BELLINZ PTY LIMITED v FC of TJudges:
The issue arising in the present application is whether a lessee of plant and equipment, under a lease which contains an option to purchase, is entitled to claim depreciation as the owner of the plant and equipment for the purposes of s 54(1) of the Income Tax Assessment Act 1936 (Cth) (``the ITAA'').
Section 54(1) provides for the owner of plant and equipment to be entitled to claim depreciation as an allowable deduction. However, the plant and equipment must be ``owned'' by a taxpayer during the year of income in which that taxpayer uses the plant and equipment for the purpose of gaining assessable income. The word ``owned'' is not defined in the ITAA.
The problem giving rise to the present matter is the difficulty of applying s 54(1) to modern developments in the commercial financing of the acquisition of plant and equipment used by taxpayers. Initially, the issue arose with respect to hire purchase agreements which had been accepted at common law as contracts of hire conferring an option to purchase: see
Helby v Mathews  AC 471. In commercial, if not legal, reality such contracts were regarded as agreements to purchase chattels by instalment payments subject to a condition that the property in them was not to pass until all instalments had been paid. However, a hirer under a hire purchase agreement was said by Mr McCaffrey in (1955) 7 TBRD Case G22 and (1967) 18 TBRD Case T20 not to be the legal owner of the plant or articles being acquired until all payments had been made and therefore not entitled to claim depreciation under s 54(1) in the interim period. Mr McCaffrey's stated view was that it was a matter for the legislature if it was intended that a hirer be an owner for the purposes of s 54(1).
In administrative rulings and in practice, the Commissioner permitted hirers to claim depreciation as an ``owner'' from the commencement of the hire purchase agreement for the purposes of s 54(1). Subsequently a similar practice was adopted by the Commissioner with respect to a lease of plant or equipment which contained an option to purchase. In each case the underlying principles that appear to have been acted upon by the Commissioner were that:
- • the ``rent'' being paid by the hirer or the lessee comprised a ``capital'' component (which was to be applied towards payment of the purchase price when the option was exercised) and an ``interest'' component (which was the financier's return on the transaction);
- • the ``interest'', but not the ``capital'', component of the rent was deductible by the hirer or lessee as an allowable outgoing under s 51(1);
- • as, on the termination of the hiring or the lease, it was almost certain that the hirer or the lessee would exercise the option it was appropriate to treat the hirer or lessee as if they were purchasers of the plant and equipment;
- • as the hirer or lessee was to be treated as a purchaser of the plant or equipment, and was therefore not entitled to a deduction for the ``capital'' component of the ``rent'', it was entitled to depreciate the relevant items under s 54(1) as an owner notwithstanding that the option had not been exercised and the purchase price had not yet been paid.
The Commissioner's approach may accord with commercial reality but gives rise to conceptual difficulties. As a result of the Commissioner's practice (in accordance with the principles set out above) of allowing hirers and lessees to depreciate plant to be acquired under an option to purchase the issues arising in the present case under s 54(1) did not come before the courts.
In the arrangements giving rise to the present dispute the applicants endeavoured to structure the leveraged financing for the acquisition of the plant and equipment used at the Loy Yang Power Station in the State of Victoria (``the plant'') in a manner which complied with the Commissioner's rulings and practice. Whether they had done so was a matter of much contention between the parties.
The sale of the Loy Yang Power Station
On 12 May 1997 a corporation owned by the Victorian government settled the sale of the
ATC 4402Loy Yang Power Station to Horizon Energy Partners (now called Loy Yang Power Partners) (``the Loy Yang Operator'') for $4.8 billion. The acquisition was funded, inter alia, by a loan of $3.8 billion provided by a consortium of banks to Horizon Energy Projects Pty Ltd which was wholly owned by the Loy Yang Operator. For present purposes it is not necessary to distinguish between the Loy Yang Operator and its financing arm.
The present dispute involves one aspect of the overall purchase; arrangements for the leveraged financing for the acquisition and leasing of the plant. The arrangements involved, inter alia, the following transactions:
- • the acquisition, for $4.8 billion, by the Loy Yang Operator from the Victorian government of the Loy Yang Power Station which included the plant;
- • the sale of the plant for $743.35 million by the Loy Yang Operator to Biasca Pty Ltd (``Biasca'') (the shareholders of which were certain financiers);
- • a lease of the plant with an option to purchase granted by Biasca to the Loy Yang A No 1 Lease Partnership (a partnership of the financiers or their subsidiaries which were the shareholders in Biasca) (``the Lessor Partners'' or ``the Lessor Partnership'') for a term of fourteen years, six months and one day expiring on 12 November 2011;
- • a mortgage of the lease of the plant, including an equitable mortgage of the plant, by Biasca to directly or indirectly secure the obligations owed to the consortium of financiers financing the acquisition of the Power Station;
- • a sub-lease of the plant (without an option to purchase) by the Lessor Partnership to the Loy Yang Operator for a term of fourteen years and six months.
The Lessor Partners and, where applicable, their parent companies (the shareholders in Biasca) were:
- (a) Bellinz Pty Ltd (a wholly owned subsidiary of Australia and New Zealand Group Limited);
- (b) Erstfeld Pty Ltd (a wholly owned subsidiary of National Australia Bank Limited);
- (c) Beauheath Pty Ltd (a wholly owned subsidiary of Allmead Pty Ltd which is a subsidiary of Pratt Holdings Pty Ltd);
- (d) Faido Pty Ltd (a wholly owned subsidiary of Rabo Australia Limited);
- (e) Australian Mutual Provident Society (``AMP'');
- (f) ANZ Life Assurance Company Limited; and
- (g) BAWA (No 1) Pty Ltd (a wholly owned subsidiary of the Bank of Western Australia Limited).
Under the financing arrangements for the acquisition of the Power Station certain obligations, including an equitable mortgage of the plant, were to be undertaken by the owner of the plant. AMP, one of the financiers involved in the leveraged financing of the plant, is a life company. Sections 38, 40 and 41 of the Life Insurance Act 1995 (Cth) prohibit life companies from, inter alia, charging or encumbering their assets. As the liability required to be assumed by AMP as a financier was believed to fall within these provisions it was decided by the seven financiers that the acquisition of the plant was to be by Biasca, rather than the Lessor Partnership, with the consequence that AMP would not be charging or encumbering any of its assets in contravention of the Life Insurance Act 1995.
It was an integral aspect of the overall financing that each of the Lessor Partners was to be entitled to claim a pro rata share of depreciation of the plant as an allowable deduction under s 54(1) of the ITAA and offset the deduction against assessable income which they received from other sources. If AMP had not been a participant there would have been no difficulty in that regard as, in accordance with the Commissioner's rulings for sale and leaseback arrangements (TR 95/30) and leveraged lease transactions (IT 2051), the Lessor Partners were contributing the required twenty per cent equity to enable the purchase of the plant by them for the purpose of leasing it back to the Loy Yang Operator. As a consequence the Lessor Partners would be entitled to depreciation of the plant as owners under s 54(1) and to an allowable deduction for that depreciation in determining the individual interest of each partner in the net income or loss of the partnership.
However, as AMP was not entitled to charge its interest in the assets the relevant financiers decided to establish the lease and sub-lease transactions described above in the belief and expectation that they would have been entitled to essentially the same taxation benefits in accordance with the Commissioner's public rulings and determinations (TR 95/30, TD 94/20 and TD 93/187 which were believed to be binding under s 170BA of the ITAA) and earlier administrative rulings (IT 28, IT 2051 and IT 2419) as lessees under a lease with an option to purchase as part of a leveraged sale and leaseback arrangement. The relevant transactions were as follows:
The significance of depreciation to the Lessor Partners for tax purposes can be discerned from the following aspects of a tax statement (which is incomplete) for the Lessor Partnership through to 30 September 2012.
