-
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
Members: French CJKiefel J
Bell J
Gageler J
Nettle J
Tribunal:
Full High Court
MEDIA NEUTRAL CITATION:
[2015] HCA 25
Nettle J
92. This is an appeal from a judgment of the Full Court of the Federal Court of Australia
[148]
93. In brief summary, in 1997 the appellant purchased the assets of an electricity transmission business owned by the State of Victoria. Among the assets so purchased was an electricity transmission licence issued under s 163 of the EIA. Section 163 provided inter alia for an electricity transmission licence to be subject to such conditions as were determined by the Office of the Regulator-General, including conditions requiring the licensee to pay specified fees and charges in respect of the licence ( " specified fees " ).
94. Over and above the specified fees, s 163AA of the EIA provided that the Governor in Council could, by Order, declare that further specified charges, or charges calculated in a specified manner, be payable by the licensee as an impost at the times and in the manner so determined ( " specified charges " ).
95. Neither the specified fees imposed under s 163 nor the specified charges levied under s 163AA were expressed to be payable in exchange for holding the electricity transmission licence; but, perforce of cll 3.4 and 18 of the licence and s 35 of the
Office of the Regulator-General Act
1994 (Vic), failure to pay the specified fees or the specified charges could have resulted in revocation of the licence
[150]
96. Under the contract of sale, the appellant became the holder of the electricity transmission licence and as such liable to pay the specified fees and specified charges. In addition, the contract of sale expressly required the appellant to pay the specified charges to the State and to refrain from contesting their validity. The amount of the specified charges was also expressed to be a component of the " total payments to the State in connection with the privatisation of the Seller " but not part of the " Total Purchase Price " for the assets.
97. The appellant claimed that both the specified fees and the specified charges were deductible from its assessable income. The Commissioner did not dispute that the specified fees were deductible but rejected the claim for the specified charges. The basis of rejection was that the Commissioner conceived the specified charges to be payments out of taxable profits or alternatively paid on capital account.
98. At first instance, Gordon J affirmed the Commissioner ' s position. Her Honour held that the specified charges were not
ATC 17480
incurred in gaining or producing assessable income and therefore were not deductible because they were paid out of taxable profits; and further or alternatively were not deductible because they were paid on capital account.99. On appeal to the Full Court, the majority held that the specified charges were incurred in gaining or producing assessable income but were not deductible because they were paid on capital account. Davies J, in dissent, agreed that the specified charges were incurred in gaining or producing assessable income but held that they were incurred on revenue account and thus deductible.
100. The two questions which fall to be determined in this appeal are, therefore, whether the specified charges were incurred in gaining or producing assessable income and whether they were incurred on capital account.
101. For the following reasons, it should be concluded that the specified charges were incurred in gaining or producing assessable income and they were not incurred on capital account. It follows that the specified charges were deductible from the appellant ' s assessable income and that the appeal should be allowed.
The facts
102. Until 1993, the State Electricity Commission of Victoria ( " SECV " ) was responsible for most generation, all transmission and the majority of distribution and supply of electricity in Victoria.
103. Early in October 1993, SECV was disaggregated into three new businesses: Generation Victoria, to undertake the generation of electricity; National Electricity (later called Power Net Victoria or PNV) to undertake the State-wide transmission of electricity; and Electricity Services Victoria, to undertake the distribution of electricity to consumers.
104. The EIA came into full force on 3 January 1994. PNV was issued a transmission licence under Pt 12 of the EIA. Section 158A(1) of the EIA relevantly provided that the Governor in Council could, by Order published in the Government Gazette, regulate in such manner as the Governor in Council thought fit prices in respect of goods and services prescribed in respect of the electricity industry, including charges for connection to and use of the transmission system. Section 158A(2) provided that the charges could be set by reference to certain factors, including a general price index or caps on revenue.
The Tariff Order
105. On 20 June 1995, an Order (
"
the Tariff Order
"
) was made under s 158A imposing, amongst other things, a cap on the revenue which PNV could derive from the provision of
"
Prescribed Services
"
[151]
106. The Tariff Order provided that PNV
'
s maximum allowed revenue (
"
MAR
"
) in respect of the supply of the Prescribed Services for each financial year (
"
t
"
) was to be calculated according to the following formula
[152]
MAR t = MAC t x SMD t
where:
" MAC t " (in $ /kW) represented the maximum average charge ( " MAC " ) in financial year t that PNV could charge for the capacity to transmit one kW of electricity at the forecast summer maximum demand ( " SMD " ); and
" SMD t " (in kW) represented the forecast SMD for the financial year t . The SMD for each financial year up to 30 June 2005 was specified in the Tariff Order.
107. The revenue cap was calculated to reflect efficient levels of operating and maintenance costs (which were estimated to be a percentage of the replacement cost value of assets); a return on capital equal to the optimised depreciated replacement cost value of assets multiplied by a weighted average cost of capital; and straight line depreciation at rates reflecting estimated useful lives on current cost accounting asset base.
108. The Tariff Order provided a mechanism by which the MAC was to be adjusted each financial year by multiplying the previous year ' s MAC by (CPI − X). CPI referred to the Consumer Price Index, a proxy for inflation. The " X factor " was a fixed integer calculated to reflect expected annual efficiency gains. Consequently, in order to increase its
ATC 17481
profits in real terms, PNV had to make annual efficiency improvements in excess of the X factor.
Privatisation of PNV
109. In April 1997, the Victorian Government announced its intention to privatise PNV and, around the same time, the Government undertook a review of the Tariff Order. As a result of the review, it was determined that the X factor applicable to PNV would not be appropriate to a private transmission company. Rather than reset the X factor, however, which would have required amending the Tariff Order for the period up to 31 December 2000, the Government determined to impose additional charges to recover the difference between the gross revenue that would accrue to PNV under the Tariff Order as it stood and the MAR which Government modelling suggested would be derived if the X factor were modified appropriately. Section 163AA of the EIA was thus enacted to facilitate the imposition of the additional charges as specified charges
[153]
110. The Government explained the intended effect of the specified charges in an " Information Memorandum for the Proposed Sale of PowerNet Victoria " , dated August 1997 ( " the Information Memorandum " ), as follows:
" 1.4.1 PowerNet ' s Operations and Market Position
…
Incentive Based Regulatory Regime
PowerNet operates under an incentive based regulatory regime whereby its maximum allowed revenue ( ' MAR ' ) in respect of the existing network and certain prescribed augmentations is subject to annual escalation based on the application of a CPI-X factor to the previous period ' s maximum average charge ( ' MAC ' ) per kW of forecast summer maximum demand ( ' SMD ' ) and any increase in forecast SMD …
As the CPI-X regulatory regime applies to PowerNet ' s revenue and not its profits, PowerNet will retain the benefit of any productivity gains during the regulatory period in excess of those assumed in setting the X factor (except in limited circumstances, where specific rules apply). Furthermore, any efficiency gains earned by PowerNet above the levels assumed are to be adjusted progressively over the subsequent regulatory period and in a manner which ensures that such efficiency gains are fairly shared between PowerNet and its customers.
