Transurban City Link Limited v Commissioner of Taxation

either 25˝, 27, 29, 31 or 33 years after the Date of Completion of the last Section of City Link if the Equity Return on that date is or exceeds 17.5 per cent per annum; all City Link Project Debt has been repaid; and the State has given notice electing to end the Concession Period; or · later, as follows:

where an event specified in the Appendix to the Concession Deed has occurred having a Material Adverse Effect and the parties agree (or it is determined) pursuant to cl 2.10 of the Concession Deed that the appropriate method of redress is to vary the Concession Period. 31 Clause 2.11 of the Concession Deed provides that the Concession Period cannot be extended to exceed an aggregate period of 43 years and 6 months from the Link Expected Completion Date except where the State agrees, and that any such extension will ordinarily be limited to 53 years and 6 months from the Link Expected Completion Date. 32 The Concession Deed provides that, in consideration for the State granting the concession (as set out in cl 2.8), Transurban shall pay concession fees to the State (cl 3.1 of the Concession Deed). The concession fees are payable for the full term of the Concession Period and the Concession Period continues only so long as the concession fees are paid. If the Concession Period is terminated, no further concession fees are payable (cl 3.1 of the Concession Deed). The period during which Transurban may exercise the rights granted by the concession ends at the end of the operations phase as that is the date on which the Concession Period ends. 33 The concession fees are made payable pursuant to paragraphs (a) and (d) of cl 3.1 of the Concession Deed. Paragraph (a) sets out the base concession fee and paragraph (d) sets out an additional concession fee. 34 Subclause 3.1(a)(i) of the Concession Deed provides as follows: "[Transurban] shall (provided the Concession Period then continues), in consideration of the State granting the concession rights set out in clause 2.8, pay to the State in the period from the date of the commencement of the Concession Period until the end of the twenty-fifth year after the date which is 6 months earlier than the Link Expected Completion Date an annual concession fee of $95,600,000, payable in equal instalments semi-annually in arrears, on the last Business Day of each June and December in that period and on the date of termination of this Deed (should termination occur in that period) with each such payment being adjusted on a pro rata basis for any period of less than 6 months." 35 Subcll 3.1(a)(ii) and (iii) are expressed in similar terms to subcl 3.1(a)(i) and provide for fees payable in equal instalments semi-annually in arrears as follows: (ii) $45.2 million per annum for years 26 to 34 of scheduled operations; (iii) $1 million per annum from year 35 of scheduled operations until the end of the Concession Period (in the event that the Concession Period is extended to this time). 36 Clause 3.1(d) of the Concession Deed imposes an additional concession fee pursuant to a graduated scale (set out in Schedule 4 of the Concession Deed) if toll revenue exceeds certain Base Case Financial Model projections ("the Base Case Model"). The Base Case Model, which is defined in cl 1.1 of the Concession Deed, was developed on the basis of identified assumptions and estimates, including traffic estimates, used by Transurban and the Trustee in entering into the agreement. The additional concession fees increase over time. For example, in years one to five a 10 per cent increase in City Link Project revenue over the Base Case Model revenue calls for an additional concession fee of 10 per cent of the increase (ie of the excess revenue), whereas in years 18 and later a 10 per cent increase in revenue over the Base Case Model revenue calls for an additional concession fee of 25 per cent of the increase (see cl 3.1(d) and Schedule 4 of the Concession Deed). However, payment of the additional fee is conditional upon Equity Investors' returns exceeding the Base Case Model returns (cl 3.1(d)). An Equity Investor is defined as a person holding Project Securities as defined in cl 1.1 of the Deed. The concession fee structure facilitates: · a base level rate of return to the State; and · the potential for a higher rate of return to the State by way of the additional concession fees. 37 Transurban may, at its option, satisfy the obligation to pay the base concession fees (but not the additional concession fees) by issuing to the State "Concession Notes" (cl 18.5 of the Master Security Deed). Clause 18.5 of the Master Security Deed, entered into by Transurban, the Trustee, the State and the City Link Project financiers, provides that Concession Notes may not be presented for payment unless the State is entitled to do so in accordance with the terms of the Concession Note. 38 The term "Concession Notes" is defined in cl 1.1 of the Concession Deed (as amended by cl 3.1 of the Deed Amending the Concession Deed dated 20 February 1996 ("the amending Deed")) as "securities issued by [Transurban] which are in the form of, and which are issued on the terms set out in, Exhibit W". Exhibit W, as inserted by the amending Deed and contained in Annexure A to the amending Deed, contains the form of Concession Note. Part 3 of the form of Concession Note provides for: (a) payment of the Concession Note 33 years and 6 months after the Link Expected Completion Date; but (b) earlier payment is provided for where the following conditions are met: (i) an Equity Return (defined in cl 1.1 of the Concession Deed as "the expected real after tax internal rate of return which a Notional Initial Equity Investor is projected to receive on its investment" using the Base Case Model) of 10 per cent per annum or more; and (ii) payment under the Concession Note not resulting in the aggregate amount paid under Concession Notes in the financial year in which the Concession Note is presented exceeding 30 per cent of distributable cash flow for the preceding financial year. 39 Accordingly, all outstanding Concession Notes, under which no interest is payable, are redeemable by the State within 33 years and 6 months after the Link Expected Completion Date. Transurban issued Concession Notes to the State for the base concession fees payable for the years of income ended 30 June 1996, 1997 and 1998. Transurban has also issued Concession Notes to the State for all subsequent concession fees payable under the Concession Deed. 40 The Master Security Deed prioritises obligations owed to the "Security Trustee", which acts on behalf of the financiers, and the obligations owed to the State. The Deed sets out the rights of enforcement as between the State and the Security Trustee where there has been a finance default (see the definition in cl 1.2 in the Master Security Deed and cl 18.1 of the Security Trust Deed). The Master Security Deed is Exhibit K to the Concession Deed and therefore is ratified and also has effect as though it had been enacted (s 14 of the City Link Act). Further priority provisions as between creditors are set out in a Security Trust Deed entered into between Transurban and the City Link Project financiers. 41 Clause 1.3(b) of the Concession Deed and cl 1.4 of the Master Security Deed provide that the terms of the Master Security Deed will prevail to the extent of any inconsistency in a City Link Project Document, which is defined as including the Concession Deed and the Concession Notes. 42 Clause 1.9 of the Master Security Deed (as amended) provides that for so long as any Project Debt is owing, the amount of any payment to be made (other than payment of the State's Priority Amount) shall be owing to the State but shall not be due for payment until money is available for withdrawal from the Distributions Account to meet that payment in full. The Base Case Model does not anticipate that cl 1.9 will operate to prevent payment to the State of Concession Notes (which are not State Priority Amounts) where the Concession Notes would otherwise be payable. Nonetheless, the effect of Pt 4(b) of the Concession Note and cl 1.9 of the Master Security Deed is that presentation of the Concession Note by the State for payment cannot occur while Project Debt is outstanding unless there is sufficient money in the Distributions Account to meet the payment in full. 43 Under the Base Case Model redemption of the Concession Notes was expected to commence in November 2013 and Project Debt was expected to be repaid by 2023. It was likely that 2013 was the earliest day on which payments might commence as the Base Case Model was relatively insensitive to traffic volumes in relation to the period prior to 2013. Under the financiers' Financial Model redemption was expected to commence in 2017. However, as traffic volumes have fallen short of the projections in both models the current expected redemption dates are closer to 2034. Under that scenario, as no interest is payable, the value of the Concession Notes issued to date, discounted to net present value, is likely to be "nil" or a very small amount. 44 Although the Commissioner did not rely upon circumstances occurring since the opening of City Link those circumstances can demonstrate the relationship between traffic volumes and revenues to the real, if not the nominal, value of the returns the State might expect from the Project. That matter is apparent from the Base Case Model used by the parties for the purposes of the Concession Deed. Thus, although events occurring since the opening of City Link may not be relevant to the issues in the present case they afford examples of the sensitivity of the Base Case Model projections to traffic flow and the revenues derived therefrom and the interrelationship between those matters and the value of the expected financial return to the State. ARE THE CONCESSION FEES LOSSES OR OUTGOINGS "INCURRED" IN THE 1996, 1997 AND 1998 YEARS OF INCOME? 45 If the concession fees, or the amounts payable in respect of those fees under the Concession Notes, are outgoings incurred in each of the relevant years of income they are able to be carried forward to subsequent years as losses because little or no off-setting income was earned by Transurban during that period. 46 The Commissioner claims that, on the proper construction of the relevant Project documents, Transurban did not incur liability to pay the concession fees in the relevant years of income because the obligation to pay the fees imposed on Transurban by cl 3.1 of the Concession Deed is properly to be characterised "as a contingent obligation". He contends that: "21. … Although the obligation is imposed in unconditional terms, the overriding effect of the related transaction documents is to render [the] obligation conditional. 22. Nor is the contingency purely theoretical. As a practical matter, it is unlikely that Transurban will be required to discharge the obligation until many years into the future. 23. As a practical matter, therefore, in none of the years of income is Transurban 'definitively committed' or 'completely subjected' to the obligation to make the payment in the future. 24. If, contrary to the [above] submission, any part of any Concession Fee is a deductible outgoing, such outgoing is properly referable to the year of income in which the payment is made, rather than the year in which the obligation to make the payment is incurred." 47 Transurban claims that cl 3.1 imposes an "unequivocal positive obligation" to pay the concession fees and the entitlement of Transurban to defer payment of the fees "does not derogate from the absolute nature of the obligation" to pay the fees. In support of that claim Transurban contends: "68. Clause 3.1 of the [Concession Deed] imposes an unequivocal positive obligation upon [Transurban]. The clause is clear and unambiguous and provides that [Transurban] 'shall pay to the State' 'an annual concession fee … payable in equal instalments semi-annually in arrears, on the last business day of each June and December … with each such payment being adjusted on a pro rata basis for any period of less than 6 months'. It is plain that [Transurban] has 'completely subjected' itself to, and is 'definitively committed to', the concession fee obligation in each of the years in question. … 69. The fact that clause 18.5 of the Master Security Deed provides [Transurban] with an ability to issue Concession Notes as a means of satisfying its obligation to pay concession fees does not derogate from the absolute nature of the obligation imposed by the [Concession Deed]. Clause 18.5 of the Master Security Deed does not create any contingency or condition precedent to the establishment or continued existence of [Transurban's] liability to pay concession fees to the State. 70. Contrary to the suggestion in paragraph 15 of the [Commissioner's] Contentions, neither the terms of clause 1.9 of the Master Security Deed nor the terms of the Concession Note create any condition precedent or contingency to the establishment of [Transurban's] liability or obligation. These terms do not remove or alter, or purport to remove or alter, the positive obligation imposed upon [Transurban] by clause 3.1 of the [Concession Deed]. That obligation is expressed in unequivocal language and, as the [Commissioner] observes, 'is imposed in unconditional terms'. 71. Indeed, and as recognised by the [Commissioner] in his Objection Decision, clause 1.9 of the Master Security Deed and the terms of the Concession Notes impact only upon the timing of payment. Clause 1.9 reflects the priority or sequence of payments from cashflows agreed to by the various groups of creditors, including the State. Those arrangements affect only the timing of payment of pre-established liabilities to the State. As the [Commissioner] properly concedes, '…the right to a deduction is not affected by questions of payment …'. 72. There can be no doubt that the concession fees are 'properly referable' to the income years in which the deductions are claimed. … As noted above in the context of the revenue nature of the concession fees: (a) [Transurban's] right to operate the CityLink is not for an indefinite period; (b) [Transurban] is under a clear obligation to pay the concession fees during the Concession Period; (c) the concession fees are: (i) recurrent; (ii) annual fees payable semi-annually in arrears on the last business day of June and December; (iii) adjusted on a pro-rata basis for any period of less than six months; (iv) only payable while the Concession Period endures; (v) payments made for the periodic use of the CityLink rights; (vi) analogous to rental payments under a lease or licence fees under a licence; (d) the advantage secured by the concession fees is the use of the CityLink rights in each successive period to which they relate; (e) it is '… appropriate to describe the fee as an annually recurring impost payable for the right to earn income in the relevant year'. …" 48 In order to deal with the competing contentions it is necessary to consider the provisions in the Project Documents, including the Concession Notes, that provide for payment of the Concession fees payable by Transurban in the relevant years of income. 49 As explained above, cl 2.8 of the Concession Deed sets out the concession rights granted by the State to Transurban. Clause 3.1 provides that in consideration of the grant of those rights Transurban shall "pay to the State" an annual concession fee of $95.6 million in equal instalments semi-annually in arrears on the last business day in June and December. In the events that have occurred, cl 3.1 operates to require the fees of $95.6 million to be paid during the first 28 years of the Concession Period. There is to be a pro-rata adjustment for any payment that relates to a period of less than 6 months. 50 However, cl 1.9 of the Master Security Deed (in the form it was in during the relevant years of income), provided that: "1.9 Payments by the Company or Trustee For so long as any Project Debt is owing and notwithstanding the express terms of any Project Document to the contrary, any payment to be made by the Company or the Trustee to the State under, or for breach of, any Project Document (other than payment of the State's Priority Amount ) (the 'State Payment Amount') shall be owing to the State but shall not be due for payment until sufficient money is available for withdrawal from the Distributions Account (as defined in the Security Trust Deed) to meet that payment in full and each of the Company and the Trustee undertakes not to apply any amounts held in the Distributions Account maintained in its name for any purpose other than payment of that State Payment Amount until the balance of the Distributions Account maintained in its name equals or exceeds that State Payment Amount to the extent that it is not in dispute and all or part of the balance has been applied by it to pay that State Payment Amount in full to the extent that it is not in dispute." 51 For the purposes of cl 1.9 the Concession Deed and the Concession Notes are "Project Documents"; references in the clause to the Company and to the Trustee are references to Transurban and to Perpetual Trustee Company Limited; "Project Debt" means, in substance, the debt incurred in respect of the initial financing of the City Link Project (see cl 1.1(a) of the Master Security Deed and cl 1.1 of the Concession Deed); and the concession fees and any amounts payable in respect of the fees under a Concession Note are "State Payment Amounts" as they do not fall within any of the payments defined in cl 1.2 of the Master Security Deed as a "State's Priority Amount". 52 Clause 1.9 of the Master Security Deed operates to defer the date for payment of the concession fees payable by Transurban under cl 3.1 of the Concession Deed, and for payment of the amounts payable under Concession Notes, until "Project Debt" is no longer owing or there is sufficient money available in the Distributions Account for payment of the amounts due "in full". 53 The Project Documents contain elaborate provisions as to the moneys of Transurban that are, and are not, to be paid into the Distributions Account for so long as Project Debt is owing. However, it appears to be common ground that the extent to which funds go into the Distributions Account from time to time depends both on actual cash flow and the forecast revenues for the future. 