• The impact of this case on ATO policy is discussed in Decision Impact Statement: Federal Commissioner of Taxation v Citylink Melbourne Ltd (Published 4 October 2006).

FC of T v CITYLINK MELBOURNE LIMITED

Members: Gleeson CJ
Gummow J
Kirby J
Callinan J
Heydon J

Crennan J

Tribunal:
Full High Court of Australia

MEDIA NEUTRAL CITATION: [2006] HCA 35

Decision date: 20 July 2006

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Crennan J

78. Citylink Melbourne Limited (formerly Transurban City Link Limited) ( " the respondent " ) is the concessionaire of the State of Victoria ( " the State " ) pursuant to a concession agreement in respect of a major infrastructure project. The main issue in this appeal is whether concession fees paid by the respondent pursuant to that concession agreement are allowable deductions at their full face value under s 51 of the Income Tax Assessment Act 1936 (Cth) ( " the 1936 Act " ), applicable to the 1996 and 1997 years of income, and s 8-1 of the Income Tax Assessment Act 1997 (Cth) ( " the 1997 Act " ), applicable to the 1998 year of income (together " the sections " ).

79. Concession agreements are familiar in circumstances where a government, seeking to minimise public sector debt, retains private sector interests to build new infrastructure ^[82] G ó mez-Ib á ñ ez, Regulating Infrastructure: Monopoly, Contracts, and Discretion , (2003) at 12 and 85-88; and also Grimsey and Lewis (eds), The Economics of Public Private Partnerships , (2005). . Charters or concessions to private sector interests, for the building and operating of infrastructure such as canals or railways, were common in nineteenth century Britain, as were municipal charters or franchises for similar purposes in the United States of America ^[83] Linder, “ Coming to Terms With the Public-Private Partnership ” , in Grimsey and Lewis (eds), The Economics of Public Private Partnerships , (2005) 75 at 85; and also Grimsey and Lewis, Public Private Partnerships: The Worldwide Revolution in Infrastructure Provision and Project Finance , (2004). . In Vinter, Project Finance ^[84] 3rd ed (2006) at 85. , it is said:

" In the context of project finance, [ a concession ] is usually granted by a governmental or quasi-governmental authority. The concession is the cornerstone of the ' BOT ' ( ' build, operate, transfer ' ) project finance model. In this model, a concession is granted to a concession holder who is required to build the relevant project facilities or piece of infrastructure, operate them or it for a fixed period and, at the end of such period, transfer them (or it) back to the person who originally granted the concession. "

80. In broad terms, the common features of such commercial arrangements are: (i) the shared risks of a large project are allocated to the parties best able to incur the least cost in managing such risks ^[85] Victoria, Legislative Council, Parliamentary Debates (Hansard), 28 November 1995 at 841. , and (ii) consideration or priority is given to the repayment of lenders and to ensuring an adequate return to investors before any concession period expires ^[86] Vinter, Project Finance , 3rd ed (2006) at 86. . The fiscal consequences of certain aspects of such commercial arrangements are the subject matter of this appeal.

The facts

81. The Melbourne City Link Project ( " the Project " ) was a major infrastructure project. The State contracted with the respondent to design, construct and maintain a major system of roads ( " the Link " ) which was to be operated using tolls. The respondent ' s tasks were to be undertaken during a period when the State conceded to the respondent the right to do all that was necessary to complete those tasks, with a view to ultimate transfer to the State of the completed infrastructure, and all other rights (including relevant intellectual property rights), at the expiry of the concession period. At the point of " surrender back " ^[87] Victoria, Legislative Council, Parliamentary Debates (Hansard), 28 November 1995 at 841. , the State will resume its right to operate the roads system, by tolling if it wishes.

82. After a competitive bidding process in 1995, the respondent, as part of the successful consortium, and the State entered into a suite of contracts ( " the Project Documents " ) governing the Project, some of which are discussed in more detail in the judgment at first instance ^[88] Transurban City Link Ltd v Commissioner of Taxation (2004) 135 FCR 356 at 361ff. .

83. The Melbourne City Link Authority Act 1994 (Vic) and the Melbourne City Link Act 1995 (Vic) ratified relevant Project Documents. Thus the document central to this appeal, the Concession Deed, took effect as if enacted as law ^[89] Section 14(1) of the Melbourne City Link Act 1995 (Vic). . The legislation also empowered the State to contribute Crown land for the purposes of the Project, with the necessary planning approvals, and permitted the respondent to construct and maintain the infrastructure, and to impose tolls upon the users of the infrastructure ^[90] Sections 1 and 4 of the Melbourne City Link Act 1995 (Vic). .

