 14ZAZA of the TAA Act, a person who is dissatisfied with a private ruling may lodge an objection unless an assessment has been issued in respect of the relevant income tax year or the ruling relates to withholding tax that has become due and payable. No assessment has been issued in respect of the applicant's income tax for the income year ended 30 June 2001, nor is the second criterion of relevance here. The private ruling is a taxation decision: s 14ZAZA. 6 Section 14ZZ of the TAA Act confers a right of appeal on an applicant against an adverse objection decision on a private ruling. On an appeal against the disallowance of an objection to a private ruling, the Court is sitting in its original jurisdiction, and the Court is confined to the arrangement identified in the private ruling or identified by documents referred to in the Commissioner's private ruling which, or a copy of which, is available to the rulee: s 14ZAS(3) of the TAA Act; United Energy Limited v Commissioner of Taxation (1997) 78 FCR 169 per Lockhart J at 172 and Sundberg and Merkel JJ at 184; First Provincial Building Society Ltd v Commissioner of Taxation (1995) 56 FCR 320 per Hill J at 322. By s 14ZAS(2), if the correctness of a private ruling depends upon an assumption, the assumption is an aspect of the arrangement to which the ruling relates. In the present appeal the Commissioner has made two assumptions set out in the private ruling. 7 The appeal is similar in nature to a stated case: Payne v Federal Commissioner of Taxation (1994) 28 ATR 58, wherein the Court noted the limitations inherent in the nature of such appeals. In that case, Hill J said at 66: "The Court itself can not inquire into potential facts",and in CTC Resources NL v Commissioner of Taxation (1994) 48 FCR 397, Hill J doubted, at 432-3, whether the Court had power to draw its own inferences of fact. 8 The first assumption made pursuant to s 14ZAQ was one of existing fact, namely, that the Minister did not make a direction pursuant to Article 6.1 of the Articles of Telstra Limited that Telstra shares could be registered before the final instalment payment date. Secondly, the applicant, in its application for a ruling, chose, pursuant to s 103-25 of the 1997 Act, to use the cost base as indexed. Neither party contends that the assumptions made are inappropriate, the sole question in this appeal being the relevant indexation factor for the purpose of determining the indexed cost base of the applicant's shares in Telstra, and this must be determined having regard to the overall context of the capital gains tax regime. The regime that applies is set out in Part 3-1 of the 1997 Act. The 1997 Act replaced Part IIIA of the Income Tax Assessment Act 1936 (Cth) ("the 1936 Act"), which part was introduced in 1985. 9 The Notice of Private Ruling dated 2 March 2001 identified the Public Offer Document and Appendices 5 and 6 to that document as forming part of the arrangement to which the ruling related. The ruling noted: "Appendix 5 of the Public Offer Document summarised the provisions of the Instalment Receipts and the Trust Deed. That summary purported to be incomplete and was 'subject to, and qualified by reference to, the Trust Deed.'" The Trust Deed also formed part of the arrangement to which this ruling related. 10 As appears from the Notice of Private Ruling, the Offer to the public closed on 3 November 1997. Applicants had to include with their application for shares a first instalment payment of $1.95 per share. On about 19 October 1997, the applicant applied for 3,000 shares by completing and signing an application form attached to the Public Offer Document and forwarding that form with a cheque for $5,850. 11 On or about 15 November 1997 it was determined to allocate 2,200 Instalment Receipts to the applicant. The Commonwealth transferred Telstra shares to the Trustee and the applicant's rights and obligations as an "IR Holder" and in relation to the Telstra shares were governed by the Trust Deed. The applicant was notified on 25 November 1997 that he had been issued 2,200 Instalment Receipts. A refund of $1560 was enclosed with that notice. 12 The applicant received two dividend payments in relation to his Instalment Receipts, on 31 March 1998 and on 30 October 1998. 13 The "Obligor Determination Time" was "End of Day" on 4 November 1998. The "Final Instalment Payment Date" was 17 November 1998. Until this date, the registration and transfer of shares was prohibited under the Articles of Association. The Final Instalment was $1.30 per share for original IR Holders and $1.35 per share for subsequent IR Holders. 