• 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

Judges: Gleeson CJ
Gummow J

Kirby J
Callinan J
Heydon J
Crennan J

Court:
Full High Court of Australia

MEDIA NEUTRAL CITATION: [2006] HCA 35

Judgment date: 20 July 2006

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Kirby J

4. This appeal comes from a judgment of the Full Court of the Federal Court of Australia ^[1] City Link Melbourne Ltd v Commissioner of Taxation (2004) 141 FCR 69 . . It involves questions that have provided a rich source of litigation in this Court concerning whether a claimed deduction from income tax liability arises on revenue account (and is thus prima facie deductible) or on capital account (and is thus not deductible). An additional question, if the classification on revenue account is upheld, is whether the obligation giving rise to the claimed deduction was " incurred " in the 1996 to 1998 years of income ( " the income years " ) and was " properly referable " to income which the taxpayer derived in those years.

5. The answer to these questions is to be found, ultimately, in the operation of s 51(1) of the Income Tax Assessment Act 1936 (Cth) ( " the 1936 Act " ) ^[2] Referable to the 1996 and 1997 income tax years. and s 8-1 of the Income Tax Assessment Act 1997 (Cth) ( " the 1997 Act " ) ^[3] Referable to the 1998 income tax year. . The appeal proceeded on the assumption that the respective provisions of the 1936 Act and the 1997 Act were identical in substance ^[4] (2004) 141 FCR 69 at 71 [ 2 ] . . I agree with that assumption.

The facts

6. For the most part, the facts relevant to my reasons sufficiently appear in the reasons of Crennan J ^[5] Reasons of Crennan J at [ 81 ] - [ 87 ] . . I incorporate and will not repeat them. In those reasons, her Honour describes the arrangements between Citylink Melbourne Limited (formerly known as Transurban City Link Limited) ( " Transurban " ) and the State of Victoria ( " the State " ) for the achievement of the City Link Project ( " the Project " ). She explains the contents of the Concession Deed ^[6] Reasons of Crennan J at [ 100 ] - [ 110 ] . , the issue of Concession Notes ^[7] Reasons of Crennan J at [ 107 ] - [ 110 ] . , the controlling operation of the Master Security Deed ^[8] Reasons of Crennan J at [ 111 ] - [ 114 ] . and the terms of the Security Trust Deed ^[9] Reasons of Crennan J at [ 115 ] - [ 118 ] . . I will not needlessly restate any of this material. I gratefully accept these descriptions. The facts at trial were complex. As Crennan J ' s reasons indicate, further details of the Project, to elaborate the relationship and arrangements between Transurban and the State, may be found in the reasons of the primary judge and of the Full Court ^[10] Reasons of Crennan J at [ 118 ] . See Transurban City Link Ltd v Commissioner of Taxation (2004) 135 FCR 356 at 361ff; (2004) 141 FCR 69 at 71ff. .

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The proceedings in the Federal Court

7. Before the primary judge : The primary judge ^[11] (2004) 135 FCR 356. (Merkel J), whose orders were reversed by unanimous decision of the Full Court of the Federal Court of Australia ^[12] (2004) 141 FCR 69 per Hill, Stone and Allsop JJ. , concluded that Transurban incurred a loss or outgoing in respect of the concession fees because the liability in respect of them arose unconditionally ^[13] Under the Concession Deed, cl 3.1. , and was satisfied by Transurban ' s electing to issue the Concession Notes, under which there was a present liability to pay the amounts due at a future time ^[14] (2004) 135 FCR 356 at 378 [ 75 ] . . The primary judge also concluded that the fees were " referable to the period in respect of which the liability for the fees is incurred " ^[15] (2004) 135 FCR 356 at 380 [ 81 ] . . However, he reached these conclusions notwithstanding an intuitive opinion, which he expressed, as to their artificiality and unreality. Indeed, he suggested that such an outcome could normally only be expected in " a taxpayers ' heaven " ^[16] (2004) 135 FCR 356 at 381 [ 84 ] . .

8. Despite the foregoing findings, the primary judge held that the concession fees were not deductible because they were akin to a promised share of profits or payment of a dividend to the State in return for the advantage flowing to capital which the State had contributed to the Project ^[17] (2004) 135 FCR 356 at 408 [ 188 ] - [ 189 ] . . The concession fees were thus outgoings expended " on the structure within which the profits were to be earned " . They were not " part of the money earning process " ^[18] (2004) 135 FCR 356 at 409 [ 191 ] citing BP Australia Ltd v Federal Commissioner of Taxation (1965) 112 CLR 386 at 398, 403-404; [ 1966 ] AC 224 at 266, 271. . They were outgoings on capital and not on revenue account ^[19] (2004) 135 FCR 356 at 409 [ 191 ] . .

9. It was on this basis that the primary judge rejected Transurban ' s " appeal " to the Federal Court against what it claimed was the erroneous decision of the Commissioner of Taxation ( " the Commissioner " ) disallowing Transurban ' s objection to the Commissioner ' s disallowance of deductions claimed by Transurban in respect of concession fees for the income years.

10. In the Full Court : In allowing Transurban ' s appeal, the Full Court found that Transurban had incurred the concession fees in the income years although they were years during which the tollway was still under construction and therefore not generating (as it later did) substantial revenues from vehicular tolls. Moreover, the Full Court found that the concession fees were referable to the income years and that the State and Transurban were not joint venturers and did not, in any legal sense, share profits ^[20] (2004) 141 FCR 69 at 85 [ 50 ] . . Finally, the Full Court concluded that the concession fees were payable for use and operation of, or the right to conduct, the Project. They were therefore a cost of conducting the business operation rather than a cost of acquiring a profit-making enterprise ^[21] (2004) 141 FCR 69 at 92-93 [ 70 ] . . On this footing, the Full Court rejected the primary judge ' s conclusion that the concession fees were outgoings on capital account.

