SPI PowerNet Pty Ltd v Commissioner of Taxation [2014] FCA 261 | Case summary

REASONS FOR JUDGMENT 1 SPI Powernet Pty Ltd ("SPI PowerNet") claims deductions in proceeding 330 of 2012 for each of the fiscal years from 1998 to 2006 for expenditure of a capital nature on the purchase of copyright. The claim was made in the 1998 year under Division 10B of Part III of the Income Tax Assessment Act 1936 but in subsequent years the claim was made under Divisions 373 and 40 of the Income Tax Assessment Act 1997 when Division 10B of the 1936 Act was substituted by the 1997 Act. SP Australia Networks (Transmission) Ltd ("SPANT") claims deductions in proceeding 331 of 2012 for what was in substance the same underlying transaction but does so for the 2006 to 2011 years of income as a result of being the head company upon the formation of a tax consolidated group. Its claim is based on the value and re-set tax cost of the copyright as at 19 October 2005 under Division 40 of the 1997 Act. The facts underlying each claim, however, are the same although questions of valuation differ in the two proceedings, but for convenience the evidence was tendered in the proceedings as common to both, subject to relevance and challenge to admissibility or weight. There is a separate issue in the 2001 year of income (being the year of income which ended on 31 December 2000) in which SPI PowerNet is the applicant, concerning whether it is liable for the 25% penalty which the Commissioner had imposed. On that issue the principal matter in dispute is whether SPI PowerNet had a reasonably arguable case within the meaning of the relevant provisions of the Taxation Administration Act 1953. 2 There was little dispute about the evidence in the sense of contested versions of facts or events, but there was substantial dispute about the relevance of evidence which was given and whether the evidence was sufficient to discharge the taxpayers' burdens of proof. I will not, therefore, recite the evidence at length other than to give context and where necessary to explain my reasons. The applicants' respective claims for deductions arose from the acquisition by SPI PowerNet of the previously Victorian state owned electricity transmission business. The acquisition was made under an Asset Sale Agreement dated 12 October 1997 which was completed on 6 November 1997. SPI PowerNet was, at the time, named GPU PowerNet Pty Ltd ("GPU PowerNet") and was a wholly owned subsidiary of the United States corporation GPU Inc. All of the shares in GPU PowerNet were subsequently acquired by SPI Australia Holdings Pty Ltd by an agreement for the sale of shares dated 30 June 2000 and on 2 July 2000 GPU PowerNet was renamed SPI PowerNet Pty Ltd. I will follow, for convenience, the practice adopted by the parties of generally referring to SPI PowerNet by that name even though its name was GPU PowerNet at the time it entered into the Asset Sale Agreement. 3 One of the assets acquired by SPI PowerNet under the Asset Sale Agreement was the copyright in drawings, plans and other works falling within the meaning of a "unit of industrial property" in Division 10B of the 1936 Act, which entitles a taxpayer to a tax deduction. The Asset Sale Agreement, however, did not specify what part of the purchase price was paid for that asset and, therefore, any deduction to which SPI PowerNet may be entitled depends upon the operation of s 124R(5) (which was part of Division 10B at the time). The Asset Sale Agreement required SPI PowerNet to pay the Total Purchase Price of $2,502,600,000 which was defined to be "the sum of the price of the Assets (including the Land) net of Contract Liabilities and Creditors (excluding Specified Contractors) assumed under [the] agreement" and, for the avoidance of doubt, was expressly defined to exclude the estimated duty. The Assets thus paid for by SPI PowerNet were identified in the definitions to mean: (a) the Plant and Equipment; (b) the Business Records; (c) the Contract Benefits; (d) the Land; (e) the Intellectual Property Rights; (f) the Licences; (g) all the Seller's entitlements under the Real Property Leases; (h) inventories, raw materials and stores of the Seller used in the Business; (i) cash on hand and deposits and securities in the name of the Seller, other than with TCV; (j) entitlements under the Employment Contracts; (k) the Trade Debts; and (l) all other tangible or intangible assets (including goodwill and insurance proceeds) from the Seller's insurance policies) owned by the Seller whether or not listed in the balance sheet of the Seller forming part of the 1997 accounts, other than the Specified Assets. Most of the items included within the definition of "assets", for which SPI PowerNet paid the total purchase price, were themselves the subject of specific definitions. However, what is relevant for present purposes is that the assets for which the total purchase price was paid included any copyright belonging to the seller coming within the words "Intellectual Property Rights" in clause (e) of the definition of assets. The "Intellectual Property Rights" referred to in subclause (e) of the definition of the assets sold to SPI PowerNet were separately defined to mean the rights of the seller to all: (a) patents, copyrights or designs, registered or unregistered; (b) rights under each licence in respect of such patents, copyrights or designs; and (c) equitable rights in respect of such patents, copyrights or designs or such licences. The Asset Sale Agreement, however, as stated above, did not allocate any specific part of the total purchase price to the copyright acquired by the purchaser. 4 SPI PowerNet's claim for deductions for the copyright in each of the tax years from the 1998 tax year (ended 31 December 1997) to the 2006 year depended upon the terms of Division 10B of the 1936 Act. Any entitlement obtained under those provisions might then continue in subsequent years through subsequent provisions together with the operation of transitional provisions. In the 1999 to 2002 years of income (up to 30 June 2001) any entitlement to a deduction would continue under Sub-division 373B of the 1997 Act and the Income Tax (Transitional Provisions) Act 1997. That is because Division 10B of the 1936 Act was replaced with Division 373 of the 1997 Act and the replacement provisions allowed deductions for un-recouped expenditure for items of copyright which had been acquired before the 1999 year. The terms of Division 373 were not the same as those in Division 10B but SPI PowerNet's claim for the 1999 to 2002 years depended upon the claim first coming within the terms of Division 10B as they had been in the 1936 Act. Its claim for deductions for the subsequent period from 1 July 2002 to the 2005 year of income arose under s 40-25 of the 1997 Act and other transitional provisions. That is because Division 373 was in turn replaced with Division 40 of the 1997 Act with effect from 1 July 2001. SPI PowerNet's accounting period ended 31 December and its claims for the 2002 year were, therefore, under Division 373 for the period to 1 July 2001 and under Division 40 for the period to 31 December 2001. Its claims under Division 40 for capital allowance deductions were for the original un-recouped expenditure under the earlier provisions. In each case, however, the deduction claimed for the periods up to the 2006 year depended upon Division 10B (and s 124R(5) in particular) of the 1936 Act in the 1998 year of income. The claim of SPANT in proceeding 331 of 2012 for the period from 19 October 2005 to 31 March 2011 depends upon different provisions and will be dealt with separately below. 5 A taxpayer's deduction under Division 10B was expressed to depend upon how Division 10B was made to apply to the taxpayer. Division 10B was, by s 124L, made to apply to the owner of industrial property who, amongst other matters, had incurred expenditure of a capital nature on the purchase of a unit of industrial property. Section 124M(1), in that division, permitted a taxpayer to deduct an amount, pursuant to a formula, for the residual value of "a unit of industrial property", which was defined in s 124K to include the rights possessed by a person under a law of Australia as an owner of copyright. The provision read: unit of industrial property means: (a) rights possessed by a person under a law of Australia as: (i) the grantee or proprietor of a patent for an invention; or (ii) the owner of a copyright; or (iii) the owner of a registered design; or (iv) a licensee under such a patent, copyright or design; and includes equitable rights in respect of such a patent, copyright or design or in respect of a licence under such a patent, copyright or design; or (b) rights possessed by a person under a law of a foreign country that are equivalent to the rights referred to in paragraph (a). An owner of copyright, therefore, had a unit of industrial property within the meaning of s 124K(a)(ii) in Division 10B and was entitled to an allowable deduction pursuant to the formula in s 124M. The copyright acquired by SPI PowerNet was, therefore, something for which it was able to claim a deduction. 6 An element in determining the amount of the allowable deduction under Division 10B was the cost of the unit of industrial property to the owner. The cost of a unit of industrial property for the purposes of Division 10B was to be ascertained under s 124R and depended upon the basis upon which Division 10B was made, by s 124L(1), to apply to the owner of a unit of industrial property. Division 10B was, by s 124L(1)(b), made to apply to SPI PowerNet in this case because it had become the owner of copyright by having "incurred expenditure of a capital nature on the purchase of the unit of industrial property". That meant that SPI PowerNet was an owner referred to in s 124L(1)(b) which, in turn, required the cost of the copyright it acquired, being a unit of industrial property, to be ascertained under s 124R(1)(b). 