14 The applicant paid the Final Instalment on 26 October 1998. The applicant was notified on 7 December 1998 that his holding of Instalment Receipts had been cancelled and 2,200 Telstra fully paid ordinary shares registered in his name. 15 The applicant contracted to sell 100 of those shares on 3 November 2000. Settlement occurred on 9 November 2000. The assumption made and accepted was that the applicant would elect that the cost base of the 100 shares would include indexation in his return for the year ended 30 June 2001. The Notice of Private Ruling indicated that: "In calculating the indexation factor to be used in determining the indexed cost base of the shares, the index number in relation to the Final Instalment is 121.9, i.e. the index number for the quarter ended 31 December 1998." 16 The applicant contends that the index factor to be used in determining the indexed cost base of the shares is 120.0 (December quarter 1997), not 121.9 (December quarter 1998). 17 Parts 3-1 and 3-3 of the 1997 Act apply to disposals of capital gains tax ("CGT") assets on and from 1 July 1998. The disposal of the 100 shares occurred in November 2000. 18 A taxpayer makes a capital gain if the capital proceeds from the disposal of a CGT asset exceeds the cost base of the CGT asset: ss 102-20, 104-10(4) of the 1997 Act. By s 110-25(2)(a) of the 1997 Act, the first element of the cost base of a CGT asset is, relevantly, "the money you paid, or are required to pay, in respect of *acquiring it". 19 Section 103-15 of the 1997 Act provides: "This Part and Part 3-3 apply to you as if you are required to pay money … even if: (a) you do not have to pay … it until a later time; or (b) the money is payable by instalments." 20 It is to be assumed, in the present case, that the applicant has chosen that the cost base includes indexation. It follows that, subject to some qualifications not presently relevant, the cost base is to be worked out by indexing the expenditure in each element of the cost base: s 114-1 of the 1997 Act. In this case an amount is indexed by multiplying it by its "indexation factor": s 960-270 of the 1997 Act. Section 960-275(2) of the 1997 Act applies to the indexation of a cost base of a CGT asset: "For indexation of the *cost base of a *CGT asset (except the first element of the cost base of an asset covered by subsection (3)), the indexation factor for expenditure in an element of the cost base is: *Index number for the quarter ending on 30 September 1999 *Index number for the quarter in which the expenditure was incurred The expenditure can include giving property: see section 103-5. Note 1: This rule does not apply to expenditure incurred after 11.45 am on 21 September 1999 or any expenditure relating to a CGT asset acquired after that time: see section 114-1. Note 2: This rule applies even if you do not actually pay some of the expenditure until a later time (for example, under a contract to purchase an asset by instalments). Note 3: There are rules affecting when the expenditure was incurred: see sections 114-15 and 114-20." 21 Notes 2 and 3 are, in my view, important in the resolution of this appeal. 22 The CGT event that has happened in relation to the 100 Telstra shares is CGT event A1, which is set out in s 104-10 of the 1997 Act. Relevantly, that section provides: "(1) CGT event A1 happens if you *dispose of a *CGT asset. … (3) The time of the event is: (a) when you enter into the contract for the *disposal; … (4) You make a capital gain if the *capital proceeds from the disposal are more than the asset's *cost base. …" The capital proceeds from the CGT event A1 happening to the 100 shares was $626. 23 Subsection 110-25(7) of the Act concerns indexation in the cost base. It provides: "The cost base of a *CGT asset *acquired at or before 11.45 am (by legal time in the Australian Capital Territory) on 21 September 1999 also includes indexation of the elements of the cost base (except the third element) if the requirements of Division 114 are met." 24 Section 114-1 of the 1997 Act, found in Division 114 of the Act, provides: "In working out the *cost base of a *CGT asset *acquired at or before 11.45 am (by legal time in the Australian Capital Territory) on 21 September 1999, index expenditure incurred at or before that time in each element. (The expenditure can include giving property: see section 103-5)." 25 Subsection 110-25(8) of the 1997 Act provides: "However, for the purposes of working out the *capital gain of an entity mentioned in an item of the table from a *CGT event happening after 11.45 am (by legal time in the Australian Capital Territory) on 21 September 1999, the cost base includes indexation only if the entity mentioned in the item chooses that the cost base includes indexation". Item 1 of the table that is part of subs 110-25(8) provides that if the entity is an individual, the cost base includes indexation only if the individual so chooses. 