It is expected that there will be a number of opportunities for PowerNet to achieve productivity gains in excess of those assumed in setting the X factor. "
111. The Information Memorandum explained how the X factor would be " effectively reset " for the period ending 30 June 2001 by the imposition of the specified charges under s 163AA as follows:
" 2.4.2 Specified Charges on Holder of Transmission Licence
It is intended that an Order will be made pursuant to section 163AA of the Electricity Industry Act imposing the following specified charges on the holder of the PowerNet transmission licence … of:
- (a) $ 50 million per annum for each of the years ending 30 June 1998 through 2000; and
- (b) $ 40 million for the year ending 30 June 2001.
The specified charges will be fixed amounts and payable quarterly in arrears for each financial year to 30 June 2000 and equal instalments payable on 30 September and 31 December 2000, in respect of the year ending 30 June 2000 [ scil 2001 ] .
It is intended that charges under section 163AA will not be imposed from 31 December 2000.
…
2.4.4 Background to Revised Revenue Controls and the [ Specified Charges ]
The Tariff Order currently specifies that an X-factor of 1.79 % will apply to 31 December 2000. PowerNet ' s revenue caps have effectively been reset through the [ specified charges ] and the new X-factor for 2001 and 2002. This approach to re-setting the revenue caps was adopted:
- (a) due to constraints imposed by the Maximum Uniform Tariffs which the [ distributors ] can charge franchise
ATC 17482
customers and which currently apply to consumers without revision to 31 December 2000; and- (b) to avoid any windfall gains accruing to PowerNet and its customers which may result from the re-set. "
Sale of the assets of PNV to the appellant
112. On 12 October 1997, the appellant
[154]
" A. The Seller [ PNV ] is the owner of the Assets.
B. The Seller agrees to sell and the Buyer [ the appellant ] agrees to buy the Assets … on the terms and conditions set out in this agreement.
…
E. The total value attributed by the parties to the sale of Assets (net of Creditors and Contract Liabilities) the subject of this agreement is $ 2,555,000,000 made up of:
Total Purchase Price $ 2,502,600,000 Estimated Duty $ 52,400,000 $ 2,555,000,000 F. The parties agree that the total payments to the State in connection with the privatisation of the Seller are $ 2,732,500,000 (including future [ specified charges ] of $ 177,500,000 payable by the Buyer, which the State values in net present value terms at approximately $ 161,000,000). "
113. The " Total Purchase Price " was relevantly defined as " $ 2,502,600,000 being the sum of the price of the Assets … net of Contract Liabilities and Creditors … assumed under this agreement " .
114. Clause 4.3 of the Asset Sale Agreement provided that completion was subject to a number of conditions precedent, including that:
" (a) the State, the Seller and the Buyer shall procure that the Office of the Regulator-General approves the transfer of the Transmission Licence from the Seller to the Buyer with effect from Completion;
(b) the State shall procure the publication in the Government Gazette of an Order in Council declaring that the Buyer is a transmission company for the purposes of the [ EIA ] , to take effect when the Buyer holds a licence to transmit electricity issued under Part 12 of the [ EIA ] ;
…
(d) the State shall procure the publication in the Government Gazette of the [ specified charges ] Order … "
115. Clause 4.4 provided for the appellant, upon completion, to pay the Total Purchase Price (plus interest, less deposit) to PNV and any duty owed to the State.
116. Clause 13.3 set forth a number of warranties and acknowledgments by the appellant including, in cl 13.3(d), the following relating to the specified charges:
" (1) the amounts to be payable by the Buyer pursuant to the [ specified charges ] Order are an integral part of the regulatory framework of the industry and the Buyer accepts that it must pay the amounts set out in the [ specified charges ] Order in order to carry on the Business transferred from the Seller;
(2) the Buyer must not challenge the validity of the [ specified charges ] Order or the amounts, or the basis of calculating the amounts, specified in the [ specified charges ] Order;
(3) the Buyer agrees to pay to the Treasurer the amounts specified in the [ specified charges ] Order in accordance with the terms of, and at the times specified in, the [ specified charges ] Order, whether or not the [ specified charges ] Order is valid or enforceable; and
(4) the Buyer may not transfer the Transmission Licence or allow any person to become a licensee under the Transmission Licence unless the proposed licensee has first delivered to the State a covenant (in form and substance satisfactory to the State) agreeing to be bound by this clause 13.3(d) as if it were the Buyer. "
ATC 17483
The specified charges
117. On 28 October 1997, the Governor in Council made the following Order under s 163AA of the EIA declaring the specified charges payable by PNV to the Treasurer for payment into the Consolidated Fund in respect of PNV ' s licence ( " the Order " ):
" The Governor in Council acting on the recommendation of the Treasurer under Section 163AA(1) of the Electricity Industry Act 1993 declares that the amounts payable as an impost by Power Net Victoria, as the holder of a licence (the ' Transmission Licence ' ) to transmit electricity issued under Part 12 of the Electricity Industry Act 1993, to the Treasurer for payment into the Consolidated Fund under Section 163AA(2) of the Electricity Industry Act 1993, are as follows:
- (a) $ 37,500,000 in respect of the financial year ending 30 June 1998, payable in arrears in two instalments, being $ 25,000,000 on 31 March 1998 and $ 12,500,000 payable on 30 June 1998;
- (b) $ 50,000,000 in respect of each of the financial years ending 30 June 1999 and 30 June 2000, payable in arrears in four equal instalments on 30 September, 31 December, 31 March and 30 June in each relevant financial year; and
- (c) $ 40,000,000 in respect of the 6 months ending on 31 December 2000, payable in arrears in two equal instalments on 30 September 2000 and 31 December 2000.
This Order applies to any person or persons (jointly and severally) to whom the Transmission Licence is transferred or any subsequent holder of the Transmission Licence or any person or persons (jointly and severally) who acquire all or substantially all the business of Power Net Victoria and who is or are issued with a licence to transmit electricity under Part 12 of the Electricity Industry Act 1993. "
118. On completion on 6 November 1997, the appellant paid the amounts provided for in cl 4.4 and subsequently paid specified charges totalling
$
177,500,000 levied under the Order, as follows:
| Year of income ended 31 December 1998 | Year of income ended 31 December 1999 | Year of income ended 31 December 2000 |
| $ 62,500,000 | $ 50,000,000 | $ 65,000,000 |
119. The specified charge payable in respect of the financial year ended 30 June 1998 was $ 37,500,000, rather than the $ 50,000,000 provided for in the Information Memorandum, because, in the events which occurred, the Order did not take effect until after the first quarter of that financial year.
The claim for deductions
120. In brief summary, the transaction by which the appellant acquired the assets of PNV and the liability to pay the specified charges had the following features:
- (1) The appellant contracted to buy the assets of PNV, which included the transmission licence necessary to carry out the business.
