Ausnet Transmission Group Pty Ltd v The Commissioner of Taxation of the Commonwealth of Australia

[2015] HCATrans 76

[2015] HCATrans 076

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Melbourne   No M139 of 2014

B e t w e e n -

AUSNET TRANSMISSION GROUP PTY LTD (ACN 079 798 173)

Appellant

and

THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Respondent

FRENCH CJ
KIEFEL J
BELL J
GAGELER J
NETTLE J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON THURSDAY, 9 APRIL 2015, AT 10.14 AM

Copyright in the High Court of Australia

MR S.H. STEWARD, QC:   If the Court pleases, I appear with my learned friends, MS L.A. HESPE and MS K.J. DEARDS, for the appellant.  (instructed by Deloitte Lawyers Pty Ltd)

MS H.M. SYMON, QC:   If the Court pleases, I appear with my learned junior, MR E.F. WHEELAHAN, for the respondent.  (instructed by Australian Government Solicitor)

FRENCH CJ:   Yes, Mr Steward.

MR STEWARD:   As the Court will have seen from our written outline, we propose to address the matter by dealing with the negative limb first, the question of whether the payment was on capital account, and then we will address the positive limb after that, which is the point raised by the notice of contention.

Let me address the negative limb first.  There is an anterior issue which does need to be decided before we get to determine the character of the imposts in question.  The anterior question arises because, perhaps surprisingly, the parties do not agree about what is the source of the liability.  My learned friends say the source of the liability is a promise to pay the imposts contained in a contract called the asset sale agreement.  We do not agree.  Our primary position is that there was no promise to pay the impost, but rather the source of the liability arises from the Order in Council which was authorised by section 163AA of the Electricity Industry Act.  We simply paid a tax which was part of the regulatory regime.

FRENCH CJ:   Did that liability crystallise upon transfer?

MR STEWARD:   It crystallised upon us being the holder of the licence at the specified dates in 1998, 1999, and 2000.  The reason why we need to decide that issue first is because deciding that issue correctly will then tell you what was the advantage, if any, obtained.  This is a bit like the South Australian Battery Makers Case where, in the judgment of Justice Gibbs, as his Honour then was, his Honour said that the first issue to decide is what was the advantage obtained and in order to decide that we need to ask the anterior question, why did we pay it?  Why are we being made to pay this impost?

The first issue is confessedly largely one that turns upon the factual material before the Court.  The second issue, which is this - if we are wrong, if we are wrong that the source of the liability is the order, and if my learned friends are right that there was a promise given in the asset sale agreement then we, in our submission, still win and we do so for the reasons largely given when we sought special leave, namely asking the question what was the price for the transmission business is not the correct question to ask.  Rather, one must ask from the perspective of the taxpayer, what advantage was secured by paying these imposts?

It will be our submission that there was, on the one hand, a purchase price that was paid – some $2.5 billion – called the total purchase price in the agreement.  The imposts were a separate matter altogether.  The dictum of Justice Fullagar from the Colonial Case that was applied against my client below really needs to be read in context as merely a description of the usual outcome and not a discrete test.  The correct test for the negative limb was what is the character of the advantage sought?  What was it calculated to effect?  Now, could I turn to that anterior question?  We should commence with the section in play, section 163AA, which is attached to the submissions.

FRENCH CJ:   Incidentally, what reprint of the Electricity Industry Act should we refer to?  There is Reprint 30, I think, and Reprint 40.

MR STEWARD:   Your Honour, I think we are agreed between us that it is the one dated 27 November 1997.  The section has not materially changed before its repeal.  In our written submissions, we made two observations about the language of this section which we respectfully submit are important.  The first proposition was that by its terms this provision creates a power to impose charges but only on a certain type of exigible entity.  The type of exigible entity is the holder of a licence, relevantly, here, a transmission licence.  There is no more general power to impose charges on anybody else. 

Secondly, we submitted that the manner of imposition is rendered expressly clear – liability will arise – and the words are “as an impost”, not as a contractual promise but as an impost, that is, with respect, as a special tax imposed by the State on a very narrow class of exigible entity and as one might expect with a tax, it is paid in to the consolidated fund. 

Could we make three further observations about this provision?  The power is broadly linked to Victoria’s privatisation program.  We do not deny for a moment that the imposts are connected to and are bound up with the privatisation of the transmission business.  There is no attempt to deny that.  We can see how it is bound up with the privatisation program in subsection (3).  Subsection (3) by its terms turns off the power to make the order if the relevant transmission company has already been privatised. 

So you can only make the order before privatisation which is why, as we shall see, the order was made some six or seven days before completion of the contract and transfer of the transmission licence.  But secondly, other than that connection, the provision by its terms and on its face gives a power to impose charges without regard to the sale of any electricity business.  It does not turn upon sale as the font of the power to impose the charge. 

GAGELER J:   But could it only apply to place the impost where a sale has occurred?

MR STEWARD:   I think, your Honour, that is the expectation, yes, that it will only take place before privatisation and subsection (3)(1) infers - was, if you like, a statement by the State that it would not impose any more charges once you privatised. 

GAGELER J:   So it could only apply in respect of the transmission assets to be sold ‑ ‑ ‑

MR STEWARD:   I think, your Honour, we would submit it can only apply to what is called a public transmission company.

GAGELER J:   Yes.

MR STEWARD:   That term is not defined, but one imagines it is intended to refer to a transmission company which has not been sold.  The third ‑ ‑ ‑

NETTLE J:   I am sorry, Mr Steward ‑ ‑ ‑

MR STEWARD:   Yes, your Honour.

NETTLE J:   It would have been open to impose the charge on PNV even if the company’s assets had not been sold.

MR STEWARD:   Yes.

NETTLE J:   Even though it is unlikely any such charge would have been imposed.

MR STEWARD:   Correct, precisely.

NETTLE J:   It was open to do so.

MR STEWARD:   Yes, it was.  At that time, your Honour, I think it is common ground PNV would have paid notional tax to the State Government in any event, so it would have perhaps made no sense to do so, but it was open, yes.  The third observation I wanted to make clear about section 163AA is that there is a separate charge which the holder of the transmission licence must nonetheless pay annually, and that is derived not from section 163AA but from a clause in the transmission licence itself, clause 16.  I do not need to take the Court to it. 