26 The denominator in the formula to be found in subs 960-275(2) of the 1997 Act provides that indexation commences from the time that "the expenditure was incurred." In the case of actual payments, indexation arises from the time those payments are made. In relation to that element of the cost base which consists of an amount or amounts that the taxpayer is required to pay, indexation arises in the quarter that that requirement to pay arises. In relation to the first instalment, the parties are agreed that indexation arises in the December quarter of 1997. 27 The question in issue is whether the applicant was required to pay the final instalment at the time that the applicant contends, being the time that Telstra accepted the applicant's application for shares under the Telstra share offer (the December quarter 1997) or at the time that the respondent contends, being the quarter in which the final instalment was in fact paid (the December quarter 1998). For the applicant to succeed, he must show that he came under a personal obligation to pay the final instalment at a time prior to the December quarter of 1998. 28 The precise question in this case is in what quarter the expenditure of not more than $1.35 per share for the final instalment was "incurred". It can be accepted, as was submitted by counsel for the respondent, Mr Robertson, that the meaning of the word "incur" in the context of incurring a loss or outgoing within s 8-1 of the 1997 Act (and subs 51(1) of the 1936 Act) requires the existence of a legal obligation and not merely a commercial certainty of future expenditure. 29 In Merrill Lynch International (Australia) Ltd v Federal Commissioner of Taxation (2001) 47 ATR 611, Lindgren J was concerned with bonus schemes operated by three Merrill Lynch companies. While discretionary, there was an expectation that the bonuses would be paid as part of an employee's remuneration. Lindgren J held that for the outgoing to be deductible in the period, the taxpayers must have completely subjected or definitely committed themselves to pay bonuses to employees by the end of that period. In resolving this question, a legal or jurisprudential approach must be pursued (as opposed to a "commercial" analysis). The taxpayers had in fact made no such commitment; a "commitment" made to individual employees was irrelevant. The observation of Lindgren J at [82] that: "What is important for the decision of this case is the general requirement that, 'theoretical contingencies disregarded', there must be a legal liability which the taxpayer is not entitled, of its own volition, to prevent becoming enforceable by action" is a means of emphasising the reference by Hill J in Commissioner of Taxation v Mercantile Mutual Insurance (Workers' Compensation) Ltd (1999) 87 FCR 536 to the necessity for a liability to be "presently existing" before, in the relevant sense, it is incurred. CONTENTIONS BY THE RESPONDENT 30 It was submitted on behalf of the respondent that the only time the applicant came under a legal obligation to pay the final instalment for the Telstra shares was the time described in the document governing the relationship between the parties (the Trust Deed) as the "Obligor Determination Date" being: "The date specified in the offer document as being the date for determining who will be obliged to pay the final instalment (it being expected, subject to any variations which may arise as a result of days not being business days, that such date will be the 10th business day prior to and inclusive of the final instalment payment date, as illustrated in the fourth schedule." This date, it was said, was 4 November 1998. 31 The respondent submits that the Telstra Share Offer Document on which the applicant relies as supporting his contention that he came under a legal obligation to pay the final instalment in the quarter ended 30 September 1997 is, at best, "ambiguous". It was submitted for the Commissioner that: "The ambiguous Share Offer Document does not, however, govern the precise legal relationship between the parties." 32 Reference is made to folio 5 where there is a heading "Where you can find more information". The qualifications to which Mr Robertson referred are qualifications where more detailed information appears or where certain parts of the Share Offer Document are a summary and/or an indication of the material in the appendices. In my view, on a fair reading of that document, the Telstra share offer in Australia was "made through this public offer document which incorporates by reference the appendices." The view I take of the matter is that the Telstra Public Offer Document is an offer of sales in Telstra by instalments. That document states: "The sale of Telstra shares will be in two instalments, with the first instalment payable on application and the final instalment payable on 17 November 1998. Until the final instalment is paid, your interest in Telstra shares will be in the form of instalment receipts. If you retain your instalment receipts you will be required to pay the final instalment on the due date. You should read this document carefully before you decide to invest. If you then wish to apply for shares, you must complete, sign and lodge an application form which is attached to oraccompanies this document." 