7 Section 124R(1)(b) provided for the ascertainment of the cost of the unit of industrial property under one of three provisions, namely, s 124L(1)(b), s 124R(3) or s 124R(5) depending upon, in effect, three different circumstances: For the purpose of this Division, the cost of a unit of industrial property to the owner of a unit shall…be taken to be: […] (b) in the case of an owner referred to in paragraph 124L(1)(b): (i) if sub-section (3) or (5) of this section is applicable - the cost ascertained in accordance with that sub-section; or (ii) if neither of those sub-sections is applicable - the expenditure referred to in paragraph 124L(1)(b). One circumstance which governed the basis upon which to ascertain the cost of a unit of industrial property was where the acquisition had been between parties who had not been dealing at arm's length in relation to the purchase (in which case the cost was to be determined in accordance with s 124R(3)). The second circumstance was where the unit of industrial property had been purchased in a dealing where the parties had been dealing with each other at arm's length in relation to the purchase but where no separate price had been allocated to the unit of industrial property by the parties (in which case the cost was to be ascertained by reference to s 124R(5)). The third circumstance was that of all other cases, that is, where the purchase did not come within the two other specifically mentioned circumstances (in which case the cost was to be the actual expenditure incurred by the owner as referred to in s 124L(1)(b)). The effect of these provisions, in general terms, was that an owner of a unit of industrial property would be entitled to claim as a deduction the actual cost of its acquisition unless (a) the Commissioner was satisfied that the parties to the acquisition had not dealt with each other at arm's length in relation to the purchase or (b) there had not been a separate amount allocated by the parties to the acquisition: a taxpayer was entitled to a deduction for the value of the unit in the case of the first exception, and, in the case of the second exception, a taxpayer was entitled to a deduction for the amount of the total expenditure which the Commissioner determined was to be taken to be the amount of the purchase price of the unit. 8 In this case there is no suggestion that SPI PowerNet, as purchaser, had acquired the copyright other than in an arm's length dealing in relation to the purchase of the copyright. Section 124R(3), therefore, did not apply. However, the copyright it acquired had been purchased with other property and no separate price had been allocated to it, making s 124L(1)(b) inapplicable as the basis of ascertaining the cost. Accordingly, it was s 124R(5) which applied to determine the cost of the unit of industrial property for the purposes of the application of Division 10B. In that event s 124R(5) provided that the amount of the expenditure on the purchase of a unit of industrial property coming within its terms was to be taken to be so much of the purchase price as the Commissioner determined. Section 124R(5) provided: Where, in the case of an owner referred to in paragraph 124L(1)(b), the unit of industrial property was purchased by the owner of the unit with other property and no separate price was allocated to the unit, the amount of the expenditure of a capital nature incurred by the owner on the purchase of the unit for the purposes of this Division shall be taken to be so much of the purchase price of the unit and the other property as the Commissioner determines. The reference in the section to the amount being determined by the Commissioner gave rise to a substantial dispute in the proceeding about the construction of s 124R(5), namely whether the amount of the deduction depended upon the Commissioner's discretion or whether s 124R(5) operated objectively in the manner considered in WR Carpenter Holdings Pty Ltd v Federal Commissioner of Taxation (2008) 237 CLR 198 (High Court); (2007) 161 FCR 1 (Full Federal Court). 9 The position adopted by the parties on the WR Carpenter issue changed during the course of the dispute with each abandoning the position initially held in favour of the position which the other had first held but had then abandoned. SPI PowerNet had initially contended that the Commissioner had erroneously exercised a discretion which had been conferred by s 124R(5) rather than that the Commissioner had failed to determine the objectively ascertainable correct amount which was allowable under s 124R(5). The Commissioner's position had initially been that the determination of the amount allowable under s 124R(5) did not depend upon the finding of error in the exercise of power by the Commissioner. By the time of the hearing, however, the respective positions had been reversed and the parties were given leave to file amended appeal statements to reflect their changed positions. The Commissioner's case at the hearing was that s 124R(5) depended upon the exercise of a discretion and that SPI PowerNet had failed to show error in the exercise of the discretion. SPI PowerNet's case at the hearing was that s 124R(5) did not make an assessment dependent upon the Commissioner's discretion and that in Part IVC proceedings it was sufficient to establish, in accordance with the decision in WR Carpenter, that the assessment was excessive as considered in Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 without the need first to establish reviewable error as described in Avon Downs Pty Ltd v Federal Commissioner of Taxation (1949) 78 CLR 353. 10 The litigation in WR Carpenter had considered the distinction between statutory provisions where liability was imposed by reference to objective matters and those provisions where liability depended upon the Commissioner forming a state of mind, opinion or judgment as an integer in the liability. The issue arose in that case in the context of ss 136AD (1) and (4) in Division 13 of the 1936 Act which relevantly provided: (1) Where: (a) a taxpayer has supplied property under an international agreement; (b) the Commissioner, having regard to any connection between any 2 or more of the parties to the agreement or to any other relevant circumstances, is satisfied that the parties to the agreement, or any 2 or more of those parties, were not dealing at arm's length with each other in relation to the supply; (c) consideration was received or receivable by the taxpayer in respect of the supply but the amount of that consideration was less than the arm's length consideration in respect of the supply; and (d) the Commissioner determines that this subsection should apply in relation to the taxpayer in relation to the supply, then, for all purposes of the application of this Act in relation to the taxpayer, consideration equal to the arm's length consideration in respect of the supply shall be deemed to be the consideration received or receivable by the taxpayer in respect of the supply. […] (4) For the purposes of this section, where, for any reason (including an insufficiency of information available to the Commissioner), it is not possible or not practicable for the Commissioner to ascertain the arm's length consideration in respect of the supply or acquisition of property, the arm's length consideration in respect of the supply or acquisition shall be deemed to be such amount as the Commissioner determines. Each of these subsections provided for assessments to be made by reference to amounts determined by the Commissioner. The taxpayer in WR Carpenter had contended that these provisions therefore made the assessments depend upon the exercise of discretion by the Commissioner, and sought to challenge the exercise of the discretion and to that end had sought particulars of the Commissioner's exercise of the discretion in its case. 11 The Court in WR Carpenter rejected the taxpayer's application for particulars of the Commissioner's determination, holding that the assessment did not depend, as an integer of liability, upon the exercise of the Commissioner's discretion. The judgment of the Full Federal Court explained that Division 13 identified a number of objectively ascertainable criteria, the satisfaction of which would create liability. The Court identified those objective criteria as being: an international agreement between parties not dealing with each other at arm's length under which property is supplied for less than the arm's length consideration in respect of the supply or for no consideration. The Court went on to observe that the matters in respect of which the taxpayer in that case had sought particulars did not concern the existence or otherwise of any of those (objective) criteria; rather, the taxpayer sought particulars about matters seeking to challenge, on judicial review grounds, the exercise of the Commissioner's discretion. In that context the Full Federal Court explained that sub-section 136AD(4) operated like an averment clause as an exceptional case to the ordinary operation of the provisions. The Court said at [32]: Once it is seen that subs (4) is there for the exceptional case, its function in the Div 13 machinery becomes apparent. It operates like an averment clause. It does not create an irrebuttable presumption. It simply provides the Commissioner with a means of proof. Presumably in the present case the applicants will endeavour to show that the arm's length consideration would have been the amount in fact received or receivable by them, or at any rate would have been something less than the figure deemed by the Commissioner. It is difficult to see how the possibility or practicability of ascertainment that faced