Could I then invite the Court to go to the Order in Council which appears at appeal book 3.  It may be attached to submissions.  In any event, before I take you to the language of the Order in Council I wanted to make five broad propositions, which I do not believe are in dispute.  I make these five broad propositions to provide context to why the Order in Council was made. 

The first proposition is that in order to undertake a transmission business in Victoria you needed to have a licence – section 159 of the Electricity Industry Act.  Secondly, as a licence holder, the revenue one could charge at that time was regulated.  It was regulated by a tariff, and the tariff imposed what is known as the maximum allowable revenue, known below as the MAR.  So there was a cap on the revenue you could earn.

Thirdly – and this is not in dispute – the State made a mistake in determining the MAR.  In a review that took place prior to privatisation, it realised that the MAR was too high, and had to address that problem.  Theoretically – and this is an important point for us – that discovery could have taken place after sale.  The review that took place did take place before sale, but theoretically they may have discovered that the MAR was too high post‑sale. 

Fourthly, the imposts in question here exist as the solution to the problem.  What they do and what they are intended to do is to remove the excess of MAR in the period before they were free to correct the MAR.  They were not free to correct the MAR until the distributor companies, who also had a retail business, until the tariff regulation for the retail business was removed in 2000.

FRENCH CJ:   There was some variable called X, I think.

MR STEWARD:   The X factor, your Honour.

FRENCH CJ:   Yes.

MR STEWARD:   I have hesitated to refer to it in that way.  I make it clear it does not refer to the quality of our arguments.  It is a mysterious factor designed to enable the MAR to be adjusted annually – CPI times X.

FRENCH CJ:   Yes.

NETTLE J:   The X factor could have been amended by legislation to do what was done with these additional charges, could it not have?

MR STEWARD:   It could have, and another option that was open to the government that was not taken was when they came to adjust the X factor in 2000, they could have adjusted it in such a way as to recoup the excessive MAR from the previous years.  That is important because what this is telling you is that the purpose of the imposts is nothing to do with the sale of the transmission business as such.  It is about the income earned after it, and about making sure that the entity only earned the correct amount and not an excessive amount.

GAGELER J:   If the MAR had been reduced before the sale, the expected income stream from the asset sold would have been reduced ‑ ‑ ‑

MR STEWARD:   Yes.

GAGELER J:   ‑ ‑ ‑ and the sale price would have been, presumably, reduced.

MR STEWARD:   Absolutely correct.  There is no question about that because, of course, your Honour, the calculation of sale price takes place by reference to future cash flows discounted.  There is no doubt about that.  But all outgoings have to be taken into account in deciding that.  Cash flow – that includes salary and wages, operating expenditure, all of those things will affect the sale price but it does not tell you whether those outlays when incurred are on revenue or on capital account. 

But the point your Honour made is an important one because if, of course, the government had had the capacity to reduce the MAR we would not be here because economically what my learned friends are seeking to tax here is MAR that we have to give back.  It is MAR that we do not enjoy economically because we give it back by paying the impost.

That is an important point to understand here when looking at this from – as we are urged to do so – a practical and business point of view.  What my learned friends are really, really trying to do is tax income that economically we have to give back, that we do not economically enjoy.  I will return to that later on, if I may.

FRENCH CJ:   But your characterisation argument really focuses upon the character of the liability which you say derives from the statute read with the order?

MR STEWARD:   Yes, that is our primary case that really what happened here is we paid a tax which secured for us no advantage but reduced our income.  That is our primary case.

KIEFEL J:   It was a tax on gross profits?

MR STEWARD:   A tax on gross revenue, as we shall see, not profits – gross revenue.  The final proposition which I have not yet made here by way of background is that having removed the excess MAR over 1998, 1999, 2000, the impost ceased to apply.  So the timing of the impost – why are they made in those years and why do they stop – is bound up with the ability in 2000 to correct the MAR in a way they could not have done before sale in the way that your Honour just mentioned.

The Order in Council, if I could take you to it now, is at appeal book 2, page 742.  I am not going to read it out.  I just want to make the following observations – short observations, if I may.  First, we again see the same language as that invoked in section 163AA, namely, the reference to it being an impost and an impost imposed upon a particular type of entity, the holder of the transmission licence. 

Secondly, each of the charges is tied to particular years in which the holder of the licence earns income from the exploitation of the rights conferred by it.  The required nexus for each year is conveyed by those very favourite words in statutes, the words “in respect of”.

Thirdly, and, with respect, contrary to the contentions of our learned friends, this order did not create in 1997 a present liability to be discharged in future years.  The key word, with respect, is the word “payable” and its conjunction with particular dates in future years.  The liability is not payable in 1997 only to be paid out in future years.  Rather, liabilities become payable on particular future dates.  As best as I can see, there are 12 instalments that are required, or 12 payments, beginning on 31 March 1998 and finishing on 31 December 2000.

What is significant, of course, is not only is it payable on future dates, but it identifies the person who will pay it then as being the person who holds the licence.  The final words of the order make it clear that the draftsperson expressly contemplated – indeed, had to contemplate – that the person who would bear the liability in the future years would not necessarily be the first person identified as holding the transmission licence, namely the vendor, PNV.  This order applies to any person to whom the transmission licence is transferred.  In our respectful submission, in 1997, what was created by the Order in Council was a future liability and a contingent liability, the contingency being that you hold the licence at those dates.

FRENCH CJ:   Now, how does that interact with subsection (3) in respect of a non‑public transmission company?

MR STEWARD:   The interaction is the timing.  The order had to be made before the licence was transferred to the privatised entity.  Your Honour will see it says at the commencement of the order:

The [Order] in Council . . . declares that the amounts payable as an impost . . . as the holder of a licence –

PNV.  But the draftsperson knew, at the time this order was made, two things, your Honour.  Firstly, the asset sale agreement had already been entered into, and, secondly, the completion was about to take place, which is why we see these ‑ ‑ ‑

FRENCH CJ:   Sorry, what I am trying to understand is how does the order continue to apply once the licence has been transferred to a non‑public transmission company?