11. By special leave, this appeal is now brought to this Court to permit the Commissioner to propound his arguments defensive of the orders made by the primary judge.

The applicable legislation

12. Primacy of the legislation : Problems of income tax law, such as the present, cannot be resolved by generalities. In each case, it is the duty of the decision-maker to apply the relevant legislation to the facts as found. Income tax law is not a mystery unto itself, to be preserved separate from other parliamentary law as a legal canon reserved to a specialised priestly caste ^[22] Federal Commissioner of Taxation v Ryan (2000) 201 CLR 109 at 146 [ 84 ] ; cf Steele v Deputy Federal Commissioner of Taxation (1999) 197 CLR 459 at 477 [ 52 ] . . It is a law enacted by the Federal Parliament and, in its new form especially, it is intended to be generally understood by taxpayers, most of whom do not have ready access to countless decisions, many of them contradictory, written on the legislation these past seventy years.

13. In deriving the meaning and application of income tax law, as in other areas of the written law, wisdom lies in maintaining fidelity to the statutory text and the purpose of the legislation as found in its language and elucidated by authority and admissible material ^[23] Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 at 381-382 [ 69 ] - [ 71 ] . . This has been a constant, and unanimous, theme of decisions of this Court, in many fields, in recent years ^[24] See, eg, Roy Morgan Research Centre Pty Ltd v Commissioner of State Revenue (Vict) (2001) 207 CLR 72 at 77 [ 9 ] , 89 [ 46 ] ; Trust Company of Australia Ltd v Commissioner of State Revenue (2003) 77 ALJR 1019 at 1033 [ 92 ] ; 197 ALR 297 at 316; Federal Commissioner of Taxation v Linter Textiles Australia Ltd (in liq) (2005) 220 CLR 592 at 649-650 [ 181 ] ; Commissioner of Taxation v Stone (2005) 79 ALJR 956 at 969 [ 79 ] ; 215 ALR 61 at 78-79; R v Lavender (2005) 79 ALJR 1337 at 1357 [ 107 ] ; 218 ALR 521 at 548; Combet v Commonwealth (2005) 80 ALJR 247 at 280 [ 135 ] ; 221 ALR 621 at 660; Neindorf v Junkovic (2005) 80 ALJR 341 at 350-351 [ 42 ] ; 222 ALR 631 at 641; Weiss v The Queen (2005) 80 ALJR 444 at 452 [ 31 ] ; 223 ALR 662 at 671. . Where the outcome is governed by legislation, the starting point is always the legislative text. Income tax law is no different. We sit here to apply the legislation, not judicial approximations of it.

14. The legislation : The applicable legislation, in its successive forms in the 1936 Act and the 1997 Act, is set out in Crennan J ' s reasons ^[25] Reasons of Crennan J at [ 88 ] - [ 99 ] . . It is unnecessary for me to repeat the provisions. Effectively, both enactments allow the taxpayer to deduct from its assessable income any losses or outgoings to the extent that (relevantly) they were necessarily incurred in carrying on a business for the purpose of gaining or producing its assessable income. No such loss or outgoing may be deducted if

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(relevantly) it is a loss or outgoing of capital, or of a capital nature ^[26] See Steele (1999) 197 CLR 459 at 466-472 [ 19 ] - [ 35 ] , 480-487 [ 64 ] - [ 78 ] . . Here are the two sides of the legislative coin. In the case of the income of a business (such as Transurban) the statutes envisage a division of the world between losses or outgoings on revenue account and on capital account. In the case of revenue account, the deduction is available only to the extent that it is " incurred " in " gaining or producing … assessable income " or " necessarily incurred " in " carrying on a business for the purpose of gaining or producing " assessable income. The statutory language is relatively simple. It is expressed in ordinary, not technical, language. Courts should not burden it with undue elaboration. I say this whilst acknowledging that the application of the legislation will often require explanation and justification so as to make its meaning clear and to ensure a consistency and accuracy of approach ^[27] See, eg, Ronpibon Tin NL and Tongkah Compound NL v Federal Commissioner of Taxation (1949) 78 CLR 47 at 55; cf Steele (1999) 197 CLR 459 at 481 [ 67 ] . .

15. From the remarks of successive judges, explaining the application of the legislation to particular facts, have come observations that have sometimes hardened into supposedly fixed rules ^[28] cf Teo, “ ‘ Australia ’ s Largest Tax Case ’ Revisited: A Nail in the Coffin for the Objective Approach to Determining the Deductibility of Expenses? ” , (2005) 8 Journal of Australian Taxation 328 at 330-331. . Every now and again, it is necessary to pause and return to the legislation itself so as to ensure that decision-makers are applying its provisions as enacted by the Parliament. This is especially necessary where, as here, there are very complex commercial arrangements involving novel transactions for a major public-private infrastructure project.

The issues

16. The issues arising in this appeal are foreshadowed in the foregoing observations. Logically, the first question is whether Transurban ' s liability for the concession fees constituted outgoings on capital, rather than revenue, account. If this is so, that is the end of Transurban ' s entitlement to claim a deduction in respect of those fees. Further issues do not then arise. If, however, the fees are judged to be on revenue account, other, subsidiary questions arise.

17. The issues presented for decision are thus:

• (1) The capital characterisation issue : Are the concession fees outgoings incurred in the performance of a promise given by Transurban as consideration for the acquisition of a capital asset, namely, the grant of the concession for the Project ( " the Concession " )? Are there circumstances where such payments are not of a capital nature, given the object and purpose for which the payments are made?
• (2) The incurring of the obligation issue : If the first issue is determined against the Commissioner and the concession fees are characterised as being on revenue account, where the contract provides that an obligation may be satisfied by the issue of Concession Notes which are subject to identical conditions for presentation as the conditions which allow the deferral of payment, does the issue of such Notes mean that the obligation was " incurred " in the relevant income years or at some other time?
• (3) The proper referability issue : If the first issue is determined adversely to the Commissioner and the second issue in favour of Transurban, where the outgoing is " incurred " in the income years but will not fall due for payment until some uncertain time in the future, can the full amount of the outgoing nevertheless be said to be " properly referable " to the income years, and thus deductible in respect of those years?