Financial Rent from Depreciation Amount of rent Taxable Period End Loy Yang of 20% component allowable Income Operator allowable on as ``interest'' diminishing after deduction of values the capital component Part of Year 30 SEP 97 28,342,205 -53,891,345 -20,813,092 -47,249,732 30 SEP 98 79,497,733 -138,948,449 -57,473,035 -118,098,751 30 SEP 99 79,497,733 -110,910,431 -57,002,766 -88,465,464 30 SEP 00 79,179,628 -88,538,373 -56,402,588 -65,811,332 30 SEP 01 79,716,134 -70,685,370 -54,450,572 -45,469,808 30 SEP 02 79,597,438 -56,437,120 -52,261,662 -29,151,344 30 SEP 03 79,497,733 -45,064,646 -49,755,446 -15,372,359 30 SEP 04 79,497,733 -35,986,654 -46,896,469 -3,435,389 30 SEP 05 79,267,918 -28,739,550 -43,482,272 6,996,096 30 SEP 06 79,409,444 -22,953,563 -39,859,361 16,546,519 30 SEP 07 79,716,134 -18,333,722 -36,166,349 25,166,063 30 SEP 08 79,597,438 -14,644,694 -33,224,609 31,678,135 30 SEP 09 79,497,733 -11,698,709 -29,871,257 37,877,768 30 SEP 10 79,497,733 -9,345,926 -26,224,493 43,877,314 30 SEP 11 79,267,918 -7,466,765 -22,356,673 49,394,481 30 SEP 12 277,655,443 -717,198 -2,453,933 274,471,812 NET TOTALS 1,418,736,098 -714,362,515 -628,694,577 72,954,009
The rent payable by the Loy Yang Operator to the Lessor Partnership under the sub-lease was substantially the same rent (less a sub- lessor's profit to the Lessor Partnership of $67 million over the term of the lease) as was payable under the lease by the Lessor Partnership to Biasca. The whole of the rent payable by the Operator was to be an allowable deduction to the Operator and assessable income to the Lessor Partnership because it did not contain a capital component as there was no entitlement on the part of the Operator to purchase the plant at the termination of the lease. As the lease from Biasca contains an option to purchase in favour of the Lessor Partners part of the rent paid by the Lessor Partnership to Biasca would be deemed to have a ``capital'' component being that part of the rent paid on account of the notional ``purchase price'': see for example Commissioner's Ruling IT 196. As a consequence only the ``interest'' component, which is set out in the tax statement, would be an allowable deduction under s 51(1) of the ITAA for the Lessor Partnership. The tax statement discloses that the lease and sub-lease arrangement was expected to enable the Lessor Partners to receive the substantial benefits of depreciation from the outset. As a result of that expectation the financiers were able to offer a lower cost of leveraged financing, in respect of the plant, to the Loy Yang Operator.
On 13 May 1997 the Lessor Partnership applied to the Commissioner for a private ruling in respect of the leveraged leasing arrangement under s 14ZAF of Part IVAA of the Taxation Administration Act 1953 (Cth) (``the Administration Act''). Section 14ZAF provides:
``A person may apply to the Commissioner for a private ruling on the way in which, in the Commissioner's opinion, a tax law or tax laws would apply to the person in respect of a year of income in relation to an arrangement.''
An arrangement is defined in s 14ZAAA (for the purposes of public rulings) as:
- (a) scheme, plan, action, proposal, course of action, course of conduct, transaction, agreement, understanding, promise or undertaking; or
- (b) part of an arrangement;''
The same definition applies to private rulings: see s 14ZAA(2).
A private ruling is binding on the Commissioner: see s 170BB of the ITAA.
A favourable private ruling was of considerable significance to the overall financing of the acquisition. The evidence is that the net present value of the cash flow savings of the leveraged lease structure is approximately $60 million over the period of the lease. The lease from Biasca contains a condition subsequent to the effect that in the event that a favourable private ruling was not given by 31 December 1997 (which was subsequently extended to 31 March 1998) the leveraged leasing arrangement was to be replaced by the provision of alternative finance which would result in substantial additional cost to the Loy Yang Operator.
The leveraged lease arrangements were carefully structured to fall within the Commissioner's rulings and practice. As a consequence the Lessor Partners expected that they would be treated as owners of the plant for the purposes of s 54(1). After extensive consultations between the Lessor Partners and the Commissioner that expectation was almost realised. On 6 November 1997 the Commissioner forwarded a draft of a proposed private ruling which was favourable to the Lessor Partnership. However there was a reconsideration of the matter in the Commissioner's office and it soon became apparent that a favourable ruling would not be given by 31 December 1997. In December 1997 mandamus proceedings were issued by the Lessor Partners but were compromised by the Commissioner agreeing to issue a binding private ruling by 28 February 1998.
On 19 January 1998 the Commissioner forwarded to the solicitors for the Lessor
ATC 4405Partners an issues paper setting out the Commissioner's concerns in relation to two issues:
- (1) Whether the plant can be said, for the purposes of s 54 of the ITAA, to be ``owned'' by the Lessor Partners by reason of their having an option to purchase the plant?
- (2) If the Lessor Partners were entitled to a deduction for depreciation in respect of the plant under s 54, whether Part IVA of the ITAA applies to the arrangements pursuant to which the option to purchase was granted?
A detailed response to the issues paper was given on behalf of the Lessor Partners. By a Notice of Private Ruling dated 27 February 1998 the Commissioner ruled that:
``1. The Leasing Partnership will not be entitled to a deduction for depreciation as it will not be the owner of the Equipment.
2. Alternatively, if the Leasing Partnership is entitled to a deduction for depreciation, Part IVA will apply to the arrangements described in the Application.''
The ruling was accompanied by an explanatory memorandum, which did not form part of the ruling, setting out the basis for the Commissioner's conclusions.
The Lessor Partners lodged a notice of objection against the private ruling. The objection, which was lodged in accordance with s 14ZAZA and Part IVC of the Administration Act was disallowed by the Commissioner on 2 March 1998 (``the objection decision''). On 4 March 1998 the Lessor Partners filed an application to the Court pursuant to s 14ZZ of the Administration Act appealing against the objection decision. Under s 14ZZP of the Administration Act the Court may make such order as it thinks fit including an order confirming or varying the objection decision. The Commissioner must take such action as is necessary to give effect to the final decision of the Court: see s 14ZZQ. A taxpayer who appeals to the Court against an objection decision is bound by the decision of the Court in relation to the private ruling: see s 170BH of the ITAA.
The appeal, the original mandamus proceeding and a further administrative law proceeding issued by the Lessor Partners were heard on 10, 11 and 12 March 1998. It eventually became common ground that the three main issues sought to be raised by the Lessor Partners were able to be dealt with in the appeal. Accordingly, the Lessor Partners did not proceed with the two administrative law proceedings. Also, in the course of the proceeding the parties resolved certain complaints of the Lessor Partners as to alleged defects in the private ruling. Consequently agreement was reached as to:
- • the documents which comprise the factual information given to the Commissioner and upon which he based his ruling; and
- • the arrangement on which the ruling was sought.
These matters are of importance. On a review of a private ruling, whether by the Administrative Appeals Tribunal or the Court, the reviewing body is to review the opinion of the Commissioner in the ruling as to the way in which the relevant tax law applies to the ``arrangement'' the subject of the ruling. In doing so, the reviewing body is to be limited to the facts identified by the Commissioner as constituting the arrangement and relied upon by him in making his decision: see
FC of T v McMahon & Anor 97 ATC 4986; (1997) 149 ALR 159. Accordingly, it was imperative that the arrangement the subject of the ruling and the facts on which the ruling was based be clearly identified.