MR STEWARD:   Your Honour, the answer is that subsection (3) provides a power to make the order and then that power is turned off, effectively, after privatisation.  But the order can continue to exist, having been made prior to the act of privatisation.

FRENCH CJ:   Of course, you have made a promise not to challenge the validity of the order, I think.

MR STEWARD:   I will come back to that.

FRENCH CJ:   Yes.

MR STEWARD:   There may have been some concern that it looked like an excise, but I will return to that.

FRENCH CJ:   Well, there might have been a concern about its interaction with subsection (3).

MR STEWARD:   I cannot answer that, your Honour.  There is no evidence about that, unfortunately.  Now, as it happens, the possibility of a transfer of the licence to a privatised entity was not only clear because the asset sale agreement had been entered into, but the language of the end of the Order in Council contemplates that it might have been transferred again.  That is why it goes to the trouble of making sure that whoever is going to be the transferee has to be someone who will undertake to pay it.

NETTLE J:   But you would have remained bound by your covenant in the agreement to pay it in any event, would you not?

MR STEWARD:   No covenant in the agreement, your Honour.

NETTLE J:   No promise to pay?

MR STEWARD:   No promise to pay.  I will come to that; no promise.  Just on that, as it happened in the year 2000, ownership of the appellant did change.  There was not a sale of the business but there was a sale of all of the shares.  There is a finding of that at paragraph 6 in the judgment of the learned primary judge. 

FRENCH CJ:   It was GPU to SPI, was it not?

MR STEWARD:   Yes.  Now, we respectfully submit that the contingency – that is that you had to be the holder of the licence – was sufficient to deny the presence of a present liability in 1997 when PNV, albeit only for a few days, existed – co‑existed with this order, if you like.  Could I invite the Court to go to the decision of this Court in James Flood 88 CLR 492, which appears on my learned friend’s list.

James Flood, it will be recalled, concerned the deductibility of a provision for holiday and sick pay which had not yet been taken up by various employees.  The deduction was denied on the ground that it had not yet been incurred.  The liability was fully accrued but this Court identified that there existed a number of contingencies which might intercept, to use the language of the Court, the accruing right of the employee to take holiday and sick pay.  If I could invite the Court to go to page 504 of the judgment to the second paragraph, and there is a passage about seven or so lines into that paragraph commencing “Now in dealing with that instrument”, their Honours say:

it is necessary at the outset to observe that under the award an employee may fail to become entitled to annual leave for a number of reasons.  He may die, his employment may be terminated . . . From the employer’s point of view there is a further possibility.  He may never become liable to give his employees two weeks’ leave on full pay because he may sell his business . . . It may be true that all these reasons which, so to speak, would intercept the accruing right of an employee to be paid by the taxpayer are all of a particular character, but it is difficult to say in the face of them that there is a definite obligation to make a payment, incurred in respect of each completed month –

The reason why we have taken the Court to take passage is because in James Flood the possibility of the sale of a business was sufficient to deny a present liability.  It was a contingency which ensured that the future liability remained contingent.  We rely upon that because of the contingency here that you had to be the holder of the licence.  The liability to pay the impost could be intercepted, to use the language of James Flood, by selling the transmission licence. 

It follows from what we have just said – and with great respect to Justice Edmonds below – that his Honour was incorrect when he reasoned that PNV had a present liability prior to completion, which was then assumed by the taxpayer appellant.  Nothing was assumed in 1997 because there was nothing yet to be assumed.  Liabilities were in the future.

GAGELER J:   But James Flood is a case about the application of the word “incurred” in section 51 of the Act as it then stood.

MR STEWARD:   Absolutely, yes.

GAGELER J:   It is not suggested here that the liability that arose under section 163AA was incurred at the time of the order being made.

MR STEWARD:   My learned friends submit that.

GAGELER J:   I see.

MR STEWARD:   Yes, they do.  Could I next turn to another document, being the information memorandum which was given to all bidders.  There are three or four important passages in that information memorandum which I need to draw to the Court’s attention, both for the purposes of the negative limb contentions and also for the positive limb contentions and it is convenient to do it now rather than take you back to it later on. 

The information memorandum appears at appeal book volume 1, page 66.  Can I first ask the Court to go to page 80 - that is using the page numbers for the appeal book rather than the information memorandum.  You will see about point 7 there is a heading “Incentive Based Regulatory Regime”.  There is a useful description in the following paragraph of the MAR and the X factor, but the first sentence of the next paragraph is what I would like to draw to the Court’s attention.  It says:

As the CPI‑X regulatory regime applies to PowerNet’s revenue and not its profits –

and then, if I could take the Court to go to page 99, you will see in the middle of the page – and I draw this to the Court’s attention now for we will need to return to it – following from about point 3 onwards, there is a description of what the revenue cap is calculated to reflect.  This sets out the composition of the calculation.  It relates to “efficient levels of operating and maintenance costs”, “a return on capital”, and “straight line depreciation”.  I draw that to the Court’s attention now because that was very much relied upon by the learned primary judge for her Honour’s conclusion that there was a distribution of profits, rather than a payment of gross revenue and I will turn to that.

KIEFEL J:   When her Honour referred to profit, she was talking about profits after tax, was she?

MR STEWARD:   The answer is, we think, yes.  We think that like the United Energy Case, which we will come to, her Honour concluded that the payment came out of a fund which had already borne income tax.  But we disagree with that.

KIEFEL J:   At page 80, when this memorandum says “revenue and not its profits”, the profits it is referring to are net profits after tax?  It must be because revenue is otherwise just income, is it not?

MR STEWARD:   It is not clear.  I will show your Honour some pro forma accounts in a minute with would tell you exactly where the imposts lie in terms of it being before or after tax.  I will come to that in a moment.  Could I then draw the Court’s attention to pages 101 and 102?  On 101, at paragraph 2.4.2, there is an explanation of the imposts in dispute in this matter:

It is intended that an Order will be made pursuant to section 163AA . . . imposing the following specified charge . . . 

The specified charges will be fixed amounts and payable quarterly in arrears for each financial year . . . 

It is intended that the charges . . . will not be imposed from 31 December 2000.  