the Commissioner at the time of assessment would be relevant to the applicants' argument, before the court, that the figure advanced by them is in fact the correct arm's length consideration. At [42] the Court held that the exercise of the powers under ss 136AD(1)(d), (2) and (4) could not be challenged on judicial review grounds and added at [43]: Before we turn to examine some of the authorities, we would make the general observation that, in our view, the answers to the questions posed by this appeal lie in the analysis of the language of Div 13 in the light of s 177(1) itself rather than an intermediate classification of provisions as turning on the Commissioner's state of mind or otherwise. This is not to suggest that a distinction of the kind drawn by his Honour below between "state of mind" cases and "determination" cases is neither valid nor appropriate, but arguably it does not fully explain why s 177(1) does not prevent examination of the due formation by the Commissioner of his state of mind or satisfaction, whereas it does prevent examination of the due making by the Commissioner of his determination. In our view, the explanation is to be found in the fact that the first goes to substantive liability whereas the second is merely procedural. Where Parliament intended that the criteria for liability should include the due formation by the Commissioner of his state of mind, opinion or judgment, either in lieu of objective criteria, or as an addition to incomplete objective criteria, s 177(1) has never denied the ability of a taxpayer to examine the due formation of that state of mind on judicial review grounds. But where Parliament has exhaustively set out the criteria for liability by reference to objective matters, but has made the application of those criteria dependent upon a step being taken by the Commissioner, the step is procedural in the sense that it is not a step which forms part of the criteria for liability. The due making of such a determination is not subject to examination on judicial review grounds. It was held, therefore, that the taxpayer was not entitled to the particulars which had been sought because the assessments did not depend upon the exercise of discretionary powers. The "determination" which the Commissioner was authorised to make was not in the nature of a discretionary power but gave the Commissioner the ability to make an objective finding which was reviewable on objective grounds in Part IVC proceedings rather than upon judicial review grounds. The High Court dismissed an appeal from the decision of the Full Federal Court: (2008) 237 CLR 198. The judgment of the High Court at [30] explained that the opinions of the Commissioner underlying the exercise of discretion under s 136AD(1) were not evidence of the facts "which exist or do not exist irrespective of the attitude of the Commissioner". The Court did not disapprove the observations which had been made by the Full Federal Court concerning s 136AD(4) and the Commissioner did not contend in this proceeding that the High Court had disapproved the dicta by the Full Federal Court in this respect. 12 The Commissioner contended, however, that s 124R(5) of the 1936 Act is different from the provisions considered in WR Carpenter because s 136AD (4) was said to contain the criteria of liability, namely, "arm's length consideration", while s 124R(5) was contended to provide no criteria of liability beyond the Commissioner's "discretion" to determine an amount. It is true that the amount the Commissioner could determine under s 136AD(4) was described as "the arm's length consideration in respect of the supply or acquisition", but the amount the Commissioner is to determine under s 124R(5) is similarly able to be discerned as an objective fact, namely that part of an actual purchase price paid by the purchaser of a unit of industrial property which is to be taken to be the amount of the whole which was paid for its purchase where no separate price had been allocated in the purchase. In the case of both provisions an element of the criteria for liability is made to depend upon the determination by the Commissioner of an objective fact: in the case of s 136AD(4) it was the Commissioner's determination of the arm's length consideration, and in the case of s 124R(5) it is the Commissioner's determination of that part of an actual total purchase price which is to be allocated to the unit of industrial property (assuming that s 124R(3) did not apply, namely that it was not a case where the parties "were not dealing with each other at arm's length in relation to the purchase"). In neither case are the criteria for liability made to depend upon the formation by the Commissioner of a state of mind, opinion or judgment in lieu of objective criteria. 13 The determination which the Commissioner is to make under s 124R(5) is that of part of an actual un-dissected sum which is objectively referable to the acquisition of a unit of industrial property. That may be seen by the purpose and function of s 124R(5) in the machinery of Division 10B as a whole. Its purpose and function is to enable the Commissioner to determine the actual cost of something where it was not separately agreed between the parties. The general scheme of the provisions in Division 10B is for a taxpayer to obtain a deduction for the actual cost of acquiring the unit of industrial property unless (a) the agreed cost was not in an arm's length dealing or (b) the agreed cost was part of an unallocated overall purchase price. Section 124R(5) applies where the parties to the transaction had not allocated part of an overall purchase price to the unit in question but have otherwise dealt with the purchase at arm's length. The presumption made by the section is that it is possible to take part of the total purchase price actually paid as that amount paid for the unit of industrial property. The section does not make the Commissioner's determination depend upon discretionary considerations but only upon an inquiry, like that in s 136AD(4) considered in WR Carpenter, of the amount properly attributable to the purchase price of the unit of industrial property. Indeed, it would be curious if the Commissioner, under s 124R(5), could determine as an allowable deduction an amount that was neither the actual cost allowable under s 124R(1)(b)(ii) (or an objectively ascertained portion of the actual cost under s 124R(5)) nor the arm's length value of the property allowable under s 124R(3). It would be curious for the legislature to prevent the arm's length buyer of a unit of industrial property, in an arm's length purchase, from getting the arm's length value as the cost of the unit of industrial property whilst requiring a purchaser who was not dealing at arm's length in an acquisition to do so. Section 124R(3) applies where parties are not dealing with each other at arm's length in respect of an acquisition and provides that the cost to the owner is to be the lesser of the cost of the unit to the preceding owner or the value of the unit at the time of purchase. The purpose of s 124R(5) is to enable the Commissioner to determine what the section presumes to be the objectively ascertainable portion of the total purchase price which the buyer of a unit of industrial property must be taken to have paid for the unit of industrial property. It operates where it is assumed that something was paid for the unit of industrial property but that its amount (that is, its cost) was not separately identified. The task may involve questions of judgment similar to those which go to determining the arm's length consideration in provisions like s 136AD(4), but it is a task directed to determining objectively that part of an un-dissected sum which was the cost for the purchase of a deductible asset. 14 It is, therefore, unnecessary to consider whether SPI PowerNet has established error in the exercise of any discretion by the Commissioner. Had it been necessary to do so, it would have been necessary to consider what matters the Commissioner could take into account in the formation of an opinion. Such matters must, as was said by the High Court in WR Carpenter, be "guided and controlled by the policy and purpose of the enactment", and the exercise of the power will be examinable in the way explained by Dixon J in Avon Downs Pty Ltd v Federal Commissioner of Taxation (1949) 78 CLR 353: see WR Carpenter Holdings Pty Ltd v Federal Commissioner of Taxation (2008) 237 CLR 198 at [10]. On that basis the considerations which the Commissioner could take into account in the exercise of a discretion under s 124R(5) must be those which bear upon the determination of that part of an unallocated entire sum which should be taken to be the cost to SPI PowerNet of the unit of industrial property. The criteria for the exercise of any such discretion must lie primarily in those matters which also inform and tend to produce the correct identification of that part of the total purchase price which is to be taken to be the amount paid for the acquisition of the unit of industrial property. In this case that will, therefore, give rise to substantial overlap, if not complete identity, in those matters which the Commissioner may consider in exercising any discretion in s 124R(5) and those matters relevant to the operation of s 124R(5) if it is to be applied as was considered in WR Carpenter. 