- (2) An incident of carrying out the business was the Tariff Order, which included the revenue cap that regulated the price at which Prescribed Services could be provided.
- (3) The specified charges were imposed to reflect a reconsideration of the assumptions that underpinned the calculation of the revenue cap for certain years.
- (4) The obligation to pay the specified charges was imposed on the holder of the transmission licence.
- (5) The specified charges were payable to the State over and above the purchase price for the assets, including the transmission licence.
- (6) The specified charges were payable from time to time, according to the schedule set out in the Order.
- (7) Under the Asset Sale Agreement, the appellant acknowledged that it must pay the specified charges as an
"
integral part of the regulatory framework of the industry
"
, and it warranted that it would pay the specified
ATC 17484
charges to the State without challenging their validity.
121. In its amended tax returns for the 1998, 1999 and 2000 years of income, the appellant claimed the amounts so paid in each year of income as a deduction pursuant to s 8-1 of the ITAA. Section 8-1 relevantly provides:
" 8-1 General deductions
(1) You can deduct from your assessable income any loss or outgoing to the extent that:
- (a) it is incurred in gaining or producing your assessable income; or
- (b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.
(2) However, you cannot deduct a loss or outgoing under this section to the extent that:
- (a) it is a loss or outgoing of capital, or of a capital nature " .
Decisions below
122. At first instance, Gordon J held that the specified charges were not incurred in gaining or producing assessable income because they were in substance and effect payments out of taxable profits
[155]
" Properly analysed the franchise fees are in reality akin to the State of Victoria taking a share of the profits from the [ distributors ] (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 … The residue is taken by the State as its share of profits; it has similar characteristics to a payment by way of dividend. "
123. In the present case, Gordon J applied similar reasoning as follows
[158]
" As the Tariff Order provided (and the Information Memorandum recorded), the purpose of the Tariff Order was to regulate pricing of services - it imposed a cap on the revenue which could be derived from the provision of ' Prescribed Services ' …
But the revenue cap in the Tariff Order was not limited to derivation of PNV ' s assessable income. The revenue cap in the Tariff Order was calculated to reflect three matters - efficient levels of operating and maintenance costs, a return on capital and straight line depreciation at rates reflecting estimated useful lives on Current Cost Accounting asset base … The charges were set to enable PNV to recover the cost of its assets over time (reflecting depreciation), to provide it with a return on capital (using the Optimised Depreciated Replacement Cost value of assets multiplied by a weighted average cost of capital) and to recover its estimated operating and maintenance costs … Those elements necessarily included calculation of PNV ' s taxable income - revenue less estimated operating and maintenance costs and depreciation.
…
Here the payments … represented amounts to be derived by the licence holder from the provision of the ' Prescribed Services ' that were over and above all capital and operating costs (including borrowing costs) and after allowing for an appropriate return to shareholders.
As is apparent, although the integers in the calculation of the MAR and the [ specified charges ] were not disclosed in the express terms of s 163AA, the structure of the imposition of the franchise fee in s 163A and the [ specified charges ] under s 163AA was the same - in substance and effect, a share of the profits leaving the holder of the licence with an amount determined to be a reasonable return on the capital of the company deriving that income. The residue, or surplus, was taken by the State as its share of profits. "
124. On appeal to the Full Court, Edmonds J rejected that approach. He stated that he did not consider that it was enough to characterise an outgoing as a share of profits that one may be able to say that it was
"
'
in reality akin
'
to a share of profits
"
[159]
ATC 17485
view, the reasoning of Sundberg and Merkel JJ in United Energy was to be preferred [160]" Critically, the transfer of the Transmission Licence to [ the appellant ] carried with it the s 163AA liability of PNV; equally critically, the s 163AA impost was not made on [ the appellant ] post the transfer of the Transmission Licence on Completion. The liability was assumed by [ the appellant ] on the transfer of the Transmission Licence, not by Order under s 163AA, and as such, forms as much part of the cost of acquisition of the Assets as the Total Purchase Price. "
125. Edmonds J noted that the decision of this Court in
Cliffs International Inc v Federal Commissioner of Taxation
[163]
" [ T ] he fact that payments are made or received in performance of a promise given as part of the consideration for the acquisition of a capital asset does not necessarily mean that the payments are themselves of a capital nature.
…
[ The taxpayer ' s ] promise to make the payments in the events which occurred formed part of the consideration given for the acquisition of the shares. But they were acquired without making the payments in question. The recurrent payments were not made for the shares though it might properly be said that they were payable as a consequence of the purchase of the shares.
…
The vendors for the transfer of their shares took a cash price and stipulated for a share of the proceeds of mining iron ore, if that eventuated. For its part, the appellant by agreeing to make the recurrent payments was prepared to admit the vendors of the shares to participation in the result of the mining of the iron ore. They were made, and necessarily made, by the appellant as disbursements in its business. …
If an analogue is felt to be of assistance, an analogy may be found in the grant of a licence to use a patent upon payment of a cash price and a continuing royalty on what might be produced by employment of the patent. The promise to pay the royalties is, in my opinion, in such a case part of the consideration for the grant of the licence but neither the receipt nor the payment of the royalty is for that reason a capital receipt or payment. The reasoning in Egerton-Warburton v Deputy Federal Commissioner of Taxation strongly suggests the conclusions at which I have arrived. The payments were, in my opinion, disbursements by the appellant in the course of its business and were not of a capital nature. "
126. To similar effect, Jacobs J reasoned as follows
[165]
" [ I ] t is submitted [ for the Commissioner that ] , in the case of a leasehold, where there is a sub-lease for a consideration in the form of recurrent payments, those payments are on revenue account but it is submitted that when there is an assignment for a consideration in the form of identical recurrent payments, those payments are on capital account. And the same is said of mining leases and other interests.
In my opinion this distinction cannot be maintained so absolutely. It would mean that recurrent payments under a grant for the term less a day would be on revenue account but like payments under a grant of the term … would be on capital account. …
Where the acquisition is of a depreciating right or advantage of limited duration the manner of remuneration of the transferor is inevitably a factor which largely determines whether that remuneration is deductible as a
ATC 17486
revenue outgoing. The best known example is the lease for a term of years where the consideration is a premium and a rental. "
127. Murphy J
'
s reasoning, although much briefer, proceeded along similar lines
[166]
" The question is to be decided from a practical and business point of view (see Dixon J in Hallstroms Pty Ltd v Federal Commissioner of Taxation ).
I am satisfied from a consideration of all the circumstances that the payments are not of capital or of a capital nature and that they are allowable deductions within s 51(1). The description given to the payments by the parties in their agreement is not decisive. The fact that payment of the outgoings was agreed as part of the consideration for the acquisition of a capital asset is not decisive. There is a strong analogy with an agreement to pay rent as part of the consideration for acquisition of a lease.