54 The precise mechanisms and limitations in respect of the Distribution Account are set out in cl 15 of the Security Trust Deed. In substance, cl 15 requires that the funds received in respect of the City Link Project be applied to payment of construction and operating costs and expenses, to debt servicing and repayments, to other financing payments and to certain specified Reserve Accounts before being transferred to the Distributions Account out of which the concession fees were to be paid. 55 The Concession Notes issued by Transurban to the State to satisfy its obligation to pay the semi-annual concession fees payable in each of the relevant years of income contain the terms set out in Exhibit W to the amending Deed. The Notes totalled $31,253,846.15 for the year ended 30 June 1996 (being the pro-rata amount payable for part of the semi-annual concession period which commenced on 4 March 1996) and $95.6 million for each of the years ended 30 June 1997 and 30 June 1998 (being the full amount of the semi-annual concession fees payable for each of those years). 56 The Concession Notes were issued pursuant to cl 18.5 of the Master Security Deed, which provides: "18.5 Concession Notes (a) The obligation of the Company to pay an amount payable by it under paragraph 3.1(a) of the Concession Deed may (at the election of the Company) be satisfied by the Company issuing to the State (on or before the due date for payment of the amount) Concession Notes: (i) the aggregate face value of which equals the relevant amount; … (b) The State shall not (and shall procure that none of its delegates appointed under the Concession Deed shall) present for payment any Concession Note unless it is entitled to do so in accordance with the terms of the Concession Notes. (c) … (d) …" 57 The Concession Note for the year ended 30 June 1996 contained the following provisions: "THIS NOTE WITNESSES: Part 1 Definitions … Part 2 Amount of Concession Note Upon presentation for payment in accordance with this Concession Note, the Company in its own capacity and for valuable consideration promises to pay the Crown in right of the State of Victoria in the sum of $31,253,846.15 ('Payment Amount') being the liability of the Company incurred under Article 3.1(a) of the Concession Deed in respect of the Concession Fee payable for the semi-annual period ending on 30 June, 1996 for the financial year ended 30 June, 1996. Part 3 Payment of Concession Note (a) The Payment amount must be paid under this Concession Note notwithstanding paragraphs (b) and (c), on the date which is 33 years and 6 months after the Link Expected Completion Date ('the Expiry Date') and this Concession Note may be presented for payment to the Company at any time after 32 years and 6 months after the Link Expected Completion Date. (b) If the following conditions have been satisfied at any time prior to the Expiry Date: (i) the Equity Return (determined as at a date not earlier than 4 months before presentation of this Concession Note and as if the Concession period ended on that date) must be 10% per annum or more; and (ii) the payment of the Payment Amount under this Concession Note must not result in the aggregate of the amounts paid by the Company under the Concession Notes, and of the amount payable under the Concession Note presented in the financial year in which this Concession Note is presented, exceeding 30% of the Distributable Cashflow for the preceding financial year, then this Concession Note must be paid on the later of the date which is 30 days after presentation by the State for payment and the date which is the earlier of: (A) 30 days after the finalisation of the financial accounts of the Company and Trust for the financial year preceding the financial year in which the Concession Note is presented; and (B) 3 months after the end of the financial year preceding the financial year in which the Concession Note is presented. (c) If the Concession Period ends prior to the Expiry Date: (1) due to the operation of paragraph (a) of the definition of Concession Period, then this Concession Note must be paid on the Expiry Date; or (2) otherwise, and if the conditions of paragraph (b) above have been satisfied, this Concession Note must be paid within 30 days after presentation by the State for payment. Part 4 Manner of Presentation … (b) Unless clause 1.9 of the Master Security Deed is the applicable to this Concession Note, then for so long as any Project Debt is owing and notwithstanding any express terms of this Concession Note to the contrary any payment to be made by the Company under, or for breach of, this Concession Note shall be owing but shall not be due for payment until sufficient money is available for withdrawal from the Distributions Account (as defined in the Security Trust Deed) to meet that payment in full after paying all amounts owing to the State under, or for breach of, a Project Document (other than any Concession Note) or owing under, or for breach of, any Concession Note having a prior number to this Concession Note. Part 5 Concession Note transferable This Concession Note is transferable and does not bear interest. Part 6 Replacement of Notes …" 58 The Concession Notes issued for the years ended 30 June 1997 and 30 June 1998 were, save for the amounts payable, in the same terms. 59 Part 4(b) of the Concession Notes appears to have been inserted out of an abundance of caution as cl 1.9 of the Master Security Deed applies to the amounts owing under the Concession Notes as they are Project Documents. Nothing turns on the point as Pt 4(b) fills any possible gap by, in effect, making the conditions in cl 1.9 conditions in the Concession Notes. 60 As explained above, payments of amounts due in respect of the concession fees payable under the Concession Notes were expected to commence between 2013 and 2017. However, that expectation was based on assumptions and estimates that may, or may not, prove to be accurate. One example of the assumptions made is the assumed annual tax deductibility of the semi-annual concession fees payable to the State, notwithstanding the deferral of the requirement that the fees be paid. If that assumption proves to be erroneous that would have a consequential effect on Transurban's cash flow and will reduce "the after tax internal rate of return for an investor subject to the corporate tax rate … to approximately 85 per cent of the return which would have been achieved if the concession fees were immediately deductible". 61 In the events that have occurred the assumptions and estimates about traffic volumes have not proved to be correct with the consequence that payment of the concession fees may not occur prior to 2034. However, that date may be brought forward if traffic flows, and therefore toll revenues, improve. 62 By reason of cl 1.9 of the Master Security Deed, the concession fees that fell due under cl 3.1 of the Concession Deed in respect of that portion of the Concession period which commenced on 4 March 1996 and concluded on 30 June 1998, were not required to be paid because Project Debt had not been paid and the funds in Transurban's Distributions Account were not sufficient to pay the amount of the concession fee that was due. Thus, although Transurban fell under an obligation to pay the concession fees payable during the relevant years of income the date for payment of the amount due was deferred until Project Debt had been paid or there was sufficient money in the Distributions Account to pay the full amount due to the State. 63 The Concession Notes issued in respect of the concession fees provided for a further deferral as payment under the Notes was not due until 14 February 2034. However, payment will be earlier if the cl 1.9 conditions are satisfied, the equity return to investors is 10 per cent per annum or more and the aggregate amount paid under the Concession Notes does not exceed 30 per cent of the distributable cash flow for the preceding financial year. 64 Thus, although Transurban became obliged to pay the amounts owing in respect of concession fees payable for the relevant periods in each of the relevant years of income, the date on which the fees were required to be paid depended on events outside of the control of Transurban and the State. The most that can be said about the expected date for payment is that when the Concession Notes were issued, payments were likely to commence at some time between 2013 and 2017 but it may have been later depending on whether the assumptions and estimates made in the Base Case Model or the financiers' Financial Model proved to be correct. Subject to the cl 1.9 contingencies, which were expected to apply to 2023, the latest date for payment is 14 February 2034. 65 Under the Master Security Deed payment of the amounts payable under the Concession Notes were secured by a "Deed of Charge" but payment was subject to the priorities in favour of other creditors in the Master Security Deed. 66 The initial question is whether, in the circumstances outlined above, Transurban incurred the losses and outgoings it claimed in respect of the concession fees that it became obliged to pay, but did not pay, in the relevant years of income. If it did incur the liability it claimed in respect of the concession fees a further question arises as to whether the losses and outgoings are properly referable to the year of income in which the liability was incurred or rather, are properly referable to the year in which payment of the amount due is made. It is appropriate to approach the determination of both questions assuming, but without deciding at this stage, that it is appropriate to regard the amounts due as on revenue account. The correctness of that assumption will be considered in respect of the other issues arising on the appeal. 67 The starting point for any discussion of the meaning of "incurred" in s 51(1) is the classic statement of Dixon J in New Zealand Flax Investments Limited v The Federal Commissioner of Taxation (1939) 61 CLR 179 at 207 where his Honour stated: "To come within [the] provision there must be a loss or outgoing actually incurred. 'Incurred' does not mean only defrayed, discharged, or borne, but rather it includes encountered, run into, or fallen upon. It is unsafe to attempt exhaustive definitions of a conception intended to have such a various or multifarious application. But it does not include a loss of expenditure which is no more than impending, threatened, or expected." 68 A helpful summary of the more recent authorities in Australia as to when an outgoing has been "incurred" appears in the reasons for judgment of Hill J in Ogilvy and Mather Pty Ltd v Federal Commissioner of Taxation (1990) 95 ALR 663 at 700-701: "…the courts have consistently taken the view that it is unsafe to attempt an exhaustive definition of a term such as 'incurred' in s 51(1): New Zealand Flax Investments Ltd v FCT (1938) 61 CLR 179 at 207 per Dixon J; Hooker Rex Pty Ltd v FCT 88 ATC 4392 at 4400. Nevertheless a review of the cases to which I have referred reveals a number of propositions that may now be taken to have been accepted. These, in my view are: (1) An outgoing may be incurred notwithstanding the amount is not paid in the year of income provided the taxpayer has 'completely subjected himself' to that liability: Flood's case…at 507. (2) An outgoing may be incurred notwithstanding that at the end of the year of income it represents a present liability then due although payable in the future: FCT v Australian Guarantee Corp v FCT (1984) 2 FCR 483. … (3) An outgoing not representing a pecuniary liability of the year of income will not be incurred, notwithstanding that it is certain that the outgoing will arise as a pecuniary liability in the future: FCT v James Flood Pty Ltd and Nilsen Development Laboratories Pty Ltd v FCT…. (4) A reasonable estimate of an outgoing payable in the future where the amount of that outgoing cannot be ascertained with precision at the end of the year of income will be incurred where it represents a pecuniary liability encountered in the year of income but provided it is capable of reasonable estimation. The amount will not be incurred in the year in which the precise quantum of the liability is ascertained: RACV Insurance Pty Ltd v FCT …; Commercial Union Assurance Co of Australia Ltd v FCT, … and Commonwealth Aluminium Corp Ltd v FCT…. (5) An outgoing may be incurred in the year of income, notwithstanding that it is defeasible: Flood's case at 506-7. (6) An outgoing may be incurred notwithstanding that there is no legal liability to make payment at all at least where commercially that amount is certain to be paid in the future, provided that it is otherwise 'incurred': Commercial Union case. (7) An outgoing will not be incurred in the year of income where it is no more than contingent, pending, threatened or expected no matter how certain it may be in the year of income that the loss or expenditure will occur in the future: Flood's case at 507-8; Hooker Rex Pty Ltd v FCT, … at 4400." 69 More recently, in Merrill Lynch International (Australia) Ltd v Commissioner of Taxation (2001) 113 FCR 79 ("Merrill Lynch") at 100 ([61]) Lindgren J cited the seven propositions of Hill J with approval and made certain observations in relation to the sixth proposition: "It is plain, to my mind, that his Honour was concerned in his sixth proposition to distinguish between cases in which, by tax year's end, it was certain that there was a legal liability to make payment of some amount but the amount could only be estimated, and other cases in which it might transpire later that there was 'no legal liability to make payment at all', of which Commercial Union is the illustration cited. Another illustration might be found in an executory agreement made during the tax year under which the other party defaulted after the end of that year, relieving the taxpayer of an otherwise unconditional obligation to pay." 70 In Merrill Lynch the issue was whether the applicant had incurred liability to pay bonuses to certain of its employees in the relevant year of income in circumstances where the applicant had made provision for the bonuses to be paid but had not committed itself to paying, and did not pay, the bonuses until the subsequent year of income. Lindgren J, after considering the authorities, stated at 104-105 ([80]-[83]): "[80] It is not questioned, and on the authorities could not have been questioned, that in order for the applicants to have 'incurred' by 31 December 1994 the outgoing represented by payment of the bonuses: • the applicants must have completely subjected or definitively committed themselves by that time to pay bonuses to their employees; or • that in resolving this question, a 'legal' or 'jurisprudential' approach must be pursued. The only relevant 'commitment' in this case is one to each individual employee, not, for example, a 'commitment to itself' which Merrill Lynch may be suggested to have made by the progressive accrual in its accounts of the reserve to meet bonuses. The two considerations mentioned above lead to the conclusion that in order to come within s 51(1), the applicants must, by 31 December 1994, have incurred a legal liability to the individual employees to pay bonuses to them. [81] Moreover, in my view the authorities discussed above establish that, in order for an outgoing which is in fact paid after an accounting period to have been 'incurred' within it, there must, subject to certain matters, exist by the end of that period a legal liability to pay it. [82] I will not profess to state the 'matters' referred to exhaustively: to do so is to run the danger, cautioned against as early as in New Zealand Flax, of assaying an exhaustive definition of 'incurred' in the present context. 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. [83] The cases discussed show that deductibility is not denied: • only because the quantum of the outgoing is not ascertained, and can only be estimated, at the end of the tax year (RACV; Commonwealth Aluminium; Commercial Union; Coles Myer; Woolcombers; ANZ; Mercantile Mutual); • only because the taxpayer has an available defence to an action in respect of the outgoing if the defence can, and certainly would, be waived by the taxpayer (Commercial Union ; and cf Coles Myer per Deane J); • only because the liability is defeasible (James Flood); or • only because the legal liability is not yet 'an immediate obligation enforceable at law' (James Flood; Commercial Union)." 71 One of the more recent High Court authorities on which Lindgren J relied was Coles Myer Finance Limited v Commissioner of Taxation of the Commonwealth of Australia (1993) 176 CLR 640 ("Coles Myer Finance"), in respect of which his Honour made the following observations at 100-101 ([64]-[68]): "[64] In their joint judgment, Mason CJ, Brennan, Dawson, Toohey and Gaudron JJ stated (at 661-2) as follows: In James Flood, the Court pointed out that, for a deduction to fall within s 51(1), a taxpayer need not have 'come under an immediate obligation enforceable at law whether payable presently or at a future time' [at 506]. But this statement must be understood in the light of the decision in that case. The Court held that the employees' annual holiday leave was not a deductible expense. That was because [at 507-508]:' '… [i]n respect of those employees there was no debitum in praesenti solvendum in futuro. There was not an accrued obligation, whether absolute or defeasible. There was at best an inchoate liability in process of accrual but subject to a variety of contingencies.' The event on which the entitlement of the employees depended had not occurred. James Flood therefore stands as authority for the proposition that a liability must presently be existing in order to be 'incurred' within the meaning of s 51 (1). … [65] Their Honours continued by noting (at 662) that it was also accepted in Nilsen that a liability must be presently existing in order to be 'incurred' within the meaning of s 51(1), and that in both James Flood and Nilsen the court 'accepted the legal or jurisprudential analysis rather than the commercial view as the correct one'. Finally, their Honours said (at 662-3): 'No doubt as a consequence of the Court's adoption of the legal or jurisprudential analysis in determining entitlements to a deduction under s 51(1) in preference to the commercial view, the parties did not contend in the present case for a different approach to the question.' [66] The above passages are strong statements in favour of the view that the essential elements of legal liability must exist by the end of the tax year, even if, as Merrill Lynch submits, there was no suggestion in Coles Myer itself that they did not exist by then. [67] Deane J said he was in general agreement with their Honours' reasons. However, his Honour stated (at 670) as follows: It does not follow from those cases, however, that the fact that jurisprudential analysis discloses that a particular liability to make a future payment of money is contingent necessarily means that such a contingent liability cannot constitute or found a 'loss or outgoing' which has been 'incurred' for the purposes of s 51(1). To the contrary, the weight of authority supports the conclusion that, depending upon the circumstances, a liability to pay money can constitute, or give rise to, a 'loss or outgoing' which is 'incurred' within the meaning of that sub-section notwithstanding that the money is not payable until a future time [See, for example, James Flood at 506] and that the obligation to pay it is theoretically defeasible [See, for example, James Flood at 506] or contingent [See, for example, Commercial Union at 42-3; 661-662 … Texas Co (Australasia) Ltd v Commissioner of Taxation (Cth) (1940) 63 CLR 382 ] in that it is subject to a condition which remains unfulfilled. [68] Later (at 671), Deane J stated that 'the fact that a liability to make a future payment is theoretically contingent or defeasible is a relevant consideration' but is not itself decisive against deductibility, unless the contingency or defeasibility precludes the liability from constituting a 'loss or outgoing' which has been 'incurred' in the sense explained by Dixon J in New Zealand Flax. (His Honour's formulation of a 'theoretically contingent' liability was referred to with approval by the Privy Council in Commissioner of Inland Revenue v Mitsubishi Motors New Zealand Ltd [1996] 1 AC 315 at 327.)" 