• The impact of this case on ATO policy is discussed in Decision Impact Statement: AusNet Transmission Group Pty Ltd v Commissioner of Taxation (Published 23 September 2015).

AUSNET TRANSMISSION GROUP PTY LTD v FC of T

Judges: French CJ
Kiefel J
Bell J

Gageler J
Nettle J

Court:
Full High Court

MEDIA NEUTRAL CITATION: [2015] HCA 25

Judgment date: 5 August 2015

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Gageler J

73. The distinction between expenditure that is an outgoing of a capital nature and expenditure that is an outgoing of a revenue nature is sufficiently stated for present purposes as " the distinction between the acquisition of the means of production and the use of them " ^[125] Hallstroms Pty Ltd v Federal Commissioner of Taxation (1946) 72 CLR 634 at 647 ; [ 1946 ] HCA 34 . . The distinction " depends on what the expenditure is calculated to effect from a practical and business point of view " ^[126] Hallstroms Pty Ltd v Federal Commissioner of Taxation (1946) 72 CLR 634 at 648; BP Australia Ltd v Federal Commissioner of Taxation (1965) 112 CLR 386 at 397 ; [ 1966 ] AC 224 at 264. .

74. To characterise expenditure from a practical and business perspective is not to disregard the legal nature of any liability that is discharged by the making of that expenditure ^[127] GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124 at 137 ; [ 1990 ] HCA 25 . . It is not to inquire into whether the expenditure is similar or economically equivalent to expenditure that might have been incurred in some other transaction ^[128] City Link Melbourne Ltd v Commissioner of Taxation (2004) 141 FCR 69 at 83 [ 42 ] , affirmed in Federal Commissioner of Taxation v Citylink Melbourne Ltd (2006) 228 CLR 1 ; [ 2006 ] HCA 35 . . It is to have regard to the " whole picture " of the commercial context within which the particular expenditure is made ^[129] BP Australia Ltd v Federal Commissioner of Taxation (1965) 112 CLR 386 at 399 ; [ 1966 ] AC 224 at 267. , including most importantly the commercial purpose of the taxpayer in having become subjected to any liability that is discharged by the making of that expenditure ^[130] GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124 at 137. . It is, where necessary, to " make both a wide survey and an exact scrutiny of the taxpayer ' s activities " ^[131] Western Gold Mines NL v Commissioner of Taxation (WA) (1938) 59 CLR 729 at 740 ; [ 1938 ] HCA 5 . .

75. Adopting the abbreviations used in the joint reasons for judgment, the precise question here is as to the characterisation of the expenditure made by AusNet in three subsequent income years in discharge of its legal liability which then existed by virtue of the Order in Council having been made in 1997 under s 163AA of the Electricity Act. Was that expenditure merely a cost to AusNet of holding or using the Transmission Licence during those income years so as to be an outgoing of a revenue nature, or was it part of the cost to AusNet of securing acquisition of the Transmission Licence and other assets from PNV in 1997 so as to be an outgoing of a capital nature?

76. The question cannot be answered, as AusNet seeks to have it answered, either by attempting to liken the expenditure to a simple case of a payment of land tax ^[132] Cf Moffatt v Webb (1913) 16 CLR 120 ; [ 1913 ] HCA 13 . or an adjustment for rates made on the settlement of a contract for the sale of land ^[133] Cf Commissioner of Taxation v Morgan (1961) 106 CLR 517 ; [ 1961 ] HCA 64 . , or by attempting to liken the expenditure to the contractual payments which gave rise to the division of opinion in the peculiar circumstances considered in Cliffs International Inc v Federal Commissioner of Taxation ^[134] (1979) 142 CLR 140 ; [ 1979 ] HCA 8 . or in Federal Commissioner of Taxation v Citylink Melbourne Ltd ^[135] (2006) 228 CLR 1 . .

77. Those cases can be taken to illustrate the negative proposition that the fact that a promise to make the expenditure formed part of the consideration for the acquisition of an asset does not foreclose the question of whether the expenditure when made is calculated to effect the acquisition of the asset. Other considerations - including the frequency of the expenditure, the circumstances in which it is to be paid and the method by which it is to be calculated - might yet lead to the conclusion that the expenditure when made is more appropriately to be characterised from a practical and business perspective as referable to the subsequent use of the asset or to some other circumstance.

78. Beyond that, I do not think that there is any general proposition to be taken from them. " The proper conclusion in each case in this particular area of the law " , Barwick CJ observed as a member of the majority in Cliffs , " is peculiarly dependent upon the particular facts and circumstances of that case. " ^[136] (1979) 142 CLR 140 at 148. Writing for the majority in Citylink , Crennan J made the same point when she endorsed the observation that there was " danger in arguing by analogy " ^[137] (2006) 228 CLR 1 at 43 [ 151 ] . .