The acquisition of the asset did not depend upon the payment of any ' deferred payment ' . The ' deferred payments ' if any were made, would be for currently exercising the right to mine the ore in pursuance of the agreement. The amount of deferred payments was indeterminate; the rate of 15 cents per ton was certain but the amount to be paid in any year or during the life of the agreement was uncertain and depended on the exercise of the rights to mine. "
128. Edmonds J said that he rejected the reasoning in
Cliffs
because he considered that the
"
[
j
]
urisprudence both before and after
Cliffs International
does not support
[
Barwick CJ
'
s
]
approach
"
[167]
129. McKerracher J
'
s judgment was to the same effect. Although his Honour stated that it would be too narrow an approach to confine the question to whether the payment of the specified charges was part of the purchase price
[170]
" The provisions of the Asset Sale Agreement imposed a separate contractual liability to pay the [ specified charges ] in order to acquire the Assets, including the Transmission Licence. The payment was therefore a capital amount. "
McKerracher J referred
[172]
130. Davies J did not refer to
Cliffs
or to whether expenditure promised as part of the consideration for the acquisition of a capital asset is necessarily an outgoing incurred on capital account. But, consistently with the majority
'
s reasoning in
Cliffs
, her Honour approached the matter as follows
[173]
" The obligation to pay the [ specified charges ] flowed as a necessary consequence of holding the licence, so that the thing that produced the assessable income was the thing that exposed [ the appellant ] to the liability discharged by the expenditure. The [ specified charges ] are therefore to be seen as an expense in the business operations of [ the appellant ] and on revenue account rather than as a cost in securing the right to conduct the transmission business. "
131. Davies J rejected the Commissioner
'
s argument that cl 13.3(d) of the Asset Sale Agreement made a difference. Her Honour reasoned that, although the appellant bound itself
"
as part of the terms of the Asset Sale Agreement
"
to pay the specified charges
[174]
" the occasion for the incurrence of the liability to make the payments pursuant to the Order was not clause 13.3(d) but the fact that [ the appellant ] was the holder of the licence when the amounts became payable. "
Outgoing incurred in gaining or producing assessable income
ATC 17487
132. By notice of contention the Commissioner sought to uphold the judgment of the Full Court on the basis that, although the majority rejected Lockhart J ' s method of reasoning in United Energy , his Honour ' s method of reasoning was sound and, applied to this case, led to the conclusion that the specified charges were not incurred in gaining or producing the appellant ' s assessable income because they were calculated by reference to the appellant ' s expected profits.
133. That contention should be rejected. The majority of the Full Court were right not to follow Lockhart J
'
s method of reasoning in
United Energy
. Principle and authority dictate that it does not follow from the fact that an obligation is paid or satisfied out of profits that the obligation may not have been incurred in gaining or producing assessable income
[175]
134. In this case, the appellant derived the bulk of its assessable income from the amounts which it received from the transmission of electricity in the form of Prescribed Services. It was able to transmit electricity by way of Prescribed Services in those years of income and so derive that assessable income only so long as it held the transmission licence. So long as it remained the licence holder, it was bound to pay the specified charges. The occasion for payment of the specified charges thus inhered in the use, on a regular and recurrent basis, of the means of production of the appellant
'
s assessable income. Accordingly, the specified charges were incurred in gaining or producing assessable income. Equally, the specified charges were incurred in carrying on business for the gaining or producing of assessable income because they were appropriate and adapted to that end
[178]
135. It follows that, unless the payments were properly to be characterised as incurred on capital account, they were deductible under s 8-1 of the ITAA.
Outgoing incurred on capital account
The appellant ' s submissions
136. The appellant contended that the specified charges were not incurred on capital account because payment of the specified charges neither secured nor was capable of securing any lasting advantage. To suggest otherwise, it was said, would be to ignore the raison d ' ê tre of the specified charges, which was to deny the appellant a portion of the monopoly profits that would otherwise have flowed to it from its exploitation of the licence. The specified charges were not part of the consideration for the purchase of the licence because the Total Purchase Price of the assets, including the licence, was fixed; the specified charges were a separate matter. The specified charges were not incurred for the acquisition of the licence because, by the time the appellant came to pay the specified charges, it had already acquired the licence. The revenue character of the specified charges was revealed by the fact that the appellant ' s liability for each specified charge was contingent, both legally and commercially, upon the appellant remaining the holder of the licence at the time that the specified charges fell due. The appellant could have transferred the licence and thus avoided liability for future specified charges. So long as the appellant remained the licence holder, it was bound to pay each specified charge as it fell due, just as it was bound to pay each specified fee as it fell due. Otherwise, it would have been at risk of losing the licence. Each of the specified charges was therefore a regular and recurrent outgoing which inhered in the licence and was necessarily incurred in maintaining and exploiting the licence. Those submissions should be accepted.
The Commissioner ' s submissions
137. The Commissioner contended to the contrary that it necessarily followed from the proper construction of the Asset Sale Agreement that the specified charges were paid as part of the purchase price for the acquisition of capital assets, including the transmission licence. In the alternative, it was said that the circumstances of and surrounding the payments - the connection to the asset sale transaction
ATC 17488
and the means adopted to make the payments - led to the same result.138. The Commissioner also advanced a further, independent proposition that the payments secured an advantage of a capital nature in that the specified charges formed an " integral part of the regulatory framework " in which the business was to operate. The specified charges were a mechanism adopted to adjust the regulated revenue of the transmission company to ensure that the newly privatised business would enjoy an appropriate return in its initial years. Thus, it was said, the specified charges formed part of the profit-generating subject, akin to the franchise fees considered in United Energy . Those submissions should be rejected.
The criteria of distinction
139. In
Hallstroms Pty Ltd v Federal Commissioner of Taxation
, Dixon J said that he was not prepared to concede that the distinction between outgoings on revenue account and those of a capital nature is
"
so indefinite and uncertain as to remove the matter from the operation of reason and place it exclusively within that of chance
"
[179]
140. In
Sun Newspapers Ltd v Federal Commissioner of Taxation
, Dixon J identified the
discrimen
of the capital
-
income dichotomy as being the difference between expenditure on the acquisition of the profit-yielding subject and outlays on the process of operating the profit-yielding subject
[183]
141. According to those criteria, the fact that the result or purpose of expenditure is the acquisition of some right or advantage of a lasting character for the benefit of the profit-yielding subject is a necessary but not sufficient indication that the expenditure is incurred on capital account. The final classification of an outgoing as being on capital or revenue account depends on the manner in which the right or advantage is to be used and the means which are adopted to obtain it.