72 Reference should also be made to two cases involving deferred interest debentures under which interest accrued over the term of the debentures but was not payable until the debentures matured or were redeemed. In Alliance Holdings Ltd v Federal Commissioner of Taxation (1981) 37 ALR 430 ("Alliance Holdings") Woodward J rejected the Commissioner's submission that there was, in those circumstances, no present liability in the relevant tax years (ie the years in which interest accrued but was not payable) to pay money in the future. His Honour concluded at 438 that the deductions claimed for interest in each relevant year related to "a present liability to pay the determined interest at a future date". 73 The same question came before a Full Court in Federal Commissioner of Taxation v Australian Guarantee Corporation Ltd (1984) 2 FCR 483 ("Australian Guarantee Corporation"). The relevant facts appear in the headnote to that case. The taxpayer, which raised funds by regular borrowings from the public and other sources, issued deferred interest debentures to the public. Under the terms of the debentures no interest was to be "paid or credited" prior to maturity or earlier redemption at which time a debenture "will earn and be credited with interest". Each of the members of the Full Court held that the interest that accrued on the debentures prior to redemption was "incurred" by the taxpayer in the relevant year of income as the taxpayer had subjected itself to a liability to pay the interest, notwithstanding that payment would not have to be made until maturity or earlier redemption. Toohey J construed the debentures as giving rise to a present or accrued liability to pay interest which has accrued at some uncertain time in the future, which may have been up to 20 years after the debentures were issued. Nonetheless, his Honour (at 491-493) was satisfied that the interest accruing and claimed to be deductible in the relevant year was "referable" to that year. He stated (at 493): "Taxpayers are required, by the terms of the Act, to make returns on an annual basis. This Court should be slow to disallow a method of calculating the amount of an outgoing if what is claimed is fairly referable to the year in question. In my view, the amount claimed by the taxpayer as interest on deferred interest debentures for the year ended 30 September 1978 was an outgoing incurred by the taxpayer in the relevant years. It was calculated in accordance with sound accounting practice, designed to give a true picture of the taxpayer's financial operations, and it was an approach not precluded by the language of the Act. It is insufficient objection to that approach to say that it is not known when interest will in fact be paid. The amount claimed as a deduction was, in terms of s. 51(1), incurred in the relevant year in the sense that the taxpayer subjected itself to a liability which it addressed according to a method fairly designed to reflect the extent of the liability or the year in question." See also McGregor J (at 503) and Beaumont J (at 506-507). 74 The decisions in Alliance Holdings and Australian Guarantee Corporation are consistent with the subsequent decision of the High Court in Coles Myer Finance (at 661-663) where it was accepted that an obligation to pay an outgoing at a future time is a present liability which can result in the outgoing being "incurred", notwithstanding that the outgoing is not yet payable. 75 In my view it is clear that, on the proper construction of the Concession Deed, the Master Security Deed and the Concession Notes issued during the relevant years of income, Transurban completely subjected and definitively committed itself to paying the amounts due in respect of the concession fees. The liability in each of those years arose unconditionally under cl 3.1 of the Concession Deed, and was satisfied by Transurban electing to issue the Concession Notes under which there was also a present liability to pay the amounts due at a future time. The quantum of the liability was ascertained and was not defeasible or otherwise able to be prevented from becoming enforceable by any act of Transurban: see Merrill Lynch at 105. Further, Transurban's liability to eventually pay the amounts due was not subject to any contingency other than the "theoretical contingency" that the requirements of cl 1.9 of the Master Security Deed would not be satisfied. However, it is clear that such theoretical contingencies are to be disregarded as there is a present legal liability imposed on Transurban to pay the amount in question: see Coles Myer Finance per Deane J at 669-671. Finally, it is clear from the cases cited above that uncertainty as to when amounts owing will fall due for payment and the additional fact that that uncertainty will continue well into the future, do not affect the claim for deductibility of the outgoing in question provided there is a present or accrued liability to pay the amount due. 76 Accordingly, the Commissioner's contention that Transurban's liability in respect of the concession fees should be treated as a contingent liability must be rejected. ARE THE CONCESSION FEES REFERABLE TO THE 1996, 1997 AND 1998 YEARS OF INCOME? 77 However, as was pointed out by Mason CJ, Brennan, Dawson, Toohey and Gaudron JJ in Coles Myer Finance at 663: "But it is not enough to establish the existence of a loss or outgoing actually incurred. It must be a loss or outgoing of a revenue character and it must be properly referable to the year of income in question. So it was that in New Zealand Flax the taxpayer was not entitled to deduct all payments of interest in future years notwithstanding that it had incurred a liability to pay them in the accounting period under assessment." And at 665: "The acceptance by this Court of the jurisprudential analysis of s. 51 does not compel the conclusion that, once a taxpayer subjects itself in the year of income on revenue account to a present legal liability to pay in a future year of income an amount which generates, or gives rise to, a net loss or outgoing, the net loss or outgoing is deductible in full in the year of income. The relevance of the present existence of a legal liability on the part of the taxpayer to meet the bills and notes at a future date is that it establishes that the taxpayer has 'incurred' in the year of income an obligation to pay an amount which gives rise to a net loss or outgoing, being the recurrent cost of acquiring working or circulating capital. But there remains the question: how much of that net loss or outgoing is referable to the year of income?" 78 Thus, the conclusion that there was a present, and not a contingent, liability in respect of the concession fees still leaves for consideration the question of whether the amounts payable are properly referable to the years of income in which the liability was incurred (as is claimed by Transurban) or to the years in which payment will be made (as is claimed by the Commissioner). No point was taken that the referability principle does not apply to losses as well as outgoings (cf Commissioner of Taxation v Mercantile Mutual Insurance (Workers' Compensation) Ltd (1999) 87 FCR 536 ("Mercantile Mutual") at 552-554, [61]-[69]). 79 In Coles Myer Finance all of the members of the Court, other than McHugh J, held that the net loss and outgoing claimed should be apportioned over the term of the relevant bill or note, which meant over the years of income ended 30 June 1984 and 30 June 1985. The apportionment was explained in the joint judgment at 665-666: "Although the legal liability to pay is incurred in the year of income, the amount in question is not payable until the subsequent year of income and, more importantly, the net loss or outgoing represents the cost of acquiring funds which the taxpayer puts to profitable advantage in both years of income. The cost is incurred by the taxpayer with a view to acquiring funds with which to engage in its profit-making activities during the currency of the respective bills and notes. As between the drawer and the holder of a note or bill, the burden of the liability incurred by the drawer increases with the passage of time between the discounting of the note or bill and its maturity. In ascertaining what is the taxpayer's net income or profit for a particular year of income, it is proper to set against the taxpayer's gross income or profit for that period the net losses or outgoings referable to that period. Under s. 51(1) a loss or outgoing is a deduction only to the extent to which it is incurred in gaining or producing the assessable income. That provision has been described as, 'a statutory recognition and application of the accountancy principle which all the accountants who gave evidence referred to as the matching principle', to use the words of Menhennitt J. in R.A.C.V. Insurance Pty. Ltd. v Federal Commissioner of Taxation. Apportionment of the cost over the two years of income therefore accords with both accounting principle and practice and the statutory prescription. The correctness of this approach may be illustrated by example. Let us suppose that the taxpayer raises finance by long term rather than short term bills, drawing bills which mature 10 years after the date on which they are drawn and discounting them immediately. The amount of the discount would be very substantial having regard to the very long life of the bills so that the deduction of the difference between the face value of the bills in the year in which they are drawn and the amount realised by discounting the bills, if permitted, would lead to a distortion of the taxpayer's operations on revenue account in the year of income in which the bills are drawn and would open the way to inflating very considerably the amount of allowable deductions under s. 51 for that year. Once the court rejects the approach adopted by the Full Court of the Federal Court and as well the primary argument of the taxpayer that the entire cost is an allowable deduction in the year of income, it follows that the total cost should be apportioned and, having regard to the relatively short life of the bills and notes, the apportionment should be on an accounting straight line basis over the term of the relevant note or bill. On this aspect of the case, the parties were not in dispute." 80 In the present case there was evidence, to which I later refer, that normal accounting practice would bring to account the net present value, rather than the nominal value, of the amounts due under the Concession Notes in the year of income. However, no expert accounting evidence was adduced to the effect that to bring the relevant amounts, whatever they may be, to account in the year in which liability was incurred would not give a fair view of Transurban's operations, nor was there evidence that sound accounting practice required that the liability in respect of the concession fees should only be brought to account in the year in which payment is made (cf Australian Guarantee Corporation at 491-493). Further, as was observed by Toohey J in Australian Guarantee Corporation (at 493) the fact that it is not known when the interest payment will be made is an "insufficient objection" to the payment being treated as referable to the year of income in which the liability for the interest accrued. 81 The absence of accounting evidence in the present case to the effect that the amounts due should be brought to account in the year of payment is not surprising. Assuming, as I have on this aspect of the case, that the Commissioner's submissions on the other aspects of the case have not been made out and that consequently the concession fees are on revenue account, it is difficult to perceive of any proper basis for concluding that they are not referable or attributable to the year in which the liability is incurred. On the basis of that assumption the liability for the fees arises semi-annually as the consideration for Transurban's entitlement to establish and operate City Link, and thereby derive its assessable income, during those semi-annual periods. In addition, there is no nexus between the concession fees in question and the income expected to be derived in later years: cf Mercantile Mutual at 563 [112] and 557 [82]. Thus the outgoings in respect of the fees are referable to the period in respect of which the liability for the fees is incurred. 82 The correctness of this approach is easily demonstrated. The terms of payment of the concession fees and of the amounts due under the Concession Notes issued in respect of the relevant years of income are the same. The amounts due will not fall due for payment prior to 2034 unless the requisite financial conditions enabling earlier payment have been satisfied. If the Notes were treated as referable to the year or years of income in which payment is made that would lead to a distortion of Transurban's operations on revenue account in that year or those years because, as was the case with the example given in the joint judgment at 666 in Coles Myer Finance, that "would open the way to inflating very considerably the amount of allowable deductions under s. 51 for that year [or for those years]". 83 Accordingly, the Commissioner's further submission that the amounts due in respect of the concession fees are not referable to the years in which the liability was incurred, must also be rejected. 84 Plainly, allowing 28 years of annual deductibility of outgoings of $95.6 million per year and a further nine years of annual deductibility of outgoings of $45.2 million, when those outgoings were not expected to be payable until some distant time in the future, with no interest payable on the amounts due in the meantime, is an anomalous outcome. That is particularly so as it now appears that the fees are unlikely to become payable until about 2034. In that event the value of the amounts presently due, valued on a discounted basis to net present value, is either nil or negligible. In less measured language such an outcome might be seen to be something that might only be expected in a taxpayers' heaven. 85 An answer to the anomaly might be the suggestion of Deane J at 673 in Coles Myer Finance that, where there is a present obligation to pay an amount in the future without interest being payable in the meantime, the deduction that might be allowed is "the amount which reflected the appropriate valuation of the liability" as calculated in the relevant year of income. See also Mercantile Mutual at 558-560 per Sackville J. 86 The evidence of Mr Geoffrey Phillips, Transurban's Finance Director, was that the normal basis for accounting for financial instruments, such as the Concession Notes, was on a discounted basis to net present value. He said that accounting for non-interest bearing notes on an economic basis was accepted by the accounting profession. Approaching the value of the Concession Notes for the relevant years of income on that basis Mr Phillips considered that they had a nil net present value. 87 However, while there may be much to be said for the view that in Transurban's accounts it would be appropriate to value the amounts presently due, but not payable, on a discounted basis to net present value, neither party sought to put such a case. Accordingly, as it was not contended that the valuation of the liability or, put another way, the net present value of the liability, rather than the nominal amount of that liability, should be deductible, it is inappropriate to pursue this aspect of the matter further. 88 There remains, however, the issue of whether the assumption I have made namely, that the losses and outgoings incurred by Transurban in respect of the concession fees are of a revenue character, is not correct. It is to that issue I now turn. ARE THE CONCESSION FEES PAID FOR MONOPOLY OR OTHER ANTI-COMPETITIVE RIGHTS AND THEREFORE OF A CAPITAL NATURE? 89 The Commissioner contended that, properly characterised, the concession fees were not paid for any services provided by the State. Rather, the fees were said to be the State's exaction or entitlement in return for the grant of a monopoly or exclusive or preferential rights which excluded all but Transurban from the benefits, privileges and entitlements attaching to the City Link Project. Alternatively, the Commissioner claimed the concession fees constituted a payment for the right to establish the City Link Project as a business from which the State ensured freedom from competition until termination of the concession. 90 The Commissioner's arguments were put in a number of different ways but ultimately he contended that: "26. The concession fees are 'in consideration for the State granting the concession rights set out in clause 2.8'. Relevantly, those rights include the rights to design, construct, commission, operate, impose and collect a toll for the use of vehicles. 27. These rights granted by the State in the Concession Deed are in the nature of a State monopoly or preference. No other person or entity has the rights granted to Transurban by the Concession Deed. 28. The State has exercised its exclusive authority over public roads in Victoria to grant Transurban the monopoly right to build and operate the tollway. Further, the State is restrained from enhancing its existing road system in ways that may take revenue away from the tollway." 