33 The summary of the instalment receipts and Trust Deed which is referred to in folio 82 of the Share Offer Document makes plain that the summary does not purport to be complete and is subject to, and qualified by reference to, the Trust Deed. 34 Reference will have to be made to particular clauses of the Trust Deed on which the Commissioner relies, but there can be no argument that what appears at folio 82 under the heading "General" is accurate: "The shares being sold by the Commonwealth are being sold with payment to be made in two instalments. The First Instalment of the aggregate purchase price for the shares is $1.95 per share for Public Applicants or $2.00 per share for Institutional Applicants and is payable as set out in the Public Offer Document and the Appendices. The Final Instalment, being the remaining amount due on the aggregate purchase price for the shares, is payable on November 17, 1998(the 'Final Instalment Payment Date')." 35 Counsel for the respondent relies on cl 3.3(b) of the Trust Deed, which provides, inter alia: "The Beneficial Interest held by an IR Holder [Instalment Receipt Holder] in any sale share shall not: (1) confer upon the IR Holder, other than as provided in this Deed, any right or power to require the transfer to it of the Sale Share prior to its having paid the Final Instalment in respect of that Sale Share; …" 36 It is submitted on behalf of the respondent that the extent of the monetary liability of the taxpayer is primarily set out in clause 3.4 of the Trust Deed. Clause 3.4(b) relevantly provides: "Each person who, at the date that the relevant payment obligation arises, is registered as an IR Holder … shall have the following monetary obligations to the Commonwealth or to the trustee or any Replacement Entity: (1) to pay to the Commonwealth, as provided for in this Deed, by the Final Instalment Payment Date, the Final Instalment in respect of the Sale Shares to which its IRs … relate." 37 Finally, the respondent relies on cl 10.1 which relevantly provides: (a) Each person: (1) registered as an IR Holder at the Obligor Determination Time … … shall at or before 5.00 pm on the Final Instalment Payment Date pay or cause to be paid to the Commonwealth the Final Instalment in respect of each Sale Share to which its IR Holding or … related as at the Obligor Determination Time, in accordance with the terms of this Deed and … … (b) The obligations referred to in clause 10.1(a) are binding on an IR Holder … whether or not such person had notice of such obligations at the time of becoming an IR Holder …" and on cl 10.16, which provides: "For the avoidance of doubt, no IR Holder … shall be entitled to pay the Final Instalment earlier than envisaged in this clause 10." 38 These submissions reflect the reasons given for the private ruling: "[A]s the choice of whether you would continue to be the registered holder of the IR Receipts was one in your absolute discretion, you cannot be said to have had any liability in the eyes of the law, even a contingent liability,prior to the Obligor Determination Time. … You were never definitively committed to nor had completely subjected yourself to the obligation to pay the second instalment before the Obligor Determination Time. Indeed, as clause 10.16 of the Trust Deed provides, you were not entitled to pay the Final Instalment until your obligation to pay arose. This provision was not necessary; by its terms it was inserted 'for the avoidance of doubt'. You might have definitely intended to keep your Instalment Receipts and pay for them but you were never definitively committed to do so. … In summary you incurred the Final Instalment expenditure either when you actually paid it, or at the Obligor Determination Time. Both those dates occurred in the same quarter ended 31 December 1998. …" 39 In my opinion, the respondent has confused the possibility of the defeasibility of a liability or obligation to pay the final instalment with the primary question of whether or not a liability in respect of the final payment has been incurred: Ogilvy & Mather Pty Ltd v Federal Commissioner of Taxation (1990) 90 ATC 4836 at 4845-6, per Sweeney and Ryan JJ. The fact