142. Other things being equal, where the means of obtaining a right or advantage of a lasting character is the payment of a lump sum purchase price or the payment of a lump sum purchase price by instalments, the expenditure is properly treated as incurred on capital account. If, however, the means of securing the right or advantage is by making recurrent payments accruing
de die in diem
or at other intervals, like rent, the payments may in some cases be treated as incurred on revenue account
[187]
143. Difficulties sometimes arise in deciding whether the means of acquisition of an asset or advantage are to be viewed as payments of a lump sum purchase price by instalments or as recurrent payments accruing
de die in diem
or at other intervals. As Dixon J remarked in
Hallstroms
, the courts have tended to proceed not so much with conspicuous analysis as with what his Honour described as the
"
traditional way of stating what positive factor or factors
"
in a given case lead to assigning the expenditure to one category or another
[188]
144. By way of illustration, if a property developer enters into an agreement to purchase land for a lump sum purchase price for redevelopment and subsequent retention as a
ATC 17489
long-term investment, there is no doubt that the payment of the purchase price is incurred on capital account. But what if the developer agrees that, instead of paying the purchase price, it will pay the vendor a share of the rents to be derived by the developer from the land once redeveloped? Apart from the decided cases, it might be open to classify the obligation to pay the share of rents either as an obligation to pay the purchase price by instalments or as an obligation to make recurrent payments accruing de die in diem or at other intervals. In view of the decided cases, precedent dictates that it should be classified as the former [189]145. Similarly, suppose a taxpayer purchases land to be used as its place of business and agrees in consideration of the purchase that it will take over and meet a regular and recurrent obligation owed by the vendor to a third party. Apart from the decided cases, it might be open to classify the obligation either as an obligation to pay the purchase price by instalments or as an obligation to make recurrent payments accruing
de die in diem
or at other intervals. In view of the decided cases, precedent dictates that it should be classified as the former
[190]
146. In contrast, since the lease of a shop at which a shopkeeper proposes to carry on business is an enduring asset and thus, once acquired, an accretion to the shopkeeper
'
s profit-earning subject, absent precedent it would not be illogical to classify the shopkeeper
'
s obligation to pay rent under the lease either as payment of the purchase price by instalments or as an obligation to make recurrent payments accruing
de die in diem
or at other intervals. In view of the decided cases, however, it is difficult to conceive of circumstances in which the rent should not properly be treated as an obligation incurred on revenue account
[191]
147. In this case there is no decided case directly in point. Accordingly, it is necessary to proceed by induction from the decided cases. The task is to identify what it is in the decided cases which marks the distinction between a succession of payments that should properly be characterised as payments of purchase price by instalments and a succession of payments that should properly be characterised as satisfaction of a regular and recurrent obligation, like rent.
148. Some of the cases imply that the criterion of distinction is whether an obligation to make payments is incurred as consideration for the acquisition of a capital asset
[192]
149. An assignment of a lease of business premises illustrates the point. A shopkeeper seeking an assignment of the lease of shop premises might be required to covenant with the assignor and the landlord that, in consideration of the assignment, the shopkeeper will pay all rent and other outgoings as they accrue due under the lease. Despite the covenant, there could be little doubt that each payment of rent and outgoings under the lease would be incurred on revenue account
[194]
150. Pertinently for present purposes, the same would also be true of a promise to pay rent at an increased rate under the lease. If, as consideration for agreeing to the assignment of the lease, the landlord required the shopkeeper to agree to an increase in rent and to pay the increased rent for the term of the lease, or even for just some years of the term, the payment of rent at the new rate would doubtless be incurred on revenue account.
151. Prima facie , this case is sufficiently analogous to an assignment of a lease to suggest that similar considerations should apply. By cl 13.3(d) of the Asset Sale Agreement, the appellant covenanted with the State in part consideration for the assignment of the licence to pay the specified charges when due. Despite the covenant, however, the specified charges were recurrent obligations which arose under or out of the possession and operation of the licence, just as much as rent due under a lease arises under or out of the possession and operation of the leased premises.
152. Admittedly, there can be dangers in analogies
[195]
ATC 17490
capital - revenue dichotomy rising above the category of an unformulated question of fact, there is obvious truth in Barwick CJ ' s apophthegm that in this area of the law each case turns on its facts. But analogies are useful in illuminating the manner in which established principle operates in fact and thereby revealing aspects of principle which may suggest that the result in a given case should be one thing rather than another.153. The question, then, is what is there in principle which, in the circumstances postulated of a covenant to pay rent under a lease, mandates that, despite the covenant, the rent when due or paid is incurred on revenue account?
154. Ultimately, it appears from the majority judgments in
Cliffs
, and particularly from the judgment of Jacobs J
[196]
155. It should be noted, too, that there was no disagreement between the majority and the minority in
Cliffs
as to the relevance of that criterion. Gibbs J disagreed with the majority only because, in effect, his Honour concluded that the payments in issue were not in fact made for the use and exploitation of the mineral leases. That was so because the mining operations could have been continued whether or not the payments were made. The situation was in that respect similar to
Colonial Mutual
and
Tata Hydro-Electric Agencies, Bombay v Income-tax Commissioner, Bombay Presidency and Aden
[198]
" Although there was evidence, which was accepted, that the parties regarded the payments as in the nature of royalties, the payments did not in truth have that character. The payees had no interest in the mineral leases, and could not either give or withhold permission to mine them. The payments could not properly be said to have been made for the right to mine the ore, since the mining operations could be continued whether or not the payments were made. The case falls within the principle on which Colonial Mutual Life Assurance Society Ltd v Federal Commissioner of Taxation and Ralli Estates Ltd v Commissioner of Income Tax were decided. … In my opinion the present case is indistinguishable from Colonial Mutual Life Assurance Society Ltd v Federal Commissioner of Taxation . The facts also appear to me to be indistinguishable from those in Tata Hydro-Electric Agencies Bombay v Income Tax Commissioner, Bombay Presidency and Aden , although of course that case was decided on a statute containing words different from those of s 51(1). "
156. Similarly, Stephen J based his conclusion on his perception that the payments were in truth and substance delayed instalments of the purchase price rather than payments for use or exploitation of the mineral leases. So much was demonstrated by the fact that the only connection between the amounts of the payments and the tonnage of ore extracted from the mine was that a percentage of the value of tonnage was the method of computation of the purchase price chosen by the parties
[200]
" By promised payment the taxpayer secured to itself rights, in part existing, in large partly [ sic ] only prospective and in a sense speculative but from the exercise of which, directly or at one remove, it might look forward to the deriving of income in the future. Their promised payment formed a part of the consideration in return for which
ATC 17491
those rights were secured and they were aptly enough described in the agreement as a part of the ' purchase price ' . Moreover that ' purchase price ' was paid or promised once and for all in return for one bundle of rights. Once those rights were acquired by the taxpayer there remained nothing more for the vendors to give it: the transaction between them was complete save that the taxpayer ' s promise to make the ' deferred payments ' remained to be performed. Those future payments were not to be paid in return for advantages to be granted in the future but, rather, in consideration of a single event occurring in the past, namely the transfer of the vendors ' shareholding in Basic. The linking of the quantum of the future payments with matters contemporaneous with the making of those payments was but the outcome of the particular method adopted for the determination of their quantum. "
157. Stephen J acknowledged that the situation is different where payments are for the right to use and exploit the asset, as with the payment of rent under a lease or royalties under a licence
[201]
" The important distinction between such a case and instances of leases of land or the licensing of patents is that in those cases rent or royalties are paid for the right to occupy or use the property or rights of another. But here the vendors, upon exercise of the option, retained nothing and the taxpayer thereafter made no use of anything to which the vendors retained any claim. "
158. His Honour concluded, however, that where the only reason for the adoption of a stream of payments computed by reference to production was because it was the negotiated means of computation of the purchase price, the situation was in all relevant respects similar to
Colonial Mutual
and
Tata
[202]
" It may be that money paid by a purchaser as part of the purchase price of a capital asset which he buys will not, for that reason alone, necessarily always bear the character of an outgoing of capital. But at least where, as here, whatever indicia of a revenue nature which the agreed purchase price may possess can be seen to be due only to factors such as the impossibility of placing a value, at the date of grant of the option, upon what is bought, the capital nature of what is bought will be most cogent evidence of the capital nature of the outgoing. To such a case I would apply what was said by Fullagar J in Colonial Mutual Life Assurance Society Ltd v Federal Commissioner of Taxation where speaking of payments made as the price of acquiring an asset, his Honour said:
' 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. ' "
Were the specified charges paid for the acquisition of the assets?