18. Other issues were presented at various stages in these proceedings ^[29] See reasons of Crennan J at [ 93 ] - [ 97 ] . . Some of them are arguable and important. However, I agree with Crennan J that it is enough to decide the foregoing three issues.

The propounded deduction was an outgoing on capital account

19. The applicable principles : The primary question on the first issue is whether the concession fees are outgoings on capital account. What is the principle that distinguishes payments on capital account from payments on revenue account? The statutes alone do not answer this question.

20. Judges and commentators have been complaining about the income and capital dichotomy for more than a century. In
Inland Revenue Commissioners v British Salmson Aero Engines Ltd ^[30] [ 1938 ] 2 KB 482 at 498. , Sir Wilfrid Greene MR, after a review of much authority, observed:

" There have been many cases which fall on the border-line. Indeed, in many cases it is almost true to say that the spin of a coin would decide the matter almost as

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satisfactorily as an attempt to find reasons. But that class of question is a notorious one, and has been so for many years. "

The comments of Starke J in
Hallstroms Pty Ltd v Federal Commissioner of Taxation ^[31] (1946) 72 CLR 634 at 644. See also Steele (1999) 197 CLR 459 at 482-483 [ 71 ] . were to like effect. Despite these remarks, it is useful to turn to some of the judicial explanations.

21. The distinction between capital and revenue was examined in
BP Australia Ltd v Federal Commissioner of Taxation ^[32] (1965) 112 CLR 386 at 397; [ 1966 ] AC 224 at 264-265. . There, Lord Pearce, delivering the reasons of the Privy Council in an Australian appeal involving a dispute over allowable deductions under s 51 of the 1936 Act, said:

" The solution to the problem is not to be found by any rigid test or description. It has to be derived from many aspects of the whole set of circumstances some of which may point in one direction, some in the other. One consideration may point so clearly that it dominates other and vaguer indications in the contrary direction. It is a commonsense appreciation of all the guiding features which must provide the ultimate answer. Although the categories of capital and income expenditure are distinct and easily ascertainable in obvious cases that lie far from the boundary, the line of distinction is often hard to draw in border line cases; and conflicting considerations may produce a situation where the answer turns on questions of emphasis and degree. That answer ' depends on what the expenditure is calculated to effect from a practical and business point of view, rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process ' (per Dixon J in Hallstrom ' s Case ^[33] (1946) 72 CLR 634 at 648. ). As each new case comes to be argued felicitous phrases from earlier judgments are used in argument by one side and the other. But those phrases are not the deciding factor, nor are they of unlimited application. They merely crystallize particular factors which may incline the scale in a particular case after a balance of all the considerations has been taken. "

22. In this Court, this analysis was taken a step further in
Federal Commissioner of Taxation v Energy Resources of Australia Ltd ^[34] (1996) 185 CLR 66 at 73-74 (footnotes omitted). :

" Where a taxpayer incurs loss or expense in raising funds by issuing promissory notes at a discount to their face value, its entitlement to a s 51 deduction for that loss or expense depends on the use to which the funds are to be put. If the funds are to be used as working capital, the cost of the discounts will be deductible as a revenue expense. If the funds are to be used to strengthen ' the business entity, structure, or organisation set up or established for the earning of profit ' , the cost of the discounts will generally not be deductible because they will be a capital, and not a revenue, expense. But sometimes the raising of capital may be such a recurrent event in the business life of a taxpayer that the cost of raising the capital will qualify as a revenue expense. "

23. Yet these were not new thoughts. In
Sun Newspapers Ltd and Associated Newspapers Ltd v Federal Commissioner of Taxation ^[35] (1938) 61 CLR 337 at 359. , Dixon J had observed:

" The distinction between expenditure and outgoings on revenue account and on capital account corresponds with the distinction between the business entity, structure, or organization set up or established for the earning of profit and the process by which such an organization operates to obtain regular returns by means of regular outlay, the difference between the outlay and returns representing profit or loss. "

24. Later in the same reasons, Dixon J made reference to what some would now call " guidelines " to which courts might refer in order to sharpen the foregoing distinction and to apply it to the facts of a particular case ^[36] (1938) 61 CLR 337 at 363. See also British Insulated and Helsby Cables Ltd v Atherton [ 1926 ] AC 205 at 213-214. :

" 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. "

25. Nearly a decade later, Dixon J returned to this issue. In the passage cited by the Privy Council in BP Australia , he explained that the tests for distinguishing revenue and capital

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expenditures invoke a commercial rather than a strictly legal or jurisprudential approach. In Hallstroms ^[37] (1946) 72 CLR 634 at 648. , his Honour said:

" What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view, rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process. "

26. Application to the facts : The bundle of rights appearing in cl 2.8 of the Concession Deed were granted to Transurban once and for all. Such rights were a condition of Transurban ' s being able to establish and operate the Project. The promise to pay the concession fees was made in return for the grant of that bundle of rights. The defining feature of the Project (and an essential commercial condition of its viability) was its connection, at both ends, with the existing, publicly owned freeway infrastructure ^[38] The relevant clause is set out in the reasons of Crennan J at [ 101 ] . .

27. Transurban, in this way, acquired the right to establish a profit-yielding venture. To perfect the grant of rights to Transurban, the State gave Transurban essential access to those portions of Crown land over which the tollway was to be constructed ^[39] Concession Deed, cl 4. . Transurban thereby acquired the right to place itself in a position to derive revenue for its business in the future. The advantages for which the concession fees were payable were expressed to be of a permanent and enduring character. The primary judge correctly so found ^[40] (2004) 135 FCR 356 at 405 [ 173 ] . .