Then it goes on to say – there is a diagram at paragraph 2.4.3.  We provided to the Court, and I do not know whether it reached your Honours, a colour version of that diagram - I am indebted to your Honour.  Your Honours will see the way the impost works in the diagram.  We have a heading “PowerNet’s Revenue” and we say “gross revenue” and I will come back to that.  You will see that the bit in blue is the actual revenue, the bit in black – on mine at least, anyway – is the corrected MAR, or maximum available revenue, and the yellow bit is the bit they have to take away because it is too high.  We can see then at paragraph 2.4.4 the explanation:

The Tariff Order currently specifies that an X-factor of 1.79% will apply to 31 December 2000.  PowerNet’s revenue caps have effectively been reset through the licence fee –

that is the imposts –

and the new X-factor for 2001 and 2002.  This approach to re-setting the revenue caps was adopted:

(a)due to constraints imposed by the Maximum Uniform Tariffs which the DBs –

that is distributors –

can charge franchise customers and which currently apply to consumers without revision to 31 December 2000; and

(b)to avoid any windfall gains accruing to PowerNet and its customers which may result from the re-set.

That is the explanation of why the impost is there, and this is given to all the bidders, so they all know why they have to pay it.  But note there is no mention of the impost being consideration for the sale of the transmission business.  Bidders are told that the source of the liability is the Order in Council and section 163AA.  There is no mention of it being part of the bargain that will be negotiated or reached between bidders and the State; it is just a given. 

It is a necessary part of the regulatory regime which any winning bidder must subject themselves to if they are successful.  Nor is there any suggestion here that the means of securing the correct regulatory MAR is to be by way of a sharing or distribution of profits, or surplus, or any net figure.  Certainly, there is no suggestion that the payment is to be a payment out of taxable income, as that term is defined in the Act.

We can see – and your Honour Justice Kiefel, this addresses the question you asked me earlier – where the impost is to lie if we go back to page 79.  There is a table 1.1, which sets out summary, pro-forma, historical and forecast financial results.  We will see there a profit and loss statement.  We can see the prescribed revenue flowing in, excluded revenue and other revenue; “Other revenue” is a reference to the fact that not all the sources of revenue of the owner of the transmission business was by prescribed services.  They had other sources.

One then sees the licence fee, the impost, operating as a reduction, or a deduction from the gross prescribed revenue.  It is sitting there tellingly with operating expenses, which also reduce gross revenue, and the net result is the statement of EBDIT, Earnings before Depreciation Interest in Tax.  Here, there is an unequivocal representation to bidders, that the impost is going to be a means of reducing your gross revenue, and it is going to happen, just like your expenses, before we get to the fund of profits upon which you can distribute dividends, as the law then was, or the taxable income of the company.

MR STEWARD:   There is another version of that, if it matters – and if I ask the Court to just take a note at page 161.  There is one final matter I want to draw the Court’s attention to at page 210.  At the paragraph in the middle of the page, “A5.3 Transmission Licence”:

PowerNet’s Transmission Licence was issued by the ORG pursuant to the powers in the Electricity Industry Act.  The licence is not exclusive.

The licence is not exclusive.  That stands in contrast to the position of the distributors during this time, which is described in the United Energy Case, which we will come to.  For distributors, in Victoria, following privatisation for five years each distributor had a statutory monopoly over a geographic area for the sale of electricity.  The United Energy Case held that the fee paid in that case was for the benefit of that exclusivity – that statutory monopoly.  We do not have a statutory monopoly.  True it is one can infer readily, that we have what must be called a natural monopoly by economists because we have just bought the transmission network but we do not have a legal monopoly.

FRENCH CJ:   The acquisition of the licence was subject to an approval was it not, by the regulator?

MR STEWARD:   Yes.  The approval process, I think, is set out in section 161 of the Act, 161 and 162.

FRENCH CJ:   Yes.

GAGELER J:   The whole point of having a MAR is to regulate the pricing of what would otherwise be a monopoly supplier.

MR STEWARD:   No, your Honour, I cannot agree with that.  That may represent a possible economic justification for it, but one must bear steadily in mind a distinction between, on the one hand, the economic justification and then the means adopted to resolve or secure that object.  The whole point of the MAR is that the means adopted was a reduction on gross revenue, not a sharing of profits.  That is the point. 

Could I now turn to the assets sale agreement, which of course is the source of my learned friend’s identification of the liability and which may or may not be thought to contain a covenant to pay it.  It appears in the appeal book volume 2 at page 391.  Now, confessedly, of course, both Justice Gordon at first instance and Justice McKerracher agreed that it did contain a promise.  Justice Edmonds did not say it contained a promise.  His Honour said it was bound up in the total purchase price.  Could I take the Court to the main operative provision, clause 2.1.  It is at page 402:

Subject to the terms of this agreement, on the Completion Date:

(a)       the Seller must sell . . . 

(b)       the Buyer must . . . 

(1)     buy . . . 

(2)     assume the Creditors –

and there is a provision that addresses that which I will take your Honours to, and –

(3)     pay the Total Purchase Price –

The term “Total Purchase Price” is defined earlier on page 400 about point 7:

“Total Purchase Price” means $2,502,600,000 –

and following that there is a description of it –

being the sum of the price of the Assets . . . net of Contract Liabilities and Creditors . . . assumed –

Now, the Commissioner argues before this Court for the first time that the creditors there include the State of Victoria because the Order in Council was made before completion and created a present liability on PNV.  Now, for the reasons that I have already sought to articulate, there was no such present liability.  There were future liabilities and your Honours will see that the type of creditors referred to in the total purchase price are only those which are assumed.  The clause which addresses the assumption of liabilities is clause 7 which appears on page 408:

Following Completion, the Buyer assumes with effect from Completion all liabilities of the Seller –

Pause there for one moment.  Of course, it is not a real assumption.  We need to read that as a promise by the buyer to indemnify the seller for the liability because there is no novation here.  But what is sought to be assumed are the liabilities of the seller.  PNV, for the reasons that I have already submitted, had no present liability.  It also had no future liability to pay the imposts because it was selling the transmission licence by this agreement.  It was not going to be the holder of the licence in 1998, 1999 or 2000.  So we do, with great ‑ ‑ ‑

BELL J:   SPI in turn might have sold the licence.