84. The respondent (together with Perpetual Trustee Company Limited, the trustee of the Transurban City Link Unit Trust ( " the Trustee " )) was the special purpose corporate vehicle for the Project. The respondent, the Trustee, the State and City Link Management Limited (the manager of the Trust) signed the Concession Deed on 20 October 1995. Between that date and 28 June 2002 there were 17 further deeds amending the Concession Deed ^[91] (2004) 135 FCR 356 at 361 [ 11 ] . .

85. As consideration for the rights conferred through the Concession Deed the respondent was required to pay concession fees to the State " from the date of the commencement of the Concession Period until the end of the

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twenty-fifth year after the date which [ was ] 6 months earlier than the Link Expected Completion Date " ^[92] Clause 3.1(a)(i) of the Concession Deed. . The base concession fee of $ 95.6m was payable semi-annually in arrears in June and December. The Link was first opened to traffic on 15 August 1999, with tolling commencing on 3 January 2000.

86. The Commissioner of Taxation ( " the Commissioner " ) appeals from a unanimous decision of the Full Court of the Federal Court of Australia ^[93] City Link Melbourne Ltd v Commissioner of Taxation (2004) 141 FCR 69 (Hill, Stone and Allsop JJ). allowing an appeal by the respondent from the decision at first instance ^[94] (2004) 135 FCR 356 (Merkel J). . The trial judge dismissed an appeal from the Commissioner ' s disallowance of deductions claimed in respect of the concession fees.

87. The respondent claimed concession fees paid by it as deductions in the financial years ending 30 June 1996, 1997 and 1998. These were amounts of $ 31.25m (said to have been incurred in the 1996 year of income) and $ 95.6m (said to have been incurred in each of the 1997 and 1998 years of income).

The applicable legislation

88. Section 51(1) of the 1936 Act (applicable to the income years ending 30 June 1996 and 1997) provides that:

" All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income. "

89. Section 8-1 of the 1997 Act (applicable to the income year ended 30 June 1998) provides that:

• " (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; or
  • (b) it is a loss or outgoing of a private or domestic nature … "

90. As the Full Court observed, the difference between the sections is not material ^[95] (2004) 141 FCR 69 at 71 [ 2 ] . . The same observation may be made about s 51(1) and its predecessor ^[96] Section 23(1)(a) of the Income Tax Assessment Act 1922 (Cth). .

91. In
New Zealand Flax Investments Ltd v Federal Commissioner of Taxation ^[97] (1938) 61 CLR 179. Dixon J noted that the words of the income tax legislation give rise to particular difficulties when a transaction takes more than a year to complete, because it is the words of the section (which may not apply comfortably to certain economic or commercial practices), rather than general principles, which contain the test for deductibility ^[98] (1938) 61 CLR 179 at 199 and 206-207. See also Federal Commissioner of Taxation v Orica Ltd (1998) 194 CLR 500 at 555 [ 157 ] per Callinan J. . The infinite variety ^[99] Handley v Federal Commissioner of Taxation (1981) 148 CLR 182 at 195 per Mason J. of factual situations which have fallen to be considered since New Zealand Flax ^[100] (1938) 61 CLR 179. have led to continuing elucidation of the test for deductibility and how it applies to different facts.

92. In dealing with the positive limb of the test for deductibility, it is necessary to ask whether the concession fees were outgoings incurred in, and referable to, the relevant years of income. In dealing with the negative limb of the test, it is necessary to ask whether the concession fees are an expense on capital account having regard to the advantage they secure.

93. In summary, the Commissioner contended that the Full Court erred in holding that the concession fees represented outgoings which had been incurred in gaining or producing the taxpayer ' s assessable income in the respective years of income.

94. Alternatively, it was contended the Full Court should have held that if the concession fees were incurred in each of the years of income, they were incurred only to an extent to be ascertained by straight line apportionment over the concession period.

95. In the further alternative, it was contended that the net present value of the liability to pay the concession fees should be used to calculate allowable deductions. The Commissioner applied for leave to amend the grounds of appeal to raise this point. This was opposed, particularly as the Commissioner had

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not raised the point at trial (or in the Full Court) and, accordingly, there was no evidence of the full implications of adopting that accounting practice ^[101] cf Coles Myer Finance Ltd v Federal Commissioner of Taxation (1993) 176 CLR 640 . . Leave to amend was refused. Present value discounting of outgoings, payable in the future, is currently under consideration, together with other methods for assessment and deduction, spread over the life of certain financial arrangements ^[102] Australia, House of Representatives, Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2006, Exposure Draft, December 2005. . However, the accounting basis used to date in Australian tax law for the purposes of assessment and deductions has been historical cost accounting, rather than economic equivalents ^[103] Burrill v Commissioner of Taxation (1996) 67 FCR 519 at 524 per Jenkinson, Olney and Sundberg JJ. See also J Rowe & Son Pty Ltd v Federal Commissioner of Taxation (1971) 124 CLR 421 at 448-449 per Menzies J; Federal Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199 at 216-217 per Mason ACJ, Wilson, Brennan, Deane and Dawson JJ; Federal Commissioner of Taxation v Orica Ltd (1998) 194 CLR 500 at 531-532 [ 72 ] per Gaudron, McHugh, Kirby and Hayne JJ. .