159. Allowing that the relevant criterion for determining whether a stream of payments is on capital or income account is whether, like rent paid under a lease, it is paid predominantly for the use and exploitation of an asset as opposed to its acquisition, is there anything in principle which dictates that the result should be different in this case?
160. Subject to what follows, it could not be said that the advantage or interest which the appellant sought to obtain by the payment of the specified charges was the acquisition of the licence. For just as in the case of the payment of rent under an assigned lease, by the time of payment of each specified charge the licence had been acquired. Each specified charge was paid in satisfaction of an annual obligation which inhered in the licence so acquired and, therefore, of which it can properly be said that the occasion was the maintenance or deployment of the means of production of assessable income
[203]
ATC 17492
charges not be seen as relevantly similar to rent and therefore deductible outgoings?161. The Commissioner contended that it was enough to render the payments capital that the appellant covenanted to pay the specified charges under the Asset Sale Agreement. The covenant was the predominant consideration and, as such, it characterised the payments of specified charges as, in effect, payments by instalments of the cost of acquisition of the licence.
162. Counsel for the appellant faintly suggested that, properly construed, the Asset Sale Agreement did not create a contractual obligation to pay the specified charges. But it is clear that it did. As previously noted, cl 13.3(d)(1) of the Asset Sale Agreement expressly provided that the appellant was bound to pay " the amounts set out in the [ Order ] in order to carry on the Business transferred from the Seller " .
163. The Commissioner ' s submission must nonetheless be rejected. In effect, it does no more than restate the misconception that, where a covenant to perform a regular and recurrent obligation inherent in an asset is given as part of the consideration for acquisition of the asset, the obligation must be characterised as a capital outgoing. As has been seen, at least in the case of rent and royalties, that is not the case.
164. The Commissioner next contended that payment of the specified charges was in truth and substance payment of part of the purchase price under the Asset Sale Agreement because the amount styled " Total Purchase Price " was relevantly defined as the " price of the Assets " net of " Creditors … assumed under this agreement " . Under cl 2.1 of the Asset Sale Agreement, the appellant assumed PNV ' s " Creditors " as at completion. By the time of completion, the Order had been made and PNV ' s liability to the State for the specified charges had crystallised. Hence, by the time of completion, the State was a creditor of PNV and the appellant assumed that liability.
165. That contention must also be rejected. As at the date of completion, PNV ' s liability to the State to pay the specified charges was contingent on PNV still being the licence holder when the specified charges fell due. Consequently, the appellant took over PNV ' s obligation to pay the specified charges as it did PNV ' s obligation to pay the specified fees. The position in this respect is no different from that of an assignee of a lease, who covenants as a term of the assignment to pay rent under the lease, taking over the assignor ' s obligation to pay the rent.
166. When pressed to say why in principle the appellant
'
s covenant to pay the specified charges should be regarded differently from an assignee
'
s covenant to pay rent under an assigned lease, counsel for the Commissioner could offer no more than that payment of rent under a lease is an established category of revenue outgoing and that the Commissioner relied on the decision of the Privy Council in
Tata
[204]
167. Neither of those responses is persuasive. Granted, the payment of rent under a lease is an established category of revenue outgoing, and specified charges paid in connection with an electricity transmission licence are not. But to say so discloses nothing in point of principle as to why the two should not be treated alike.
168.
Tata
was concerned with whether an obligation of a purchaser of a business to the vendor to pay a share of profits from the business to a third party was incurred
"
solely for the purpose of earning
…
profits or gains
"
of the business within the meaning of s 10(2)(ix) of the
Indian Income-tax Act
1922
[205]
169. As was explained in
Egerton-Warburton v Deputy Federal Commissioner of Taxation
[206]
ATC 17493
of the asset acquired, it is hardly to the point that the obligation may have been assumed in consideration of the acquisition of the asset.170. The Commissioner relied on the fact that, in Tata , it was held that the purchaser ' s promise to pay a share of profits to the third party was in the nature of a promise to pay the purchase price by instalments. But, as was earlier remarked, that was so because the only connection between the business acquired by the purchaser and the purchaser ' s obligation to pay the share of profits to the third party was that the purchaser covenanted with the vendor, in consideration of the acquisition of the business, to pay the third party a share of the profits to be derived from the business.
171. In contradistinction to an obligation to pay rent under an assigned lease or an obligation to pay specified charges which inheres in a licence, in
Tata
there was no connection between the purchaser
'
s obligation to pay the share of profits to the third party and the purchaser
'
s maintenance or deployment of the means of production of assessable income
[207]
172. It is true that, in
Colonial Mutual
, Williams ACJ and Fullagar J referred to
Tata
as supporting their conclusion that an obligation on the part of the taxpayer to pay the vendors of land a share of rents to be derived by the taxpayer from properties it proposed to construct on the land once acquired was a capital outgoing
[208]
Means adopted to make the payments
173. The Commissioner further contended that the specified charges were incurred on capital account because, unlike the specified fees, which were payable throughout the term of the licence, the specified charges were limited in number, fixed in amount and evidently connected with the Asset Sale Agreement, and so were far from being regular and recurrent. More specifically, it was submitted that the payments were in effect a one-off liability connected with the privatisation of the power network and were voluntarily assumed by the appellant as part of the acquisition of the assets as an alternative to payment of a higher price for the privatised business. That was borne out, it was said, by the fact that the specified charges were calculated by reference to the licensee ' s assumed profitability; that the appellant took the obligation to pay the specified charges into account in the determination of its bid price for the assets; that the appellant covenanted that it would not challenge the lawfulness of the specified charges; and that, at least initially, the appellant recorded the payments in its audited books of account as a capital outgoing. These considerations, it was submitted, reinforced the Commissioner ' s primary submission that the specified charges were paid for the acquisition of the transmission assets.
174. Those submissions face difficulties at several levels. First, although it is true that the number of payments was limited and that the payments were fixed in amount, their limited number is not of great significance. As Dixon J said in
Sun Newspapers
[209]
175.