MR STEWARD:   Yes, of course.  So we do, with respect, disagree with the proposition that the total purchase price includes the impost liability, but we can see that in an even more manifest way, if I could direct the Court’s attention to the recitals.

FRENCH CJ:   Incidentally, the definition of “creditors”, does that have any significance?

MR STEWARD:   On my learned friend’s case it does.  Your Honours will have seen it is a very broad definition.

FRENCH CJ:   Including contingent.

MR STEWARD:   Yes, but not future and contingent and, your Honour, total purchase price does not encompass all creditors, just creditors assumed.

NETTLE J:   Are not all contingent liabilities future and contingent?

MR STEWARD:   On one view, yes, that may be so.

NETTLE J:   You do covenant to bear the contingent liabilities when they come home, do you not?

MR STEWARD:   No, we read clause 7 as saying we covenant to bear the liabilities then existing.  The language of clause 7 is slightly at odds or different to or more narrow than that broad definition.  If we could turn to it momentarily:

the Buyer assumes with effect from Completion all liabilities of the Seller –

It would be odd, your Honour, if the parties had intended that we would bear the future liabilities of PNV that did not exist or pre‑exist the sale of the business, a highly uncommercial arrangement.  But we can see – if I could return to the recitals – we can actually see the bare bones of the bargain reached between the buyer and seller in great clarity.

NETTLE J:   Just staying with clause 7 ‑ ‑ ‑

MR STEWARD:   Yes, your Honour.

NETTLE J:   You agreed to pay all Creditors – capital “C” – as the Chief Justice points out, that includes contingent creditors.  Is it not a promise to pay them when they come home, when and if they come home?

MR STEWARD:   No, your Honour, because it – as my learned friends point out, it is a liability of the seller.  The seller is PNV and PNV will not have that liability in future years, ever, because it has entered into this assets sale agreement to sell the transmission licence.  It will not be the holder.

NETTLE J:   Whether or not it has the liability it has extracted from you a promise to pay it when and if it comes home.

MR STEWARD:   It has to be a liability of the seller, a liability that the seller will have, and we know for a fact from this agreement that PNV will never be liable.

NETTLE J:   I do not want to delay too long, but does not the seller at the point of sale have a contingent liability to mean the licence fees when and if they come home?

MR STEWARD:   No, your Honour, it does not.  For the reasons of the language of the Order in Council, the liability is a future liability payable at those future dates to the person who is the holder of the licence on those dates.

NETTLE J:   Thus, if it sells it, it will not have to bear it, but before so it has the contingent liability to pay, does it not?

MR STEWARD:   If it is the holder of the licence, but by this agreement it will cease to be the holder of the licence.

KIEFEL J:   But it is a liability but for the agreement.

NETTLE J:   Yes, albeit contingent, a contingent liability which you agree to bear.

MR STEWARD:   We do not read clause 7 in that way.  We would think it a bit odd to read clause 7 – well, I withdraw that.  It may be your Honour is right that contingent liabilities arising from the business which PNV held in October 1997 are covered by this promise.  But the way we read the agreement is that would not include the liabilities created by the Order in Council.

FRENCH CJ:   The Order in Council came into existence about a week before transfer.

MR STEWARD:   Yes, yes.

FRENCH CJ:   So, it came into existence while PNV was the holder of the licence.

MR STEWARD:   In a sense, your Honour, we may be labouring on a point that may not matter too much ‑ ‑ ‑

NETTLE J:   I think you are right ‑ ‑ ‑

MR STEWARD:   ‑ ‑ ‑ because, as you will see, we submit that we still – even if there is a promise ‑ ‑ ‑

NETTLE J:   I understand that point.  That is a different one to the one which you were just putting.

MR STEWARD:   Yes, of course.  But can I invite your Honour to look at the recital, because clause 7 would need to be read in the context of the recitals and recitals E and F do, with respect, set out the bare bones of the bargain in quite unequivocal terms.  I should say the accuracy of E and F has never been challenged.  It is not suggested that they are some form of misstatement of the true bargain.  You will see E says:

The total value attributed by the parties to the sale of the Assets . . . the subject this agreement is –

$2.5 billion.  It then says at F:

The parties agree that the total payments to the State in connection with the privatisation of [the seller] are $2, 732.500,000 (including –

future liabilities of 177,500 – that is the imposts – as discounted to 161.  Now, the point we get from that is clear and obvious.  If the total purchase price included the imposts, recital E would say so, but recital E does not.  Recital E says the bargain is you pay $2.5 billion for the assets and in addition, separate to that are the imposts, candidly paid in connection with privatisation, no doubt about that, but they are not paid for the assets. That is covered by the purchase price of $2.5 billion.

KIEFEL J:   But they are paid for the business, are they not?

MR STEWARD:   No.

KIEFEL J:   But you do not get the ability to conduct a transmission business unless you pay the fee.

MR STEWARD:   Correct.  All successful bidders would subject themselves to the payment of the fee; we will come to it in a minute.  This agreement contains clauses designed to better secure its payment.

KIEFEL J:   But are you not paying for a right, then?  It might not be an asset, but you are paying for something that enables you to conduct the business.

MR STEWARD:   Your Honour, in our respectful submission, there are two things to bear steadily in mind.  The first is that if this agreement contains a promise to pay the impost, or even if it does not, there can be no doubt that from the perspective of the seller, the State, the State was telling bidders you have to pay both if you want to be the owner of the licence, unquestionably.  That is from the perspective of the State.  From the perspective of the purchaser, which is how we must decide this question, recitals E and F tell you that they have made a payment for the business, $2.5 billion – that is the correct sum payable for it – and they have to make another payment, and the question becomes, and we will address this shortly, what is that payment for?  What is the advantage secured by it?

KIEFEL J:   No, the $2.55 is for the assets.

MR STEWARD:   That is the assets, yes.

KIEFEL J:   You just elided that with business.  They may be two different things.

MR STEWARD:   I did not intend to do that, and I apologise if that is the impression I gave.  The reason why it refers to assets, of course, is because that is what is generating the value; the assets generate the cash flow of the business.  I am indebted to Ms Deards - there is a definition of “assets” which your Honour will see towards the end of the page, 395, which contains a whole series of things, including the licences in subparagraph (f).