15 I need not, therefore, to the extent of the overlap, consider separately whether the Commissioner erred in the exercise of any discretion. However, it may be useful to make three observations about whether the Commissioner erred in the exercise of any discretion before turning to the application of s 124R(5) on the basis considered in WR Carpenter. The first is that, unsurprisingly, the Commissioner had in fact not made the determination under s 124R(5) on the basis of having actually exercised a discretion in the Avon Downs sense. That is unsurprising because it was not until some time after these proceedings had commenced that he altered his view about the nature of the power conferred by s 124R(5) and until then had maintained that the power did not confer a discretion. The failure to exercise the power on the basis subsequently maintained in this proceeding may be sufficient to show reviewable error, in the sense of a failure to exercise the discretion, although the case was not conducted upon that basis and no submissions were made on that issue by either party. The second is that to the extent that the Commissioner must be taken to have considered the matter from the point of view of discretionary factors he appears to have proceeded on the basis that the amount of the purchase price that was to "be taken to be" the purchase price for the copyright in this case was a question to be answered by an objective valuation of the copyright. The relevance of the valuation of the copyright is otherwise a critical issue in dispute between the parties in this proceeding and its answer will, therefore, largely govern any question about whether the Commissioner erred in the exercise of any discretion. The third is that, as SPI PowerNet contended, the Commissioner appeared to have taken into account at least three considerations which were irrelevant to his stated basis of determining the amount to be taken as the value of the copyright. The first was whether any amount allowable under s 124R(5) had already been taken into account in obtaining depreciation deductions under Division 42 and the former Division 58. The Commissioner was of the view that any amount otherwise to be included as a deduction under s 124R(5) had been allowed or was allowable as a deduction by way of depreciation for plant and equipment under other provisions and, therefore, that it could not be taken into account in valuing the copyright for the purpose of s 124R(5). The Commissioner's contention that the amount had actually been claimed as a deduction depended largely upon the view that the copyright did not have a separate value but formed part of the value of the plant and equipment. The evidence, however, for reasons to be considered below, does not support the Commissioner's contention that there was in fact an allowance of a deduction for the value of the copyright through the depreciation provisions; that is, the evidence of those called to give evidence concerning the value of the copyright was predominantly that the copyright had a separate value. The terms of s 124R(5) would not, however, otherwise permit the exclusion of an amount as a deduction if it were otherwise available under another provision but not claimed under the other provision. The second matter taken into account by the Commissioner that would be extraneous to the exercise of any discretion was that the tax group which included SPI PowerNet had not recognised the copyright as a separate asset in the balance sheet, the financial statement or in the other reported document or prospectus. The fact of a failure by a taxpayer to include an amount as a separate asset in its financial accounts is not relevant to the exercise of any discretion if the amount was found to exist as a separate asset. The third was that the Commissioner considered that the valuation of the copyright was relevant to the exercise of the power in s 124R(5), but rejected the valuation which the Commissioner had obtained on 3 August 2011 of $26 million from Value Adviser Associates Pty Ltd ("VAA"). That valuation was not in evidence in the proceeding except to the extent of the fact of it having been obtained and referred to, but rejected, by the Commissioner in making his decision. SPI PowerNet had relied upon, and claimed, a higher valuation to claim a deduction. The Commissioner had considered the value of the copyright to be relevant to a decision under s 124R(5) but rejected even the lower value. The Commissioner's rejection of any valuation as the basis of the deduction under s 124R(5) was based upon the view that the copyright had no separate value and the correctness of that view is best considered below in the context of the objective operation of the section. The exercise of the Commissioner's discretion will be erroneous where the Commissioner, having chosen valuation of the copyright as a relevant factor, describes the facts in a way that makes clear that he has misconceived the facts: see Duggan v Federal Commissioner of Taxation (1972) 129 CLR 365, 369, 370. The exercise of any discretion will, accordingly, be found to be erroneous if his exclusion of any value for the reason given was shown to be wrong. Each of these three considerations may be sufficient to find reviewable error if it had been necessary to do so. Another error alleged against the Commissioner is that he misdirected himself about the meaning of copyright, but that issue (and the Commissioner's contrary contention that the valuers failed to value the correct copyright) may also best be dealt with below in the context of the valuations relied upon by the applicants. It is also unnecessary and undesirable to consider the more general challenges to the exercise of any discretion on the grounds of unreasonableness in the sense of being an exercise of discretion that no reasonable decision maker could have made. 16 The proper construction of s 124R(5), however, is not one that makes its application depend, as an element of liability, upon the formation by the Commissioner of some discretionary opinion, state of mind, or the like, but upon an objective determination (no doubt based in part upon considered judgment of relevant facts) of that amount of an actual purchase price which is to be taken as that paid for a discernible part of what was acquired. Even so, however, the application of the section is not without difficulty. The statutory task required by s 124R(5) is, in effect, that of allocating or apportioning part of a known purchase price to part of what the total amount purchased but the basis of allocation, and the relevance of value, is not easy. The section is directed to allowing to the taxpayer a deduction for that part of a known larger amount which is to be taken to be the cost of the deductible item rather than allowing a deduction for the independent value of the item in question. The task is not, in terms, that of valuing the relevant part of what was acquired, although its value may be relevant to the process of allocation. A similar issue was considered by the Administrative Appeals Tribunal in the context of apportioning an amount for the purposes of depreciation in AAT Case 10,267 (1995) 31 ATR 1027 where the Deputy President observed at [9]: The Commissioner's (and the role of this tribunal) is to apportion the consideration for the whole among the various assets or interests acquired in such fashion as is, in all the circumstances of the transaction, appropriate. This apportionment may or may not reflect the market value. [See also Case 98 (1953) 3 CTBR 605, [7]]. The individual market value of an item purchased with others for a composite amount may not be the appropriate portion of the total purchase price which is to be taken to have been paid for the item. That may be so for various reasons and the adoption for the purposes of s 124R(5) of the value of the unit of industrial property which was acquired may not produce the outcome intended by the section. The section assumes that part of the total purchase price was a taxpayer's actual cost of acquiring the unit of industrial property and that the amount to be allocated can be determined. 17 The experts in this case had not been asked specifically to opine on methods by which part of an actual total purchase price might be taken to be the cost of the copyright in question, but were asked whether there was a generally accepted methodology or methodologies for valuing copyright in drawings and documents for a transmission system. That, however, is not the question to which s 124R(5) directs attention. The section is directed to the allocation or apportionment of a known total amount to part of the composite of the assets which the whole amount paid for: it is not directed to valuing the relevant asset except to the extent that the value may inform the task of allocation or apportionment. The dispute between the parties, however, was largely conducted upon the basis that the question posed by s 124R(5) was to be answered by valuing the copyright; although the parties reached radically different outcomes on that basis. Senior counsel for the taxpayer submitted in final submissions that it should be inferred that the experts had agreed, and had assumed, that the allocation of part of the total amount of the price paid for the transmission assets was to be undertaken on the basis of valuing the copyright. The Commissioner did not entirely disavow that approach and, indeed, relied upon the views of one of the valuers to maintain the position that no part of the total purchase price was to be allocated to the copyright because, as a matter of valuation, it had, in his opinion, no ascertainable separate value. The independent value of the copyright may be relevant to the question upon which the application of s 124R(5) depends, and in many cases will suggest or inform the answer to the question posed by the section (where, for example, the unit of industrial property has a ready market for its purchase and where that value can reliably be taken to have been largely reflected in the composite purchase price). 18 The unit of industrial property in question, and which was the subject of valuation evidence, was in excess of 100,000 drawings which were acquired by SPI PowerNet on 6 November 1997. What was valued was identified in several places in the evidence, including an affidavit of Mr Gary Ronald Towns dated 29 November 2012. Mr Towns is a consulting engineer and had been employed by the applicants from November 1997 to December 2011. He had spent his entire working life in the Victorian electricity industry, beginning as a junior electrical engineer in 1978 in the transmission business of the State Electricity Commission of Victoria ("the SEC"). The assets which Mr Towns knew to have been acquired by SPI PowerNet from the Victorian Government as at 6 November 1997 were described by him as including copyright in the drawings and various procedure manuals as:

Some 90,000 drawings saved in electronic form on a laptop
Easement plans - lines and stations
Standard maintenance instructions
Plant and equipment policy documents
Plant defects report
Primary practices and procedures
Standard oil procedures
Secondary practices and procedures, and relay test instructions (including in secondary practices and procedures)
Secondary circuit isolation
Solid state principles
Electrical instrumentation manual
Transducers
Demand recording equipment
Power system protection
Line practices and procedures
Live line procedures
Transmission field work procedures
Electrical plant and equipment - descriptive manual
Asset manual strategy
Standard lab test procedures and instructions
Training materials - TTO training protection
Vision 2020
Environmental manuals
Earthing code for stations
Plant and equipment training slides & manuals
Bushfire mitigation manual
Authority to receive - electrical access permits
Lab relay test instructions
Wholesale metering manual test procedures
GPU PowerNet Yarraville Quality Management Manual
NATA Laboratory Quality Management Manual
Relay settings software (RESIS). On 2 November 1998 Sinclair Knight Merz ("SKM") was retained to undertake a valuation of the copyright assets acquired by SPI PowerNet as at 6 November 1997 including those in the 32 categories listed above and also:
Lines On line rating software
Transformer On line rating software
Cables On line rating software
Secondary Equipment Doble Test Routines & Data. Mr Towns was the person at SPI PowerNet primarily responsible for engaging SKM and he dealt primarily with Mr Bill Toohey at SKM. 19 The precise identity of the drawings upon which the deduction was claimed under s 124R(5) was a matter of controversy between the parties. Senior counsel for the Commissioner submitted that a reason for rejecting the taxpayer's case was that the number of items which had been valued was not consistent and, therefore, that the valuations could not be relied upon by the Court. However, the evidence does not support that contention. It is true that the number of drawings valued is not identical in all places in which the subject matter valued was identified. However that difference is not material and was sufficiently reconciled by senior counsel for the taxpayers by reference to the evidence. The number of drawings which were valued, given their nature and size, were always understood and described as approximate. There is no reason to reject the evidence that the number chosen was sufficiently accurate to provide a reliable foundation for the valuation of the assets acquired as copyright. A written table headed "Reconciliation of Drawings" provided in submissions by senior counsel for the taxpayers explained how, and why, the number differed in different references in the evidence. It is not necessary to repeat the reconciliation in detail other than to note my acceptance that there was shown to be sufficient identity in the subject matter, and the number of the drawings in that subject matter, which was valued by SKM and subsequently by PriceWaterhouseCoopers ("PwC"). The evidence included a detailed and carefully referenced report by SKM in 1999. It identified that some 130,410 drawings had been acquired in November 1997. Of these 25,000 were excluded from valuation as being cancelled, superseded, obsolete, replaced or blank, leaving to be valued by SKM the total estimated number of drawings at 105,410. At one point SKM referred to 99,477 documents to be valued, but a supplementary report dated 10 March 1999 added a further 5,933 which reconciled precisely with the 105,410 estimated number of documents which were valued at that time. The evidence of Mr Toohey, together with the reconciliation provided by counsel, explains the apparent discrepancy in the number of drawings valued. The number of documents considered subsequently by PwC was not materially different. PwC referred to some 141,910 drawings of which some 46,000 were excluded. A taxpayer's burden of proof does not require proof with certainty; it requires proof upon the balance of probabilities upon probative evidence. The evidence was that there were about 105,410 documents falling within the 36 categories acquired by SPI PowerNet as at 6 November 1997 which SKM valued. 20 The SKM valuation was undertaken primarily by Mr Toohey, an engineer in the electrical works section for SKM, who valued the assets at $171 million as at 6 November 1997 using the replacement cost methodology. On 29 August 2006 PwC were engaged to comment on the reasonableness of the SKM valuation as at 6 November 1997 ("the first PwC report"). Mr Towns also managed the first PwC report for SPI PowerNet and dealt with Mr John Studley at PwC. A key assumption in that report was that in estimating the cost to recreate the critical copyright it was not possible to copy the drawings and procedure manuals. The first PwC report estimated the range of the value of the assets as between $173 million and $262 million and concluded that the SKM value of $171 million was reasonable. On 22 November 2006 PwC was engaged again to provide advice in connection with the value of the copyright assets, this time as at 19 October 2005, for the purposes of the consolidations provisions upon SPANT having become the head company of a tax consolidated group ("the second PwC report"). PwC valued the copyright as at that time to be between $230 million and $332 million. Two other experts gave evidence concerning the value of the copyright drawings. Mr Wayne Lonergan was retained for SPI PowerNet and agreed generally with the methodology adopted by PwC. Mr Tony Samuel was retained by the Commissioner and expressed the view that the copyright had no value separate from the other assets which were acquired. 21 The substance of the dispute about the value of the drawings depended less upon their number than upon the impact on their value of their significance to the operation of the electricity transmission business conducted by SPI PowerNet. Both the taxpayer and the Commissioner contended that the drawings were significant to those operations but, in part for the same reason, they reached opposite conclusions about their value. 22 Mr Ficca and Mr Towns, amongst others, gave evidence explaining the significance of the drawings to the operation of the electricity transmission business. Mr Ficca had spent his professional working career in the energy industry commencing as an electrical engineer within the SEC. He gave detailed evidence about the critical importance of the drawings to the transmission business in their use for such purposes as responding to emergency situations, augmenting works, maintaining and modifying works, replacing and refurbishing works, isolation works, proximity works, decommissioning, to satisfy contractual obligations to other entities in the electricity industry, and to satisfy technical regulators and various workplace safety and bushfire mitigation laws. Mr Towns also explained the importance of the drawings and procedure manuals whenever works are required to the transmission network. Such works included those to augmentation, maintenance and modification, replacement and refurbishment, isolation, proximity, decommissioning and communications. 23 Many examples of the drawings were tendered in evidence and Mr Ficca was asked in oral testimony to explain some to illustrate their use and importance. One of the drawings, which may be used as illustrative of the very many others, was a single line diagram for the West Melbourne terminal station depicting the 220 kV network in Victoria and its subsidiary 66 kV switchyards. Its particular importance lay in the switchyard which provides services to the distribution businesses in the metropolitan area of Melbourne. The diagram does not depict the plant as a two dimensional picture of a three dimensional object but, rather, depicts the electricity movements of the circuitry and the key elements within it. Information contained in boxes at the bottom of the first page of the drawing identified who drew it and who was involved in its design and checking. It also included such information as the various revisions which had been made to the drawing and who had done those revisions and the dates upon which they had been done. It was possible from the diagram, for example, to identify that on 21 June 1994 there had been a revision which had deleted something from part of the system depicted in the drawing. A user of the drawing would be informed, for example, that there was a capacitor bank (being a type of equipment) connected to a common point of voltage via a circuit breaker. A number of switches were identified in the drawings as being on either side of the capacitor bank, thus enabling a person to switch that piece of equipment in and out relative to the common points of voltage. The diagram is filled with marks and symbols which convey meaning both in themselves and, importantly, in relation to each other. Earthing points are identified in relation to the capacitor bank and another earthing switch. Following the line down vertically, a circuit breaker is shown which picks up the flow of current in that circuit and operates various protections. The circuit breaker is depicted as a square box below which is depicted a symbol for a switch. Information of that kind does not just record historical detail; it is essential information for maintenance operations because it informs a user of the drawing of the points where the circuit breaker can be opened safely for servicing. The drawing was not just a visual depiction of information but expressed the information in a way that informed a user about the individual details in the drawing and also about the relationship those details have to each other. Copyright does not protect facts or information (IceTV Pty Ltd v Nine Network Australia Pty Ltd (2009) 239 CLR 458 [28]) but does protect the particular form of expression of the information, namely the words, figures and symbols in which the information is expressed and the selection and arrangement of that information (Ice TV Pty Ltd v Nine Network Australia Pty Ltd (2009) 239 CLR 458 [26], [28]). There were very many drawings of this kind and very many others which differed in detail and presentation of information, but all which expressed information necessary for the use and ongoing operation of the transmission network. The form of expression of the facts and information in the drawings and other documents was useful, critical, necessary and valuable to SPI PowerNet in its transmission business. 