28. For my approach, I would adopt the comprehensive analysis of the facts expressed by the primary judge, his application of the foregoing statements of authority as to the applicable discrimen for distinguishing payments on revenue from those on capital account and his consequent conclusion that the concession fees, by these criteria, were outgoings of a capital nature. This is what the primary judge concluded ^[41] (2004) 135 FCR 356 at 408-409 [ 191 ] (emphasis in original). :

" [ W ] hen the matters stated by Dixon J in Sun Newspapers ^[42] (1938) 61 CLR 337 at 363. are considered, the concession fees are of a capital nature. The advantages sought by the payment of the concession fees are to be characterised by reference to the services, facilities and entitlements contributed by the State. Those contributions … have lasting qualities, are of enduring benefit, are of a ' once and for all ' nature and form part of the profit yielding structure of City Link. The services, facilities and entitlements contributed by the State, when considered cumulatively, are not contributed, and are not used, relied upon or enjoyed, on a periodic or recurrent basis. Rather they, and the advantages derived from them, are to be used, relied upon, enjoyed and not derogated from throughout the term of the Concession. Finally, the means adopted to obtain the services, facilities and entitlements (ie, payment of concession fees) is not a periodic reward or outlay for the use and enjoyment of City Link for periods commensurate with the payment. Rather, payment of the fees is in fixed amounts payable at the end of the Concession Period with provision for earlier payment if certain financial conditions are satisfied. In summary, the concession fees are outgoings expended ' on the structure within which the profits were to be earned ' and were not ' part of the money earning process ' ^[43] BP Australia (1965) 112 CLR 386 at 398, 403-404; [ 1966 ] AC 224 at 266, 271. . Accordingly, it must also follow that the concession fees are outgoings on capital, rather than revenue, account ^[44] cf United Energy Ltd v Commissioner of Taxation (1997) 78 FCR 169 at 182 per Lockhart J. . "

29. The evidence shows that the advantages for which the concession fees were payable were clearly of a permanent and enduring character. Those advantages, secured by the obligation to pay the concession fees, comprised the grant of the Concession for a period of approximately 38 years. Clearly, that was a capital asset because it was the indispensable part of the profit-yielding structure of Transurban. The Concession was relied upon and enjoyed by Transurban in the building of the infrastructure and then in operating it, as intended, over the concession period. Transurban obtained the Concession by undertaking the obligations provided in the Concession Deed and in the other Project documents. Those obligations included the performance of Transurban ' s promise to build and operate the tollway and to collect tolls and other revenue and to make payments to the State, including (relevantly) the concession fees.

30. Self-evidently, Transurban acquired the Concession in order to generate profits for its

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business through the operation of the tollway. This was an important capital asset so long as the Concession operated. With respect, the Full Court erred in concluding that the concession fees were " ultimately payable " ^[45] (2004) 141 FCR 69 at 92 [ 68 ] . for the right to operate the tollway. Rather, the concession fees were payable so as to secure the right to establish the essential business structure, which was a capital asset.

31. Unsurprisingly, the Full Court felt obliged to express the extent to which the concession fees were paid for the rights to design, construct and commission the tollway. The judges in the Full Court acknowledged that such rights " may be seen to confer an advantage of an enduring kind and therefore be capital " ^[46] (2004) 141 FCR 69 at 92 [ 65 ] . . However, the Full Court ignored the significance of this conceded impression in reaching its conclusion on whether the concession fees were on income or capital account (or, perhaps, partly income and partly capital).

32. Without any supporting reasoning, the Full Court proceeded to conclude that " [ t ] he concession fee can thus be seen to be paid for the right to operate the ring road system to be constructed by Transurban and to impose and collect tolls for the use of the system by motorists in accordance with the toll schedule " ^[47] (2004) 141 FCR 69 at 92 [ 66 ] (emphasis added). . Obviously there is a missing link here in the Full Court ' s reasoning. Its use of the word " thus " was never explained or elaborated. With respect, the Full Court was also wrong to conclude that the obligation was not to be viewed as a single " concession fee " , payable in instalments, as provided. Such, in my view, was the correct characterisation of the facts. These errors justify, and require, a fresh characterisation by this Court of the concession fees in substitution for that adopted by the Full Court. Performing that re-characterisation, I prefer the analysis of the primary judge. It adheres more closely to the discrimen explained by Dixon J in Sun Newspapers and Hallstroms and to the dichotomy expressed in the legislation.

33. This conclusion is still further reinforced by the nature of the Concession that Transurban secured under its agreements with the State. It is impossible to disaggregate those rights and to divide them up. Clearly, in composite, they were undifferentiated, both in their operation and in their character. The concession fees which Transurban was bound to pay to the State were paid " in consideration of the State granting the concession rights set out in clause 2.8 " ^[48] Concession Deed, cl 3.1(a). . Those rights were to design, build and operate the tollway. They were not incurred in consideration of the right to operate the tollway separately from the other rights.

34. The recurrent concession fees payable by Transurban are thus no more than the method agreed upon by Transurban and the State for payment by Transurban for a significant capital asset indispensable to the Project. It follows that the fees constitute an outgoing of capital or of a capital nature.

35. Expenditure necessary to the Project : It is true that in
Cliffs International Inc v Federal Commissioner of Taxation ^[49] (1979) 142 CLR 140 at 148. , Barwick CJ remarked that:

" the 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 " .

36. However, Barwick CJ was dealing there with a case where the taxpayer, by its recurrent payments, " acquired nothing which it did not already have " ^[50] (1979) 142 CLR 140 at 149. . The taxpayer in that case did not make those payments for the shares in issue. By way of contrast, in the present proceedings, the concession fees were clearly paid for the acquisition of the Concession essential to the conduct of the Project.