However, one of the problems which arose was that the Lessor Partners from time to time sought to comply with objections raised by the Commissioner by making amendments, or agreeing to make amendments, to their transaction documents. As a consequence the documents recording the arrangements did not necessarily accord with the agreed description of the arrangements or the applicant's submissions as to the arrangements. Whilst I have endeavoured to accommodate the discrepancies I would point out that the Court is not giving an advisory opinion on the basis of an arrangement that might be made. A private ruling was applied for and given on the basis of the arrangement in respect of which the private ruling was sought by the applicants. That arrangement was recorded in the documentation (as amended) executed by the parties. Yet the agreement by the parties as to the arrangement on which the ruling was sought departs from the documentation. For example the documentation provides that the option to purchase is subject to
ATC 4406the Equipment mortgage but the agreement states that the Equipment mortgage either permits or will be amended to permit legal title to be transferred upon the exercise of the option and payment of the limited recourse, rather than the full, loan under the mortgage. As pointed out above I have endeavoured to accommodate these matters as they do not affect the final outcome but they do emphasize the importance of the Commissioner stating the arrangement on which he has ruled (in any binding ruling, whether private or public) with clarity and precision in the ruling itself.
The appeal against the objection decision raises three substantive issues.
- 1. Was the Lessor Partnership the owner of the plant for the purposes of s 54(1) of the ITAA and, if so, does Part IVA of the ITAA apply to the leveraged lease arrangements?
- 2. Was the Commissioner required to treat the Lessor Partnership as the owner of the plant by reason of his public rulings (TR 95/30, TD 94/20 and TD 93/187) which were said to be binding pursuant to s 170BA of the ITAA?
- 3. Did the Commissioner fail to comply with his practice and rulings in respect of leveraged leasing and, if so, did that failure constitute an abuse of power reviewable by the Court?
In an appeal under s 14ZZP the Court is to determine the issues by reference to the way in which the relevant tax law would apply to the taxpayer in respect of the relevant years of income in relation to the arrangement the subject of the private ruling. It was contended by senior counsel for the Lessor Partners that the Court is to determine how the Commissioner would, as a matter of fact, apply the tax law to the arrangement. Accordingly, so it was said, if the Commissioner's practice was to apply the principles adopted by him in his rulings or practice to arrangements that are not precisely the same as those the subject of the rulings the Court was required to apply the principles even if it was of the view that they were, as a matter of law, wrong. I do not accept this contention. In my view, on an appeal against an objection decision relating to a private ruling the Court is to approach the matter objectively and is to determine how the tax law would apply to a taxpayer as a matter of law. The issue for the Court is how the Commissioner was obliged to rule on the taxpayer's application for a private ruling, rather than how, as a practical matter, the Commissioner would rule or ought, in accordance with his practice and rulings and the principles on which they were based, rule on the application. The Commissioner's private ruling demonstrates how he ``would'' rule. The question for the Court is whether that ruling is one which the Commissioner is obliged, in law, to make.
Is the Lessor Partnership the owner of the plant?
Section 54(1) of the ITAA provides:
``Depreciation during the year of income of any property, being plant or articles owned by a taxpayer and used by him during that year for the purpose of producing assessable income, and of any property being plant or articles owned by the taxpayer which has been installed ready for use for that purpose and is during that year held in reserve by him shall, subject to this Act, be an allowable deduction.''
The section has been essentially in the same form since the enactment of the ITAA in 1936. The issue in the present case relates solely to the identification of the person entitled to the deduction under s 54(1).
Property in and title to the plant passed to Biasca upon payment of the purchase price which occurred on 12 May 1997 (for the plant except the bucket wheel dredge) and on 12 August 1997 (for the bucket wheel dredge). Upon acquiring title Biasca leased the plant to the Lessor Partners under a lease containing the purchase option.
Biasca, by leasing the plant, used it for the purpose of gaining income under the lease which was assessable income in its hands. As the Full Court (Jenkinson, Einfeld and Hill JJ) said in
FC of T v Citibank Limited & Ors 93 ATC 4691 at 4702; (1993) 44 FCR 434 at 448:
``... it is hard to see why it is not correct to say that a taxpayer who purchases a car and gains income from the transaction by entering into a bailment of that car for reward does not `use' the car for the purposes of gaining or producing assessable income, notwithstanding that the taxpayer never obtains possession of the car
ATC 4407nor contemplates that it will, and notwithstanding that the bailment agreement passes to the bailee all obligations and risks in respect of the car...''
Upon its acquisition of the plant Biasca stood substantially in the same position as the taxpayer described in Citibank. It gained assessable income as owner of the plant by leasing it to the Lessor Partners notwithstanding that it never obtained possession of it nor contemplated that it would, and notwithstanding that under the other transaction documents, including the lease to the Lessor Partners and the sub-lease to the Loy Yang Operator, all obligations and risks in respect of the plant passed ultimately to the Loy Yang Operator or its financing arm.
The transaction documents were entered into on the premise that Biasca was the owner of the plant. The purchase agreement for the plant specifically provided for ownership and title to pass to and vest in Biasca on the Purchase Date, as defined, notwithstanding that the plant may remain in the possession of the Operator. The lease with the purchase option provided that, subject to the exercise of the purchase option, Biasca ``retains full title'' to the plant. The mortgage of the lease (which was entered into with the consent of the Lessor Partners as lessees) provided for Biasca to mortgage the plant ``as beneficial owner''.
In these circumstances it appears, prima facie, that Biasca has satisfied the requirements of s 54(1) and is entitled to depreciation of the plant as an allowable deduction. However the Lessor Partners contend otherwise.
The Lessor Partners' Case
It is contended by the Lessor Partners that, on the grounds set out hereunder, they, and not Biasca, are the owners of the plant primarily by reason of the option to purchase contained in their lease.
- 1. There is no single meaning for the word ``owned'' which is applicable in every context; rather, ``owned'' will be given a meaning, at least in part, by reference to the context in which it appears. For example, it was said that property has been held by the courts to be owned by persons who had interests in property ranging from contractual and security interests to mere possessory interests. In each case, so it was said, the court determined whether the person possessed the requisite rights of ownership in relation to the property.
- 2. What is relevant in the present context is the fact that the word ``owned'' appears in a revenue statute which is to be interpreted having regard to commercial reality (
FC of T v Suttons Motors (Chullora) Wholesale Pty Ltd 85 ATC 4398 at 4403; (1984-1985) 157 CLR 277 at 287) and ``from a practical business point of view, rather than upon the juristic classification of legal rights'' (
Hallstroms Pty Ltd v FC of T (1946) 8 ATD 190 at 196; (1946) 72 CLR 634 at 648). For s 54 purposes legal title is not crucial for a taxpayer to derive assessable income from the property in question; the taxpayer is to have sufficient indicia of ownership so that it can be regarded as the owner of the property in preference to any other person with an interest in that property.
- 3. In that context the exclusive right to use the plant in conjunction with existing proprietary rights therein, which could be expected (by reason of an additional payment by the Loy Yang Operator of $83.3 million as an incentive to exercise the option) to evolve into full ownership, was sufficient to characterise the holder of such rights as an ``owner'' for s 54 purposes. The Lessor Partners' other rights of ownership included rights to possession and use of the plant and the right to exclude others from using or interfering with it. However the paramount consideration was that by reason of the grant of the option to purchase, the Lessor Partners have been vested with an equitable proprietary interest in the plant which is comparable to the equitable interest obtained by a purchaser under a contract of sale of land. The nature of the interest was explained by Jessel MR in
London and South Western Railway Company v Gomm (1882) 20 Ch D 562 at 581 as follows:
- ``The right to call for a conveyance of the land is an equitable interest or equitable estate. In the ordinary case of a contract for purchase there is no doubt about this, and an option for repurchase is not different in its nature. A person exercising the option has to do two things, he has to give notice of his intention to purchase, and to pay the purchase money; but as far as the man who is liable to convey is concerned, his
ATC 4408estate or interest is taken away from him without his consent, and the right to take it away being vested in another, the covenant giving the option must give that other an interest in the land.''