24 The Commissioner accepted that copyright subsisted in the drawings and other documents but contended, principally, that they had no separate value capable of being taken as part of the amount paid by SPI PowerNet as part of the Total Purchase Price. Three experts were called to give concurrent evidence concerning the appropriate methodology for valuing copyright in drawings and documents for a transmission system. There was substantial agreement between them but there was a sharp difference on critical matters. The three expert witnesses were Messrs Lonergan, Studley and Samuel who agreed that there were three generally accepted methodologies for valuing intellectual property, but they could not agree that there was a generally accepted methodology for valuing copyright in drawings and documents for a transmission system. The three agreed that the accepted methodologies for valuing intellectual property are an income approach, a market approach and a cost approach. They also agreed in general terms that a replacement cost methodology was appropriate but could not agree about its application in these proceedings. The critical point of difference was between Mr Samuel and the other two. Mr Samuel was of the view that a market approach was relevant to the issues to be determined in the proceedings because there had been contractor agreements which had provided evidence of the amount which a willing buyer was prepared to pay for the relevant copyright from a willing seller. Mr Samuel's opinion, however, was, in essence, that the copyright could not possibly be sold separately from the transmission business any more than a key could be sold separately from the only car it could open. The other two experts were of the view that the market approach was not appropriate for valuing the copyright assets in drawings and documents for a transmission system because of the unique nature of the copyright assets and that there was no readily observable market for such assets. They considered that the existence of the contractor agreements did not provide evidence that the value of the copyright was nil but only that there was no additional payment for the copyright over and above the composite price for the contract performance. Another aspect of disagreement, again dividing Mr Samuel and the other two, concerned whether it was appropriate to make allowance for any costs associated with being deprived of the drawings and documents when calculating the value by the replacement cost approach in these circumstances. 25 The approach taken by Mr Samuel, upon which the Commissioner relied, does not accord with the task to be undertaken under s 124R(5). It may readily be accepted that there is no separate market for the copyright in the drawings and other documents, or for the drawings and other documents themselves, which were acquired by SPI PowerNet in 1998 any more than there might be a market for a key which will open only one car. However, the task contemplated by the section assumes that some part of the purchase price for the total assets has been paid for the unit of industrial property constituted by the drawings in the same way that it may be assumed that some part of an amount to purchase a car with a key may pay an amount for the car and an amount for the key to operate it. It is not a sufficient answer to the application of the section that the unit of industrial property may not be capable of independent sale in a hypothetical market. It may be that little of the total purchase price is to be taken as having been paid for the item of industrial property but that conclusion will not necessarily follow just because items which are sold together could not be sold separately. Similarly, as a matter of general principle, the task required by s 124R(5) is not answered by determining the separate value of one of a number of assets which were acquired together with the payment of one un-dissected purchase price. It may well be that the separate value of the copyright may best be determined by the replacement cost methodology, and that value may inform the answer to the question posed by s 124R(5), but it does not necessarily determine how much of the price actually paid is to be taken as the amount paid for the copyright. The application of any methodology for valuing an asset for the purposes of s 124R(5) will be of assistance only to the extent that it informs the inquiry required by that section: namely, how much of the actual agreed total sum is to be taken to have been paid for the item in question. 26 There may be cases in the application of provisions like s 124R(5) in which the value of a unit of industrial property acquired as part of the composite acquisition of assets may not be relevant. For that to be so, however, it must be clear that no part of the purchase price was paid for the unit of industrial property. The acquisition of the copyright by SPI PowerNet in this proceeding is not such a case and I do not consider the evidence to permit such a conclusion. Even the evidence of Mr Studley did not go that far: his view as an expert was, rather, that it had no separate value because, like his car key example, it could not be sold separately. The evidence of the other experts, and of those who were involved in the business activities of SPI PowerNet and in the purchase of the copyright, was that the copyright had value, that its separate value was capable of determination and that it had been purchased. Indeed, the evidence of those engaged in SPI PowerNet's business, which I accept, was that the copyright was critical to the proper operation of the business. The information conveyed in the drawings and documents, and the ability to reproduce the drawings and documents, was essential to the operations of the transmission system. The tasks for which the documents were created typically required reproduction of the documents by display on computer screens or portable hand-held devices, or as printouts for staff to take for use on-site. Reproduction with tracing paper was used before photocopying became possible, as was microfiche. The drawings and documents have been digitized since the 1980s and imported to a management system called "Objective". 27 The preponderance of the expert evidence was that the separate value of the copyright acquired by SPI PowerNet was properly to be determined, and able to be determined, by the replacement cost methodology. The three experts who gave evidence were required to prepare a joint report answering five questions before giving concurrent evidence in which their answers, and the differences between them, were explored. Their joint report was as follows: Question 1: Is there a generally accepted methodology or methodologies for valuing copyright in drawings and documents for a transmission system? The Experts agree that there are 3 generally accepted methodologies for valuing intellectual property (IP), but no generally accepted methodology for valuing copyright in drawings and documents for a transmission system. Question 2: If yes, what is that generally accepted methodology or methodologies? Matters agreed The 3 generally accepted methodologies for valuing IP are: • An Income approach • A market approach • A cost approach The Experts agree in general terms that a replacement cost methodology is appropriate, however they disagree as to its application in these proceedings. The Experts agree that an income approach is not appropriate in these proceedings. Matters not agreed The Experts do not agree as to the usefulness of the market approach in these proceedings. Reasons for disagreement Mr Samuel is of the view that the market approach is also relevant in this proceeding, as there are contractor agreements which provide evidence of the amount incurred by a willing buyer in acquiring relevant copyright from a willing seller. In Mr Samuel's opinion, these contractor agreements, which in many instances specify an acquisition cost for copyright of nil, should be given some weight, but should not be considered to be definitive as to the market value of the relevant copyright. Mr Lonergan is of the view that the market approach is not appropriate for valuing the Copyright assets in drawings and documents for a transmission system because of the unique nature of the copyright assets and as there is no readily observable