37. The better view on this issue in Cliffs International was that stated by Gibbs J and Stephen J. In his reasons, Gibbs J ^[51] (1979) 142 CLR 140 at 153. said:

" the … payments should properly be regarded as expenditure necessary for the acquisition of property or of rights of a permanent character, the possession of which was a condition of carrying on the business … at all " .

Later, Gibbs J stated ^[52] (1979) 142 CLR 140 at 156. See also at 162 per Stephen J. :

" In my opinion, if the expenditure can be truly characterized as the payment of consideration for a capital asset or advantage, it will be of a capital nature notwithstanding that the payments are recurrent and are continued for an indefinite period. "

38. 

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This approach is also consonant with that taken by Fullagar J in
Colonial Mutual Life Assurance Society Ltd v Federal Commissioner of Taxation ^[53] (1953) 89 CLR 428 at 454. where 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. "

39. As in those cases, so in this. The payments of the concession fees formed part of the purchase price to secure an asset forming part of Transurban ' s fixed capital essential to the conduct on Crown land of the Project. As such, they were outgoings of capital or of a capital nature. The primary judge was correct to so hold.

40. No analogy to rent : The Full Court came to its conclusion that the concession fees represented outgoings on revenue account by suggesting that those fees were akin to rental payments, to be treated separately from the other elements in the Concession giving rise to Transurban ' s investment in the Project ^[54] (2004) 141 FCR 69 at 93 [ 70 ] . . In fact, an actual identified rent of $ 100 per annum was payable ^[55] (2004) 141 FCR 69 at 74 [ 12 ] . . However, the question is whether the analogy to rent, which would normally be an outgoing on revenue account, was a valid one. Certainly, it played an important part in the Full Court ' s reasoning.

41. In my respectful view, the Full Court ' s rental analogy is unpersuasive. Transurban uses the tollway, designed, constructed, commissioned, operated, tolled, maintained and repaired by it, to raise revenue. It was also authorised by the Concession Deed to " raise revenues from other lawful uses of the Link approved by the State … until the end of the Concession Period, subject to and upon the terms of this Deed " ^[56] Concession Deed, cl 2.8(a). See reasons of Crennan J at [ 101 ] . . The range of functions assigned to Transurban makes it clear that it was acquiring a distinct integrated intangible asset that did not, as such, attach to property (as does a lease to land).

42. Nor were the concession fees expressly payable only to allow Transurban possession of the land from time to time or to obtain an income flow from the use of the land. Clause 2.8 of the Concession Deed not only granted rights with commensurate obligations. It also ensured the support of the State for a project that included the many identified governmental acts necessary for its successful implementation. The State ' s control over the infrastructure denied to Transurban any right to use the asset constituting the Project in the same way as a lessee usually enjoys the use of property under a lease. Unlike in a lease, there was no pre-existing distinct property right held by the State that was made the subject of use or enjoyment by Transurban. The consideration given for the Concession was given for the conveyance of new rights and not merely for their use and enjoyment. Accordingly, on the facts, the analogy between the concession fees and rent is not sustained.

43. Additionally, an inherent feature of rent is that it typically involves a (generally regular) periodical payment. It is not a deferred payment payable over time. By way of contrast, the concession fees in the present case are, effectively, the deferred consideration payable by Transurban to secure the grant of the Concession essential to constituting the Project. The concession fees are not a series of periodic payments payable for the periodic use or enjoyment of the asset. It is true that periodic accrual, accounted for semi-annually and secured by the issue of Concession Notes, comprised the mechanism adopted for the quantification of the consideration given for the rights conferred. However, what Transurban acquired was a capital asset and an advantage of a capital nature. The concession fees were thus to be classified as the instalment payments for securing that asset and advantage.

44. The Commissioner submitted that, if any analogy to an outgoing on revenue account was needed for the concession fees, a more accurate one was a promise by a lessee to pay a premium in instalments on entering into the lease. Such a payment has been described as " a cash payment made to the lessor, and representing, or supposed to represent, the capital value of the difference between the actual rent and the best rent that might otherwise be obtained " ^[57] cf King v Earl Cadogan [ 1915 ] 3 KB 485 at 492 per Warrington LJ. . The Commissioner argued that, if a lease analogy were applicable, the consideration for the Concession (the concession fees) picked up the shortfall between the annual rent and a proper commercial rent for the land. On this

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view, the promise to pay concession fees fits comfortably with the concept of a premium.

45. I do not find it necessary to decide whether the payment of concession fees was analogous to some other form of payment incidental to a lease. It is enough to conclude that rent is fundamentally the consideration for the right to use property. The concession fees in this case were never payable simply for Transurban ' s right to use land. The integrated benefits acquired and the inter-related obligations assumed future payments by Transurban for the acquisition of the Concession, which was incontestably a capital asset. They themselves therefore displayed the character of capital. The analogy to rent generally, or to rent specifically payable for a parking station lease (as the Full Court thought ^[58] (2004) 141 FCR 69 at 93 [ 70 ] . ), is unpersuasive. It led the Full Court to its erroneous classification of the concession fees as being on revenue account.

46. Conclusion: on capital account : It follows that a correct application of the statutory provisions, explained in this Court ' s past authority, produces the conclusion that the characterisation adopted by the primary judge was the correct one.

47. I acknowledge that dicta can be found in the cases that appear to support Transurban ' s argument. On this issue, there have been so many judicial remarks that one feels embarrassed to add to them. Usually they are peppered with invocations as to how the expenditure can be " truly characterised " . Characterisation, in every branch of the law, is problematic and usually disputable. Different minds categorise payments on different sides of the income and capital divide. That is why, in new and unusual circumstances such as the present case, it is necessary to return to the statutory text and to the novel means adopted to acquire the Concession and thereby to secure, fund, establish, maintain and ultimately operate this major project of capital infrastructure.