that a liability to pay is defeasible does not mean, as the Commissioner in the reasons appears to be saying, that there is no liability unless the Instalment Receipt Holder chooses not to dispose of his Instalment Receipts before the Obligor Determination Time. 40 The liability or obligation to pay on the due date is no less incurred when the instalment contract is entered into because that liability or obligation is defeasible in the sense that if the instalment receipts are sold before a particular date, both the ownership of the instalment receipts and the liability or obligation in respect of the final instalment no longer continues: see Commonwealth Aluminium Corporation Ltd v Federal Commissioner of Taxation (1977) 32 FLR 210at 224. CONTENTIONS BY THE APPLICANT 41 In my opinion, s 960-275(2) makes it plain that a purchase by instalments involves the incurring of the expenditure of money at the time the instalment contract is entered into. While it is wise to heed the caution that an exhaustive definition of the conceptions intended by the expression "incurred" is neither prudent nor possible: New Zealand Flax Investments Pty Ltd v Federal Commissioner of Taxation (1938) 61 CLR 179 at 207, it has been held that a liability presently existing or which has accrued but is not payable until a future time is sufficient: Australian and New Zealand Banking Group Ltd v Federal Commissioner of Taxation (1994) 48 FCR 268; Coles Myer Finance Ltd v Federal Commissioner of Taxation (1993) 176 CLR 640 at 662; Federal Commissioner of Taxation v James Flood Pty Ltd (1953) 88 CLR 492 at 506-7. In Australian and New Zealand Banking Group Ltd v Federal Commissioner of Taxation (1994) 48 FCR 268, Hill J, with whom Northrop and Lockhart JJ agreed, said at 278: "… for a loss or outgoing to be incurred it must be more than 'impending, threatened or expected'. Rather, the taxpayer must have been definitively committed in the year of income to that loss or outgoing: New Zealand Flax Investments Ltd v Commissioner of Taxation (Cth) (1938) 61 CLR 179 at 206-207 per Dixon J; Commissioner of Taxation (Cth) v James Flood Pty Ltd (1953) 88 CLR 492 at 506-507. The loss or outgoing must represent a present liability, albeit not immediately payable but payable in the future, and whether or not defeasible: Nilsen Development Laboratories Pty Ltd v Commissioner of Taxation (Cth) (1981) 144 CLR 616 at 627-628 per Gibbs J; Commissioner of Taxation v Australian Guarantee Corporation Ltd (1984) 2 FCR 483 at 486-487 per Toohey J." (Emphasis added) 42 In Commonwealth Aluminium Corporation Ltd v Federal Commissioner of Taxation (1977) 32 FLR 210, Newton J said at 224: "The authorities also show, in my opinion, that a taxpayer may completely subject itself to a liability, notwithstanding that the liability is defeasible: see Flood's case (1953) 88 CLR at 506-507." Also, in Federal Commissioner of Taxation v Australian Guarantee Corporation Ltd (1984) 2 FCR 483, Toohey J said at 487: "It is also well established that an outgoing may be incurred in the sense that a taxpayer may completely subject himself to a liability even though the liability is defeasible." 43 I accept the submission by Mr Alexander, counsel for the applicant, that if the final instalment for the shares was an existing obligation at the time the application for shares was accepted or the instalment receipts were allocated in November 1997 then, notwithstanding that that pecuniary obligation was defeasible, or payable at a future time upon a condition, in this case the condition that the instalment receipt not be disposed of, the final instalment was required to be paid or was incurred in November 1997 and should therefore have been included as an element of the cost base of the shares in that quarter and indexed from that quarter. THE CONTRACT OF SALE, PUBLIC OFFER DOCUMENT AND TRUST DEED 44 In my opinion, on the proper construction of the contract for the sale of shares between the applicant and the Commonwealth, the liability to pay the amount of the final instalment arose upon the formation of the sale of the shares contract and allocation of the shares in November 1997. Under the heading "Terms and Declaration section" on the back of the application for shares, clause 2, the applicant agreed: "I/we accept and agree to be bound by all the terms and conditions of the sale of the shares set out in the offer document and the terms and conditions of the Trust Deed including without limitation: (a) the obligation to pay the final instalment on the due date. (b) the liability to pay interest and recovery costs if the final instalment is not paid by the due date. (c) no encumbrance (such as a mortgage) may be created or arise over a share or which gives any person