96. Further, the Commissioner submitted that the Full Court, having held that the relevant outgoings had been incurred, erred in holding that the outgoings were on revenue account and that it should have held that each concession fee was an outgoing of a capital nature.

97. In brief, the respondent contended that each of the concession fees was an outgoing incurred in gaining or producing its assessable income. The basis of this argument was that the respondent was definitively committed to make payment of those concession fees as liability arose, and that they were referable to the relevant years of income. It was submitted that the Commissioner ' s claim for some apportionment in any deduction ran counter to established jurisprudence in respect of the sections. It was also submitted that in all the circumstances, the concession fees had the indicia of an outgoing on revenue account, rather than an outgoing of a capital nature.

98. The result in this matter is " peculiarly dependent upon the particular facts and circumstances " ^[104] Cliffs International Inc v Federal Commissioner of Taxation (1979) 142 CLR 140 at 148 per Barwick CJ. of the concession agreement. Brief reference to certain Project Documents must be made to understand the context and the commercial and legal features ^[105] Coles Myer Finance Ltd v Federal Commissioner of Taxation (1993) 176 CLR 640 at 660-661 per Mason CJ, Brennan, Dawson, Toohey and Gaudron JJ and 672-673 per Deane J. of the concession fees.

99. The primary determinants for the commercial arrangements for the Project, as embodied in the relevant Project Documents (including the Concession Deed), are the allocation of risk and the provision of finance primarily by loans, to be repaid out of revenues produced by the Project during the period of the concession.

The Concession Deed

100. The Concession Deed provided for the grant of certain rights during the concession period which commenced on 4 March 1996 and continued until " the date which is 33 years and 6 months after the Link Expected Completion Date " ( " the Expiry Date " ). The " Link Expected Completion Date " was 14 July 2000, so the concession period is due to continue until early 2034. While the fees accrued semi-annually, as explained in more detail below, the respondent was able to defer payment until some time before this date in 2034. However, the concession period could be ended earlier than the stated Expiry Date, or be extended, pursuant to cl 1 of the Concession Deed.

101. Clause 2.8(a) of the Concession Deed specified the rights granted by the State to the respondent as the rights to:

• " (i) design;
• (ii) construct;
• (iii) Commission;
• (iv) operate;
• (v) impose and collect a toll for the use of Vehicles (within the meaning of the Toll Calculation Schedule) on;
• (vi) maintain and repair; and
• (vii) raise revenues from other lawful uses of the Link approved by the State under clause 9.4(c) and (d) in respect of,

• the Link until the end of the Concession Period, subject to and upon the terms of this Deed. "

102. Clause 3.1(a)(i) of the Concession Deed provided:

" The [ respondent ] 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. "

103. 

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Clauses 3.1(a)(ii) and (iii) are expressed in similar terms to cl 3.1(a)(i) and provided for fees payable in equal instalments semi-annually in arrears of $ 45.2m per annum for years 26 to 34 of the scheduled operations, and of $ 1m per annum from the 35th year of the scheduled operations, if extended to this time.

104. Under the Concession Deed, only the respondent had the right to impose tolls upon the roads built as a part of the Project. No tolling of the Project roads occurred during the 1996, 1997 and 1998 years of income, as their construction was still in progress. Nonetheless, the concession fees were payable by the respondent to the State during both the construction and the operation phases of the concession period.

105. If the deductions claimed are allowed, they will reduce to nil the respondent ' s taxable income under assessment for the relevant years of income ^[106] (2004) 135 FCR 356 at 360 [ 5 ] per Merkel J. .

106. The concession fee arrangements refer to a base concession fee determined by a " Base Case Financial Model " , formulated in respect of projected traffic flows and tolling, as well as referring to the potential for a higher rate of return to the State by way of additional concession fees if the assumed projections are exceeded ^[107] Clause 3.1(d) of the Concession Deed. . Under the Concession Deed, the respondent might, at its option, satisfy the obligation to pay the base concession fees by issuing to the State " Concession Notes " ^[108] As defined in cl 1.1 of the Concession Deed, as amended by a later Deed amending the Concession Deed dated 20 February 1996, in cl 3.1 and dealt with in cl 18.5 of the Master Security Deed. . All outstanding Concession Notes are redeemable by the State within the concession period. Concession Notes can be factored, and are transferable. They do not bear interest and are not supported by letters of credit.