We do not deny that in order to be the successful bidder you have to pay both sums.  The question is can we confidently say that the second sum was also paid for a capital advantage, capital assets, of which the definition contains many, or is it for something else?

Can I then turn to more directly address the question of whether this agreement contains a promise or a covenant to pay the impost?  Below, there were two groups of provisions which were said to be the source of possible promises to pay.  The first is clause 4.3, which appears from page 404.

FRENCH CJ:   I am sorry, just before you leave the recitals, I suppose it is important to maintain the legal distinction between the seller and the State.  The seller is that to whom the total purchase price is paid.  The State is that to which, defined as the Treasurer, the imposts are paid.

MR STEWARD:   Yes, and we adverted to that in our submissions.  Of course, they came back and said the State is a party to the agreement, which it is undeniably, but it is of some significance for our case that the imposts are paid not to the vendor, but to the State, and to consolidated fund.

FRENCH CJ:   But that leaves open the question, is the impost a necessary payment for the acquisition of the business, albeit that it is not part of the purchase price paid to the seller?

MR STEWARD:   Your Honour, if I may address that question now by going to what I think is the nub of the matter.  From the perspective of the purchaser there is no doubt a causative relationship between the suite of promises or the suite of liabilities – if I may use a more neutral term – which it has extracted from the person buying the business.  Both of these are things that were required.  If we were here dealing with the Duties Act, following on from this Court’s decision in Lend Lease, we would say both form part of the dutiable value.  That is so. 

But what the decisions of this Court tell you in cases like – and I will come to them shortly – Cliffs International and Morgan – is that from the purchaser’s perspective, even though the payment is a condition of sale, it must be made – it has a causative relationship – even though it does, from a practical and business point of view it may nonetheless not be for the capital asset because there is present another promise that does that work.  Here, that promise is to pay the total purchase price.  That is the thing which does the work from my client’s perspective of moving the assets, not the impost as well.  But, I will take the Court to Morgan shortly, if I may.

We were at clause 4.3 on page 404.  These set out a series of conditions precedent which, in our respectful submission, do not impose a contractual liability to pay but, rather, are designed to ensure that the regulatory regime whereby the liability can be imposed upon the holder of the licence is better secured.  So that we can see in (a):

the State, the Seller and the Buyer shall procure that the Office of the Regulator‑General approves the transfer of the Transmission Licence . . . 

(b)the State shall procure the publication in the Government Gazette of an Order in Council declaring that the Buyer is a transmission company . . . 

(c)the State shall procure that clauses 7 and 15 . . . are passed and proclaimed;

(d)the State shall procure the publication in the Government Gazette of the Licence Fee Order –

“Licence Fee Order” is defined as the impost, the Order in Council.  Then -

(e)the State shall procure that the Deed of Amendment . . . set out in annexure I is executed –

None of these things convey, with great respect, a contractual promise to pay.

NETTLE J:   Surely they import an implied promise at least to attempt to achieve what is provided.

MR STEWARD:   They go so far as assisting in the machinery whereby the liability can be imposed.  But, in the context, your Honour, where there already is an instrument imposing the liability it would, in our respectful submission, be wrong to imply a further contractual promise.  We can see that working, your Honour, in the warranties which are also relied upon in clause 13.3(d) – if I could take the Court to that on page 412.

NETTLE J:   Just before you do.  Why is so important for you to establish that these do not import implied promises?

MR STEWARD:   Because, your Honour, it enables us to submit that the source of the liability is a tax, a special tax, and being a special tax there is no exchange or bargain whereby we pay it for something.  We just pay it and get nothing.

NETTLE J:   But does it detract from your case that you may have made a promise in advance to pay the tax when it was imposed?

MR STEWARD:   Only in the forensic sense deployed by my learned friends who say that that promise is one that is made for the transfer of the business, the assets.

NETTLE J:   But if the payment is for a tax then it is for a tax, is it not?

MR STEWARD:   We would submit so, your Honour, yes.

NETTLE J:   So does it matter then if there is an implied promise to pay the tax when it is imposed?

MR STEWARD:   It may not, your Honour, and it does not in terms of our second proposition which is that even if there is a promise it is still a tax and we do not get anything from it.

FRENCH CJ:   What happens if you do not pay it?

MR STEWARD:   If you do not pay it you would lose the licence.

FRENCH CJ:   Is that a statutory consequence?

MR STEWARD:   It is, your Honour.  I do not think the material is before you but there is ‑ ‑ ‑

FRENCH CJ:   Where does that appear?

MR STEWARD:   If I take you to the transmission licence to try and deal with that and I can perhaps after lunch hand up to the Court the relevant provision.  At page 931 in volume 3, your Honour, you will see paragraph 3.4 deals with the power of revocation.  I do not think this is in dispute but perhaps it is.  If you do not comply with an enforcement order it can be revoked.  Then clause 18 makes it a condition of the licence that you “comply with all applicable laws” – that is on page 937 – so that the law would include the Order in Council.  Then the term “enforcement order” is defined on page 940:

“enforcement order” means a provisional or final order made and served by the Office under section 35 of the Office of the Regulator‑General Act 1994 –

It is that section which is not before the Court, but if my memory serves me it provides that if you are in breach of a condition of the licence – and here that would be clause 18 – they can give you an enforcement order which, if you do not comply with, will lead to revocation.

GAGELER J:   Is a charge under section 163AA made a debt to the State?

MR STEWARD:   I think so, yes, your Honour.  By reason of the words in the Order in Council authorised – yes, when it falls due because of the word “payable”.

FRENCH CJ:   Well, it comes out of section 163AA(2).  That is the primary source, is it not?

MR STEWARD:   Yes, your Honour.

GAGELER J:   But is it simply enforceable as a debt?

MR STEWARD:   Yes, and if not enforceable as a debt could be enforced by threatening to take away the licence.

GAGELER J:   But are there machinery provisions in the State legislation that govern the recovery of that debt?

MR STEWARD:   Not to my knowledge, your Honour.  We will endeavour to check.

GAGELER J:   There is no other provision of the Electricity Industry Act or of any other State legislation that makes explicit that it is a debt?