any right to a share until the final instalment is paid." 45 While I agree that the terms and conditions of the Trust Deed take precedence over any "summary" or "description" contained in the Public Offer Document or the appendices thereto, the terms and conditions of the Public Offer Document are binding. Moreover, in the view I take of the matter, there is no inconsistency between the Public Offer Document and the Share Offer Document. The share offer was made through the Public Offer Document, and under the terms of that share offer the applications "represent offers to buy shares from the Commonwealth. The contract will be formed when the Commonwealth accepts your offer". Furthermore, the application for shares was made by forwarding a completed application form with a cheque for the first instalment of $1.95 per share to be received by a specified date and time. 46 Importantly, the Telstra Share Offer application form indicated that the purchase price for the shares was payable in two instalments. The Public Offer Document said: "Public Applicants under this offer will pay: · the first instalment of $1.95 per share when applying for the shares, which is 5 cents per share less than the first instalment payable by Institutional Applicants; and · a final instalment of not more than $1.35 per share, payable on 17 November 1998. The final instalment payment for Public Applicants will be at least 5 cents per share below the final instalment payable by Institutional Applicants. The discount on the final instalment only applies to instalment receipts purchased by Public Applicants under this offer and held until the final instalment is due." 47 The final price for the shares determined the amount of the final instalment, both of which were expected to be announced by 16 November 1997. Upon allocation of the instalment receipts, the applicant became the owner of the beneficial interest in the shares - the instalment receipts were evidence that the applicant held the beneficial interest in the shares, and "A registered holder of instalment receipts will be regarded as the beneficial owner of the same number of shares as instalment receipts …" 48 Further, the applicant became entitled to voting rights and "dividends" pending payment of the final instalment. The applicant, upon allocation of shares and the instalment receipts, immediately became "legally bound to pay the final instalment when it is due." The offer document noted: "If you are allocated instalment receipts … the Commonwealth will have a security interest in the shares to secure, amongst other things, the amount due on the final instalment". 49 Upon allocation of the instalment receipts, Telstra Instalment Receipt Trustee Limited held the shares as trustee for the applicant as owner of the beneficial interest and the Commonwealth as the holder of a security interest until the final instalment was paid. If the applicant were to sell the instalment receipts and the transfer was registered by 4 November 1998, "the transferor will cease to be obligated to pay the Final Instalment" and "the purchaser assumes the liability to pay the final instalment." Furthermore: " the transferor is discharged from any liability to pay the Final Instalment. … the transferee automatically agrees to be bound by all of the terms of the Trust Deed and the instalment receipt … including the obligation to pay the Final Instalment." 50 If the applicant failed to pay the final instalment on time, the Trustee could sell the shares to pay the outstanding debt including any interest and expenses and refund any surplus; if there was a deficit the applicant was liable to pay the outstanding amount. 51 As earlier expressed, under the declaration and statement on the application form, the applicant agreed to be bound by, inter alia, the terms and conditions set out in the Trust Deed. However, in my opinion, nothing in the Trust Deed is inconsistent with the description of the obligations to be undertaken by the contract to purchase Telstra shares pursuant to the Public Offer Document. Importantly, the recitals to that deed include the following: "C. The purchase price for each of the Sale Shares is to be paid to the Commonwealth by two instalments in the amounts, and on the dates, set out or provided for in the Offer Document. D. Until both of the instalments in respect of a Successful Application have been duly paid, a separate and individual trust will be established such that title to each Sale Share in respect of which that Application was Accepted will, at the direction of the Applicant, be transferred to and registered in the name of the Trustee, who will hold a Security Interest in that Sale Share on behalf of the Commonwealth (as security for payment of the Final