79. Utilising for the moment the language in recital F of the Asset Sale Agreement, I accept

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ATC 17477

the central argument of AusNet that it is insufficient to characterise the expenditure as an outgoing of a capital nature that the expenditure was part of the total payments made by AusNet to the State of Victoria " in connection with " AusNet ' s acquisition of the Transmission Licence and other assets from PNV. But to accept that argument is not to answer the question of characterisation; much less is it to characterise the expenditure as other than an outgoing of a capital nature.

80. In my view, from a practical and business perspective, the expenditure was expenditure which AusNet was required to make in order to acquire the Transmission Licence and other assets. It was a component of AusNet ' s cost of the acquisition; it was part of the price AusNet had to pay. Of course, AusNet would not have ended up paying it unless AusNet remained the holder of the Transmission Licence during the subsequent income years. But it was not a cost which AusNet bore in order simply to use the Transmission Licence during those income years.

81. That answer to the question of the characterisation of the expenditure does not depend on construing the Asset Sale Agreement to impose a contractual obligation on AusNet to make the expenditure, although it is none the worse for such a construction of the Asset Sale Agreement. In relation to the Asset Sale Agreement, it is enough for me to state that I agree with the joint reasons for judgment that cl 13.3(d) on its proper construction imposed a contractual obligation on AusNet to make the expenditure which was independent of the statutory liability imposed on AusNet under s 163AA of the Electricity Act. I do not think it necessary to consider the submission of the Commissioner of Taxation that AusNet had an additional and concurrent contractual obligation to make the expenditure under cl 7 of the Asset Sale Agreement.

82. What I consider to be more important to answering the question of characterisation is an analysis of the structure and commercial context within which AusNet ' s statutory liability to make the expenditure came to be imposed. That statutory liability was imposed during the subsequent income years by s 163AA(2) of the Electricity Act, by virtue of the continuing existence during those years of the Order in Council made under s 163AA(1) in 1997.

83. The statutory liability so imposed under the Electricity Act was not structured as a periodic payment referable simply to the holding of the Transmission Licence; it did not resemble a " fee " or " charge " payable to the Office of the Regulator-General under s 163(2) of the Electricity Act ^[138] Section 163(3)(a) of the Electricity Act. . Nor was it structured in the usual way of a " tax " ; it was not payable to the State and recoverable by the Commissioner of State Revenue under the Taxation Administration Act 1997 (Vic). It was structured instead as an " impost " , relevantly payable by the holder of the Transmission Licence to the Treasurer in amounts and at times specified in the Order in Council. Whether, as so structured, it might also answer the description of a " tax " for constitutional purposes might be a nice question were it ever to arise ^[139] Cf Air Caledonie International v The Commonwealth (1988) 165 CLR 462 at 467; [ 1988 ] HCA 61 ; Harper v Minister for Sea Fisheries (1989) 168 CLR 314 at 336 ; [ 1989 ] HCA 47 . . It does not arise here.

84. Part 12 of the Electricity Act was amended in 1997 to make s 163AA applicable to a " transmission company " ^[140] Section 24 of the Electricity Industry (Miscellaneous Amendment) Act 1997 (Vic). , for the express statutory purpose of providing for the " corporatisation and privatisation " of PNV ^[141] Section 1(b) of the Electricity Industry (Miscellaneous Amendment) Act 1997 (Vic). . By the time the Order in Council was made later in 1997 under s 163AA(1), it was apparent that the privatisation of PNV would take the form of a sale of the assets of PNV rather than a sale of the shares in PNV. In contemplation of that sale of assets, the Order in Council was expressed to apply to PNV, as the holder of the Transmission Licence, to a transferee of the Transmission Licence, and in the alternative to the holder of another licence who might " acquire all or substantially all the business " of PNV. The gazettal of the Order in Council in those terms was, by operation of cl 4.3(d), a condition precedent to the completion of the Asset Sale Agreement.

85. The prospective statutory liability of AusNet to pay the imposts to the Treasurer in the three subsequent income years was in that way established in 1997, in advance of, and with a view to, AusNet ' s acquisition of the assets of PNV. It was a prospective liability to which AusNet had to subject itself in 1997 if AusNet was to secure that acquisition.

86.

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ATC 17478

The expenditure AusNet then made by way of payment of the imposts to the Treasurer was expenditure which AusNet was required to make to the State as a result of having made that acquisition. That the Transmission Licence might ultimately have been revoked if AusNet failed to pay the imposts ^[142] Section 35 of the Office of the Regulator-General Act 1994 (Vic) and s 164(3) of the Electricity Act. does not convert the expenditure into a cost to AusNet merely of holding or using the Transmission Licence.