market for such assets . (Mr Studley agrees) Mr Lonergan considers the contractor agreements are not evidence that the value of copyright is nil. The agreements state a composite price for everything and merely state that there is no additional [emphasis added] payment for copyright over and above the composite price for the contract performance. They do not state that "the acquisition cost is nil". (Mr Studley agrees). Question 3: If yes, do any such generally accepted valuation methodologies include replacement cost methodology? Yes, replacement cost is a form of a cost based approach. Question 4 (a): If yes, what is the generally accepted meaning amongst valuers of replacement cost methodology? Matter agreed The Experts agree that the generally accepted meaning amongst valuers of replacement cost for a tangible asset is the current direct cost of replacing the asset as at the valuation date. The Experts agree that the generally accepted meaning amongst valuers of replacement cost for an intangible asset is the current direct cost of replacing the asset plus relevant opportunity costs depending on the circumstances. Matter not agreed The Experts disagree as to the application of replacement cost methodology in these proceedings relating to intangible assets. Messrs Lonergan and Studley agree that replacement cost in this circumstance includes both direct costs of replacement and opportunity costs. This is consistent with International Valuation Standards and generally accepted valuation practice. Mr Samuel agrees that direct costs of replacement are relevant in all circumstances. He agrees that opportunity costs are relevant in some circumstances but not in this circumstance. He notes that the International Valuation Standards do not address the circumstance in which the intellectual property cannot sensibly be separated from the tangible asset to which it relates. Reasons for disagreement Mr Samuel takes this view because he understands that each item of copyright in this instance is specific to a tangible asset and was acquired simultaneously with that tangible asset. It would not sensibly be acquired by any willing but not anxious buyer (WBNAB) separately from that tangible asset. It is therefore necessary to assume that the hypothetical market value transaction between the WBNAB and the willing but not anxious seller (WBNAS) takes place in the same context -l,e, that the copyright should be valued as if it were being acquired at the same time as the tangible asset. It follows, on this basis, that the cost of acquiring the copyright would not include deprival (opportunity) costs. In Mr Samuel's opinion, the inclusion of deprival costs assumes a hypothetical market that is nonsensical. This nonsensical hypothetical market is a monopoly for the assumed WBNAS that did not in fact exist. By assuming the separate sale of the copyright from the specific tangible assets to which they relate (being the Transmission System) allows for the inclusion of deprival costs that would not occur (and did not occur) in the actual market. Mr Lonergan's view is that the market value requirement under the Spencer Test is the price that would be negotiated by a WBNAB and WBNAS. As a matter of practicality it is true that the copyright may often be acquired simultaneously with the tangible asset, but as a matter of valuation practice (hypothetical market value transaction) it is not. It is possible to transact in copyright and plant and machinery each on a stand alone basis and this is also supported by many examples in practice where copyright is bought and sold independently . Furthermore, Mr Lonergan is of the view that there are frequently market transactions in other forms of copyright and there is no reason to believe that in reality there would not be some financial institution willing to bid for the copyright on the basis that it would reasonably be able to expect that it could licence the copyright back to the owner of the Transmission System at a commercial rate of return. There are many other commercial situations in which copyright is licensed separately from the tangible assets to which they relate. Mr Lonergan further notes that the 2005 transaction was part of a public listing of a 49% minority interest and the joining of a tax consolidation group . There is thus no "sale of copyright at the same time as the tangible asset". The valuation issue arises under the tax consolidation provisions of the Tax Act. Furthermore, Mr Lonergan considers that the market value should not be different for different purposes as Mr Samuel does . Mr Studley agrees with Mr Lonergan . Mr Studley's view is that the market value requirement under the Spencer Test is the price that would be negotiated by a WBNAB and WBNAS . The willing buyer in this hypothetical transaction would consider both current direct cost of replacing the asset plus relevant opportunity costs because the WBNAB and WBNAS hypothetical scenario requires that the asset be valued on an independent, stand alone basis. (Mr Lonergan agrees) Question 4b: If yes, does it include costs of re-gathering information for the purposes of creating a replacement set of drawings and documents? The Experts agree that a replacement cost approach to valuing the drawings and documents would include information re-gathering costs. Question 4c: If yes, does it include costs associated with being deprived of the drawings and documents? The Experts repeat their response to Question 4a. Question 5: Where the assessed market value of freehold land, easements, the transmission system and items of copyright as at 19 October 2005 exceeded the enterprise value of SPANT, is there a generally accepted method for dealing with that excess? Matters agreed The Experts agree that there is no generally accepted methodology for dealing with the excess as it depends on the context. The Experts agree that if there is an excess, it would be sensible for (a) the valuation of each category of assets to be revisited to ensure those valuations were not excessive, and (b) the enterprise value to be checked to ensure it was not understated (or overstated). The Experts agree that the definition of enterprise value is the market value of interest bearing debt plus the market value of equity on a controlling interest basis. Subject to Mr Samuel's and Mr Lonergan's comments below, it is agreed that a proportional reduction may be a pragmatic and reasonable approach where having done (a) and (b) there is still an excess. Matters not agreed In Mr Samuel's opinion, assuming generally accepted valuation principles have been applied, SPANT's enterprise value would not have been determined having regard to the opportunity cost of being deprived of the transmission system. It follows that the first adjustment for the purpose of dealing with the excess would be to remove the deprival costs from the valuation of the copyright. Mr Lonergan also notes the following: (Mr Samuel does not provide an opinion on Mr Lonergan's notes as insufficient information has been provided to enable him to do so.) The sum of the underlying individual assets' market values may exceed enterprise value for a number of reasons including: • Bargain purchase • Overstated liability values • Assets funded by creditors, non-interest bearing liabilities etc not reflected in enterprise value • Regulatory constraints on allowable rates of return and allowable asset bases • Onerous contracts, management agency issues, etc In the time available to prepare this report it has not been possible to quantify these issues accurately. Mr Lonergan also notes that the PWC 14.8% proportionate write down from enterprise value for ACA purposes may be based on minority interest share values rather than controlling share values . The end result being that the enterprise value set out on pages 12 and 13 in PWC's 2007 report may be understated. Therefore the 14.8% pro rata write down of asset values appears to be overstated for this reason (in addition to the easement values being in excess of their market value (1997 and 2005) and the licence value being very significantly overvalued (1997)). Mr Lonergan's preliminary "bottom line" conclusion is that after correcting for the last mentioned issues that there may be no excess in this case. The application of the replacement cost methodology in this case produced a value for the copyright as at the date of acquisition of $171.8 million by the process undertaken by SKM. 28 The first valuation of the copyright was undertaken by SKM between November 1998 and January 1999. An earlier valuation by SKM had been undertaken in 1994 of the network but that had not taken into account the replacement cost of the in situ assets and "did not purport to, nor did it in fact, value the drawings of the actual transmission system in 1994". The methodology involved in the valuation subsequently undertaken from late 1998 was explained in reports by SKM and by the evidence of Mr Toohey who had been responsible for SKM's valuation and the report. The exercise undertaken by SKM in late 1998 was to determine the replacement cost of the intellectual property contained in the copyright. The basis of the assessment included an estimate of the time it would take similarly qualified personnel to undertake the necessary work to replace the intellectual content of the drawings and other documents. The report produced by SKM in 1999 included a detailed explanation of the work undertaken to produce the estimated value of the intellectual property acquired as at 6 November 1997. 