Instalment) but will otherwise (subject to Recital G) hold such Sale Share as trustee for the Successful Applicant and registered Transferees and Transmittees. That interest and the attaching obligation of a Successful Applicant (or registered Transferee or Transmittee) is called the 'Beneficial Interest'. … F. The rights and obligations evidenced by an IR, as referred to in Recital E, may be assigned, in combination but not separately. As and from the date the name of the assignee is entered on the IR Register, that assignee will, subject to this Deed, be treated as having assumed the said rights and obligations as though it had been the Successful Applicant in respect of the Sale Share to which that IR relates. … I. The person personally liable for payment of the Final Instalment to the Commonwealth on its due date will be the Holder registered from time to time of an IR (in the case of an IR which is not the subject of an Interim ADR) or the Interim ADR Holder registered from time to time of an interim ADR (in the case of an IR which is the subject of an Interim ADR), unless such registered Holder or Interim ADR Holder is the DTC Nominee, in which case the person personally liable will be the Direct Participant Beneficial Holder of the relevant IR or Interim ADR. J. If the Final Instalment is duly paid by, through, or on behalf of, the person personally liable as referred to in Recital I in respect of the Sale Share at the time, the Security Interest will be released and the Trustee will transfer the Sale Share to the IR Holder. 52 In my opinion, on the proper construction of the terms of the Trust Deed, the liability of the applicant to pay the final instalment of the purchase price for the shares was a personal liability arising at the time of the registration of the applicant as an Instalment Receipt Holder for those specific shares, and created a security by way of charge over those shares. The provisions of the Trust Deed on which the Commissioner relies, to the effect that no IR Holder shall have any monetary obligations to the Commonwealth other than the payment obligation under cl 3.4(b) which, with clause 10.1, imposes on persons registered at 4 pm on 4 November 1998 an indefeasible obligation to pay by 5 pm on 17 November 1998, did not mean that an IR Holder registered prior to 4 pm on 4 November 1998 had no pre-existing liability to pay. In my opinion, that provision means that the liability to pay the final instalment, the payment of which was not due until the due date, ceased to be defeasible by disposal of the instalment receipts after 4 pm on 4 November 1998. 53 Further, in my opinion, the prohibition in cl 10.16 of the Trust Deed against early payment does not rebut the finding of a pre-existing liability; an instalment contract with a prohibition on pre-payment of instalments payable on nominated dates does not cease to be an instalment contract for that reason. 54 It is impossible to ignore the fact that the amount required to be paid was made up of amounts required to be paid by instalments. The expenditure in respect of the final instalment, in my view, was incurred in November 1997, even though not actually paid until November 1998. It follows that the indexation factor for the December 1997 quarter must be used to calculate the capital gain. 55 I accept further the alternative argument for the taxpayer. That argument is that under the terms and conditions of the share offer set out in the Public Offer Document, or further or alternatively under the Trust Deed, the shares were acquired subject to a liability to the Commonwealth as unpaid vendor. Section 112-35 of the 1997 Act indicates that the first element of the cost base includes the amount of the assumed liability. The cost base so modified is indexed from the time of acquisition: s 114-15 of the 1997 Act. The time of acquisition is taken to be the time the share contract was entered into: s 109-5(2) Event A1 of the 1997 Act. The consequence is that both instalments, the final instalment being the liability as unpaid vendor, are to be indexed from November 1997, and the indexation factor for the December 1997 quarter must be used to calculate the capital gain. 56 I note that by agreement between the parties, there is to be no order as to costs. 57 For the above reasons I make the following orders and declaration: 1. The objection decision of the Commissioner of Taxation dated 1 June 2001 be set aside. 2. The objection be allowed in full. 3. There be no order as to costs. 4. The Court declares that the index number under Subdivision 960-M of the Income Tax Assessment Act 1997 (Cth) to be used in respect of the Final Telstra Instalment Payment is 120.0 (December quarter 1997), not 121.9 (December quarter 1998).