91 On the critical question of the character of the advantage sought, the Commissioner contended: "i) The concession fees are consideration for the grant of the rights to the concession. These rights are an asset of [Transurban's] business ii) The Concession Period extends for many years. iii) The concession is a monopoly right to design, build and operate the City Link and charge tolls on motorists for use of the road. iv) In short, the advantage sought by payment of the concession fee is to establish a monopoly business. b) The manner in which the rights are used, relied upon or enjoyed: The rights are exploited by doing all things necessary to design, build and operate the City Link, including the investment of considerable sums of capital. c) The means used to obtain the rights: i) The rights have flowed to [Transurban] as a result of the Transurban Consortium being accepted as the preferred consortium by the State. ii) As part of the negotiations which followed, [Transurban] became a party to the Concession Deed. iii) Under the Concession Deed, [Transurban] has accepted the continuing obligations for the concession fees in consideration for the grant of the rights. iv) The base concession fee is $95.6million per annum for a period of 28.75 years, followed by a reduced concession fee of $45.2 million per annum for a period of 9 years, then followed by a further reduced concession fee of $1million per annum. v) The total consideration in the form of the concession fees will be determined by the actual length of the Concession Period. vi) The payment of the concession fee obligations is deferred by use of the Concession Note facility." 92 Transurban claimed that the concession fees do not secure, and are not payable for, monopoly rights or a monopoly business. Rather, it contended that the concession fees are plainly of a revenue nature. It submitted: "60. Examination of the facts and substance of the position in the present case demonstrates clearly that the concession fees are of a revenue nature: (1) The company is under a clear obligation to pay the concession fees during the Concession Period. (2) The concession fees are: (a) recurrent; (b) not a once and for all payment; (c) annual fees payable semi-annually in arrears on the last business days of June and December; (d) adjusted on a pro-rata basis for any period of less than six months. (3) The concession fees are payable only during the term of the Concession Period. If the Concession Period is terminated, no further fees arise. (4) The Concession Period continues only so long as the concession fees are paid. (5) The rights of the State are not extinguished by the grant of the Concession. (6) [Transurban's] right to operate City Link expires at the end of the Concession Period. (7) The concession fees are not purchase price instalments or akin to such instalments. They are payments made for the periodic use of the City Link." 93 In amplification of the seventh point Transurban contended: "65. … As is the case with a lease or licence, the advantage secured by each of the recurrent payments is used and enjoyed in parallel recurrent periods. Upon expiry of the term of the Concession Period (or its earlier termination) [Transurban's] right to use and operate the City Link ceases - as does its obligation to pay the concession fees. The concession fees are not in any sense purchase price instalments or akin to such instalments. They are payments made for the periodic use of the City Link. The rights of the State are not extinguished and when the Concession Period ends - whether as a result of the effluxion of time or earlier termination - the State will be in a commercial position to deal with the City Link as it sees fit. Again, the position is analogous to that of a lessor or licensor. 66. This is not a borderline case. The required practical examination of the facts demonstrates that the concession fees are on revenue account. This is not an acquisition of the monopoly of an existing business or indeed of any monopoly or business: cf United Energy at page 4813 and Jupiters Ltd v Deputy Commissioner of Taxation [2002] ATC 4022 at pages 4039-4040. To conclude otherwise requires the Court to ignore plain characteristics of the concession fees and what it is that they secure. The advantage secured by the concession fees is the use of the City Link for recurrent periods commensurate with the recurrent payments. The advantage can only be used or enjoyed until the Concession Period expires or is terminated. The means adopted to obtain the advantage is the provision of a 'periodical reward or outlay to cover its use or enjoyment for the periods commensurate with the payment...' (Sun Newspapers at 363). To employ the language of Sundberg and Merkel JJ (in United Energy at 4815) - and contrary to the conclusion reached in that case - in the present circumstances it is '... appropriate to describe the fee as an annually recurring impost payable for the right to earn income in the relevant year'." 94 Not surprisingly, Transurban's submissions in relation to whether the concession fees are of a capital nature overlap to some extent with its submissions in relation to whether the fees are akin to a dividend or a sharing of profits. In order to deal with those issues separately I propose to consider the Commissioner's contention that the concession fees are paid for a monopoly, exclusivity or other analogous preferential rights as a discrete issue. 95 As was stated by Fullagar J (with whom Kitto and Taylor JJ agreed) in The Colonial Mutual Life Assurance Society Limited v The Federal Commissioner of Taxation (1953) 89 CLR 428 at 454: "The questions which commonly arise in this type of case are (1) What is the money really paid for? - and (2) Is what it is really paid for, in truth and in substance, a capital asset?" 96 The principles to be applied in determining whether an item is of a capital nature are well settled. They were summarised in the joint judgment of Sundberg and Merkel JJ in United Energy Ltd v Commissioner of Taxation (1997) 78 FCR 169 ("United Energy") at 191-192: "The classic formulation of the matters to be taken into account in determining whether an outgoing is of a capital nature is that of Dixon J in Sun Newspapers Ltd and Associated Newspapers Ltd v Commissioner of Taxation (Cth) (1938) 61 CLR 337 (at 363): 'There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment.' More recently the High Court in GP International Pipecoaters Pty Ltd v Commissioner of Taxation (Cth) (1990) 170 CLR 124 at 137 said: 'The character of expenditure is ordinarily determined by reference to the nature of the asset acquired or the liability discharged by the making of the expenditure, for the character of the advantage sought by the making of the expenditure is the chief, if not the critical, factor in determining the character of … what is paid. …' In Mount Isa Mines Ltd v Commissioner of Taxation (Cth) (1992) 176 CLR 141 at 149 the High Court, after citing this passage from GP International Pipecoaters, emphasised the importance of characterising the expenditure by reference to the advantage sought by the making of the outgoing rather than the purpose served by the outcome achieved as a result of the outgoing having been made. In Hallstroms Pty Ltd v Commissioner of Taxation (Cth) (1946) 72 CLR 634 at 648 Dixon J said: '… What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view, rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process.' Lord Pearce, delivering the judgment of the Privy Council in BP Australia Ltd v Commissioner of Taxation (Cth) (1965) 112 CLR 386 at 394-5, accepted as a 'valuable guide to the traveller in these regions' the judgment of Dixon J in Sun Newspapers Ltd, but recognised that the line of demarcation between revenue and capital is '…sometimes difficult indeed to draw and leads to distinctions of some subtlety between profit that is made 'out of' assets and profit that is made 'upon' assets or 'with' assets.' His Lordship said that the observation of Viscount Radcliffe in Commissioner of Taxes v Nchanga Consolidated Copper Mines Ltd [1964] AC 948; at 960 that the demarcation between 'the cost of creating, acquiring or enlarging the permanent (which does not mean perpetual) structure of which the income is to be the produce or fruit and the cost of earning that income itself or performing the income-earning operations' was 'as illuminating a line of distinction as the law by itself is likely to achieve'. His Lordship observed (at 397): '… Although the categories of capital and income expenditure are distinct and easily ascertainable in obvious cases that lie far from the boundary, the line of distinction is often hard to draw in border line cases; and conflicting considerations may produce a situation where the answer turns on questions of emphasis and degree. That answer 'depends on what the expenditure is calculated to effect from a practical and business point of view, rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process' (per Dixon J in Hallstrom's case). As each new case comes to be argued felicitous phrases from earlier judgments are used in argument by one side and the other. But those phrases are not the deciding factor, nor are they of unlimited application. They merely crystallise particular factors which may incline the scale in a particular case after a balance of all the considerations has been taken.'" 97 If the proper characterisation of the advantage gained or secured by the payment of the concession fees was a monopoly, exclusivity or freedom from competition the decisions of the Full Courts in United Energy and Jupiters Limited v Commissioner of Taxation (2002) 118 FCR 163 ("Jupiters") at 168-169 ([24]-[32]), would support the Commissioner's contention that, notwithstanding their semi-annual recurrence, the concession fees were related to the capital structure of Transurban's City Link business. However, I am not satisfied that the concession fees were paid for any such rights, benefits or advantages. 98 Plainly, the financial viability of City Link required the State not only to perform its obligations in relation to the Project but also to refrain from engaging in certain governmental conduct that would have a "material adverse effect" on the Project. The obligations of the State in the City Link Act and the Concession Deed primarily relate to the services, facilities and entitlements the State is to provide to enable City Link to be established and to operate as a viable business. Those services, facilities and entitlements include giving legislative effect to the Concession Deed, reservation, management, acquisition, licensing and leasing of land, exemption from planning and other legislative provisions, fixing and enforcement of tolls and other special provisions. The Concession Deed also specifies the respective rights and obligations of Transurban and the State in relation to the Melbourne City Link Project and apportions the risks between them substantially in the manner described in the passages from the Treasurer's Second Reading Speech which were set out earlier in these reasons. 99 The Concession Deed also provides a scheme for dealing with conduct of the State that has an adverse effect on City Link traffic volumes. It contains complex provisions designed to induce the State to refrain from conduct that will have a material adverse effect on the Project (as defined in cl 1.1). Events that give rise to a material adverse effect are listed in the Appendix to the Concession Deed and include: acts by the State preventing, hindering or disrupting the Project; changes to traffic management measures; detrimental changes to transport routes or public transport; changes to public transport policies which discriminate against public tollways; changes in State law; and imposition of State taxes relating to transport. The remedies available for State acts of prevention include: extension of the term of the Concession; financial contributions by the State; and matters that can defer the payment of concession fees due to the State. The remedial solutions basically restore Transurban's ability to repay Project Debt and to achieve the Equity Investors projected returns. 100 Clauses 2.9, 2.10 and 2.11 of the Concession Deed and the Appendix contain detailed provisions, including remedial provisions, to deal with such State conduct. Those provisions are consistent with the principle that a grantor is required not to derogate from its own grant (see for example Trego v Hunt [1896] AC 7 at 25 and 28; Dabbs v Seaman (1925) 36 CLR 538 at 550-551; Nelson v Walker (1910) 10 CLR 560 at 583, Birmingham, Dudley and District Banking Company v Ross (1888) 38 Ch D 295 at 312 and Karaggianis v Malltown Pty. Ltd. (1979) 21 SASR 381 at 392-394). 101 Importantly, cl 2.4(b) acknowledges that the Concession Deed does not restrict the State's governmental powers to manage or change Melbourne's transport network. Rather, the Deed contains a remedial scheme, which can fairly be viewed as requiring the State to bear the risks and consequences that might follow from it derogating from its grant. 102 For present purposes it is sufficient to state that the City Link Act and the Concession Deed do not support the Commissioner's contention that the concession fees are payable for exclusivity or monopoly rights or to secure freedom from competition. Rather than granting exclusivity or monopoly rights the City Link Act and the Deed detail the respective rights, obligations and roles of the State and Transurban that will enable City Link to be established and to operate as a viable business. It is true that the State has covenanted to take traffic management and other steps to encourage the motoring public to use City Link, however, its covenants do not grant or confer any monopoly rights or any entitlement to freedom from competition. 103 Further, the fixing of tolls is strictly regulated (see s 70 of the City Link Act and cl 9.2 of the Concession Deed). The Commissioner did not identify any aspect of the procedures that were required to be followed in relation to the fixing of tolls that would lead to "monopoly rents", or anything akin thereto, being able to be derived by Transurban. 104 The absence of any such rights is easily demonstrated. If revenues exceed the Base Case Model projections, provision is made for additional Concession fees to be payable in accordance with Sch 4. If the revenues do not meet the Base Case Model projections then, as explained earlier in these reasons, that may result in the payment of the fees not being earlier than 2034. Which of the two scenarios will apply depends fundamentally on traffic volumes which, in turn, depends substantially on the extent to which the motoring public decide to use City Link and, as a consequence, become liable to pay the requisite tolls payable for the use of City Link. The extent to which the public use City Link will be based on motorists' decisions in that regard and not on any particular anti-competitive rights conferred by the State on Transurban. 105 The present case can be contrasted with United Energy in which certain franchise fees payable to the State were found to be on capital, rather than on revenue, account. The franchisee (United Energy Ltd) was required by statute to hold a licence which conferred the right to sell electricity in the licence area. The franchisee was required to pay specified licence fee charges. In addition, franchise fees were also required to be paid to the State. Sundberg and Merkel JJ concluded at 193-195 that the advantage calculated to be gained and in fact gained by the franchise fees was freedom, until the year 2001, from competition from other distribution companies for franchise customers in the licence area. The franchise fee was found to be a compulsory exaction imposed by the Victorian government to extract a share of the franchisee's profits, which were equated with a monopoly rent, the monopoly being immunity from competition granted by the government during the relevant period in respect of United Energy's franchise customers. 106 In the present case the concession fees are not paid for any competitive advantage conferred by the State's grant of the concession under the Concession Deed to Transurban. The concession fees are qualitatively different from the payments in United Energy, Jupiters and Broken Hill Theatres Proprietary Limited v Federal Commissioner of Taxation (1952) 85 CLR 423 which were found to be payments for the advantage of exclusivity or otherwise securing freedom from competition. 107 In summary, the rights and advantages secured or gained by Transurban under or by reason of the Concession Deed, the Project Documents and the City Link Act do not constitute monopoly entitlements or any other entitlement to be free from competition. The documents tendered by the Commissioner that record the negotiations between the parties in relation to the concession fees also do not suggest that the fees are being paid for any such entitlements. The Commissioner, having failed on this critical aspect of his "capital nature" case cannot advance that case by reference to the other matters referred to by Dixon J in Sun Newspapers Limited v The Federal Commissioner of Taxation (1939) 61 CLR 337 ("Sun Newspapers"). Accordingly, there is no proper basis for characterising the concession granted by the State of Victoria as a monopoly, an exclusive right or an entitlement to be free from competition. It follows that the Commissioner's contention that the concession fees are of a capital nature because Transurban is paying the concession fees for such rights, must be rejected. ARE THE CONCESSION FEES AKIN TO A SHARING OF PROFIT OR TO A DIVIDEND? 108 I now turn to the most difficult aspect of the present case, which is whether the concession fees, in truth and in substance, are akin to a sharing of profit or a dividend. 109 On this aspect of the case the Commissioner has relied on documents created in the course of negotiations in relation to City Link as well as on the City Link Act and the Concession Deed. The Commissioner put his case as follows: "12. Where a payment is made out of profits and is conditional on profits being earned, such a payment is not made to earn profits or assessable income. It is in substance a dividend from profits, which is not a revenue outgoing and is not deductible. … 25. Although the payments arise under a contract, that contract has the force of law by incorporation into the Melbourne City Link Act 1995. Accordingly, the Concession Fee is properly to be seen as 'a compulsory exaction imposed by the Victorian Government to extract a share of the taxpayer's profits'. The concession fee answers the description of a State tax on profits given by Latham CJ in Matthews v Chicory Marketing Board (Vic) (1938) 60 CLR 263 at 276, namely - 'a compulsory exaction of money by a public authority for public purposes, enforceable by law, and … not a payment for services rendered.' … 30. Further, the State has invested significant resources in the project (such as land and State works) without direct or immediate economic reward. The irresistible inference is that the State is a participant and takes its return out of the profits by way of the concession fee. … 33. By clause 3.1(d), Transurban agrees to 'pay to the State as an additional concession fee a proportion of the amount by which the aggregate revenue derived by [it] in any relevant period exceeds that projected in the Base Case Financial Model.' The fact that the State shares in any profits beyond those projected in the Base Case Financial Model supports the conclusion that the concession fee itself was set so as to provide the State with an agreed share of projected profits. … 44. The Concession Notes do not carry interest. Additionally, there is a complex matrix of events, effects, negotiations and outcomes prescribed in the Appendix to the Concession Deed with respect to clause 2.9. These variables allow the Applicant and the Trustee to seek redress from the State for certain matters that adversely affect the project. The State's financial return is subject to the highest degree of risk, as recovery of amounts for concession fees is subordinated to returns to the equity holders. 