107. The respondent issued Concession Notes to the State for the base concession fees payable for the years of income ended 30 June 1996, 1997 and 1998. In the Base Case Financial Model it was anticipated, or assumed, that the State would commence redemption of the Concession Notes in the year 2013, and that this would continue until the end of the concession period.

108. Part 3 of each Concession Note provided that certain conditions precedent must be met before presentation of the Concession Note for payment. These were:

• " (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 [ respondent ] under the Concession Notes, and of the amount payable under this 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. "

109. Part 4 of each Concession Note provided that for so long as Project Debt was owing any payment to be made under the Concession Note was " owing " but " shall not be due for payment " .

110. In addition to the concession fees, the respondent was also obliged to pay rent to the State for the use of the relevant land upon which the roads and infrastructure were to be built ^[109] See cl 3.1(b) of the Concession Deed; however, the rent was set at an amount which would not provide a normal economic return for the use of that property. . Further, certain other amounts were payable to the State by the respondent, where the State incurred costs; these were included, as explained shortly, as a part of defined " State ' s Priority Obligations " .

The Master Security Deed

111. It was agreed that the terms of the Concession Deed prevailed over all other Project Documents, except the Master Security Deed. The Master Security Deed was signed ten days after the Concession Deed on 30 October 1995 by the State, the respondent, the Trustee, the agent of the lenders to the Project (Australia and New Zealand Banking Group Limited), and the Security Trustee (ANZ Capel Court Limited).

112. The Master Security Deed operated so that the order of priority of payments as between the lenders and the State was as follows: first, obligations defined as the " State ' s Priority Obligations " were to be met; then the lenders ' " Project Debt " (defined in the Concession Deed so as to encompass money owed under the lending documents); followed by the other amounts owed to the State which included the concession fees and Concession Notes; and then finally any other securities.

113. The amended form of cl 1.9 of the Master Security Deed stated:

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ATC 4423

" 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 [ respondent ] 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 [ respondent ] 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. "

114. It can be noted that this provision is reflected in Part 4 of each of the Concession Notes as described above.

The Security Trust Deed

115. The Security Trust Deed established a number of accounts, including the special purpose Distributions Account referred to in cl 1.9 of the Master Security Deed, from which the entitlements of the State and the equity holders were to be paid ^[110] Clause 15 of the Security Trust Deed, referring to the “ Borrower ’ s Distributions Account ” and the “ Guarantor ’ s Distributions Account ” , each encompassed by the definition of “ Distributions Account ” in cl 1.1. .

116. The Security Trust Deed operated so that all the revenues of the Project were channelled through this framework of accounts, which was effectively controlled by the agent for the lenders. Clause 1.9 of the Master Security Deed had the effect that payments from the relevant Distributions Account could be made to the State only when the Project Debt owing to the lenders had been satisfied, and when there was sufficient money available to meet the payment of a Concession Note in full.

117. The respondent ' s ability to issue Concession Notes subordinated the payment of the concession fees to Project Debt owed to the lenders. This gave effect to the priorities dictated by the Project ' s commercial lending arrangements. The system of accounts described above, referred to in the hearing as " the waterfall of accounts " , ensured conformity between the parties ' contractual obligations and the subordination arrangements.

118. Further details of the Project are contained in the reasons of the trial judge ^[111] (2004) 135 FCR 356 at 361ff. and in the reasons of the Full Court of the Federal Court ^[112] (2004) 141 FCR 69 at 71ff. .

The decisions below

119. The trial judge determined that the respondent had incurred an outgoing in respect of the concession fees in the years of income because the liability in each of those years of income arose unconditionally under cl 3.1 of the Concession Deed and was satisfied when the respondent elected to issue Concession Notes giving rise to a present liability to pay the amounts in the future ^[113] (2004) 135 FCR 356 at 378 [ 75 ] . . His Honour also found that the fees were referable to the period in respect of which the liability for the fees was incurred. However, his Honour went on to find that the concession fees were outgoings of a capital nature rather than on revenue account ^[114] (2004) 135 FCR 356 at 408 [ 190 ] . .

120. The Full Court agreed with the trial judge ' s findings that the respondent had incurred an outgoing, namely the concession fees, in the years of income and that they were referable to those years ^[115] (2004) 141 FCR 69 at 81 [ 31 ] and 82 [ 37 ] . . However, the Full Court went on to find that the concession fees were payable for the right to conduct the business operations of the respondent in respect of the Project during the concession period ^[116] (2004) 141 FCR 69 at 85 [ 50 ] . . The Full Court then concluded that the concession fees were characterised properly as an outgoing on revenue account rather than as an outgoing of a capital nature ^[117] (2004) 141 FCR 69 at 92-93 [ 70 ] . . In my opinion, the Full Court was correct in the conclusions reached and in the orders which it made.