- ``The right to call for a conveyance of the land is an equitable interest or equitable estate. In the ordinary case of a contract for purchase there is no doubt about this, and an option for repurchase is not different in its nature. A person exercising the option has to do two things, he has to give notice of his intention to purchase, and to pay the purchase money; but as far as the man who is liable to convey is concerned, his
- 4. Under the lease and the option to purchase Biasca disposed of the rights of ownership described above including its right to alienate the proprietary interest in the plant created by the demise and option. The Lessor Partners' interest in the plant was said to entitle them to preserve, through equity, as against all others (including Biasca) their right to acquire legal title to the equipment: see
Achatz v De Reuver  SASR 240 at 249;
Vandervell v Inland Revenue Commissioners  2 AC 291 at 314-315 per Lord Upjohn;
Ballas v Theophilos (No. 2) (1957) 98 CLR 193 at 208 per Williams J;
Jacobs v Platt Nominees Pty Ltd  VR 146.
- 5. The consequence of the foregoing is that, for all intents and purposes, the plant is ``owned'' by the Lessor Partners for the purposes of s 54 because all relevant economic and legal rights of ownership in respect of the plant have been disposed of by Biasca to the Lessor Partners so that Biasca can no longer be considered to be the owner.
The Commissioner's Case
Initially the Commissioner accepted that ownership for the purposes of s 54(1) may include something less than legal or beneficial ownership. It was accepted that if in ``commercial reality'' or ``from a practical business point of view'' a person has the rights, responsibilities and risks of ownership, but not legal or beneficial title to the goods, that person might nevertheless be the owner for the purposes of s 54(1). This position was consistent with the practice and rulings of the Commissioner which treated a hirer or a lessee with an option to purchase as an owner because as a matter of economic, if not legal, reality they were ``purchasing'' the goods in question.
In the course of the hearing I asked the Commissioner to define his concept of ``economic'' ownership in a manner that enabled its application to s 54(1). Clearly that was not an easy task. As was said in An Introduction to Roman Law (B. Nicholas, Clarendon Press, 1962) at 1:
``We have so far been proceeding in truly Roman fashion and have left undefined our most fundamental concept - ownership. It can indeed be said that ownership is either so simple as to need no explanation or so elusive as to defy definition. At its simplest it is the difference between mine and thine, at its most sophisticated it is the ultimate right, the right behind all other rights.''
The Commissioner responded to the request by abandoning his position on ``economic'' ownership and contended that ownership in s 54 means the ``entire dominion'' in or the ``absolute'' ownership of the plant. Senior counsel for the Commissioner acknowledged that his contention departs from the view previously expressed but explained that:
``It is adopted following a review of the implications of the decision in
Melluish v BMI (No. 3) Ltd  1 AC 454 and consideration of the difficulty inherent in formulating a definition of `owner' as used in section 54 which is less than absolute ownership.''
In the result the Commissioner's case was:
- 1. Section 54 allows a deduction for depreciation of ``plant or articles owned by a taxpayer'' and used to earn assessable income. In ordinary usage, that which is owned by a taxpayer is that to which he has title, or which belongs to him. A bailee under a lease or a hire purchase agreement is not the owner: see for example
Stefanetto v Forestry Commission  2 NSWLR 332, 338, affirmed (1976) 133 CLR 507, 514, 518, 521.
- 2. Biasca, and not the Lessor Partners, is the owner of the plant for the purposes of s 54(1). Accordingly, the Lessor Partners cannot claim depreciation as they have no title to the plant, but only the opportunity to purchase it and thereby acquire title in the future.
In a recent article, ``Beneficial Ownership'' ((1997) 26 Australian Tax Review 34), Robin Speed examined the longstanding legislative usage in the ITAA of words such as ``beneficial ownership'' and their derivations like ``ownership'' and concluded (correctly, in my view) that they have no historical or contemporary universal meaning.
Malaysia Shipyard v ``Iron Shortland'' (1995) 131 ALR 738 at 747-748 Sheppard J considered that the meaning of ``owner'' in s 19 of the Admiralty Act 1988 (Cth) was undoubtedly ambiguous. Sheppard J said that in choosing whether it means or includes beneficial owner, as distinct from registered owner, he should have regard primarily to the words of the relevant section in the context in which that section appears in the Act, the purpose and object of the provision and any reasons of policy which might tell in favour of one view or the other. See also
R v Kentish (1979) 96 DLR (3d) 706 at 715-719.
A similar approach is appropriate for s 54. A helpful starting point is the discussion of the nature of ownership in Halsbury's Laws of England (Fourth Edition, Volume 35, paras 1127 and 1128):
``1127. Meaning of `ownership'. Ownership consists of innumerable rights over property, for example the rights of exclusive enjoyment, of destruction, alteration and alienation, and of maintaining and recovering possession of the property from all other persons. Those rights are conceived not as separately existing, but as merged in one general right of ownership.
The ownership of goods differs from the ownership of land in that the common law did not treat land as the subject of absolute ownership but only of tenure. The common law also did not recognise the possibility of the ownership of goods being split up into lesser successive interests or estates, nor did it contemplate remainders or reversions in chattels.
1128. Division of owner's rights. Ownership is nevertheless divisible to some extent. For example one or more of the collection of rights constituting ownership may be detached. Thus prima facie an owner is entitled to possession or to recover possession of his goods against all the world, a right which a dispossessed owner may exercise by peaceable retaking. He may, however, voluntarily or involuntarily part with possession, for example by the pledging, lending, hiring out, bailment, theft or loss of his goods, in any of which cases he is left with a right of ownership without possession, accompanied or not accom- panied, as the case may be, by the right to possess.''
Although the word ``owner'', prima facie, connotes entire dominion (see
Union Trustee Company of Australia Ltd v FC of T (1915) 20 CLR 526 at 530) that dominion can be divided between an owner and others. The divisible rights of ownership can give rise to difficulty in identifying the ``owner'' of particular property in some circumstances. The division of proprietary rights (including those created by statute) between the owner and a hirer under a hire purchase agreement is one example: see
AL Hamblin Equipment Pty Ltd v FC of T 74 ATC 4310 at 4313; (1974) 131 CLR 570 at 573-574 per Barwick CJ. The division of rights between a legal and a beneficial owner of property is another example. In such cases an enquiry as to ``ownership'' must have regard to the purpose for which the enquiry is being made.
In that context s 54(1) recognises that:
- • loss of or diminution in capital value of plant is a ``cost'' resulting from the use of the plant to gain assessable income;
- • allowing depreciation as a deduction spreads the ``cost'' of the asset over its estimated useful life as a cost (albeit of capital) incurred for the purpose of gaining or producing the assessable income.
The premise underlying both the section and the principle upon which it is founded is that loss of capital value is suffered by the owner for the purpose of gaining assessable income. Legal as opposed to beneficial ownership has little, if any, relevance to the policy or purpose of s 54(1). Accordingly, where plant is used by the beneficial, rather than the legal, owner to gain assessable income the policy of the section is served by the beneficial owner being entitled to depreciate the plant. There is no reason in principle why a taxpayer, not having all of the rights of ownership in respect of property, cannot be the owner of that property for the purposes of s 54.
Assistance on this issue can be gained from
Melluish (Inspector of Taxes) v B.M.I. (No. 3) Ltd  1 AC 454 in which the House of Lords considered the entitlement to a writing- down capital allowance, akin to depreciation, for a taxpayer which acquired and hired out plant and machinery to local authorities. The Inspector of Taxes refused the claim on the
ATC 4410ground that, after its installation but prior to the lease, the equipment had become fixtures in the premises owned by the authorities and therefore did not ``belong'' to the taxpayer as required by s 44(1) of the Finance Act 1971. Under the lease by the taxpayer lessor to the authorities the equipment was to remain personal and moveable property owned by the taxpayer and was to be returned to it upon termination of the lease notwithstanding that it may have become a fixture during the lease.
Lord Browne-Wilkinson (with whom the other Law Lords agreed) accepted that the lessor's rights under the lease were not purely contractual and said that the lease conferred on the taxpayer:
``... an equitable right in the equipment enforceable against any subsequent taker of the land to which it is affixed other than a bona fide purchaser for value without notice.''