45. Accordingly, the State's return from the Project by way of concession fees is subject to a higher risk than that which is being borne by equity holders, and should be treated as if it were a return on an equity interest." 110 In substance, the Commissioner contended that the City Link Project was a joint venture between, inter alia, the State and Transurban. He then contended that under the joint venture arrangements firstly creditors were to be paid, Equity Investors were to receive a ten per cent equity return and then those investors and the State were to share in the remaining "spoils" in the manner set out in the Concession Deed. 111 Transurban contended: "78. The concession fees are payments made for the periodic use of the CityLink rights. They are not (as the [Commissioner] now asserts) '… the means by which [Transurban] shares with the State the profits from operating the CityLink …'. A brief examination of the characteristics of the concession fees makes the true position readily apparent. For example: (a) the concession fees are not payable out of 'profits' (as is implicitly recognised by the [Commissioner] in paragraph 38 of his Contentions); (b) throughout the Concession Period the [Concession Deed] imposes upon [Transurban] a clear and positive obligation in respect of the concession fees; (c) the base concession fees are fixed in amount and the obligation created under the [Concession Deed] is not dependent upon profit levels being achieved; (d) the concession fees are: (i) recurrent; (ii) not a once and for all payment; (iii) annual fees payable semi-annually in arrears; (iv) adjusted on a pro rata basis by reference to time; (v) only payable during the term of the Concession Period; (vi) analogous to payments in the nature of rent or licence fees - being recurrent payments for the periodic use of the CityLink rights. 79. The Concession Note mechanism does not change the position. The Concession Notes simply alter the timing of the discharge of the liability imposed by clause 3.1 of the [Concession Deed] but do not alter the incidence or character of that liability. 80. The [Commissioner] was correct when he concluded that the concession fees are 'fixed, per annum charges, over the concession period …' and that the '… concession note facility enables the payment [the subject] of the obligations to be deferred'. (Objection Decision paragraph 106). On any view, they do not constitute a share of profits." 112 If, as is contended by Transurban, the concession fees are a recurring payment for the periodic use of City Link they would be on revenue account as they would be sums expended "as part of the money earning process" rather than "sums expended on the structure within which the profits were to be earned": see B.P. Australia Limited v Commissioner of Taxation of the Commonwealth of Australia (1965) 112 CLR 386 at 398 and 403-404. However, if the concession fees are in reality akin to the State taking a share of profits or receiving a dividend as a joint venturer the fees will not fall within either limb of s 51(1) of the 1936 Act or within s 8-1 of the 1997 Act: see United Energy per Lockhart J at 180-181. 113 In United Energy Lockhart J concluded that the franchise fees were in reality the payment to the State of its share of profits. His Honour stated (at 180): "The government surrendered its monopoly of the control of this industry but in return demanded through legislation (s 163A) that the residual profit to be derived from the carrying on of the industry became its profit. Properly analysed the franchise fees are in reality akin to the State of Victoria taking a share of the profits from the DBs (in this case the applicant), leaving the applicant an amount determined by the Treasurer to be a reasonable return on the capital of the company used in deriving the income (s 163A(2)(c)). The residue is taken by the State as its share of profits; it has similar characteristics to a payment by way of dividend. Notwithstanding a degree of recurrence, the franchise fees are not in my opinion expenses or costs incurred in the derivation by the applicant of its income or in the course of carrying on its business from which it derived such income. It is unreal to regard the payment of the franchise fees as falling within either of the two limbs of s 51(1) of the Act. The fees are compulsory exactions imposed by the Victorian government to extract a share of the applicant's profits made rather than a cost incurred in the process of derivation of income." And at 181: "The arrangement between the applicant and the State of Victoria is one of profit sharing or akin to the payment of dividends to the Victorian government as shareholder. The franchise fee is not paid as a cost in the business of deriving income but is a dividend or profit paid to the State or a tax which in my view does not fit within either of the two limbs of s 51(1)." It is relevant to observe that in United Energy the franchise fees were calculated by reference to expected, rather than actual, profits but that was not regarded as fatal to the proper characterisation of the fees as akin to a sharing of profit. 114 The distinction between a non-deductible payment calculated as a share of profits in return for a "capital account" contribution and a deductible payment calculated as a share of profit in return for a "non-capital account" contribution was considered in two High Court cases in relation to corporate capital raising by the issue of debentures or notes, the interest on which was payable out of surplus revenue or profits. 115 In The Commissioner of Taxation (Western Australia) v Boulder Perseverance Limited (1937) 58 CLR 223 ("Boulder Perseverance") a mining company raised working capital by issuing profit sharing notes which bore interest at a specified rate and also entitled the note holders to a percentage of the profits of the company during the currency of the notes. The company's claim under the Dividend Duties Act 1902-1924 (WA) to deduct the moneys paid to the note holders in respect of profits was disallowed on the basis that payments were made from profits and were not properly allowable as a deduction in calculating the profits. The Court (Latham CJ, Dixon and McTiernan JJ) stated at 229-230: "There is nothing new in the problem of distinguishing between a distribution of the profits or income forming the subject or part of the subject of an income tax or profits tax and a payment which, although made to earn those profits and therefore a necessary deduction in ascertaining them, is nevertheless calculated as a percentage of the profits otherwise available. Many contracts of service provide for a remuneration varying with the profits derived from the business to which the service is given. If expenditure is in truth no more than remuneration for work done for the purpose of producing income or profits, it must be deducted from the earnings before the net income or profits can be found. This is no less necessary when the amount of remuneration is dependent upon the amount of the earnings of the business diminished by the deduction therefrom of all other expenses incurred in the production of the income or profit. At the same time it is apparent that, when work performed in the course of a business is remunerated by a share or percentage of the profits, the position of the person remunerated may be brought so close to that of a partner sharing in a distribution of the final balance of profits earned as to be practically indistinguishable. In the same way, when money is borrowed for use in the business, the reward of the lender in the form of interest is regarded as a necessary or proper deduction for the purpose of ascertaining the profits of the business, and the fact that the reward is made to vary with the success of the business ought not to affect its character as an expenditure incurred for the purpose of earning profit. Yet capital may be invested in a business in order to obtain a share in the profits indistinguishable from that of the proprietor. The solution of the difficulty must in every case be found in determining the point as at which the ascertainment of net profits is required, and this depends upon the purpose for which they are to be computed. Profits may be regarded as a fund composed of receipts which must be applied to various purposes in succession. In this view it is a fund subject to diminution by an indefinite succession of disbursements or outgoings until it is finally dissipated. In its course from the initial receipt to its final distribution, the fund may be computed at different points for different purposes. If the purpose is to find what the business returns to its proprietors in a form which they can enjoy as they choose, a point must be taken at which every other expenditure to which the fund must be applied has already been deducted. But, to illustrate the difference which the nature of the purpose makes in the point at which profits are computed, an imaginary example of an opposite extreme may be taken. Suppose the purpose were to find what amount was to be provided by a business for the remuneration of labour in order to fulfil an obligation to reward all those who contributed their labour to an enterprise by dividing profits among them. In such a supposed case no deduction would be allowable on account even of wages, still less of remuneration calculated as a percentage upon the earnings of the business." 116 The decision in Boulder Perseverance turned upon the scope, purpose and interpretation of the relevant statute. The Court (at 231-232), relevantly for present purposes, distinguished between the fixed interest charges, which were to be regarded as an ordinary business expenditure which was deductible in ascertaining profits, and the participation in the trading profits over and above the fixed interest charges, which was to be regarded as a right to the distribution of the taxable fund constituted by the trading profits finally earned by the business. It was therefore not deductible as it was: "more than a payment contingent upon the making of net profits and proportional to their amount. It is a payment of part of the net profits under that description." (at 234) 117 A similar issue arose in Federal Commissioner of Taxation v The Midland Railway Company of Western Australia Limited (1952) 85 CLR 306 ("Midland Railway Company"). The facts in that case were complex but the ultimate issue related to the deductibility under s 51(1) of the 1936 Act of amounts paid to redeem certain reversionary certificates issued in respect of unpaid interest on debenture stock that had previously been issued by the taxpayer. Interest was payable on the debenture stock at a fixed rate but only out of surplus revenue. After there had been no such revenue the taxpayer, in the course of reorganising its share and loan capital, issued the reversionary certificates which provided for redemption of the certificates, at the discretion of the directors of the taxpayer, upon payment of a proportion of the net profits of the taxpayer. 118 The High Court by a 2-1 majority, dismissed an appeal from Kitto J, who allowed the taxpayer to deduct the amount paid to redeem the reversionary certificates on the basis that the amounts paid were in the nature of payments of interest on moneys borrowed by the taxpayer for the purposes of its business. As in Boulder Perseverance, the case turned on the distinction between a return on a contribution to the capital structure of the profit yielding subject, which is not deductible, and a return by way of interest on money lent to the profit yielding subject, which is deductible. 119 Dixon J stated at 316: "When capital is raised by a company by the issue of shares the shareholder contributes to the capital structure of the 'profit yielding subject' and obtains a title to share proportionately in the distribution of the profits yielded. This is so even when they are preference shares bearing a fixed rate of dividend. … But capital may be contributed upon contractual terms entitling the contributor to a share of the profits of 'the profit yielding subject', although he does not become a shareholder. When such an investment of capital is made in order to obtain a share of ultimate profits, a distribution of the share of profits has not been considered to be an outgoing incurred for the purpose of earning profits and so to be antecedently deductible as a trade expense before the ascertainment of the taxable fund: A. W. Walker & Co. v. Inland Revenue Commissioners. Again if a company remunerates an employee for services in its trade or business the outlay is prima facie deductible as a trade expense, even although the amount may be calculated as a percentage of profits. But if there is a joint adventure the profits of which are to be shared between the parties to it the fact that one of them contributes nothing but his services to the enterprise will not put his share of profit into the category of a deductible trade expense of the business." 120 In explaining why a share of divisible profits obtained by "an advance of capital or for an advantage enuring to capital in some other form" is not deductible Dixon J stated at 317: "What is there acquired by the lender, or the person contributing the advantage of a capital nature, is the recurrent right to participate in the profits of the profit-yielding subject to the capital structure of which he is contributing. In principle it is the same as the purchase of a share of profits in a business. 'If a person purchases a share of profits, of course, the profits paid to that person cannot be deducted': per Greene M.R., British Sugar Manufacturers, Ltd. v. Harris. Thus in A. W. Walker & Co. v. Inland Revenue Commissioners of the facts of which there is a summary in Commissioner of Taxation (W.A.) v. Boulder Perseverance Ltd. which I shall not repeat, Rowlatt J. said: 'The contract simply gives the lenders a share of the profits, without any rights or liabilities of partners; it simply takes three-twentieths of the profits and gives it to the lenders and the borrowers take the other seventeen-twentieths themselves'." 121 In rejecting the Commissioner's contention that any amount payable out of profit is not deductible Dixon J stated at 318-319: "Yet why should this make the liability any the less a trading debt, any the less an outgoing incurred in gaining the assessable income or necessarily incurred in carrying on the business for the purpose of gaining such income? The postponement of the debt in the order of claims upon revenue, the nature of the contingency by which the creditor's right to payment is qualified, the fact that the only source to which he may look for payment is profit after all expenditure has been deducted including preference dividends so that only dividends on ordinary shares remain, these elements do not appear to me in any way to detract from the character of the disbursement as an outgoing incurred for the purpose of carrying on the business and gaining assessable income. It all amounts only to an attenuation and restriction of the creditor's rights leaving the business origin and purposive character of the debt unchanged. The complications of the transaction in the present case tend to obscure its essential character. But essentially it appears to me not to be a disposal of a share in profits to a purchaser or party acquiring a right to share in profits as a quid pro quo for some benefit given to the proprietor of the business. It is the replacement of a liability, a contingent liability, to pay a sum of money incurred for the purpose of gaining income with a liability which although a new obligation in point of law is a liability for the same sum of money. The obligees take no percentage or proportion of profits whatever they may amount to. They are entitled to no more than the fixed amount of the old debt and the existence of profit provides only the occasion and means of payment. The contingencies introduced are all in derogation of the obligees' former rights which are reduced and postponed. But the business foundation of the liability is the same; nothing that is done seems to me to be relevant to or to affect the reason why the undertaking saddled itself with the liability in the sum and remains saddled therewith and that is the criterion which s. 51 (1) adopts." See also Webb J at 322. Fullagar J at 331-335 arrived at a different conclusion but that was based upon his different characterisation of the transaction, rather than on any disagreement with the underlying principles. 122 On the basis of the above cases the two questions arising on this aspect of the present case may be stated as follows: · Can the State's contribution to the City Link Project be properly characterised as equivalent to an "advance of capital or an advantage enuring to capital in some other form"? and, if so: · Are the concession fees akin to profit sharing with, or the payment of a dividend to, the State as a joint venturer in return for its contribution? 123 The present case offers an additional layer of complexity because it concerns the State's role in a major infrastructure project where the line between outgoings on revenue and capital account, based as it is, in part, on conceptions of "joint ventures" or mutual contributions of capital or of a capital nature, can become even more difficult to draw. Of course, the State represented and warranted that it entered into the Project Documents "as a commercial rather than a public or governmental act" (cl 14.1(b) of the Concession Deed). However, it doesn't follow that the contributions it is making are commercial, rather than governmental, contributions. For example, legislating for the fixing, enforcement and recovery of tolls payable to Transurban, and making evasion of a toll an offence, which was stated by the Treasurer to be a matter on which the commercial viability of City Link depended, is plainly a governmental, rather than a commercial, contribution. 