87. The method by which the amounts and timing of the imposts specified in the Order in Council was determined does not point to a different conclusion. It is correct, as AusNet submits, that the " purpose and effect " of the imposts was to enable the State to recover from AusNet the " excess amount of gross revenue " which AusNet was projected by the State to be likely to earn from the use of the assets which AusNet was to acquire from PNV in light of the belated realisation that the " X " factor in the " CPI minus X " calculation of the revenue cap had been set too low. But it is not really correct for present purposes to characterise that effect, as AusNet seeks to do, as being to " reset " the revenue cap. The revenue cap was to remain unaltered. The revenue cap remaining unaltered, but the " X " factor having been set too low, AusNet was projected to earn significantly higher returns from the use of the assets it was acquiring from PNV in the three subsequent income years. The effect of the imposts was to require AusNet to disgorge to the State the estimated amount of those projected additional returns.

88. In order to acquire the assets of PNV in 1997, AusNet was required to submit in advance to an obligation to remit to the State the estimated amount of above-normal returns it would earn from the use of those assets in the three subsequent years. From a practical and business perspective, that is to my mind the long and the short of it.

89. If an analogy were to be sought in the decided cases in this Court (and I do not suggest that it is necessary that one should be found), perhaps the closest analogy is Colonial Mutual Life Assurance Society Ltd v Federal Commissioner of Taxation ^[143] (1953) 89 CLR 428 ; [ 1953 ] HCA 68 . , to which Edmonds and McKerracher JJ both referred in the decision under appeal ^[144] SPI PowerNet Pty Ltd v Federal Commissioner of Taxation (2014) 220 FCR 355 at 359 [ 12 ] , 368 [ 56 ] . . There, land was sold to an insurance company on terms which required the company to erect a building on the land, to use its best endeavours to lease parts of the building, and to pay to the vendors for a period of 50 years 90 % of all rents collected. The subsequent periodical payments of that proportion of rents by the insurance company to the vendors were held to constitute outgoings of a capital nature. Fullagar J, with whom Kitto and Taylor JJ agreed ^[145] (1953) 89 CLR 428 at 460. , said it was " incontestable " that those payments were made " in order to acquire a capital asset " , and continued ^[146] (1953) 89 CLR 428 at 454 (emphasis in original). :

" The documents make it quite clear that these payments constitute the price payable on a purchase of land, and that appears to me to be the end of the matter. It does not matter how they are calculated, or how they are payable, or when they are payable, or whether they may for a period cease to be payable. If they are paid as parts of the purchase price of an asset forming part of the fixed capital of the company, they are outgoings of capital or of a capital nature. It does not indeed seem to me to be possible to say that they are incurred in the relevant sense in gaining or producing assessable income or in carrying on a business - any more than payment of a … lump sum payable on transfer. 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? "

Fullagar J concluded ^[147] (1953) 89 CLR 428 at 459 (emphasis in original). :

" Here we have a transaction of a purely business nature, in which it may be safely assumed that two parties, bargaining on equal terms, had full regard to the value of the land and the probable value of the consideration. According to the documents the periodical payments are the price for which the land is being bought, and no reason can be suggested for not giving to the documents their full literal effect. The transaction might perhaps have taken a form under which parts of the total payments to be made were, or could be, treated as interest on deferred payments of a price. But it did not take any such form. As matters stand, the total of the payments is simply the total price of the land. "

90.

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ATC 17479

Here, as there, we have a transaction of a purely business nature in which AusNet (on the one hand) and PNV and the State (on the other hand) can safely be assumed to have had full regard to the value of the assets which AusNet was acquiring from PNV. The imposts to be imposed through the making of the Order in Council were not held out by the State to be negotiable in the events which led up to the Asset Sale Agreement. The non-negotiable imposts were nevertheless plainly taken into account by AusNet in setting the additional amount it was prepared to bid as the " Total Purchase Price " , which, when added with stamp duty and the imposts, came to be referred to in recital F of the Asset Sale Agreement as " the total payments to the State in connection with the privatisation of [ PNV ] " . The amount AusNet was prepared to bid might well have been different had the revenue cap truly been " reset " and had the imposts not been imposed. But we are not concerned with hypotheticals. In the form in which the parties were content to enter into the transaction, the non-negotiable imposts and the additional amount which AusNet was prepared to bid and which the State was prepared to accept as the " Total Purchase Price " were together in a real commercial sense the price which AusNet committed to pay to the State in order to acquire the assets of PNV.

91. For these reasons, I would dismiss the appeal with costs.