ATC 17494
Secondly, assuming that " fixed amounts " means that the payments were pre-determined and set out in the Asset Sale Agreement rather than being imposed ad valorem on profits or income actually generated, the fact that they were so fixed is logically beside the point. In form and as a matter of substantive legal obligation, the payments were of a compulsory tax levied annually during the transition period. As the appellant submitted, a payment in the nature of a periodical tax is customarily conceived of as incurred on revenue account. As Moffatt v Webb shows [211]176. Here, as in Moffatt v Webb , the payment of the specified charges did not secure to the appellant any capital advantage. It secured the appellant against being disturbed in its operation of the licence and against the potential that the licence would be forfeit if the specified charges were not paid. According to ordinary conceptions, those attributes colour the specified charges as outgoings incurred on revenue account.
177. Thirdly, it is not clear why the fact that the specified charges were calculated by reference to the licensee
'
s estimated revenue and profitability should be regarded as significant. Plainly deductible regular and recurrent obligations like rent
[212]
178. Admittedly, the specified charges were a " one-off " liability in the sense that they were imposed only during the transition period between 1998 and 2000, after which the X factor was increased to 11 per cent. It is also correct that the specified charges were associated with privatisation of the power network and that they were the means by which, figuratively speaking, the State took a share of the economic monopoly profits which it was projected would flow to the licensee during the transition period. But neither of those considerations detracts from the legal and fiscal reality that the specified charges were a regular and recurrent tax to which the appellant was subjected qua licence holder throughout the transition period.
179. Fourthly, the fact that the appellant covenanted not to challenge the lawfulness of the specified charges and to pay them in any event is also beside the point. It has not been suggested that they were unlawfully imposed and, in any event, unless and until their imposition was declared to be unlawful the appellant was under a legal obligation to pay them. It is true that, if their imposition under s 163AA had been declared unlawful, the appellant ' s only obligation to continue to pay them in those circumstances would have been its contractual liability under cl 13.3(d). No doubt, it might also be said that that was incurred in consideration of the transfer of the licence to the appellant. But, even then, the nature of the contractual liability, no less than a contractual liability to pay rent under a covenant given in consideration of an assignment of lease, would still have been a regular and recurrent liability which inhered in the asset - in this case, the licence - in respect of which it was charged.
Payments of tax on capital account
180. The Commissioner contended that a tax can be and often is an affair of capital. Counsel for the Commissioner instanced conveyance duty payable on the acquisition of land and also referred to the decision of the Full Court of the Federal Court in United Energy as authority that compulsory imposts may be incurred on capital account.
181. Those comparisons are inapposite. Conveyance duty is an outgoing on capital account because it is a charge on the capital value of the property conveyed. As such, it is in the nature of an additional capital cost of acquisition of the property conveyed. A tax of that kind bears no relationship to the specified charges in this case, which, as opposed to being charged on the purchase price of the licence, were computed and levied in respect of each of the three transition period years of operation of the licence according to the profits which it was
ATC 17495
considered were capable of being generated from operation of the licence in that period.182. Finally, the Commissioner contended that the specified charges were paid as part of the regulatory framework in which the transmission business was to operate. The regulatory framework, which included the Tariff Order, gave licence holders benefits that included predictable revenues and the ability to outperform the assumptions which underpinned those revenues. Those benefits formed part of the profit-yielding structure of the business. Thus, by analogy with United Energy , the payments should be treated as incurred on capital account.
183. That contention should also be rejected. The decision in
United Energy
rested on the conclusion of the plurality that the distribution franchise fee which United Energy was required to pay to the Government under s 163A of the EIA was consideration for the advantage of being free from competition of other distribution companies within an exclusive distribution area. Their Honours reasoned as follows
[215]
" In the Explanatory Memorandum set out under the heading The Franchise Fees , the fee is said to be ' appropriately viewed … as a fee payable by the [ distributors ] for the benefit … of their franchise customer bases ' . That is in our view an accurate description of the fee. The ' benefit ' referred to is that a franchise customer, being one who has ' not yet become contestable ' under the reforms, must buy electricity from the distribution company for its area for so long as that customer is not ' contestable ' . The franchise fee is not payable for the right to sell electricity to customers in the distributor ' s licence area. That right is conferred by a licence to sell electricity granted under ss 162 and 163 for which a different fee is payable. Rather the franchise fee is payable for the advantage enjoyed by the distribution company of being free from the competition of the other four distribution companies for the custom of franchise customers in the distributor ' s licence area. The fee was aptly described by the Minister as a ' monopoly rent ' for the exclusive right to sell to franchise customers in the distributor ' s licence area during the transitional period.
The licence is consistent with the Act. The exclusivity granted to a licensee in respect of franchise customers does not arise by reason of any term of a Retail licence. Rather, it arises because each Retail licence authorises sales of electricity only to franchise customers within the licence area. That limited authorisation and the prohibition against unauthorised sales under s 159(1) ensure the exclusivity required by s 162(2B).
Accordingly, the franchise fee is payable by the taxpayer for and by reason of the exclusivity provided for under ss 162(2B) and 163A(4) and conferred by a combination of s 159(1) and the terms of the Retail licences granted to the five distribution companies. This conclusion is significant as it is not strictly correct to contend, as did counsel for the taxpayer, that the franchise fee is payable in ' consequence ' of the licence or the monopoly the licence entitled the taxpayer to exercise in relation to part of its market. "
184. The decision is, therefore, distinguishable on the basis that the franchise fee was considered to have been paid in consideration of a legal monopoly whereas, in this case, the licence did not confer a legal monopoly. The only monopoly was economic.
185. More importantly, however, several aspects of the plurality ' s reasoning in United Energy are distinctly problematic. The fact that the Government chose to describe the franchise fee as " a fee payable by the [ distributors ] for the benefit … of their franchise customer bases " , or even that the franchise fee was based on the Government ' s asseverated conviction that the State should receive some benefit from the monopoly profits which it was anticipated would flow to a licence holder, could not alter the formal and substantive legal reality that the franchise fee was a compulsory exaction levied on a licence holder because it was a licence holder. Whatever the underlying economic rationale of its imposition, it was a regular and recurrent obligation of which the occasion inhered in the means of production of assessable income.
186.
ATC 17496
It is true that United Energy ' s licence effectively conferred the benefits of exclusivity in the licence area. But non constat that the franchise fees were not expenditure of a kind among the wide class of things which in the aggregate form the constant demand which must be answered out of the returns of trade or circulating capital. Allowing that exclusivity is to some extent a lasting advantage and, therefore, that sums outlaid in securing exclusivity may be characterised as outgoings of capital [216]187. Most importantly, the reasoning of the plurality in
United Energy
is at odds with the later reasoning of this Court in
Federal Commissioner of Taxation v Citylink Melbourne Ltd
[217]
" The concession fees are only payable during the term of the concession period. The respondent does not acquire permanent ownership rights over the roads or lands used. All rights granted under the Concession Deed revert to the State at the expiry of the concession period. Unlike periodic instalments paid on the purchase price of a capital asset, the concession fees are periodic licence fees in respect of the Link infrastructure assets, from which the respondent derives its income, but which are ultimately ' surrendered back ' to the State. Accordingly, they are on revenue account. "
188. The Commissioner submitted that Citylink was different because the concession fees in that case were paid for the right to operate a capital asset as opposed to consideration for the purchase of a capital asset, and that the concession fees were payable throughout the life of the licence in contrast to the specified charges, which were payable for just the first three years of the licence period.