29 The report by SKM was based upon the documents made available by SPI PowerNet and SKM relied upon sampling to determine document content and to establish development times and replacement costs, and also to audit document numbers. The subject matter was considered to fall within the three categories of "Drawings or Survey Plans", "Documents" and "Software" which were each dealt with in a separate section of the report. The methodology adopted by SKM to determine replacement cost differed as between the three categories of documents but the general approach was described in paragraph 2.5 of the 1999 report: This review focuses primarily on the quantity, intellectual content and "cost to replace" the intellectual content of the drawings reviewed. The cost to replace the physical form of the drawings, documents etc. has not been included in the assessment ie folders, papers, printing, films. The assessment of Replacement Cost has been based on the replacement work being undertaken by personnel with experience in the type of work (eg drafting, document writing etc in the electricity industry) using modern tools (eg software drafting packages, word processing software etc) working efficiently. The man-hour estimates per task and the hourly rates applied to the various categories of personnel reflect those that would have been offered by the "competitive market" as at November 1997. Allowance has been made for expense's [sic] such as travel and accommodation where it would be necessary to visit SPI PowerNet's existing sites. It has been assumed that the programme of replacement would be such that any field survey activities which require plant outages could be integrated into maintenance activities. No additional allowance has been made for the cost of outages of equipment to allow survey/investigation for the purpose of collecting required information. Replacement of information has been based on total replacement of all documents and information contained there in, where it has been determined during the review and in consultations with GPU PowerNet representatives that the information is relevant to GPU PowerNet assets as at the 6th November 1997 and where the information is not duplicated to a major extent in other documentation. The report does not attempt to comment on all issues identified within the available information but presents a view of those issues considered notable and/or relevant. Items not considered unusual or which do not affect functionality have not necessarily been discussed in the report. Sinclair Knight Merz has not verified ownership or entitlement to claim the value of the Intellectual Property contained in these documents. The representative sample of the documents valued on this basis had been provided to SKM by Mr Towns who took care to identify drawings and documents in which the purchaser acquired copyright and to exclude those in which copyright might belong to a third party manufacturer. Over 130,000 were identified in which SPI PowerNet acquired copyright upon the acquisition, of which SKM valued 105,410 that were in existence as at 6 November 1997. The 25,000 excluded were those which, upon review, were allocated a nil cost to replace them because they had been cancelled, superseded or the like. 30 In 2006, as mentioned above, PwC was asked to evaluate the reasonableness of the previous SKM valuation. Mr Towns was again the person at SPI PowerNet primarily responsible for the task and dealt at PwC primarily with Mr Studley. Mr Towns was asked for the purposes of the PwC report to classify the assets into the categories of "critical", "important" or "useful". Mr Towns also estimated the cost per man hour of recreating the copyright assets and the number of employee days to recreate the copyright asset. The first PwC report did not include the costs associated with: recreation of assets classified as important or useful; loss of the transmission licence as a result of non-compliance with the strict conditions attaching to the holder of a licence; the fact of not owning the control centre; the risks of litigation; and the risks of breaking debt covenants as a result of litigation. PwC concluded that the $171.8 million value adopted by SKM was reasonable. Mr Lonergan subsequently reviewed the PwC methodology and also supported the valuation. 31 Valuation is essentially a matter for expert evidence, as are the details of such established methods as the replacement cost method which was undertaken in this case to value the copyright assets acquired by SPI PowerNet. The burden of proof upon a taxpayer is to be discharged upon the balance of probabilities (McCormick v Federal Commissioner of Taxation (1979) 143 CLR 284, 303; Macmine Pty Ltd v Federal Commissioner of Taxation (1979) 24 ALR 217, 235), and the evidence in this case establishes that the drawings and documents in evidence were acquired, or were updated versions of what was acquired, pursuant to the Asset Sales Agreement as at 6 November 1997, and that the copyright in them had an identifiable separate value which was capable of valuation by established methods. The valuation of copyright is unlike the question of law which arose in Federal Commissioner of Taxation v Murry (1998) 193 CLR 605 concerning the attribution of goodwill to a licence or the other assets used to carry on a taxi business. In that case it was said at 625 that the value of the goodwill of a business, itself a separate asset, may be small where it is derived from using an identifiable asset or assets. The valuation in this case is also unlike including a claim of "special value" to a purchaser when seeking to determine the market value of an item: see Boland v Yates Property Corporation Pty Ltd (1999) 74 ALJR 209 [27]; cf Commissioner of State Taxation (WA) v Nischu Pty Ltd [1991] 91 ATC 4371. The copyright in this case is one of the assets which were acquired for a total amount and the question, in essence, is how much of that amount did SPI PowerNet pay for the copyright. 32 The evidence that the value of intellectual property acquired by SPI PowerNet at the relevant time was $171.8 million does not, however, of itself necessarily determine the amount of the deduction to be allowed under s 124R(5). The value of the unit of industrial property, in this case the copyright acquired by SPI PowerNet, might not be the amount which is to be taken as that part of the total purchase price which is to be taken to be the cost for its acquisition. The replacement cost method does not seek to determine the actual cost of the copyright sold by the vendor, and may produce an amount which differs from that which should be taken to be that part of the total price actually agreed between the parties (see: GV Smith & RL Parr, Valuation of Intellectual Property and Intangible Assets (Third Edition), 72, 157, 160-4, 197-8, 205-9, 212-4, 464, 471; W Lonergan, The Valuation of Businesses, Shares and Other Equity (Fourth Edition), 310, 318). The Commissioner relied in submissions on the views expressed in the book by Smith and Parr to support the proposition that any value of the copyright must be relatively low independent of the other assets with which the copyright was used (see Smith and Parr especially at 209 and 464); but (assuming it is proper to have regard to the opinions expressed in a text book that were not put to the experts who gave evidence at the hearing) it is not the independent value of the copyright that is required to be determined for the purposes of s 124R(5): what is to be determined is what part of the total amount paid is properly to be regarded as the amount paid for the copyright (even though it might not be capable of independent sale). The replacement cost methodology as employed by SKM seems best able to capture the amount required by s s124R(5) to be determined. The replacement cost approach was explained by Smith and Parr at 197-8 as seeking "to measure the future benefits of ownership by quantifying the amount of money that would be required to replace the future service capability of the subject intellectual property". The copyright in contention in this proceeding was necessary to the operation of the transmission business and had to be acquired with the other assets. The cost of the acquisition of the copyright is likely to be reflected in the cost to create the copyright as the replacement cost method aims to determine. 33 The valuation undertaken by SKM in 1999 does not contain such costs as ought not to be included for the purposes of s 124R(5). The method adopted by SKM was not to determine what the copyright had cost someone to create, and, therefore, excluded historic costs which had been incurred in the initial creation of the copyright which would not be incurred if it had to be created by, for example, modern techniques. SKM was also careful to exclude from its valuation any copyright in material which, although acquired, was "cancelled, superseded, obsolete, transferred [or] not issued". The methodology itself, as explained above, was based upon assumptions which took into account modern efficiencies and expertise rather than historic costs that could not ordinarily be recouped from a buyer. The specific application of the methodology to the three categories of copyright was also directed to capturing in the value of the copyright the cost benefit in what was acquired. In relation to the first of the three categories they assigned a value, SKM said in the 1999 report: Assign Replacement Cost For each category a "cost to replace" the "intellectual property" was assessed. In assessing the replacement cost it was considered that the benefit of the drawings document existing installations owned by GPU PowerNet. Broadly speaking the recreation of the "intellectual property" would involve two elements:

SPI PowerNet Pty Ltd v Commissioner of Taxation

At a glance

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Judgment (14 paragraphs)

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Legislation Cited (4)

Cases Cited (15)

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