48. To be accepted as the Project controller, Transurban had, at the one moment, to accept a series of interlocking agreements that represented an integrated payment for the capital asset it acquired for the designated period. Each part of the interlocking agreements was integral to, and dependent on, the others. The capital asset would not have been provided without the carrying out of each part. The concession fees are thus to be viewed, together, as the payment of consideration for this capital asset. This conclusion makes practical and business sense. And that is the approach proper to such questions, as this Court has repeatedly affirmed ^[59] Sun Newspapers (1938) 61 CLR 337 at 359. .

49. Therefore, whilst accepting that on such issues different minds may reach different conclusions, a return to the statutory language, and the differentiation it accepts, persuades me that the primary judge ' s conclusion was the better one. It disclosed no error on this point. The Full Court ' s analysis was faulty and unpersuasive. The primary judge ' s conclusion should be restored.

Concession fees were not incurred in the income years

50. The remaining questions : Having reached the foregoing conclusion, it is strictly unnecessary for me to consider the remaining issues in this appeal. They arise only if the concession fees are properly to be characterised as outgoings on revenue account. Nevertheless, out of respect for the parties ' arguments, and in case I am wrong in the foregoing conclusion, I will offer my opinion on the chief remaining issues.

51. If one returns to the statutory language and the division it postulates between the income and capital accounts, there are serious factual oddities that militate against a conclusion that the concession fees, for which Transurban seeks deduction from its income tax obligations, were " incurred " in the income years. Transurban claimed a deduction for each year of income for which it incurred a liability to pay concession fees although no amount was actually paid to the State in respect of those fees in the relevant taxation years. During those years, the tollway was still being constructed. No tolls were collected. It was this feature of the evidence that led McHugh J, in the special leave hearing in relation to this appeal, to observe ^[60] [ 2005 ] HCATrans 304 at 2. :

" [ Y ] ou have been allowed a deduction of $ 95 million which you do not pay until [ 2013 on the base case ] …

[ T ] he words of section 51 … talk [ ] about an outgoing …

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[ A ] rguably, this is a case of form triumphing over substance.

…

[ W ] hen you talk about ' present liability ' you are putting a gloss on the words of the section. … [ H ] ere you have a situation where you pay rent, $ 95 million, you discharge the liability by issuing a note, and the concession note, on one theoretical view, may never be payable at all. "

52. These remarks were stated tentatively. They did not represent considered judicial conclusions and doubtless they reflect various imperfections. However, they highlight the intuitive oddity of the outcome upheld by the decision of the Full Court. They require this Court to scrutinise that outcome closely, to ensure that it accords with the text and purposes of the legislation. On the face of things, that seems unlikely. But have we, by judicial glossing of the legislation, reached such an outcome?

53. The Commissioner ' s submissions : On the assumption that liability for the concession fees was " incurred " , the Commissioner submitted that nonetheless such fees were not outgoings incurred in the years of income, within the applicable provisions. He submitted, first, that the payments were not due until the conditions stated in cl 1.9 of the Master Security Deed and the conditions in Pt 3 of the Concession Notes were satisfied. He argued that these conditions had not been satisfied in the income years. He further submitted that the payments were not " properly referable " to the years of income. He also argued that for the concession fees to be deductible in full in the income years, long before they would fall due for payment, was truly an anomalous outcome. This was particularly so given the large discrepancy between the face value and the net present value of the concession fees in the respective years of income.

54. The Commissioner argued that this Court should hold that, where a contract provides that a contractual obligation to make a payment in the year of income is subject to conditions which defer payment indefinitely, or for a very long time in the future, at nil or negligible present cost, the obligation is not " incurred " in the relevant sense. He urged that the applicable statutory provisions contemplated that only the actual expenses of carrying on an income-earning activity in the year of income would be deductible in that year. This submission was made on the footing that the words " loss or outgoing " include debts but only if they have " come home " as a loss or outgoing and are " properly referable " to the income year. The concession fees, he suggested, did not answer to these descriptions.

55. Looking afresh at the language of the legislation and its apparent purpose and assuming, contrary to my primary conclusion, that the concession fees are to be characterised as payable on revenue account, I would accept these submissions and uphold the Commissioner ' s arguments.

56. Concession fees were not incurred : The trial judge, with apparent reluctance ^[61] (2004) 135 FCR 356 at 378 [ 75 ] . , and the Full Court with more enthusiasm ^[62] (2004) 141 FCR 69 at 83 [ 39 ] . , concluded that Transurban did " incur " a loss or outgoing in respect of the concession fees in the income years. Clause 3.1(a) of the Concession Deed arguably provides that the liability to pay the concession fees was unconditional. However, in fact, the obligation to pay was subject to conditions in cl 1.9 of the Master Security Deed and Pts 3 and 4(b) of the Concession Notes. While the Project Debt remains owing, the concession fees are owing but not due for payment, unless sufficient money is in the Distributions Account to meet the payment in full. The State thus had no absolute right to payment of the concession fees or to present the Concession Notes for payment.

57. The practical effect of these conditions was that the State ' s entitlement to demand payment was dependent upon the traffic levels, revenue and available cash flows arising from the operation of the tollway.

58. Transurban elected to issue Concession Notes with respect to the amounts of concession fees in the income years. However, the State can demand payment only when the conditions for presentation in Pt 3 of the Concession Notes are satisfied. In the absence of satisfaction of the conditions in Pt 3(b) or (c) of the Concession Notes, the State is entitled, under Pt 3(a), to present the Concession Notes within one year of the Expiry Date for payment on the Expiry Date. Like any claim for payment under Pt 3(b) and Pt 3(c)(ii), if the relevant conditions are satisfied, it is subject to cl 1.9 of the Master

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Security Deed. It is uncertain whether these conditions will be satisfied either by this time or before the end of the Concession (be that at the Expiry Date or another time).