His Lordship then said:
``I turn then to consider whether the bundle of rights enjoyed by the taxpayer companies (including the limited equitable right to which I have referred) is sufficient to justify describing the equipment as `belonging' to the taxpayer company for the purposes of section 44. In my judgment the factors relied upon are not sufficient to constitute `belonging'. The taxpayer company has never been the owner of the equipment, whether in law or in equity; it became a fixture (and therefore the property of the local authority) before the lease was entered into. Unless and until the local authority is in default or decides not to renew the lease the taxpayer company has no right to possession of the equipment or to direct how it shall be used. Its only property right is a contingent right to become the owner at a future date. In the meantime the property is owned and enjoyed exclusively by the local authority. The fact that the taxpayer company has an equitable right which may in the future be enforceable against some third parties does not, in my judgment, carry much weight; it indicates that there are rights relating to the equipment which belong to the taxpayer company, not that the equipment itself belongs to them. (at 475-476)
I therefore reach the conclusion that for the purposes of section 44 property belongs to a person if he is, in law or in equity, the absolute owner of it. Such a construction reflects the obvious, prima facie, meaning of the word: what belongs to me is what I own. It produces a coherent and easily applicable formula and, save in relation to fixtures, avoids anomalous results.''
For the reasons set out above I agree that a beneficial owner will be an owner and that a person with only a ``contingent right to become the owner at a future date'' will not be an owner for the purposes of s 54(1). That raises the question of the status of a purchaser under a contract of sale.
Kitto J, in
Haque v Haque (No 2) (1965) 114 CLR 98 at 124, said that the effect of an unconditional contract of sale was to transfer ``to an extent'' the beneficial ownership of land. However, when the purchaser has paid the purchase money the vendor became a ``constructive trustee of the property sold'' (
Chang v Registrar of Titles (1976) 137 CLR 177 at 185 per Mason J) and, being entitled to insist on a conveyance of the property sold, is rightly described as ``the beneficial owner'' (
R v Australian Broadcasting Tribunal; Ex parte Hardiman (1980) 144 CLR 13 at 31 which was a case concerning beneficial entitlement to shares rather than land).
More recently in
K.L.D.E. Pty Ltd v Commr of Stamp Duties (Qld) 84 ATC 4793; (1984) 155 CLR 288 a majority of the High Court (Gibbs CJ, Mason, Wilson and Dawson JJ), after considering Haque, Chang, Hardiman and other authorities concluded (at ATC 4797; CLR 296-297) that beneficial ownership of land passed to the purchaser, under an unconditional contract of sale which was capable of specific performance, on the contract being entered into notwithstanding that the balance of the purchase price had not then been paid. Brennan J (at ATC 4799-4800; CLR 300-301) dissented on the basis that beneficial ownership did not pass until the purchaser was entitled to insist upon a conveyance of the property sold which, in K.L.D.E., was when it paid the balance of the purchase price on completion.
On a narrow view K.L.D.E. is authority as to ownership of land for the purposes of an exemption from duty under s 49C(2) of the Stamp Act 1982 (Qld). However the authorities and reasoning relied upon by the majority in
ATC 4411arriving at their conclusion does not suggest that it was based on that narrow view. In my view a similar approach to ownership is appropriate under s 54(1). It is consistent with principle (as enunciated in K.L.D.E.) and the purpose and object of s 54(1) to treat a purchaser of plant under an unconditional contract capable of specific performance and who is using the plant to gain assessable income as the owner of the plant for the purposes of s 54(1). However the conclusion does not go far enough for the Lessor Partners who are not purchasers of the plant under an unconditional, or even a conditional, contract of sale.
Although it might be accurate to say that the holder of an unexercised option to purchase specific goods under a lease has a contingent equitable interest in the goods:
- • the property in the goods remains in the owner until the option is exercised;
- • the lessee has no power to dispose of the goods;
- • the lessee has no obligation to buy the goods, even conditionally, until the option is exercised.
See Benjamin's Sale of Goods (Fifth Edition, Sweet & Maxwell, 1997) at paras 1-050 to 1-053. The same view prevails in Australia. In
Forestry Commission of NSW v Stefanetto [ 1975] 1 NSWLR 332 at 338 and on appeal to the High Court (1976) 133 CLR 507, a hirer with an option to purchase was not regarded as the owner of goods within the legal or natural meaning of ``owner''. In the High Court Mason J said (at 518):
``Under a hire-purchase agreement it is the vendor, not the hirer, who is the owner of the goods and who is correctly so described as a matter of legal terminology, notwithstanding that the hirer has an `equity' in the goods which by statute may amount to a proprietary interest for certain purposes. Likewise, under a bailment or lease agreement, it is the bailor or lessor, not the bailee or lessee, who is the owner of the goods and who is properly so described.''
Mason J (at 518) accepted that on some occasions a person who has a limited possessory interest in chattels might be popularly referred to as the ``owner'' of them. Barwick CJ (at 514) also agreed that the machinery and plant was not ``owned'' (within the natural meaning of the word) by the hirer under a hire purchase agreement. See also Needham J at first instance at 338. Although Stefanetto was concerned with the meaning of ``owner'' in a commercial agreement and not in a statutory context it affords a good example of the difficulties of departing from the legal conception and natural meaning of ownership in favour of some popular or economic conception.
Ultimately ownership consists of rights over property. Accordingly, unless the legal or natural meaning is displaced by the context in which the issue of ownership arises a legal or jurisprudential, rather than a commercial or popular, analysis of these rights is required (cf
Coles Myer Finance Limited v FC of T 93 ATC 4214 at 4220-4221; (1992-1993) 176 CLR 640 at 662). Nothing in the context, object or purpose of s 54 displaces the jurisprudential or legal approach. As ownership rights are divisible the question for the purposes of s 54(1) in such cases must be whether the taxpayer, claiming to be the owner, holds sufficient rights over the plant or equipment to characterize that person as the owner in preference to any other person also holding rights over the plant and equipment. Section 54(1) anticipates that plant and equipment being used for the purpose of gaining assessable income will be owned by someone. The issue will always be whether the taxpayer claiming depreciation under the section has the requisite rights of ownership in preference to any other person. Accordingly, I do not accept the Commissioner's contention that ``entire dominion'' or ``absolute ownership'' is required for the purposes of s 54(1).
However that conclusion does not assist the Lessor Partners. They could not point to any decision which treated a lessee with an unexercised option to purchase as an owner of the property the subject of the option. The case law to which I have referred demonstrates, in general, that the holder of an unexercised option cannot be regarded as the owner of the property the subject of the option.
I am of the view that although the Lessor Partners can be said to be lessees with a contingent equitable interest in the plant by reason of their option to purchase, the rights they have under the lease are not sufficient to displace Biasca, and constitute them, as the owner of the plant for the purposes of s 54(1). The Lessor Partners' position is analogous to
ATC 4412that of the taxpayer in Melluish in the sense that their property right in respect of the plant is a ``contingent right to become the owner at a future date''.
In the present case the right is contingent, not only upon the exercise of the option and payment of the balance of the purchase price on the termination of the lease but also upon other matters provided for under the lease. These matters include discharge of the mortgage (cl 14.3) or agreement on a transfer of title subject to or on an early discharge of the mortgage and the absence of an early termination of the lease as a result of an Event of Default (as defined) (cl 13). An Event of Default under the sub-lease can also trigger the entitlement of the Lessor Partners or the shareholders in Biasca to exercise their rights under the Default Put Option Agreement (``the put option'') to require the Loy Yang Operator or its financing arm to acquire Biasca's interest in the lease and the plant and the shareholding in Biasca. Accordingly, the exercise of the purchase option is also contingent upon the put option not having been exercised.
The Lessor Partners have not established that the Commissioner erred in ruling that they are not the owners of the plant for the purposes of s 54(1) of the ITAA. As I have concluded that the Private Ruling is to be upheld on the basis of s 54(1), subject to the other two issues raised by the applicants, it is unnecessary to consider whether, if the Lessor Partners were entitled to a deduction for depreciation, Part IVA will apply to the arrangements the subject of the Ruling.