121. The commercial arrangements embodied in the relevant Project Documents are that the respondent encountered a liability for, and was definitely committed to, the payment of each concession fee as it became due, in each of the years of income. The terms concerning the time at which those liabilities are to be discharged do not affect the respondent ' s liability for concession fees in the years of income, nor do they render that liability, in any realistic or practical sense, contingent or uncertain. The subordination of the respondent ' s debt and the conditions precedent

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to commencement of the discharge of that debt were driven by the State ' s desire to have publicly accessible infrastructure for the Victorian community, without incurring new public sector debt, and not by any desire of the respondent ' s to avoid or postpone its liability to taxation. Each of the questions raised needs to be considered in more detail.

Were the concession fees incurred in the years of income?

122. New Zealand Flax ^[118] (1938) 61 CLR 179. concerned the deductibility of interest payments payable in the future. In considering the test for deductibility, Dixon J said ^[119] (1938) 61 CLR 179 at 207. :

" 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 or expenditure which is no more than impending, threatened, or expected. "

It has long been recognised that an outgoing may be " incurred " , but not " discharged " ^[120] Federal Commissioner of Taxation v James Flood Pty Ltd (1953) 88 CLR 492 at 506-507; Coles Myer Finance Ltd v Federal Commissioner of Taxation (1993) 176 CLR 640 . , in the relevant year of income. In
Federal Commissioner of Taxation v James Flood Pty Ltd ^[121] (1953) 88 CLR 492. Dixon CJ, Webb, Fullagar, Kitto and Taylor JJ considered commercial and accounting practice and the test for deductibility and said of s 51(1) ^[122] (1953) 88 CLR 492 at 506. :

" The word ' outgoing ' might suggest that there must be an actual disbursement. But partly because such an interpretation would produce very strange and anomalous results, and partly because of the use of the word ' incurred ' , the provision has been interpreted to cover outgoings to which the taxpayer is definitively committed in the year of income although there has been no actual disbursement. " (emphasis added)

The Court went on to say " outgoings " could only have been " incurred " if " in the course of gaining or producing the assessable income or carrying on the business, the taxpayer has completely subjected himself to them " ^[123] (1953) 88 CLR 492 at 506 (emphasis added). .

123. In
Nilsen Development Laboratories Pty Ltd v Federal Commissioner of Taxation ^[124] (1981) 144 CLR 616. , Barwick CJ said a liability could only be treated as having been " incurred " within the meaning of s 51(1) if it had " ' come home ' in the year of income " ^[125] (1981) 144 CLR 616 at 623. , yet his Honour recognised that a liability could be qualified as a deduction if it falls due in the year of income, but may be paid later ^[126] (1981) 144 CLR 616 at 624. .

124. In
Coles Myer Finance Ltd v Federal Commissioner of Taxation ^[127] (1993) 176 CLR 640. Deane J, agreeing with the majority ^[128] Mason CJ, Brennan, Dawson, Toohey and Gaudron JJ. , stated ^[129] (1993) 176 CLR 640 at 670. :

" [ T ] he 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 and that the obligation to pay it is theoretically defeasible or contingent in that it is subject to a condition which remains unfulfilled. " (footnotes omitted)

125. Deane J considered that the critical question was whether the taxpayer was, as a practical matter, definitively committed or completely subjected to discharge of the liability in the future ^[130] (1993) 176 CLR 640 at 670-671. . His Honour recognised that on some facts it would be apparent that a condition giving rise to a theoretical contingency could be treated, for practical purposes, as certain to be satisfied ^[131] (1993) 176 CLR 640 at 671-672. .

126. A Full Court of the Federal Court in
Federal Commissioner of Taxation v Australian Guarantee Corporation Ltd ^[132] (1984) 2 FCR 483. held that a liability in respect of interest on debentures to be paid (or credited) on maturity or earlier redemption was incurred in the year of income in which the taxpayer subjected itself to the liability to pay the interest, although actual payment was to occur at some uncertain time in the future.

127. It was against these examples of the application of the test for deductibility, and such propositions of general application as can be derived from those authorities, that the deductibility of the concession fees fell to be assessed. Hill J essayed a synthesis of these authorities in
Ogilvy and Mather Pty Ltd v Federal Commissioner of Taxation ^[133] (1990) 95 ALR 663 at 700-701. , which was relied upon by the Full Court below ^[134] (2004) 141 FCR 69 at 79-80 [ 28 ] . . The synthesis demonstrated that accruals based tax accounting and the jurisprudence in respect of the test for deductibility could not always be

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reconciled with a commercial or accounting approach.