59. In
New Zealand Flax Investments Ltd v Federal Commissioner of Taxation ^[63] (1938) 61 CLR 179 at 207. , Dixon J said that the concept of loss or outgoing actually incurred " does not include a loss or expenditure which is no more than impending, threatened, or expected " . By the application of this test, the conditions for payment in the present case indicate that any loss or outgoing in respect of the concession fees was at best " impending, threatened, or expected " . It was not " actually incurred " .

60. In
Nilsen Development Laboratories Pty Ltd v Federal Commissioner of Taxation ^[64] (1981) 144 CLR 616. , the question arose as to whether an employer ' s provision for employees ' leave entitlements was deductible for income tax purposes from the employer ' s income. This Court held that such provisions were not deductible in that case because there was no liability to make the payment either due or payable by reference to the year of income. The Court concluded that, if at all, such liability did not arise until the time when the period of leave was entered upon by an employee. Until then, the amounts were not " incurred " .

61. In his reasons in Nilsen Development , Gibbs J explained that an actual entitlement to payment was necessary to sustain the conclusion that an obligation was " incurred " ^[65] (1981) 144 CLR 616 at 628. . His Honour said:

" The employees were entitled to leave, but they were not entitled to payment. The entitlement to payment would not arise until the employees took leave (or died or left the employment). The event on which the entitlement … to payment depended had not occurred. There was a certainty that a liability to make payments in respect of leave would arise in the future, but it had not arisen. The present is not a case in which there was an immediate obligation to make payment in the future, or a defeasible obligation to pay, or a present obligation which as a matter of law was unenforceable - there was no accrued obligation to make any payment at all. There was no loss or outgoing ' incurred ' within s 51(1). "

Similarly, Barwick CJ in Nilsen Development said ^[66] (1981) 144 CLR 616 at 623-624 (emphasis added). :

" [ T ] here can be no warrant for treating a liability which has not ' come home ' in the year of income, in the sense of a pecuniary obligation which has become due, as having been incurred in that year. Sir John Latham ' s language in
Emu Bay Railway Co Ltd v Federal Commissioner of Taxation ^[67] (1944) 71 CLR 596 at 606. clearly enough indicates that to satisfy the word ' incurred ' in s 51(1) the liability must be ' presently incurred and due though not yet discharged ' . The ' liability ' of which Sir John speaks is of necessity a pecuniary liability and the word ' presently ' refers to the year of income in respect of which a deduction is claimed. It may not disqualify the liability as a deduction that, though due, it may be paid in a later year. That part of Sir Owen Dixon ' s statement in New Zealand Flax Investments ^[68] (1938) 61 CLR 179 at 207. which presently needs emphasis is that the word ' incurred ' … ' does not include a loss or expenditure which is no more than pending, threatened or expected ' : and I would for myself add ' no matter how certain it is in the year of income that that loss or expenditure will occur in the future ' . "

62. Conclusion: liability not incurred : A deduction need not be referable to income actually derived in a specific tax year ^[69] Commissioner of Taxation (NSW) v Ash (1938) 61 CLR 263 at 271; John Fairfax & Sons Pty Ltd v Federal Commissioner of Taxation (1959) 101 CLR 30 at 35, 46; Commissioner of Taxation v Finn (1961) 106 CLR 60 at 68; AGC (Advances) Ltd v Federal Commissioner of Taxation (1975) 132 CLR 175 at 185, 197; Inglis v Federal Commissioner of Taxation (1979) 28 ALR 425 at 427-428; Fletcher v Federal Commissioner of Taxation (1991) 173 CLR 1 at 16; Steele (1999) 197 CLR 459 at 467 [ 22 ] , 481-482 [ 68 ] . . Deductibility is dependent on the fact that the taxpayer has become liable to pay a pecuniary sum ^[70] Coles Myer Finance Ltd v Federal Commissioner of Taxation (1993) 176 CLR 640 at 676-677. . The mere existence of a debt answering to that description does not necessarily mean that the loss or outgoing has been " incurred " in the year of income. As I explained in
Steele v Deputy Federal Commissioner of Taxation ^[71] (1999) 197 CLR 459 at 482 [ 68 ] . :

" The words ' to the extent to which ' contradict a complete divorce between [ the assessable income and the incurring of ' losses and outgoings ' ] . The word ' in ' also suggests the necessity of a connection between the ' losses and outgoings ' in question and the real possibility of ' assessable income ' . Further, the very notion of ' allowable deductions ' , so described, suggests a relationship of some kind between the ' losses and outgoings ' in question and ' the assessable income ' . "

63. It follows in the case of such a loss or outgoing, due in the year of income but payable

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in the future, that the liability must have " come home " ^[72] Nilsen Development (1981) 144 CLR 616 at 623. . This is a metaphor. Its utility was questioned during argument of this appeal. But income tax law is full of metaphors of this kind. Sometimes such expressions can help to explain what is meant by the language of the statute. So it is here.

64. In the present case, Transurban ' s obligation had not " come home " . The concession fees were " owing " in a notional sense. However, they were not " due for payment " . This was because of the payment conditions. Transurban did not, therefore, " incur " an obligation to pay the concession fees until those conditions were satisfied. Until then, the obligation in respect of the concession fees remained " impending, threatened or expected " . Accordingly, Transurban had only a " hope " or " expectation " of a loss or outgoing. No such loss or outgoing had actually been " incurred " . The Commissioner was therefore correct, on this ground, to reject the deduction claimed by Transurban.

The fees were not referable to the income years

65. Concession fees: a future expense : In
Coles Myer Finance Ltd v Federal Commissioner of Taxation ^[73] (1993) 176 CLR 640 at 677. , this Court held that the fact that a taxpayer has subjected itself in the year of income to a future liability does not necessarily compel the conclusion that the liability is " incurred " , and is therefore deductible in full, in that year of income. For such a deduction, the liability, it was held, must be " properly referable to the year of income in question " ^[74] Coles Myer (1993) 176 CLR 640 at 663. .