189. There is no substance in either of those distinctions. As was earlier noticed, although the appellant covenanted as part of the consideration for its acquisition of the licence that it would pay the specified charges when due, it paid the specified charges after it had acquired the licence in discharge of a regular and recurrent obligation in the nature of a tax imposed on it as the holder of the licence. And, although its payment of the specified charges could perhaps be viewed as being as much in discharge of its contractual liability to pay the imposts as in discharge of its statutory obligation to do so, principle and the analogy of rent payable by an assignee of a lease who has covenanted as a term of the assignment to pay the rent when due imply that the predominant and therefore determinative character of the specified charges was one of an outgoing of which the occasion was the maintenance or deployment of the licence as means of production of assessable income. As has been stated, recurrence is not a question of recurring every year or every accounting period. The test is whether the expenditure is in the wide class of things which in aggregate form the constant demand which must be answered out of the returns of trade or circulating capital. Actual recurrence of the thing need not take place or even be expected.
Economic equivalence?
190. It remains to mention the reliance which the Commissioner placed on the facts that the appellant computed the amount of its bid for the licence by reference to the anticipated specified charges burden, and at least initially recorded the specified charges in its books of account as a capital outgoing. As in several other aspects of the Commissioner ' s submissions, the significance
ATC 17497
which the Commissioner attributed to those facts appeared to proceed from an unstated sub-text - that, because the State could have structured the obligation to pay the specified charges as an obligation to pay an additional amount of purchase price, the specified charges should be treated as if they were additional amounts of purchase price. Thus, despite counsel taking care to avoid specific reference to conceptions of that nature, not a little of the argument presented as if it were based on notions of economic equivalence of the kind which this Court rejected in Citylink [219]191. There is no room for notions of economic equivalence in the determination of what is deductible. Obviously, any capital outlay can be expressed in terms of an economically equivalent projected stream of income payments just as any projected stream of revenue outgoings can be expressed in terms of a present discounted capital value. Thus, the less the specified fees, specified charges and other revenue obligations, the more the assets were likely to be worth, and so the more that a rational self-interested purchaser would be prepared to pay; and vice versa. It is, therefore, not at all surprising that the appellant took the specified charges into account in determining its bid price for the assets and undertaking of PNV. But, absent notions of economic equivalence, that says nothing about the appropriate characterisation of the payments.
192. No doubt, the State could have structured the transaction as one of payments in consideration of the State ' s agreement to the assignment of the licence instead of specified charges payable qua licensee. Had it done so, the payments would have been a capital expense. But the State chose to proceed by way of specified charges exigible in respect of holding the licence instead of payments in consideration of assignment of the licence, just as it might have chosen to proceed by way of a variation in the X factor. The need to approach the characterisation of outgoings from a common sense business point of view does not mean that, because an outgoing on revenue account could have been structured as a transaction on capital account, by some process of economic equivalence it may be treated as if it were the latter. It was not suggested that Pt IVA of the Income Tax Assessment Act 1936 (Cth) applied.
193. The fact that the appellant recorded the outgoings as capital in its books of account is equally inconsequential
[220]
Conclusion and orders
194. In the result, the appeal should be allowed. The orders of the Full Court should be set aside. In their place, it should be ordered that the appeal to the Full Court is allowed with costs, the judgment of the Federal Court is set aside, and in its place the appeal against the disallowance of objection is allowed and the matter is remitted to the Commissioner for reassessment according to law. The respondent should pay the appellant ' s costs of the appeal to this Court.
Appendix
Transmission Licence
3.4 The Office may at any time give at least 20 business days notice of revocation to the Licensee if the Licensee does not comply with an enforcement order or an undertaking , and the Office decides that it is necessary or desirable to revoke this licence in order to achieve the policy objectives , in which case the term of this licence ends, subject to clause 3.5, on the expiration of the period of the notice.
…
18. Compliance with laws
The Licensee must comply with all applicable laws including but not limited to the Tariff Order .
ATC 17498
…" enforcement order " means a provisional or final order made and served by the Office under section 35 of the Office of the Regulator-General Act 1994;
…
" undertaking " means an undertaking given by the Licensee under section 35(5)(a) of the Office of the Regulator-General Act 1994;
…
Office of the Regulator-General Act 1994
35. Enforcement orders
- (1) This section applies if a person is contravening, or in the opinion of the Office is likely to contravene -
- (a) a determination; or
- (b) if the Office is under the relevant legislation or by virtue of an Order in Council under section 3(2) responsible for licensing, the conditions of a licence -
and the Office considers that the contravention or likely contravention is not of a trivial nature.
- (2) The Office may serve a provisional order or a final order on the person requiring the person to comply with the determination or licence condition.
- (3) Unless sooner withdrawn by the Office, a provisional order has effect for a period of 7 days commencing on the day that it is served.
- (4) The Office may serve another provisional order upon the expiry of a preceding provisional order.
- (5) If the Office has made a provisional order, the Office must not make a final order if -
- (a) the person has undertaken to comply with the determination or licence condition; or
- (b) the Office is satisfied that the order would be inconsistent with the objectives of this Act.
- (6) The Office must not make a final order unless the Office has -
- (a) given the person at least 28 days notice of the intention to do so; and
- (b) given the person the opportunity to make a submission in respect of the order; and
- (c) considered any submission or other objection to the order received by the Office.
- (7) The Office must as soon as possible after serving a provisional order or a final order on a person publish a copy of the order in the Government Gazette.
- (8) A person must comply with a provisional order or a final order or an undertaking under sub-section (5)(a).
Penalty: 1000 penalty units and 100 penalty units for each day after service of the order that contravention continues.
Footnotes
[148][149]
[150]
[151]
[152]
[153]
[154]
[155]
[156]
[157]
[158]
[159]
[160]
[161]
[162]
[163]
[164]
[165]
[166]
[167]
[168]
[169]
[170]
[171]
[172]
[173]
[174]
[175]
[176]
[177]
[178]
[179]
[180]
[181]
[182]
[183]
[184]
[185]
[186]
[187]
[188]
[189]
[190]
[191]
[192]
[193]
[194]
[195]
[196]
[197]
[198]
[199]
[200]
[201]
[202]
[203]
[204]
[205]
[206]
[207]
[208]
[209]
[210]
[211]
[212]
[213]
[214]
[215]
[216]
[217]
[218]
[219]
[220]
[221]
[222]
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