128. The Commissioner submitted that the concession fees were not incurred within the meaning of the sections, because payment was not possible until cl 1.9 of the Master Security Deed and the conditions in Parts 3 and 4 of the Concession Notes were satisfied, none of which conditions had in fact been satisfied in the relevant years of income.

129. The Commissioner submitted that the effect of Part 3 of the Concession Notes and cl 1.9 of the Master Security Deed (reflected in Part 4 of the Concession Notes) is to render the liability of the respondent to the State contingent. It was argued that the practical effect of both sets of conditions was that the State ' s entitlement to demand payment depended on traffic levels, revenue and available cash flow. It was conceded that the concession fees were intended and meant to be paid, but it was argued that the conditions imposed on payment took the concession fees outside the scope of the sections because any loss or outgoing could at best only be " impending, threatened, or expected " ^[135] New Zealand Flax (1938) 61 CLR 179 at 207 per Dixon J. and that liability for concession fees had not " come home " ^[136] Nilsen Development Laboratories Pty Ltd v Federal Commissioner of Taxation (1981) 144 CLR 616 at 623. in the years of income.

130. The respondent characterised the terms of cl 1.9 of the Master Security Deed as subordinating the payment of the concession fees to the payment of the Project Debt owed to the lenders. The respondent identified the essential terms as providing that for so long as any Project Debt is owing any payment to be made by the respondent or the Trustee to the State shall be owing to the State, but shall not be due for payment until the relevant criterion is satisfied. It was submitted that this clause expressly confirms the existence of a liability which shall be owing, but that it alters the sequence in which payments would be made. The respondent contended that its promise to pay the State in accordance with the sequence of subordination, and to discharge preferentially liabilities to secured creditors, did not interfere with or diminish the certainty of its commitment to pay the concession fees.

131. Whilst there were no funds representing reserves allowing for future payment of concession fees, the accounts of the respondent refer to:

• " k) Non Interest Bearing Long Term Debt

• Non interest bearing long term debt represented by the Concession Notes has been included in the financial statements at the present value of expected future repayments. The present value of expected future repayments is determined using a discount rate applicable to the [ respondent ' s ] other borrowing arrangements. The present value of expected future repayments will be reassessed periodically. "

132. The financial statements of the respondent also contain a section headed " Non-Current Liabilities " which is broken down to include " Borrowings - Non Current " . An entry for " Concession fee [ s ] " is also recorded, as well as an entry accounting for the " Revaluation of Concession Note [ s ] " .

133. In confirming the approach of the trial judge, the Full Court found that the respondent had completely subjected and definitively committed itself to paying the amount of the concession fees which accrued in each of the relevant years of income, and that the condition in cl 1.9 of the Master Security Deed that there be adequate funds in the Distributions Account did not lead to the conclusion that the liability to pay was not " incurred " within the meaning of the sections ^[137] (2004) 141 FCR 69 at 81 [ 31 ] . . The Full Court went on to find that, in any event, the Concession Notes operated to satisfy the respondent ' s liability under the concession fees in the relevant years of income since the State could sue on the notes themselves ^[138] (2004) 141 FCR 69 at 81 [ 32 ] . .

134. The conclusion will be reached here that the concession fees were incurred in the years of income. On a semi-annual basis, the respondent was subjected to a contractual liability to pay the concession fees. The liability arose as and when each concession fee became due. That is when the outgoing was encountered or run into ^[139] New Zealand Flax (1938) 61 CLR 179 at 207 per Dixon J. . These facts exemplify a situation where a liability is " incurred " in the year of income but not " discharged " in that same year ^[140] Federal Commissioner of Taxation v James Flood Pty Ltd (1953) 88 CLR 492 at 506-507; Coles Myer Finance Ltd v Federal Commissioner of Taxation (1993) 176 CLR 640 . . The circumstances are distinguishable from those in
Nilsen Development Laboratories Pty Ltd v Federal Commissioner of Taxation ^[141] (1981) 144 CLR 616. and
Emu Bay Railway Co Ltd v Federal Commissioner of Taxation ^[142] (1944) 71 CLR 596. . In Emu Bay interest on debenture stock was only payable, in respect of any year, if a certain amount of net

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income was achieved. No debt or liability could arise in years when no net income was earned. Accordingly, no liability to make any outgoing had come into existence ^[143] (1944) 71 CLR 596 at 606 per Latham CJ. in the relevant year of income. Clause 1.9 of the Master Security Deed is directed at conditions precedent to the timing of the discharge of the liability, not to the coming into existence of the liability. Here the liability comes into existence in the year of income. The deferral of the time for its discharge cannot alter this conclusion, nor can the length of time of the deferral ^[144] Federal Commissioner of Taxation v Australian Guarantee Corporation Ltd (1984) 2 FCR 483 . .