MR STEWARD:   I cannot answer that one way or the other, I cannot assist your Honour, I do apologise.

FRENCH CJ:   Is there any contractual consequence if you fail to pay the impost?

MR STEWARD:   Not in our respectful submission, no.  Could I then return to clause 13.3?

GAGELER J:   I am sorry, if we are going to the source of the liability to pay, how do you put it?

MR STEWARD:   We put it in two ways, your Honour.  We say the source of the liability to pay is the Order in Council as authorised by section 163AA, and that is how the dissenting judge below, Justice Davies, found it to be.  Alternatively, if the asset sale agreement contains an express or an implied promise to pay it, that is the source of the liability, or the more proximate source of the liability.  Either way, paying this tax does not secure to us a capital advantage.

GAGELER J:   Well, the second way is a contractual liability, liability at common law in contract.  The first way is what, in your submission?

MR STEWARD:   It is a statutory debt created by reason of the Order in Council, like the payment of any tax.

GAGELER J:   So you have to put it as a debt?

MR STEWARD:   Yes.  When the Commissioner of Taxation sues people under the Income Tax Act, he sues in debt.  He then produces to the judge the notice of assessment which is conclusive evidence of the due and correct making of the assessment, and he recovers.

GAGELER J:   It is just by the way, really, that it is also a breach of the licence, not to pay.

MR STEWARD:   It would depend upon the financial position of the holder of the licence at that time as to which of the remedies would be invoked.  Clause 13.3, page 412, subparagraph (d) is the second source of the potential promise to pay.  The first part of (d), number (1), provides that:

the amounts to be payable by the Buyer –

and we do attach significance to this –

pursuant to the Licence Fee Order –

not pursuant to this contract –

are an integral part of the regulatory framework of the industry and the Buyer accepts that it must pay the amounts set out in the Licence Fee Order –

Pausing there, in our submission, no promise to pay is conveyed there.  Indeed, it would be inconsistent with the identification of the source of the liability, being the licence fee order, for wanting to go further and say there is a further promise; unnecessary to go so far.  Number (2), on the next page –

the Buyer must not challenge the validity of the Licence Fee Order –

Your Honour the Chief Justice adverted to that earlier.  We do not have evidence before the Court as to what the concern was; we will just have to infer it.  I infer an excise, no more than that.  Number (3) is where we get the closest thing to a promise to pay –

the Buyer agrees to pay to the Treasurer the amounts specified in the Licence Fee Order in accordance with the terms of, and at the times specified in, the Licence Fee Order, whether or not the Licence Fee Order is valid or enforceable –

Now, the way we read that is that that creates a conditional liability or promise to pay in the event that the licence fee order is invalid.  This has expanded the remedies available to the State to collect the licence fee order.  But importantly, from our submissions, if that promise had been activated – and it never was – what would have been paid would not be the licence fee impost we paid here, because the premise of (3) is that they are invalid, but rather a different sum, albeit in the same amount and payable at the same time, but it would not be the licence fee order itself.

FRENCH CJ:   Well, it is whether or not the licence fee order is valid or enforceable.  The premise is not that it is invalid.

MR STEWARD:   We do read it as that is the premise.  We acknowledge that those words are used, but when you read it in the context of (1), identifying that the source of the liability is the licence fee order, the only work that (3) could do in addition to that liability would be if the licence fee order had fallen over, which there was some concern that it might.  Then, (4) is important as well:

the Buyer may not transfer the Transmission Licence or allow any person to become a licensee under the Transmission Licence unless the proposed licensee has first delivered to the State a covenant –

So here there is a covenant that must be conveyed –

agreeing to be bound –

Now, of course, that did not happen, but we do rely upon (4) because again what (4) is telling you is that the parties contemplated that the licence may get sold.  That is significant for us because if you sell the licence you avoid the liability to pay.

FRENCH CJ:   It really is a promise to the State, is it?

MR STEWARD:   Yes.  Not to PNV.  PNV – I do not think this is before the Court – but I think PNV disappeared shortly after the asset sale agreement.  So much for the asset sale agreement, the question now becomes whether or not there is a promise to pay it or whether it is imposed by the Order in Council.  What advantage does it secure for us?  The way that we have submitted it in our written submissions is to suggest and submit to the Court that really, in our primary case, really the impost is just like the land tax that was paid in Moffatt v Webb. 

Moffatt v Webb 16 CLR 120 was a case of a decision of this Court where land tax was paid by the owner of land who was undertaking a grazing business. It was a case under the old Income Tax Act (Vic), which provided a deduction in section 9.  If I could take the Court to it.  Section 9 is relevantly reproduced in the headnote:

(1)      All losses and outgoings actually incurred in Victoria by any taxpayer in production of income . . . shall be deducted –

The issue was whether State land tax was deductable pursuant to that provision.  The passage that I do want to take the Court to appears on page 130 of the judgment of Chief Justice Griffith.  Firstly, at about point 2 of the page, his Honour the Chief Justice said:

The land taxed is the very land on which the business is carried on; and, as I have already pointed out, it is impossible to carry on the business of grazing on that land without paying the tax.  It seems to me, therefore, that the tax falls within the words “a payment made wholly and exclusively for the purpose of the trade,” as construed in that case.

A third point made for the Commissioner was that land tax is capital expenditure.  I confess that I am unable properly to appreciate that argument.  The cases relied on in support of it were cases in which money of money’s‑worth was paid or given as the price of something to be used in order to earn income.  It is impossible to say that land tax is paid for the purpose of acquiring anything.  It may secure the taxpayer against being disturbed in his possession, but it certainly adds nothing to his capital – some people might think it diminishes it.

In this case, as we have endeavoured to submit, the very purpose of the impost was to diminish the gross revenue of the taxpayer.  That is why it is there.  That is the work that it does.  In our respectful submission, our primary case is that we fall squarely within Moffatt.  Just like Moffatt where land needed to be held in order to carry on the business, we here need to have the transmission licence in order to carry on the business, and by reason of holding that licence – the very thing that helps generate assessable income for us in each year – the reason – the thing that is productive of income is also the very thing which creates the liability. This raises the very basis upon which Justice Davies below decided in favour of my client when her Honour said, at paragraph 107:

The obligation to pay the imposts flowed as a necessary consequence of holding the licence, so that the thing that produced the assessable income was the thing that exposed SPI –

the taxpayer ‑

to the liability discharged by the expenditure.