124 But, the question remains whether such contributions are to be treated as an advantage enuring to capital or merely as an incident of the concession rights granted by the State that enable Transurban's "periodic use of the City Link rights". It is the unusual governmental aspects of the Project, on which there is little guidance in the case law, that I have found to be most difficult in characterising the State's contribution to the City Link Project. Also, the complex provisions that defer payment of the concession fees, without interest, also raise difficult questions as to how the State's return for its contribution is to be characterised. 125 Clause 3.1 of the Concession Deed expressly provides that the concession fees, in amounts fixed at $95.6 million, $45.2 million and $1 million (depending on the year in which the fees are payable), are payable in consideration of the grant of the concession rights set out in cl 2.8 which enabled Transurban to establish and operate City Link. The detailed provisions of the Deed, and the specificity with which all of the terms of the relationship between the respective parties have been set out in it and the City Link Act, leave little scope for implications or inferences in relation to the concession rights the State is granting and the contributions the State is making to the Project and the return to which it is entitled in respect of those contributions. However, the labels used by the parties and the terms they use to define their respective rights and obligations are not determinative of their relationship for income tax purposes and, in particular, of what the payments in question were really for: see for example Jupiters at 457 [26]. 126 An example of the problem with labels is the warranty by the State in cl 1.4, that the Project Documents have not created a joint venture between the parties. Clause 1.4 provides: "No Partnership or Joint Venture Neither this Deed nor any other Project Document creates a partnership, joint venture or fiduciary relationship (except as may subsist under the Trust Deed between the Trustee and the Manager) among any of the parties." As was pointed out by Mason, Brennan and Deane JJ in United Dominions Corporation Limited v Brian Proprietary Limited (1985) 157 CLR 1 ("United Dominions") at 10 the term "joint venture" is not a technical one with a settled common law meaning. In that regard it is to be noted that the parties have not stated in cl 1.4 what they mean by the term "joint venture". Thus, while cl 1.4 can have relevance to the implications that might be drawn as to the nature of the legal relationship the parties have created it is not determinative of whether there has in fact been a "joint venture" or a "joint adventure" for the purpose of mutual profit of the kind outlined in some of the examples given in Boulder Perseverance and Midland Railway Company. 127 In Rotherwood Pty Ltd v Commissioner of Taxation (1996) 64 FCR 313 at 324 Lee J (with whom Spender and O'Loughlin JJ agreed) stated: "Where a sum paid or received is described as the consideration for a contract, the description applied to the sum by the parties to the contract is to be given some weight but it does not follow that the character of the payment as made by the payer, or as received by the payee, is determined by that description: see Cliffs International Inc v Commissioner of Taxation (1979) 142 CLR 140. The description of the payment in the contract may be only part of a matrix of facts from which the character of the payment, as paid or received, is to be determined: see Reuter v Commissioner of Taxation (1993) 93 ATC 5,030 at 5,036; Commissioner of Taxation v Cooling (1990) 22 FCR 42 at 53 per Hill J. That is not to say that the process of characterisation permits documents recording or describing the payment made or received to be disregarded as if the transaction recorded therein were a sham. What is said is that the Court is required to look at the circumstances as a whole and not restrict itself to consideration of the form of a document in which the payment is recorded or the words chosen by the parties to describe the payment: see SP Investments Pty Ltd v Commissioner of Taxation (1993) 41 FCR 282 at 294-295 per Hill J." 128 In my view the same principle applies to the description the parties have given to their relationship. Thus, a statement that the parties have not entered into a joint venture is relevant to determining, but is not determinative of, whether they are in fact joint venturers. All of the circumstances of the case must be considered. 129 Initially, Transurban objected to the Commissioner's tender of extraneous documentation on the ground that the Court should not go outside the contractual documentation and the relevant legislative enactments in characterising the concession fees. Ultimately, however, Transurban accepted that the Court is entitled to have regard to all of the circumstances of the case, at least, in dealing with the Commissioner's contentions in relation to the proper characterisation of the concession fees. Nonetheless, it can be accepted that in the present case the contractual documents, which have been given statutory effect, are of considerable importance. 130 It is appropriate to commence a consideration of "the circumstances as a whole", or the "matrix of facts" which are relevant to the proper characterisation of the concession fees payable by Transurban to the State, with the documents that record the pre-contractual negotiations concerning the concession fees. (a) Pre-contractual negotiations 131 Macquarie Corporate Finance Limited ("Macquarie Finance") acted as the financial adviser to the Project sponsors, Transfield and Obayashi, and formed part of the "Transurban Team" in negotiations with the State. A Memorandum by it dated 21 April 1995 to Transurban and "All Equity Participants" described the "Profit Share Arrangements" between Transurban and the State as follows: "Super Profit Sharing Arrangements Transurban proposes that the community have the following two means of sharing in profits of excess of the base case projected returns: 1. Concession Period of 34 years as previous with a possible reduction down to 24 years if 16% real after tax hurdle is achieved. 2. The sharing of excess nominal pre-tax cashflow distributions in any year as described in the table below is subject to the actual cumulative post tax real cashflow paid to a notional 33% tax paying initial investor exceeding the cumulative post tax real cashflow projected under the Base Case for that same investor. Excess Over Base Case Distribution in any Year Community Share Equity Investors Share Up to 20% Nil 100% 20.1% to 49.9% 20% 80% 50.0% to 74.9% 40% 60% 75.0% to 99.9% 60% 40% 100% upwards 80% 20%

State Profit Share in Base Case Profits Transurban proposes that the State have the following two means of sharing in base case profits: 1. Cash land lease rentals totalling $78m payable in preference to equity distributions. 2. Land lease rentals payable by way of promissory notes of $90 million per annum in semi-annual instalments commencing 6 months after Financial Closing. The State may present these promissory notes for payment once Upfront Equity investors have received a real after-tax internal rate of return of 10% per annum. The promissory notes can then be redeemed utilising up to a maximum of [40]% of available cashflow for equity distributions in any one year. Under the various design options payment of these promissory notes commence in 2012. Transurban projects that under the base case projections for all of the Solutions, all of the promissory notes will be redeemed by the end of the Concession Period." 132 A section of a "Transurban Melbourne City Link Project" document dated April 1995 set out part of the proposed consortium's "Commercial Offer" as follows: "7.1 Licence Payments/Lease Rentals Transurban proposes to pay the State licence payments of $95 million per annum payable semi-annually in arrears commencing six months after Financial Closing and through the Construction Phase for use of the Project Land. Lease payments will commence in the Operations Phase at $95 million per annum payable in semi-annually in arrears. The payments will reduce to $45 million per annum in semi-annual instalments from the 26th to 34th years of the Operations Phase. Transurban's obligation to make the licence payments will be satisfied by a mix of cash and promissory notes and the lease payments will be satisfied by the issue of promissory notes only. The State may present both the licence and lease promissory notes for payment once Upfront Equity investors have received a real after-tax internal rate of return of 10% per annum. The promissory notes can then be redeemed utilising up to a maximum of 30% of available cashflow for equity distributions in any one year. Under the various design solutions, payment of these promissory notes is projected to commence between 2012 and 2013 of the Operations Phase. Transurban projects that under all of the Solutions, all promissory notes will be redeemed by the end of the Concession Period as outlined in the following table." 133 The accompanying table, relevantly, recorded the total of the "Promissory Notes" to be issued as $3,104 million with a net present value of $233 million on the basis of commencement of payment of the Notes as from 2013. "Cash Licence Payments" were recorded in Year 1 ($23.5 million) and in Year 2 ($8.3 million) as totalling $31.8 million. The document proposed that "super profits be shared with the State" in the same proportions as were set out in the Table in the Memorandum of 21 April 1995. 134 The Funds Flow during the Operations Phase in the section of the April 1995 document entitled the "Finance Plan" was described in the text as follows: "It is proposed to allocate revenues earned from the Project's operation in the following priority: > Payment by the Company of the Tollway operating costs. > Payment by the Company into a Maintenance Reserve Account, Tag Sinking Fund and top-ups to the Debt Service Reserve Account until they have reached their minimum specified levels (refer to Section 11.9 for a more detailed explanation). > Payment by the Company of its debt service obligations on the Infrastructure Borrowing Facility for the first five years of the Operations Phase. > Payment by the Company of rentals to the Trust under the Trust Sublease. > Payment by the Trust of interest and fees on the Project Debt Facility, CPI Bonds and Floating Rate Notes. > Payment by the Trust of the scheduled principal repayments due under the Project Debt Facility, CPI Bonds Facility, and Floating Rate Note Facility. > Payment by the Company of the principal and interest outstanding under the Tag Funding Facility. > Redemption of land lease promissory notes (when applicable); and > Distributions to equity and State profit sharing arrangements subject to satisfaction of various loan coverage ratios." The last item concerns the payments that ultimately were to be made out of the "Distributions Account" for concession fees and the return to Equity Investors. 135 A Memorandum of Understanding between the Melbourne City Link Authority and Transfield and Obayashi dated 28 July 1995 recorded that the issue of notes was substituted for the "initially proposed cash licence payment of $32 million", which appears to be a reference to the "Cash Licence Payments" in the April 1995 document of $31.8 million. The Notes, which were to be called "Licence and Lease Rental Notes" were subject to deferral of payment substantially on the same terms as those that apply to the Concession Notes. The Memorandum stated: "The State accepts the licence and lease payment proposal (involving the issue of promissory notes) made by Transurban on 26 April 1995, as amended so as to substitute the issue of notes referred to below for the initially proposed cash licence payment of $32 million. The Trustee is to issue the notes, which will not carry interest and which will be called 'Licence and Lease Rental Notes'. The notes are to be transferable but only capable of encashment by the State. The conditions for encashment are to be endorsed on the notes and reflected in the Master Security Deed. Those conditions are that the IRR for upfront equity be at least 10% real after tax per annum and that the cash applied in payment of the notes in a financial year not to exceed 30% of the cashflow available for distribution to equity investors." 136 A subsequent Memorandum of "Transurban" dated October 1995, which set out the changes to the "Financial Model" since 18 July 1995, recorded that the changes included: "• Renaming Licence/ Lease Notes as Concession Fee Payments • Renaming Incentive Rentals as Additional Concession Fee Payments." 137 The Macquarie Finance memorandum dated 21 April 1995 stated that the financial returns to the State out of Project revenue for the State's contributions to, and participation in, the Project were to be obtained by means of "Profit Share Arrangements". The State's share in "Base Case Profits", which I take to mean the profits projected on the basis of Transurban's Base Case Model or an earlier form of that Model, was initially proposed in the form of "cash land lease rentals totalling $78 [million] payable in preference to equity distributions" and "Land lease rentals payable by way of promissory notes of $90 million per annum". The terms of payment of the promissory notes were substantially those that apply to the Concession Notes. On the basis of the Base Case Model the first payment was expected to commence in 2012 with all of the promissory notes being redeemed by the end of the Concession Period. 138 The State was to share in "profits in excess of the base case projected returns" by two means. The first was by the Concession Period of 34 years being reduced to 24 years if the specified real after tax hurdle rate of return was achieved. The second was an increasing share of the "super profits" that would be earned in the event that there was an excess in respect of the revenues that were expected to be derived under the Base Case Model. If that occurred the State and Transurban's Equity Investors were to share proportionately in the excess revenues with the State's share increasing progressively from nil (for up to a 20 per cent increase) to 80 per cent (for an increase in excess of 100 per cent). Although the calculation is based on revenue, rather than profit, it is clear that the excess was regarded by members of the "Transurban team" as a "super profit". That is not surprising as the Base Case Model required costs, expenses and returns to financiers and equity investors to be taken into account in a manner that meant "excess" revenues could be treated as akin to "super profits". 139 In a Transurban "Management Committee Report", dated 7 July 1995, the revenue arrangement offered to the State under the heading "Revenue Sharing with the State" proposed that where the "[a]ctual commutative post tax real cashflow to initial equity investors exceed Base Case expectations" the State was to share in the increase in tolling revenue with the State's share of the increase ranging progressively from nil to 70 per cent depending on the increase. The State's share, which was to be paid "by way of lease payments", was to rise over the period of the Concession. 140 Subsequent proposals also altered the cash and promissory notes amounts payable for the leases and for the licence fees, which were all to be payable by promissory notes under which payments were projected to commence as from 2012 or 2013. 141 It is to be noted that as at April 1995 the net present value of the total of $3,104 million of promissory notes to be issued over the Concession period was calculated to be $233 million on the basis of payment commencing as from 2013. Interestingly, evidence was given at the hearing that the net value of all of the Concession Notes that were expected to be issued under the Concession Deed ranged between $230 - $270 million. The other relevant payment to the State was a licence fee of $31.8 million payable during the first two years of the construction phase. By 28 July 1995 promissory notes were proposed to be issued for the licence fees, which appear to have been rounded off at $32 million. By October 1995 the Licence/Lease Notes were to be called "Concession Fee Payments" and the "super profits" to the State which were called "Incentive Rentals" were to be called "Additional Concession Fee Payments". 142 The Concession Deed was executed "with effect at and from the 20th day of October 1995". Under the Concession Deed the annual concession fees for the first 25 years of the concession period were agreed to be $95.6 million per year. The State's entitlement to additional concession fees was set out in Sch 4 of the Concession Deed. The detail of the entitlement appears to have changed in favour of the State but the underlying principle appears to have been retained. 143 Further, in lieu of the amounts of $78 million and $32 million suggested during 1995 for licence and lease fees only nominal rentals of $100 per year were payable for the leases of the land used by Transurban for the operation of City Link. Although licences were also granted during the constructions phase the proposed lease/licence payments became part of the concession fee, payment of which was to be satisfied by the issue of the Concession Notes. 144 There is no evidence before the Court that explains how the concession fees payable under the Deed were calculated or arrived at. Notwithstanding extensive endeavours by the Commissioner to ascertain what the amounts payable represented, he has had little success in taking that matter any further. However, certain findings can be made, and certain inferences can be drawn from the evidence, in relation to the fees. First, it always appeared to have been an integral part of the proposed arrangements that the fees were to be payable by interest free notes, which only provided for payment prior to the end of the Concession Period if liabilities for costs and expenses and for Project Debt had been met and a 10 per cent per annum return to Equity Investors had been achieved. As a consequence of the deferral of payment of the fees their net present value, on the basis of the Base Case Model projections, was calculated to be significantly less than 10 per cent of their nominal value. On current projections the net present value of the fees is significantly less than the value calculated on the basis of the Base Case Model projections. 