135. An agreement, as here, between secured creditors to subordinate the rights of one to the other, does not alter the purposive character of a debt ^[145] Federal Commissioner of Taxation v The Midland Railway Co of Western Australia Ltd (1952) 85 CLR 306 at 318 per Dixon J. , nor does it render the liability, in respect of the debt, a liability which is merely impending, threatened, or expected ^[146] New Zealand Flax (1938) 61 CLR 179 at 207 per Dixon J. . The Concession Notes are a mechanism which satisfies the liability, but the liability is a contractual obligation irrespective of that mechanism.

136. The respondent ' s obligation to discharge the debt is not conditional on the commercial operating risks of the Project. Those risks do no more than affect the date on which the discharge of the liability begins and the speed with which it is discharged. The Concession Notes had to be paid no later than a certain date, namely 33 years and 6 months after July 2000 ^[147] See Part 3(a) of the Concession Notes. . They may be paid earlier if certain conditions are satisfied. If the last possible date for payment was extended, there would still be an equally certain date for payment. A liability can be encountered in the year of income without the taxpayer knowing the precise date for satisfaction of the liability ^[148] Federal Commissioner of Taxation v Australian Guarantee Corporation Ltd (1984) 2 FCR 483 . . The only sense in which it could be said the liability on the Concession Notes is contingent is in the abstract sense that all events in the future are conditional or contingent ^[149] Commonwealth Aluminium Corporation Ltd v Federal Commissioner of Taxation (1977) 32 FLR 210 at 224 per Newton J. .

137. In the relevant years of income, the respondent was definitively committed and had completely subjected itself to the losses or outgoings which the concession fees represent. A condition affecting the timing of the discharge of a liability (but not the creation of the liability) does not render the liability contingent in any business or commercial sense ^[150] Federal Commissioner of Taxation v Australian Guarantee Corporation Ltd (1984) 2 FCR 483 . .

Were the concession fees referable to the years of income?

138. In a joint judgment in Coles Myer ^[151] (1993) 176 CLR 640 at 663 per Mason CJ, Brennan, Dawson, Toohey and Gaudron JJ. , it is stated:

" 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. " (footnote omitted)

139. The Commissioner submitted that the concession fees represented a future expense of the respondent ' s business operations because their payment fell to be met out of future assessable income. It was urged that the approach was consistent with observations made by Dixon J in
Commissioner of Taxation (NSW) v Ash ^[152] (1938) 61 CLR 263 at 282. to the effect that it conforms to business principles to match expenses and revenue. The Commissioner also contended that only so much of the concession fees should be referable to the relevant years of income as is calculated to give a substantially " correct reflex " ^[153] Commissioner of Taxes (SA) v Executor Trustee and Agency Co of South Australia Ltd (1938) 63 CLR 108 at 154 per Dixon J. of the respondent ' s income. The respondent submitted that the criterion of referability is the advantage secured by the liability in question, not the source of funds from which the liability will be discharged.

140. At trial and before the Full Court, it was found that the concession fees were the consideration for the respondent ' s entitlement to establish and operate the roads system. It was this entitlement which enabled the respondent to derive its assessable income during the relevant income years. Accordingly, there was no connection between each of the concession fees and the income expected to be derived in later years ^[154] (2004) 135 FCR 356 at 380 [ 81 ] ; (2004) 141 FCR 69 at 82 [ 37 ] . .

141. Clause 3.1 of the Concession Deed stipulates that each concession fee is an annual liability payable semi-annually. For periods less than six months, the amount of the fee is adjusted pro rata. The amount of the liability for concession fees corresponds precisely to the period to which a concession fee relates. Furthermore, while the concession fees represent a base fee, the additional concession fees ^[155] Provided for in cl 3.1(d) of the Concession Deed. were calculated on the basis of additional revenue which was generated within the particular period.

142. These particular aspects of the concession fee arrangements make it clear that the advantages or gains referable to each

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concession fee " come home " ^[156] Nilsen Development Laboratories Pty Ltd v Federal Commissioner of Taxation (1981) 144 CLR 616 at 623 per Barwick CJ. in the relevant income years.

143. In any event, the legislation does not require that the purposes of an outgoing be the gaining or production of income in the year in which the outgoing is claimed as a deduction ^[157] Amalgamated Zinc (De Bavay ’ s) Ltd v Federal Commissioner of Taxation (1935) 54 CLR 295 at 303 per Latham CJ, 306-307 per Starke J and 309 per Dixon J; Ronpibon Tin NL and Tongkah Compound NL v Federal Commissioner of Taxation (1949) 78 CLR 47 at 57 per Latham CJ, Rich, Dixon, McTiernan and Webb JJ; Commissioner of Taxation v Finn (1961) 106 CLR 60 at 68 per Dixon CJ; Federal Commissioner of Taxation v Smith (1981) 147 CLR 578 at 585 per Gibbs CJ, Stephen, Mason and Wilson JJ. . Concession agreements are sufficiently familiar not to require exploration by analogy. They are essentially licence agreements to use capital assets for the limited period of the concession. Here the capital assets of the Link are to be " surrendered " by the respondent to the State at the expiry of the concession period ^[158] Australia, House of Representatives, Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2006, Exposure Draft, December 2005; and cl 3.4 of the Concession Deed. .