I would emphasize that my decision only concerns the rights of a lessee with an option to purchase. Whilst I accept that the rights of a lessee in that situation have an obvious analogy with those of a hirer under a hire purchase agreement it has not been necessary or relevant for me to consider the position of a hirer and whether the statutory or contractual rights of such a person enable a distinction to be drawn between a hire purchase agreement and a lease with a purchase option for the purposes of s 54(1).
Is the Commissioner bound by his public rulings to treat the Lessor Partnership as the owner of the plant?
The Public Rulings System
Part IVAAA of the Administration Act provides a framework for the Commissioner to make public rulings. Section 14ZAAE provides:
``The Commissioner may make a public ruling on the way in which, in the Commissioner's opinion, a tax law or tax laws would apply to any person in relation to a class of arrangements.''
Section 14ZAAF provides:
``The Commissioner may make a public ruling on the way in which, in the Commissioner's opinion, a tax law or tax laws would apply to a class of persons in relation to an arrangement.''
Section 14ZAAG provides:
``The Commissioner may make a public ruling on the way in which, in the Commissioner's opinion, a tax law or tax laws would apply to a class of persons in relation to a class of arrangements.''
Rulings made in relation to a class of arrangements will apply to all arrangements in that class, whenever made, unless the ruling states that it is to apply only to arrangements made after a specified date in which case it will apply only to those arrangements: see s 14ZAAH. A public ruling may be withdrawn and will cease to apply to any arrangements carried out after the withdrawal of the ruling: see ss 14ZAAK and 14ZAAL. Public rulings were not permitted to be made under Part IVAAA prior to 1 July 1992 and do not apply to arrangements carried out before that date.
For a ruling to be a public ruling, the ruling must, inter alia, state that it is a public ruling and be published: s 14ZAAI.
The ITAA makes provision for public rulings to be binding on the Commissioner. In circumstances in which a public ruling in relation to an arrangement would apply in a different way from that in which the law would apply to that arrangement, the ruling will apply if it is more favourable to the taxpayer: see s 170BA(3).
Relevantly, a public ruling will only be binding in the sense that the Commissioner cannot depart from it in making an assessment where the ruling relates to ``an arrangement''
ATC 4413and the tax law relates to ``that arrangement'' in a different way. The ruling is binding as to the way in which a tax law applies to a person or class of persons in relation to an arrangement or class of arrangements. It is not binding in relation to the principles or reasoning stated in it. This distinction is significant in the present case. Accordingly, unless the particular arrangement is the same as the arrangement in respect of which the ruling was made, the Commissioner is not bound to assess the taxpayer in the same way.
The Lessor Partners, in designing the structure of the transaction, had reference to a number of rulings which they contend establish that a lessee under an agreement that includes a right or option to acquire the goods the subject of the lease is treated as the owner of those goods for the purpose of s 54(1) of the ITAA. They then contend that in making his private ruling in relation to the arrangement in the present case, the Commissioner was obliged to rule in the applicants' favour in accordance with his public rulings which incorporated by reference the Commissioner's earlier rulings and practice on the subject.
A number of the rulings relied upon by the applicants were not binding public rulings as they were made prior to 1 July 1992 and do not fulfil the requirements of a public ruling under Part IVAAA of the Administration Act.
In Taxation Ruling IT 2500 the Commissioner sets out the Australian Tax Office's policy that although Taxation Rulings (made prior to 1 July 1992) and Advance Opinions are not legally binding, they will be followed by the Office and departed from ``only where there are good and substantial reasons''. The Ruling sets out the circumstances in which the Office would depart from a ruling, including that ``the approach adopted in a Taxation Ruling is... no longer considered appropriate''.
As binding Public Rulings relied upon by the applicants refer to earlier rulings dealing with a similar subject matter it is helpful to consider the rulings chronologically and assess their effect cumulatively.
Ruling IT 28
Taxation Ruling IT 28, a non-binding ruling, was issued on 6 July 1960 and reissued on 2 September 1983. Under this ruling the Commissioner sets out the likely taxation implications of finance companies leasing plant on a rental basis, instead of adopting hire purchase arrangements.
The Commissioner warned in the ruling that payments under lease agreements would not always be regarded as fully deductible rentals. In circumstances where the payments were essentially ``consideration for the sale of the goods purported to be leased... the payments would be outgoings of a capital nature which would not be deductible for income tax purposes''. As an example of such an arrangement, the Commissioner stated:
``If, for instance, the arrangements were such as to confer on the lessee, if he chose to avail himself of the option, a right whereby the property in the goods would pass to him from the lessor at any point of time , the arrangement would, in my opinion, constitute for all practical purposes, a contract for the sale of the goods.''
The types of transactions which prompted the Commissioner to issue the ruling were simple lease agreements which, on investigation by the Commissioner, involved:
``auxiliary arrangements under which, on the expiration of the lease, the lessee would gain ownership, or retain the use, of the goods previously leased by him.''
The ruling did not expressly state any view of the Commissioner as to whether a lessee who held an option over the leased goods would be taken to be the owner and therefore entitled to a deduction for depreciation under s 54. In stating that the arrangement for practical purposes would constitute a contract for the sale of the goods it may be implied that the Commissioner would take the view that such a lessee would be the owner of the goods for the purposes of s 54; but the ruling stops short of establishing that matter as a principle. In any event in the example given the property in the goods is to be able to pass ``at any point of time'' to the lessee. That is not the situation in the present case.
Ruling IT 2051
This ruling, dated 29 July 1983, sets out the requirements for leveraged leases to be accepted by the Commissioner for the purposes of the ITAA. The ruling describes a ``leveraged lease transaction'' as one in which:
``... a partnership of companies or other taxpayers acquires plant which it leases for a term of years to a lessee and where, by reason of the `leverage' obtained from the borrowing of a substantial non-recourse loan (or a similar arrangement), the members of the partnership are not effectively at risk for any more than a relatively small part of the funds used to acquire the plant. The lenders' security for the substantial amounts lent to acquire the plant is limited to the subject plant or to the rentals payable by the lessee.''
The stated requirements for transactions to be recognised as leveraged lease transactions for the purposes of the Act, include, inter alia, that the lessors themselves contribute 20% of the cost of the plant and that the lessees do not have a right, obligation or option to purchase the plant.
The applicants contend that the relevance of this ruling was the opinion expressed in it as to what will be accepted as a genuine lease agreement:
``An agreement may be accepted for income tax purposes as a lease, as distinct from a purchase agreement, only if the lessee does not, either during the term of the lease or at its end, have an obligation, right or option to purchase the plant. It would correspondingly be unacceptable if the obligation, right or option were to be given to an associate of the lessee or the lessor had a right or option to require the lessee or an associate to purchase. Any right in the lessee to nominate a third party purchaser would be examined to ensure that it did not amount to an arrangement for purchase.''
The ruling relates to circumstances in which a lease with an option or agreement to purchase would not be treated as a lease for income tax purposes. The ruling does not deal with the converse situation of whether a lease, which includes an arrangement by which the lessee might acquire the plant, will be regarded as a purchase agreement for income tax purposes.
In the present case although the arrangement accepted as a lease in the ruling might broadly correspond with the sub-lease from the Lessor Partners to the Loy Yang Operator that is of no assistance to the applicants' contention that the Lessor Partners, as lessees from Biasca with an option to purchase, are owners of the plant and thereby entitled to depreciation.
Taxation Ruling IT 2419
This ruling, made on 25 June 1987, relates to depreciation of trading ships purchased under hire purchase agreements. The ruling was issued after the Australian Tax Office's consideration of whether an ``eligible trading ship'' being hired under a hire purchase agreement would be owned by the hirer for the purposes of s 57AM of the ITAA which allows a deduction for depreciation of eligible trading ships, defined relevantly as ``a ship or new ship owned by a taxpayer''.