66. Upon the present hypothesis, in the present case, the concession fees in issue are a future expense of Transurban ' s business operations. They actually fall to be met out of future assessable income ^[75] See above these reasons at [ 26 ] - [ 29 ] . . That conclusion emerges from the terms governing the time when such payments fall due under the Concession Note arrangement, and the absence of any obligation to pay interest on amounts outstanding, in the context of the projections set out in the financial model received in evidence. To allow a deduction in the income years for the losses or outgoings when the burden of the liability only arises with the passage of time (possibly decades in the future) offends the principle of proper referability adopted by this Court in Coles Myer .

67. Before the primary judge, in reliance upon that authority, the Commissioner argued that the concession fees were " referable " to the years of income during which they would actually fall due for payment. In my opinion, that submission was correct. It postulates an approach which appears consistent with the language and purpose of the legislation. It is reinforced by the following observations of Dixon J in
Commissioner of Taxation (NSW) v Ash ^[76] (1938) 61 CLR 263 at 282. See also Coles Myer (1993) 176 CLR 640 at 665-666. concerning the matching of deductions for expenses with income:

" Where the reason for allowing a deduction is that it is a normal or recurrent expenditure or an expenditure which is fairly incident to the carrying on of the business, it is evident that it can seldom be associated with any particular item on the revenue side against which to set it, and, as the ground of its allowance is that it is an incident or accident, something concomitant to the conduct of the business, it follows that to deduct it in the year when it falls to be met is consistent with the reason for deducting it and conforms with business principles. "

68. The primary judge rejected the Commissioner ' s submission in this respect. He did so because he considered that to allow deductions for concession fees in the year that they fall due for payment could potentially distort Transurban ' s operations on revenue account ^[77] (2004) 135 FCR 356 at 380 [ 82 ] . . With respect, this conclusion was not correct. Payment of the concession fees was intended to be met out of later revenues rather than any revenues during the income years. It is therefore clear that distortion could arise if the outgoings are referable to years in which the liability is incurred.

69. Such distortions may be readily avoided by adopting the " reflex principle " which this Court explained in Carden ' s Case ^[78] Commissioner of Taxes (SA) v Executor Trustee and Agency Co of South Australia Ltd (1938) 63 CLR 108 . . According to that principle, only so much of the loss or outgoing is reasonably referable to the income year in question as is calculated to give a substantially correct reflex of Transurban ' s true income position, each year over the life of the Project. In Carden ' s Case ^[79] (1938) 63 CLR 108 at 154-155. Dixon J explained this concept in these words:

" In the present case we are concerned with rival methods of accounting directed to the

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same purpose, namely, the purpose of ascertaining the true income. Unless in the statute itself some definite direction is discoverable, I think that the admissibility of the method which in fact has been pursued must depend upon its actual appropriateness. In other words, the inquiry should be whether in the circumstances of the case it is calculated to give a substantially correct reflex of the taxpayer ' s true income … Speaking generally, in the assessment of income the object is to discover what gains have during the period of account come home to the taxpayer in a realized or immediately realizable form. "

70. Conclusion: no correct reflex : A correct reflex of Transurban ' s income was obliged to take into account the following facts:

• (1) No amount would be derived through the operation of the Project until some time after the income years;
• (2) The Concession Notes were not interest-bearing. The true cost to Transurban was thus far less than the face value of the Concession Notes. In fact, that cost decreased the longer the period of time for which they were to be held before being presented for payment. The Project documents forecast that the payment of Concession Notes would not be a demand on revenues in the income years because it would be many years before the preconditions for presentation of the Concession Notes would probably be satisfied;
• (3) By contrast, the value of the benefits enjoyed by Transurban, from the grant of the Concession, was projected to increase in later years; and
• (4) The expected source of funds for payment of the concession fees was the returns enjoyed by Transurban in the later years of the Project.

71. The anomaly of this result was recognised, and called to attention, by the primary judge. Obviously, it is a result having a considerable potential for tax avoidance. The primary judge was right to perceive the anomaly. He should have given effect to his intuition. As I have shown, it is supported by the authority of this Court.

72. A straight line apportionment was the approach taken by this Court in Coles Myer for allocating the discount on the accommodation bills and notes in issue there in each income year. If this approach is followed, no deductions would be allowable to Transurban in any of the income years because the trial judge held that the net present value of the concession fees, in those years, was nil, or negligible. In the trial, the Finance Director of Transurban, Mr Phillips, gave evidence that, if the concession fees were only deductible when payable (that is, when the Concession Notes were redeemed), their net present value was " nil " ^[80] Trial transcript before Merkel J, 3 October 2002 at 88. . It was on the basis of that evidence that the primary judge concluded, correctly in my view, that from an accounting and economic point of view, the present value (rather than the nominal value) of the concession fees was the relevant value. It follows that the primary judge was correct to conclude that the present value of the concession fees payable in the income years was " nil or negligible " ^[81] (2004) 135 FCR 356 at 381 [ 84 ] , 399 [ 150 ] . .

Outcome and orders

73. My conclusion is that the concession fees, on the assumption that they were incurred in the income years and were properly referable to those years, were not deductible because they were capital in nature. If, however, the concession fees were to be classified as an outgoing on revenue account they were not deductible because, on the evidence, they were not outgoings " incurred " in the income years. Any future obligation was neither satisfied in, nor properly referable to, those years.

74. On this basis, the conditions for deductibility stated in the applicable income tax legislation for the income years were not established. The Commissioner was therefore right to disallow the claims. The Full Court erred in upholding Transurban ' s objections to the Commissioner ' s assessments.

75. To give effect to these conclusions the following orders should be made. The appeal should be allowed with costs. The judgment of the Full Court of the Federal Court of Australia should be set aside. In place of that judgment, this Court should order that the appeal to the Full Court be dismissed with costs.