Apportionment

144. The Commissioner ' s alternative submission was that if the concession fee is incurred every year, the nominal amount of each concession fee should be spread over, or attributed to, the income years from the date when each fee was incurred until the date upon which it would fall due for payment.

145. The Commissioner accepted that, in general, deductions ought to be allowable at the face value of the loss or outgoing rather than at the discounted present value ^[159] Armco (Australia) Pty Ltd v Federal Commissioner of Taxation (1948) 76 CLR 584 at 618 per Dixon J. . However, in reliance on Coles Myer ^[160] (1993) 176 CLR 640 at 661, 663 and 665-666 per Mason CJ, Brennan, Dawson, Toohey and Gaudron JJ and 673 per Deane J. , it was contended that the principle to be generally applied is not inconsistent with apportioning the face amount of an outgoing which is incurred over a number of years.

146. The facts here are distinguishable from Coles Myer ^[161] (1993) 176 CLR 640. , which concerned outgoings referable to an advantage spread over two years. The semi-annual liability for concession fees here does not secure the respondent ' s rights under the Concession Deed for future years. Each concession fee, like any periodic licence fee, is payable for its period. Other concession fees become due in each successive year. Accordingly, straight line apportionment is not an appropriate accounting basis for calculating the deductibility of the concession fees.

Were the concession fees on capital account having regard to the advantage they secured?

147. The starting point is the statement of Dixon J in
Sun Newspapers Ltd and Associated Newspapers Ltd v Federal Commissioner of Taxation ^[162] (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. "

148. The characterisation of an outgoing depends on what it " is calculated to effect " , to be judged from " a practical and business point of view " ^[163] Hallstroms Pty Ltd v Federal Commissioner of Taxation (1946) 72 CLR 634 at 648 per Dixon J. . The character of the advantage sought by the making of the expenditure is critical ^[164] GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124 at 137 per Brennan, Dawson, Toohey, Gaudron and McHugh JJ. .

149. The trial judge found that the concession fees were referable to " advantages enuring to capital " ^[165] (2004) 135 FCR 356 at 405 [ 175 ] . (in a form other than the provision of financial capital) and " akin to sharing profit " ^[166] (2004) 135 FCR 356 at 407 [ 182 ] . , with the State as a joint venturer being paid a dividend. As an alternative finding, the trial judge held that the concession fees were of a capital nature because they were properly characterised as outgoings expended " on the structure within which the profits were to be earned " , and not outgoings expended in gaining or producing the respondent ' s assessable income as a " part of the money earning process " ^[167] (2004) 135 FCR 356 at 389 [ 112 ] and 409 [ 191 ] . .

150. The trial judge also characterised the concession fee arrangements as analogous to a large lump sum fee payable in instalments, placing an emphasis on the total rights acquired by the respondent to design, construct and establish the roads and toll business ^[168] (2004) 135 FCR 356 at 405 [ 173 ] . .

151. The Full Court recognised the danger in arguing by analogy ^[169] (2004) 141 FCR 69 at 92 [ 67 ] . because the arrangements here are sui generis commercial arrangements specific to infrastructure projects. The Full Court also found the concession fees were a periodical and recurrent expense of conducting the respondent ' s business operations rather than an expense to acquire a profit-making enterprise ^[170] (2004) 141 FCR 69 at 93 [ 70 ] . .

152. The Commissioner contended that even if the concession fees were incurred in the years of income and were properly referable to those years of income, they were not deductible because they were capital in nature. The concession rights in cl 2.8 of the Concession

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Deed were characterised by the Commissioner as a bundle of rights necessary to establish a profit-yielding structure. Any analogy with lease payments was rejected.

153. Having regard to the criteria set out by Dixon J in Sun Newspapers ^[171] (1938) 61 CLR 337 at 363. , the respondent submitted that the concession fees do not secure for the respondent any enduring asset in terms of the roads built; rather, the grant of the concession resulted in the acquisition of the right to build, operate and earn a profit from the tolls charged for the use of those roads for the duration of the concession period.

154. 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 ^[172] cf Cliffs International Inc v Federal Commissioner of Taxation (1979) 142 CLR 140 . . 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.

Conclusion

155. The concession fees satisfy the test for deductibility at their full face value in respect of each of the income years in which they are claimed as deductions. The appeal should be dismissed with costs.