The ruling determined that the hirer would be treated as the owner for the purposes of s 57AM, on the basis that:
``Although a hirer is not the legal owner of property during the term of the hire purchase agreement it has been the practice of this office for many years to treat a hirer, under a hire purchase agreement, as the owner of plant for the purposes of the general depreciation provisions in the income tax law.''
Clearly the ruling only applies to an ``eligible trading ship'' being hired under a hire purchase agreement. As pointed out above I have not accepted that the same consequences necessarily follow under s 54(1) for a hirer under a hire purchase agreement and a lessee with an option to purchase on the termination of the lease.
The above three administrative rulings are founded on principles which are supportive of and consistent with the applicants' contentions, but they do not, in terms, apply to the applicants' claim under s 54(1) in respect of the arrangement the subject of the present case.
Public Ruling TD 93/187
Taxation Ruling TD 93/187, made on 23 September 1993, states that:
``This Determination is a public ruling to the extent that it is capable of being so in terms of Part IVAAA of the Taxation Administration Act 1953.''
The ruling considers the taxation treatment of a lease where the lessee or an associate has an option to purchase the shares of, or a controlling interest in, the lessor company. It commences with the principle in Ruling IT 28 that a lease which provides the lessee with an option to purchase the leased goods will be treated as a contract for the sale of the goods. The ruling states that:
``... an arrangement under which the lessee or an associate may gain control of the company which holds the leased goods falls within this category and hence will not be accepted as a lease. It would correspondingly be unacceptable if the lessor had a right or option to require the lessee or an associate to purchase the shares of, or a controlling interest in, the lessor company.''
The ruling is primarily concerned with the policy that in the circumstances where the lessee may control or gain control over the company which owns the leased goods, the lease payments ``will include outgoings of a capital nature which will not be deductible for income tax purposes''. The ruling then states that:
``The lessee will be entitled to claim depreciation on the leased asset and any interest components of the lease payments.''
The ruling applies in terms to a lease arrangement between related or associated companies. Whilst it is founded on the principles relied upon by the applicants, I do not accept that the complex tripartite arrangement in the present case (sale, lease and sub-lease) is the same arrangement as that with which the ruling is explicitly or implicitly concerned.
Taxation Determination Number TD 94/20
Taxation Determination TD 94/20, issued on 17 March 1994, does not state that it is a public ruling for the purposes of Part IVAAA of the Administration Act. Although the parties accepted it to be a binding public ruling, it does not appear to comply with s 14ZAAI.
The ruling answers the question ``Is a lease acceptable if it is based on a $1 residual value or if the lease is for the useful life of the asset?''.
The ruling states that where a lease is for the whole or a substantial part of the useful life of an asset, the lease is not acceptable. In other cases the lease may be acceptable even if the residual value is only $1 if the residual value conforms to the table of values set out in IT 28 and TD 93/142. If the lease is for the whole or a substantial part of the life of the asset, only the interest component of lease payments will be deductible. The ruling concludes:
``If a lease is not accepted, the lease payments will include outgoings of a capital nature which will not be deductible for income tax purposes. The lessee will be entitled to claim depreciation on the leased asset and any interest components of the lease payments. The lessor will not be entitled to claim depreciation, but will be required to treat the transaction as either a financed purchase of the leased asset by the lessee, or, if a sale and leaseback was involved, as a loan to the lessee. The reference to sale and leasebacks in the last sentence is not to be taken as an acceptance of sale and leaseback transactions.''
Once again the arrangement in this ruling is not that entered into in the present case although the principle upon which it is based is relied upon by the applicants.
Public Ruling TR 95/30
Taxation Ruling TR 95/30, made on 30 August 1995, states that
``to the extent that it is capable of being a `public ruling' in terms of Part IVAAA of the Taxation Administration Act 1953, [it] is a public ruling for the purposes of that Part.''
The ruling appears to have been made pursuant to s 14ZAAE of the Administration Act.
The ruling describes the ``class of person/ arrangement'' as follows:
``... financing arrangements taking the form of a sale and leaseback of assets that were owned by the lessee prior to the sale. Under these arrangements, the owner of an asset sells the asset but continues to use the asset as lessee under a lease from the purchaser.''
If Biasca had leased the assets back to the Loy Yang Operator it is likely that it would have been entitled to the benefit of this ruling. However, it leased the plant to the Lessor Partner and not the Loy Yang Operator.
The ruling states that the taxation consequences of a transaction will depend upon its legal characterisation, and that if the legal characterisation is that of a ``sale and leaseback'' arrangement the ``taxation consequences will generally be as outlined'' in the ruling (emphasis added).
The description of the ``arrangement'' to which the ruling applies implicitly involves two parties: (1) the original owner/vendor and subsequent lessee of the asset and (2) the purchaser and subsequent owner/lessor of the
ATC 4416asset. The arrangement contemplated is one where the original owner sells the asset to the entity which will lease the asset back to the vendor. The ruling describes the lease as resulting in ``periodic payments by the lessee to the lessor'', that is, by the purchaser as lessor to the vendor as lessee.
In describing the ``usual tax treatment of sale and leasebacks'', the ruling states:
``The lessor , as owner of the asset, is entitled to claim a deduction for depreciation, or other deduction, as appropriate.''
The ruling adds that the lessee's entitlement is to ``claim the lease payments as a deduction in full''.
However the ruling also observes that a purported sale and leaseback transaction may have a different tax effect. Where sale and leaseback arrangements include an option or other right for the lessee to acquire the asset, the lease payments are `` likely to be partly of a capital nature''. (Emphasis added) In these circumstances, the ruling states that:
``... the leaseback will be treated by the ATO as akin to hire purchase arrangements, giving the lessee the ownership of the asset for depreciation purposes: refer to Taxation Rulings IT 28 and IT 196.''
However, the ruling later states, at paragraph 46:
``Arrangements for the repurchase of the asset, whether they are automatic or occur at the option of the lessee, are likely to be regarded as akin to a hire purchase agreement. In circumstances where the arrangement for repurchase of the asset was regarded as akin to a hire purchase arrangement, the lessee would be allowed a deduction for the revenue component of the payments, and consistent with current ATO practice, for depreciation (see Taxation Rulings IT 28 and IT 196, but cf (1955) 5 CTBR (NS) Case 90).''
This last ruling only deals with a sale and leaseback which is not the same arrangement as the tripartite arrangement (sale, lease, sub- lease) in the present case. However, the ruling is significant as a reading of the whole of the ruling indicates that the Commissioner is no longer stating with certainty that he would treat arrangements for purchase ``whether they are automatic or occur at the option of the lessee'' as akin to a hire purchase agreement. He only says that he is ``likely'' to do so. Also in the introductory section the Commissioner states only that the consequences in the ruling will ``generally be as outlined''. Accordingly, in the most recent of the rulings the Commissioner has moved away from his earlier principle of treating a lease with a purchase option as a purchase agreement in the same way as he has treated a hire purchase agreement as a purchase agreement for the purposes of the ITAA.
For the reasons set out above the public rulings are not in respect of arrangements of the complex tripartite kind made in the present case. Insofar as the series of rulings state the principles upon which the applicants rely, in the last ruling the underlying principle of treating a lease with a purchase option as an agreement to purchase was modified to be a principle that is ``likely'', but not necessarily, to be applied. Accordingly, the Commissioner was not bound by s 170BA of the ITAA to rule in the applicant's favour by reason of his public rulings. Further I am satisfied that, contrary to the applicants' contentions, the Commissioner acting consistently with his rulings and practice would not necessarily form the opinion that the arrangement in the present case is to be regarded as akin to a hire purchase agreement or an agreement for purchase by the Lessor Partners. Consequently, even taking the broader view of the ruling system urged by the applicants, I would not be satisfied that on that view they would be entitled to depreciate the plant as owners under s 54(1).