145 Second, the unusual contractual arrangements in relation to the concession fees were likely to have been structured to assist in achieving tax deductibility of the nominal value of the liability for concession fees by ensuring a present liability to pay arose, which was capable of being satisfied by the issue of promissory or concession notes providing for payment, without interest, well into the future. 146 Third, initially some cash payments for licence or leasing liabilities were to be payable in respect of the substantial and valuable areas of land required for the Project but, ultimately, the arrangements were changed to nominal rentals of $100 per year. Thus, the proposed cash payment amounts became part of the total amounts payable for concession fees over the Concession Period. 147 Fourth, the changes in terminology from "licence/lease" fees and "inducement rental" to "concession fees" and "additional concession fees" is consistent with the view that those aspects of the return to the State from the Project are, in truth, the amount that was to be payable for the totality of the State's contribution to the Project, including its contributions of the substantial areas of land required for the Project. The description of the fees payable on excess revenue as "additional concession fees" is apt because, although those fees are payable as a percentage of increases in revenue over the Base Case Model revenues, they are just another aspect of the return to the State by way of concession fees. 148 Fifth, the changes in the course of negotiations to the detail of some of the financial arrangements and to the terminology used in respect of the payments to be made, do not appear to have been made as a consequence of or in response to any significant changes in the State's contribution to, and participation in, the Project. In particular, while aspects of the State's contribution and participation may have altered in the negotiation process it does not appear that there was any fundamental change in the "advantages" the State was to contribute and for which Transurban was to pay. 149 Finally, there is nothing about the proposals set out above that make the description by Transurban's financial adviser of the arrangements with the State as "Profit Sharing Arrangements" inapt or inappropriate from a practical or business point of view. It is true that the "profit sharing" description was only employed in some pre-contractual documentation used for internal purposes by members of the "Transurban team". Further, the precise meaning of "profit" can be elusive and will depend on the context in which it is used: see QBE Insurance Group Limited v Australian Securities Commission (1992) 38 FCR 270 at 284. However, no evidence was adduced by any members of the Transurban team, or otherwise, that the use of the term was misconceived or mistaken. (b) Payment of the Concession fees 150 The evidence before the Court is to the effect that, from both an accounting and economic point of view, the net present value and not the nominal value of the concession fees would be regarded as the relevant value of those fees. I am satisfied that, from a practical and business point of view the value of the State's entitlement to payments of the concession fees would be the net present value, and not the nominal value, of those entitlements. As explained above, on the basis of the Base Case Model projections in 1995 those fees had a net present value of less than 10 per cent of their face value. Further, the Base Case Model itself was based on projections and estimates that may or may not be met. If they were not met the commencement of payment as from 2013 would not occur and the net present value would decrease accordingly. That is borne out by the events that have occurred. Traffic volumes and therefore revenues received have fallen short of the estimates and that has resulted in the net present value of the concession fees being considerably less than was expected. Indeed, the net present value of the concession fees payable in the relevant years of income is nil or negligible. Those facts, of themselves, may not be significant. However, what is significant is that, in a practical and business, if not a legal, sense the parties structured their arrangements in a manner that has resulted in the State bearing substantially the same risks in relation to its real financial return as Equity Investors, whose financial returns were likewise dependent on traffic volumes and the revenues received therefrom. 151 Of course there is nothing unusual about a creditor and an Equity Investor bearing the same or similar risks. For example, as the High Court cases to which I have referred made clear, an outgoing conditional upon profit being derived or expressed as a percentage of profit may nonetheless be on revenue account, depending on what the outgoing was truly paid for. However, if parties contribute items enuring to capital in a joint adventure, structure their arrangements in a manner that subjects the contributors to substantially the same risks and provide for their respective real returns to be based upon or related to profits or profitability, the outgoing will not be on revenue account if it is found to be akin to a share of profit or a dividend to a joint venturer. 152 In the present case there is a dispute between the parties as to whether the State's return in the form of concession fees, is akin to a share of profit or a dividend. In dealing with that issue I infer that it was expected that Transurban's liability for payment of the concession fees would be satisfied by the issue of Concession Notes, under which payment prior to February 2034 was dependent on three factors: (a) so long as Project Debt has not been repaid there must be a sufficient amount in the Distributions Account to pay the amounts owing to the State in full; (b) the return to Equity Investors must be 10 per cent per annum or more; (c) in any financial year the fees paid must not exceed 30 per cent of the distributable cashflow for the preceding financial year. 153 Earlier in these reasons I also briefly outlined the requirements, which were expected to apply until 2023, in respect of the Distributions Account. The requirements were referred to as the "waterfall of accounts" that cl 15 of the Security Trust Deed mandates. Clause 15 prescribes the regime for dealing with Project receipts for so long as Project Debt remains owing. It was described as a "waterfall of accounts" because the clause prescribes the manner in which money from one account "overflows" into other accounts with the flow that occurs being dependent upon whether specified criteria are met. The pool at the bottom of the waterfall is the Distributions Account, which is the pool for payment of concession fees or Concession Notes to the State and for payment of any return to Equity Investors. The penultimate account is the Excess Cash Flow Account. Funds can only be paid out of that account into the Distributions Account when the prescribed "lock-up ratios" that protect debt servicing and repayments are met and the balances in the specified Reserve accounts are at least equal to their prescribed minimum balances. 154 The accounts in the waterfall that do not fall into the Distributions Account are those that ensure payment of construction and operating costs and expenses, debt repayments and servicing, other financing payments and payments to the specified Reserve Accounts. In the case of the Reserve accounts the payments may be required to provide for future contingencies, rather than current liabilities, by maintaining sufficient funds in those accounts to meet those contingencies. 155 The Commissioner contended that the requirements set out in cl 15 and the restrictions placed on any early redemption of the Concession Notes reinforce the conclusion that payment to the State can only be made after operating costs and other expenses have been paid from toll revenue receipts. He also contended that, as cl 14.3 of the Concession Deed confined Transurban's business activities to the operation of City Link, and as Transurban was required to deliver City Link to the State on the expiry of the Concession Period (cl 3.4), the only funds available to Transurban to pay the concession fees were those derived from an excess of revenue over costs and expenses. The Commissioner claimed that the practical effect of the above requirements and restrictions was that payments to the State can only be made out of the profits earned by Transurban as the operators of City Link. 156 Transurban disputed the Commissioner's contentions. It contended that the liability to pay the concession fees was not directly or indirectly dependent on profit. It claimed that the "existence of the liability to pay concession fees, the obligation to discharge that liability, the character of the liability and the quantum of the liability are incapable of being influenced by whether or not profit is in fact earned." Transurban pointed out that it had an obligation to ensure the fees were paid as they constituted a liability of Transurban for which the company remained responsible regardless of whether profits were earned. That liability was contrasted with the lack of any legal obligation to pay Equity Investors any particular return on the funds invested by them. 157 In order to refute the Commissioner's contentions, that payments out of the Distributions Account are payments out of profits, Transurban noted that: · the Account is only concerned with cash items with the consequence that it does not include revenue earned during the period but not yet received or non-cash expenses such as depreciation of plant and equipment; · the cash inflows include items such as loan drawdowns that are not revenue; · the cash outflows include items such as loan repayments that are not expenses; · the Account cannot be any sort of approximation of Transurban's profit as it combines Accounts of Transurban and the Trust and is treated as including both the cash flow of Transurban and the Trust; and · the Account only restricts payments while Project Debt is outstanding. Transurban contended that these aspects of the Account "deny the amounts paid into the Distributions Account the character of a profit" and do not reflect any approximation of the "amount of the gain made by [Transurban's] business during the year". 158 Transurban also relied upon the Deed of Charge in favour of the State giving the State priority in respect of the concession fees over unsecured creditors and the consortium partners in the event of insolvency. While an insolvency scenario is relevant to the legal characterisation of the State's entitlements I do not regard it as significant when viewing those entitlements from a practical or business point of view as that scenario is no more than a theoretical contingency which does not appear as an outcome even in the worst case scenarios before the Court. 159 The Commissioner's contentions addressed the circumstances that are necessary to enable payment of the concession fees prior to February 2034 or, more importantly, as from 2013 being the expected commencement of payment according to the Base Case Model. Plainly, early payment depended primarily on whether sufficient revenues were earned or, put another way, whether there was an excess of revenue over costs and expenses to meet the preconditions for early payment. While the early payments were to be made out of the cash flowing into the Distributions Account (which included non-revenue items), in a practical sense sufficient profits or profitability were necessary preconditions for that outcome to occur. 160 Transurban's contentions focussed on the obligation to pay the concession fees on the expiry of the Concession Period (being February 2034), rather than on the expected earlier payment scenario. Viewed in that way its submission that the payment must be made regardless of the profits earned in the meantime is plainly correct. A problem with Transurban's reliance on payment in February 2034, rather than earlier, is that on that scenario the real value of the concession fees (ie their net present value) is a very small amount. Thus, while it is true that cl 15 is based on cashflow, rather than profit in any technical or accounting sense, it is equally true that any return to the State prior to February 2034 could only occur if sufficient profits were earned or profitability achieved to pay a 10 per cent per annum return to Equity Investors, which normally would be paid, directly or indirectly, out of "profits". 161 Transurban is correct in pointing out that there is no obligation to pay any return to Equity Investors but the fact remains that such a return is a condition of payment to the State prior to February 2034. Put another way, payment in 2034 would have been one of the worst case scenarios brought about because of a lack of sufficient profit or profitability, with the resultant shortfall in cash flow, to enable earlier payment. In summary, I accept that, in a legal sense, the concession fees are payable regardless of the profit earned by Transurban. However, I do not accept that, in a practical and business sense, any significant return to the State in respect of the concession fees, which means payment earlier than February 2034, is unrelated to profit or profitability. 162 Further, the deferred payment of the concession fees without interest has the consequence that the semi-annual recurrence of the liability to pay the fees is not matched by any such recurrence in respect of payment. Indeed, the only certainty in relation to payment of all of the fees is that payment must occur in February 2034. In my view a business person would view the date of payment, rather than the date of liability to pay, as the relevant date, with the consequence that the interest free deferral arrangement means the fees are not in truth and in substance semi-annual recurrent fees, notwithstanding that the liability to pay them is recurrent. That viewpoint also undermines Transurban's submission that the means adopted to obtain the concession is the provision of a periodic reward or outlay to cover its use or enjoyment for the periods commensurate with the payments. 163 The situation with additional concession fees is simpler. They were described, although not defined, as "super profits". They were also described, although not defined, as a sharing of the super profits between the State and Equity Investors. In substance, they will only be payable if the revenues exceed the Base Case Model revenues by the prescribed amounts. Thus, they would appear to only be payable in the event of profits or profitability exceeding the projections in that Model and they are calculated as a percentage of the excess. Thus, they can be fairly equated with, or treated as akin to, a return calculated as a percentage of profit. 164 It is also significant that an additional return to the State in the event that additional concession fees become payable is that the Concession Period, as defined in cl 1.1, may be shortened by up to about eight years if the Equity Return to investors is or exceeds 17.5 per cent per annum, Project Debt has been repaid and the State has given notice of its desire that the Concession Period end. The significance of early termination for the State is that City Link (including plant and equipment used for the Project) reverts to State ownership and the concession ends. Accordingly, although it will no longer be entitled to be paid concession fees the State would become entitled to operate City Link for its own benefit: see cl 3.4 of the Concession Deed. Plainly, the reversion of City Link to the State at the end of the Concession Period is a further financial return of significance to the State. While the reversion may be equated to some extent with a landlord's right to a tenant's fixtures and improvements, that is not a complete picture of the entitlement in the present case. The State, without financial commitment or contribution and therefore without any cost to it, will own the fully operational City Link and will be able to conduct the City Link Project on its own behalf as from the termination date. 165 It is significant that all of the parties expected that the real returns to the State would be substantial and that they would occur progressively by the payment of concession fees between 2013 (or 2017) and 2034. I am satisfied that those expected financial returns to the State are, in a practical and business sense, dependent upon the cashflows that would result from the profit or profitability projected in the Base Case Model. However, as explained above, there is no evidence as to how the quantum of the concession fees has been calculated or arrived at and I am unable to infer that the fees were calculated as a percentage of, or by reference to, profit. But, it does not follow that those fees are therefore unrelated to profit. The nexus between early payment of the fees and profit or profitability in the manner outlined above, which arises primarily by reason of the financial conditions that must be met if payment is to be prior to 2034, have led me to conclude that the concession fees are akin to a share of profit, albeit by reference to fixed and predetermined amounts, rather than by reference to a percentage of profit. The fees are also akin to a dividend in a fixed amount. Plainly, the additional concession fees have a clearer nexus with profit. My conclusions are reinforced by the description given in the pre-contract documentation to the returns to the State as a "profit sharing arrangement". 166 The failure of the Commissioner to identify the precise nexus between the concession fees and profits is not fatal to his case. I am prepared to infer there is a nexus in the sense that a total amount, that was able to be valued in both nominal and net present value figures, was agreed upon in the course of negotiations to be part of the State's return. The complexity of the Base Case Model may make it difficult, if not impossible, to ascertain the manner in which the total amount was related to profit but, for the reasons given above, I am satisfied that it has a sufficient nexus with profit and profitability. 167 I now turn to consider what the fees are paid for and, in particular, whether the fees are paid to the State in return for advantages of a capital nature or for advantages enuring to capital. (c) The State's contributions to and participation in the City Link Project 168 The State's contributions to, and participation in, the City Link Project are not controversial. They are detailed in the Concession Deed and the City Link Act and have been summarised earlier in these reasons. As pointed out, the City Link Project was Australia's largest urban infrastructure project. Its establishment and operation required contributions by the private sector which the State, presumably, was either unable or unwilling to provide. Those contributions were primarily debt and equity financing and the considerable managerial and technological skills required to construct, establish and operate City Link. 169 However, the establishment and operation of City Link also required contributions by the State, which could not be provided by the private sector. Those contributions, which can fairly be characterised as the "advantages" provided by the State, and for which the concession fees were paid, are essentially the services, facilities and entitlements set out in the City Link Act, which relate to: · ensuring the Concession Deed has the force of law (Pt 2); · the reservation and management of land for the City Link Project and special planning provisions, including exemption from the requirements of certain State legislation (Pts 2A and 3); · special powers relating to acquisition, possession, temporary occupation and management of land, including arrangements with public bodies concerning that land (Pt 3); · the fixing and enforcement of tolls, including making available the PERIN procedures for enforcement (Pt 4); · special provisions enabling the Exhibition Street Extension Project (Pt 4A); · other provisions to facilitate the City Link Project (Pt 5). 170 In essence, the above matters enabled the State to provide a unique framework which resulted in: · the Concession Deed to have the force of law; · the acquisition (including the compulsory acquisition), reservation, management, licensing and leasing of the land required for the Project; · planning and all other governmental approvals or permissions required for the Project being obtained; · the fixing and enforcement of tolls, which was critical to the ongoing viability of City Link; and · other special and incidental matters necessary for the Project to be implemented. 171 The Concession Deed basically provides for and details the State's responsibilities in respect of City Link. The Deed details the State's responsibilities in relation to metropolitan roads and transport policies (cl 2.4), agreed traffic management measures (cl 2.5), works the State is to carry out (cl 2.15), Project land and leases (cl 4) and Planning Scheme requirements and remediation (cl 5). These and the other items that detail the specific obligations of the State ensure that the State will perform the governmental acts necessary to enable City Link to be established and to operate as a viable business entity during the concession period. 172 Transurban's characterisation of the concession fees as fees paid "for the periodic use of the City Link" is based on the concession granted by cl 2.8 of the Concession Deed. That concession can be characterised as the right to establish and operate City Link. However, that characterisation is based on a juristic view of the advantages obtained by cl 2.8. A practical and business point of view would view the fees as really paid for the services, facilities and entitlements, or, put another way, the advantages, actually contributed by the State. Those advantages are of critical importance as they: · enabled the State to grant the concession; and · were necessary prerequisites for City Link to be established and to operate as a viable business. 173 It is appropriate to view the advantages provided by the State cumulatively as, in real terms, a single concession fee was paid for them. The State's contributions were not temporary, periodic, or directly related to or concerned with the day to day operations of City Link. Rather, those advantages, which were of a permanent and enduring character, formed part of the profit yielding structure of City Link. 174 Further, under the Concession Deed the State's entitlement to payment of the fees, and also to the reversion of City Link to it at the end of the concession, was in a practical sense conditioned upon the State accepting responsibility for certain political governmental risks in relation to the Project. Those risks were described by the Treasurer in the Second Reading Speech and have been outlined earlier in these reasons. Although cl 2.4(b) of the Concession Deed provides that the exercise by the State of its governmental powers was not to be restricted by the Deed, an additional advantage obtained by Transurban from the State's acceptance of political risk in relation to governmental acts was, in effect, to obtain rights akin to an indemnity against the consequences of State acts that hindered, threatened or impeded the financial viability of City Link. That protection complemented the advantages referred to above by ensuring, as far as possible in relation to governmental conduct, that the State would not derogate from the advantages it was contributing during the Concession Period. The State's acceptance of political risk is closely related to the advantages referred to above. 175 In summary, the matters described above, which are set out in the City Link Act and the Concession Deed, are the advantages which enabled the State to grant the concession rights described in cl 2.8 and are, in truth and substance, the advantages for which the concession fees are really paid. In my view, they are to be regarded as the State's contributions to the Project as they were necessary preconditions that had to be met if the Concession in cl 2.8 was to be granted. They are properly characterised as advantages enuring to capital. (d) Joint Venture 176 Earlier in these reasons I discussed the problems concerning the use by the parties of labels to describe their relationship and referred, as an example, to cl 1.4 of the Concession Deed in which the State represented and warranted that the Project Documents did not create a joint venture between the parties. However, as was pointed out in the joint judgment in United Dominions at 10: "The term 'joint venture' is not a technical one with a settled common law meaning. As a matter of ordinary language, it connotes an association of persons for the purposes of a particular trading, commercial, mining or other financial undertaking or endeavour with a view to mutual profit, with each participant usually (but not necessarily) contributing money, property or skill. Such a joint venture (or, under Scots' law, "adventure") will often be a partnership. The term is, however, apposite to refer to a joint undertaking or activity carried out through a medium other than a partnership: such as a company, a trust, an agency or joint ownership. The borderline between what can properly be described as a "joint venture" and what should more properly be seen as no more than a simple contractual relationship may on occasion be blurred. Thus, where one party contributes only money or other property, it may sometimes be difficult to determine whether a relationship is a joint venture in which both parties are entitled to a share of profits or a simple contract of loan or a lease under which the interest or rent payable to the party providing the money or property is determined by reference to the profits made by the other." 177 The reference to a joint adventure under "Scots' law" was explained by Dawson J at 14: "Whilst the concept of a joint venture is said to be the creation of American courts (see 46 Am. Jur. (2d.), Joint Ventures, s.2), it is a term which is widely used and it is well known in Scottish law where it is regarded as a variety of association, partnership or not, in which no firm name is used and the association is confined to a particular adventure, speculation, course of trade or voyage: Encyclopaedia of the Laws of Scotland (1931), vol.XI, par.67, at p.32." 178 It is appropriate to reiterate some key events in relation to the Project. It commenced with the State issuing a Project Brief on 20 September 1994. By 29 May 1995 the Transurban consortium, constituted by Transfield and Obayashi, was informed that it was the preferred bidder. Transurban was incorporated on 30 August 1995. On 28 July 1995 the Melbourne City Link Authority (acting as an agent of the State pursuant to the MCLA Act) entered into a non-binding Memorandum of Understanding with Transfield, Obyashi and Transurban City Link Pty Ltd (which was the then Project Vehicle) setting out the principles which the parties intended be adopted in the Project Documents. The Concession Deed was entered into on 20 October 1995 and was ratified by the Victorian Parliament when the City Link Act came into effect on 12 December 1995. Under the Deed, Transfield and Obayashi (or anyone else engaged by Transurban and the Trustee) were the Construction Contractors The Project was extended to include the Exhibition Street Extension when the agreement concerning the Extension was executed on 22 April 1998. 179 It is clear that the State, Transfield, Obayashi, Transurban and the Trustee formed an association for the purposes of the City Link Project with each participant making its particular contributions (which included the exercise of State legislative and administrative powers, money, property, technology and other skills), all of which were necessary to establish City Link and enable its operation as a viable business. The particular contributions of the participants were set out, inter alia, in the City Link Act, in the Project Documents and in the construction contracts. 180 Each of the private sector participants in the Project, plainly, were doing so with a view to profit. The State's participation accorded with the "Infrastructure Investment Policy for Victoria (June 1994)" (see cl 2.2(b) of the Concession Deed) and it saw its participation as being consistent with its governmental role. In that regard the Concession Deed acknowledged that the Project would deliver "significant benefits to the community in terms of positive economic, social and environmental outcomes" (see cl 2.2(a)). Further, cl 2.1(a)(i)-(xi) sets out the State's intentions in relation to the Project. It is unnecessary to detail them as it is sufficient to observe that they are consistent with the State's governmental role concerning traffic management, the economy and the environment. However, the State also represented and warranted it was entering into the Project Documents to which it is a party "as a commercial" act (cl 14.1(b) of the Concession Deed). Senior counsel for Transurban suggested that the clause meant that the State was "responding to commercial criteria and considerations". It is unnecessary to consider the precise effect of the clause as, whatever its meaning might be, it suggests that a purpose of the State in granting the concession was "commercial", which I would take to mean "with a view to profit". 181 Accordingly, all of the participants can be taken to have made their respective contributions to, and to have become associated together in, the City Link Project with a view to profit. 182 Thus, whatever the legal effect of cl 1.4 of the Concession Deed might be taken to be, I am satisfied that, as a matter of fact the State and Transurban were parties to a "joint venture" or a "joint adventure" in relation to the City Link Project. That finding affords strong support for the Commissioner's contention that the concession fees were, at the least, a sharing of revenues in a manner that was akin to sharing profit or the payment of a dividend. (e) Jones v Dunkel 183 Thus far, I have considered the evidence without referring to the Commissioner's reliance upon Jones v Dunkel (1959) 101 CLR 298. The Commissioner contended that the failure of Transurban to call any witness: · to explain how the concession fees were calculated or arrived at; · to explain or contradict the references in the pre-contractual documentation to the concession fees, and the additional concession fees, constituting a profit sharing arrangement between Transurban and the State; or · to otherwise contradict the Commissioner's case that those fees were not costs or outgoings incurred in the process of deriving assessable income; supports the Commissioner's case that the fees were akin to a sharing of profits or a dividend to a joint venturer. 184 Clearly, there were witnesses currently employed by Transurban who were involved in the negotiations with the State, which determined the quantum and terms of payment of the concession fee, who would be able to contribute to the discussion of what the fee was being paid for: cf Richard Walter Pty Ltd v Commissioner of Taxation (1996) 67 FCR 243 at 246 and 268. One potential witness was Mr Kim Edwards, who was in a senior position throughout the bidding period and became the Managing Director of Transurban. Another potential witness was Mr Paul O'Shea who was a "Transurban" financial adviser during the bidding period and became general counsel for Transurban. However, neither Mr Edwards or Mr O'Shea were called by Transurban to be witnesses. 185 Transurban was put on notice of the Commissioner's Jones v Dunkel contention in a letter dated 29 April 2002, to which Transurban's solicitors responded by stating their client had no obligation to call the evidence suggested by the Commissioner but would "bear [the Commissioner's] observations in mind as we prepare for trial". 186 Transurban did not call any witness who had any role in, or any knowledge of, the negotiations leading up to the Concession Deed. Indeed Mr Phillips, who is currently Transurban's Finance Director and gave evidence on behalf of Transurban, only joined the company on 1 July 1996. 187 Transurban carried the onus of showing that the payments were not akin to a sharing of profits or a dividend to a joint venturer. The issues "thrown up" in the documents filed by the parties prior to the hearing raised those issues as issues of fact, which Transurban was "required to explain or contradict": see Cross on Evidence 6th Australian Edition (2000) [1215] and Schellenberg v Tunnel Holdings Pty Limited (2000) 200 CLR 121 at 143. The failure of Transurban to explain or contradict the facts raised by the Commissioner's profit-sharing case lead me to infer that that evidence would not assist Transurban's case and to more readily and confidently draw the inference that the concession fees were akin to a sharing of profits or a dividend to a joint venturer, or, at the least, to conclude that Transurban has failed to discharge the onus upon it to establish that, relevantly, the fees were not akin to a sharing of profit or a dividend to a joint venturer but rather, were costs or outgoings incurred in deriving Transurban's assessable income in the relevant years of income. (e) Conclusions 188 Applying a practical and business point of view to the evidence in the present case I have arrived at the following conclusions: · the description of the arrangements with the State in the pre-contractual documents as "Profit Sharing Arrangements" is not inapt or inappropriate; · the concession fees are akin to a share of profits, albeit that they have been agreed to in fixed and pre-determined amounts rather than as a percentage of profit; · the concession fees are also akin to the payment of a dividend; · the concession fees are paid for the services, facilities and entitlements contributed by the State; · those services, facilities and entitlements: - were of a "once and for all" nature and of enduring benefit to the City Link Project; - enabled the State to grant the concession and were necessary prerequisites for City Link to be established and to operate as a viable business; - formed part of the profit yielding structure of City Link, and are properly characterised as advantages enuring to capital; · Transurban and the State were in fact parties to a joint venture and the returns to the State were to be received by the State as a joint venturer. 189 The above conclusions mandate that the questions stated in [122], be answered as follows: · the State's contribution to the City Link Project is to be properly characterised as equivalent to an advantage or advantages enuring to capital in a form other than the provision of financial capital; · the concession fees are akin to profit sharing with the State or to the payment of a dividend to it as a joint venturer in return for the advantages enuring to capital that the State has contributed to the City Link Project. 190 Accordingly, it must follow that the concession fees are not outgoings expended in gaining or producing Transurban's assessable income or expended in carrying on a business for the purpose of gaining or producing such income. 191 Alternatively, for the following reasons I have concluded that, when the matters stated by Dixon J in Sun Newspapers at 363 are considered, the concession fees are of a capital nature. The advantages sought by the payment of the concession fees are to be characterised by reference to the services, facilities and entitlements contributed by the State. Those contributions, which have been described in detail above, have lasting qualities, are of enduring benefit, are of a "once and for all" nature and form part of the profit yielding structure of City Link. The services, facilities and entitlements contributed by the State, when considered cumulatively, are not contributed, and are not used, relied upon or enjoyed, on a periodic or recurrent basis. Rather they, and the advantages derived from them, are to be used, relied upon, enjoyed and not derogated from throughout the term of the Concession. Finally, the means adopted to obtain the services, facilities and entitlements (ie payment of concession fees) is not a periodic reward or outlay for the use and enjoyment of City Link for periods commensurate with the payment. Rather, payment of the fees is in fixed amounts payable at the end of the Concession Period with provision for earlier payment if certain financial conditions are satisfied. In summary, the concession fees are outgoings expended "on the structure within which the profits were to be earned" and were not "part of the money earning process": see B.P. Australia at 398 and 403-404. Accordingly, it must also follow that the concession fees are outgoings on capital, rather than revenue, account: cf United Energy at 182 per Lockhart J. 192 For the above reasons, the losses or outgoings incurred in respect of the concession fees are not allowable deductions and the appeal of Transurban to the Court must be dismissed with costs. I certify that the preceding one hundred and ninety-two (192) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Merkel.

Associate: Dated: 2 February 2004 Counsel for the Applicant: Mr AC Archibald QC with Mr M Connock

Counsel for the Respondent: Mr CM Maxwell QC with Mr IB Stewart

Solicitor for the Respondent: Australian Government Solicitor

Date of Hearing: 2, 3 and 4 October 2002

Further Written Submissions filed: 11 and 22 October 2002

Date of Judgment: 2 February 2004