Thus far I have approached the matter on the basis that the arrangement in the present case is the tripartite transaction of a sale, lease and sub- lease of the plant back to the original vendor/ operator. However in reality the arrangements involve other aspects which further distinguish it from the arrangements the subject of the rulings. The option to purchase is contingent (as explained earlier in relation to s 54(1)) and, in substance, can only be exercised at the termination of the lease and not ``at any time''. The option is also subject to the mortgage. Further, the put option is another aspect of the arrangement that suggests that it has departed from both the letter and the spirit of the Commissioner's rulings and practice.
Accordingly, the applicants' case in reliance upon the binding rulings has not been made out.
ATC 4417I have confined my review of the rulings to the s 54(1) issues arising in the present case. Several of the rulings also raise issues under Part IVA which would have had to be considered in the event that I found in favour of the applicants on the s 54(1) ground in relation to the rulings. As I have not done so it is not necessary to consider the Part IVA questions raised in that regard.
The present case suggests that the public rulings to which I have referred may not have served the purpose Parliament envisaged that they would serve. When the binding rulings system was introduced into the Administration Act by the Taxation Laws Amendment (Self Assessment) Act 1992 the Minister Assisting the Treasurer stated in the Second Reading Speech for the Bill:
``This Bill will provide real benefits for taxpayers by making the system fairer and more certain.
The new system of binding and reviewable rulings will promote certainty for taxpayers, and thereby reduce their risks and opportunity costs. The new system will also be fairer because taxpayers will be able to object to private rulings and have the matter reviewed by an independent tribunal or court.''
(Vol. H. of R. 184 at 2774-2775)
By making a ruling that states that it is binding ``to the extent it is capable of being a public ruling'', or that a particular arrangement is `` likely to be regarded as a hire purchase arrangement'', or that tax treatment of a particular arrangement is to be ``generally'' as outlined the Commissioner is not providing the certainty that binding public rulings are intended to provide. Further, rulings in such terms obviously have a tendency to mislead, which is antithetical to the system of certainty and fairness intended to be provided to taxpayers by the public ruling system.
Is the private ruling an abuse of power?
The applicants have relied upon the long- standing practice and the rulings of the Commissioner to which I have referred to contend that, in refusing to rule that the Lessor Partners were owners of the plant for the purposes of s 54(1), the Commissioner is not acting in good faith, fairly and without discrimination in the administration of the powers conferred upon him under the provisions of the ITAA and the Administration Act.
For present purposes I am prepared to assume that, at least since the decision of the House of Lords in
R v Inland Revenue Commissioners; Ex parte Preston  AC 835, it can be taken to be accepted in England, Australia and New Zealand that:
- • the revenue authorities owe a duty of fairness to each individual taxpayer;
- • the Court will intervene by judicial review if satisfied that the unfairness complained of renders the authorities' insistence on performing their duties or exercising their powers an abuse of power.
Recent decisions in England in
R v Inland Revenue Commissioners; Ex parte Unilever plc  BTC 183, in Australia in
David Jones Finance and Investment Pty Ltd & Anor v FC of T 90 ATC 4730 (on appeal 91 ATC 4315 at 4331), and
Pickering & Ors v FC of T 97 ATC 4893 at 4900-4901, and in New Zealand in
Sigma Agencies Ltd v Collector of Customs (Northern Region) (1997) 1 NZLR 467 at 491 set out the basis for and provide potential examples of the Preston principle of fairness.
The cases in which this issue has been raised usually relate to procedural or machinery matters (Preston, Unilever) or the exercise of discretionary powers (Pickering). There may be some doubt as to how the principle would be applied to decisions on substantive matters (such as the operation of s 54(1)) although such matters were accepted in David Jones ``arguably'' to fall within the principle.
David Jones concerned certain taxpayers' entitlement to a rebate under s 46(2) of the ITAA, which had been allowed by the Commissioner over a long period contrary to the decision of the High Court in
Patcorp Investments Ltd & Ors v FC of T 76 ATC 4225. O'Loughlin J, in considering the Commis- sioner's departure from his practice of allowing the rebate without notice to taxpayers, said at [ 90 ATC] 4734:
``Arguably therefore, the mandate given to the Commissioner in sec. 8 to attend to the general administration of the Act, requires him to exercise his statutory powers with `procedural fairness' - and, so it was said, it would be unfair on the part of the Commissioner to change an entrenched practice without warning and with
ATC 4418retrospective effect and in circumstances (as alleged in para. 13(ii) of the statement of claim) where a `rebate of tax (is) allowed to other taxpayers in like circumstances'.''
However since David Jones the binding private and public ruling system has been implemented, inter alia, to create greater certainty, fairness and consistency in the administration of tax laws. The system should limit, if not eliminate, the potential for unfairness in respect of substantive matters arising under a tax law.
I need not pursue these matters further as I am satisfied that there are a number of answers to the applicants' contentions.
- 1. The Commissioner's administrative practices and his rulings must be viewed in the context of the changed statutory regime brought about by the binding public and private ruling system. The very essence of that system is that taxpayers are entitled to rely on the public rulings as being binding on the Commissioner in the manner provided by the Act but, when there is doubt, they may apply for a binding private ruling to resolve the doubt. That is precisely what has occurred in the present case. For the reasons set out above the various rulings, when viewed cumulatively, did not entitle the Lessor Partners to conclude that their leveraged financing and leasing arrange- ments necessarily fell within the rulings or practice or otherwise bound the Commissioner to treat them as owners of the plant under s 54(1). I would infer that the leveraged leasing arrangements were made conditional upon a private ruling being obtained as there was doubt about the applicability of the Commissioner's rulings and practice. In these circumstances the Commissioner did not breach any duty of fairness in arriving at a conclusion in his private ruling that was required by s 54(1) and was not precluded by his public rulings.
- 2. The unfairness of which the cases speak usually arises when the Commissioner has misled taxpayers by openly or publicly adopting a specific practice from which he has unfairly departed without reason or prior notice of his intention to do so. David Jones was concerned with a decision changing past practice with retrospective effect without affording the taxpayer an opportunity to be heard before doing so. The present case is a far cry from that situation. The Commissioner's most recent public ruling on the issue made it quite clear that, at best, it was ``likely'' that he would treat a lessee with an option to purchase as an owner for the purposes of s 54(1). Before forming a different, and adverse, view on that issue and changing any previous practice in that regard the Commissioner afforded the applicants every opportunity to persuade him that he should not do so. To the extent that there was a departure by the Commissioner from previous practice or the principles stated in his rulings I am not satisfied that the departure breached any duty of fairness.
- 3. For the reasons already set out I am satisfied that the leveraged financing and sub-leasing arrangements in the present case differ in significant respects from the lease with a purchase option arrangement the subject of the Commissioner's practice and described in some of the rulings. The tripartite (sale, lease and sub-lease) arrangements, the plant mortgage and the put option clearly distinguish the transaction from those the subject of the rulings and practice. It is a gross over-implification to say that, in accordance with the rulings and practice, in any case where there is a lease with a purchase option the lessee is the owner for the purposes of s 54(1). There are possibly other aspects of the complex financing arrangements (which I have not found it necessary to consider) that might also distinguish the present transactions from the simple lease transactions considered by the Commissioner in his practice and rulings. The applicants may have had a justifiable expectation that the Commissioner was likely to apply the principles he relied upon in his rulings and practice but prudence and common sense dictated the application for the private ruling that was made. It was for the Commissioner to determine how the tax law would apply to the arrangement and whether it was distinguishable from the arrangements the subject of his rulings and practice. If he erred in doing so the applicants were entitled to have the matter reviewed by the AAT or the Court. They did so. There was no substantive or procedural unfairness in that process.
Accordingly, I am not satisfied that any abuse of power has occurred.
For the above reasons I have concluded that the application is to be dismissed with costs.
THE COURT ORDERS THAT:
1. The application is dismissed.
2. The applicants pay the respondent's cost of and incidental to the application.
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