That language comes from the decision of this Court in Herald & Weekly Times which her Honour refers to and that case – Herald & Weekly Times – sought a deduction for payments of compensation in defamation.  The question was whether they were deductible.  This Court said that the very thing that created the liability, the act of publication, was the very thing that secured it assessable income and so they allowed the deduction.

FRENCH CJ:   Incidentally, the position you put with respect to the sources of the liability – you put it really as a binary position.  Your primary position is the statute.  The secondary position is even if the contract does not matter.  Would you accept – and I do not think it would make any difference to your argument – that the liability may be – there may be concurrent liability, statutory and contractual?

MR STEWARD:   We have debated that possibility amongst ourselves.  It will not matter for our argument.  It is possible, but it will not matter.

FRENCH CJ:   Well, for example, there might be a contractual route to enforce the liability.  There might be a statutory route by reference simply to the statutory declaration.

MR STEWARD:   Yes, that is right.  That is why we put it that the agreement enlarged the possible remedies available to the State.  We say it goes no further than that, but if it does, we still are in the territory of asking what the payment was for.  Can I then address the second proposition now?  Your Honours will have seen that what was deployed against the taxpayer below was the famous dictum of Justice Fullagar in the Colonial Case 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 –

That is the dictum.  In our respectful submission, we read that not as a test but as a description of the usual case.  What is the test is set out by Justice Fullagar on the same page in the judgment when his Honour famously said:

The questions which commonly arise in this type of case are (1) What is the money really paid for? – and (2) Is what it is really paid for, in truth and in substance, a capital asset?

That is the test.  Could I now take the Court to the decision in Morgan? Its reference is 106 CLR 517. Morgan concerned the sale of land.  One of the payments the purchaser was required to make, in addition to a price of some £26,000, was a payment to the vendor to recompense it for that portion of the rates the vendor had earlier paid to the rating authority but which related to that part of the year in which the purchaser was to be the owner and occupier of the land.  So there was at settlement a further payment made to recompense the vendor for those rates.  The argument against deductibility appears at page 520 of the report at about point 4.  Their Honours say:

For there are two opposed sets of considerations affecting the answer.  Against the allowing of the deduction it is urged that the amount of the rates or other outgoings already paid by the vendors but apportioned to the purchaser forms an item of the total payment which the purchaser must make in order to obtain a transfer of the property, and if it is not strictly part of the consideration for the land, at all events it is a payment made as the fulfilment of a condition precedent to obtaining a transfer.

Pausing there, there is a clear recognition of a causative relationship by the Court of the fact that you had to make the rates recompense payment if you were going to get the land.  That is part of the suite of promises that the vendor has insisted upon and which he will not give you the land unless you make.  If the Fullagar dictum was the test, then you would conclude that the payment for the rates was on capital account, but this Court held that it was deductible, and one can see the key passage over the next page at 521 in the second paragraph, commencing at point 4:

On the whole the better view appears to be that the apportioned part of the rates does form an allowable deduction from the assessable income of the year covering the period to which that part is referable.  Not only as a matter of reason and business sense is it an outgoing on account of revenue, but an examination of the grounds on which it is said to be capital and not incurred in gaining the assessable income discloses their inadequacy.  In the first place neither under the contract nor under the statutory provisions –

and I pause there.  There were statutory provisions in place which would make the purchaser liable for the rates in the event he did not pay them –

does the apportioned part of the rates really represent a payment for the land as a profit or income earning subject, that is as a capital asset.  The price remains fixed.  The payment of the apportioned part is separate –

That, with respect, is the nub of our second proposition.  We are the same.  The price is fixed, $2.5 billion, the imposts are a separate matter.  They discharge a separate concern, namely, the regulation of the appellant’s maximum allowable revenue in the years following a sale.  The two are distinct.  So that we can see immediately that there is, on the one hand, an acceptance that in these cases there can be a causative relationship, that the promise must be made in order to get the business, but that is not the end of the inquiry. 

One must go on and ask in the context what was it for, and inferentially, if you can identify another promise that was given or made that was adequately for the capital asset you are more likely to conclude that the second promise is for something else.  You need to reach a conclusion whereby you are confident in all the facts with the result of characterisation which is that the imposts here are for a separate matter.

GAGELER J:   So, if clause 13.3(d)(3) is a contractual obligation to pay, what is that for, in your submission?

MR STEWARD:   We would submit it is still for no capital advantage.  In other words, it is not necessary for me to identify that unlike – I will start again.  In Morgan, it was for the rates.  In Cliffs International, it was for the right to receive royalty income in the successive years; I will come back to Cliffs International.  They are cases where the additional promise does secure an advantage and the question is, is it capital or revenue?  This case is unusual because the promise, if it be one made, does not secure an advantage.  Indeed, it would be antithetical to the whole regulatory regime if it did, because the purpose of the regime is to take away, not to give something back.

GAGELER J:   It is a promise for consideration.

MR STEWARD:   It is a promise to pay tax, and then the question becomes what advantage did you get by promising to pay the tax?

GAGELER J:   That is the question I asked.

MR STEWARD:   The answer is nothing, from my client’s perspective, nothing.  Indeed, it would be odd if the answer was otherwise.  When one looks back at the reason for the impost, the problem that was discovered, you are making too much gross revenue, we will need to take away some of that gross revenue and the means of doing that will be the payment of this tax.  It would be odd if, as part of that, one were to conclude that you got something back.

My learned friend’s reliance upon English decisions such as Dowdall needs to be considered in the context that Dowdall was a case under the English Income Tax Act which imposes tax on profits.  I will give you the reference to the statutory test – I think it is at page 410 of the speeches of their Lordships, in the speech of Lord Reid in the second paragraph:

Tax under this Schedule shall be charged in respect of—(a) The annual profits or gains arising –

This Court has on a number of occasions warned about the use of English income tax cases in our system which, like the US Internal Revenue Code, does not tax profits but taxes taxable income, being a fund comprised of assessable income less allowable deductions.

We can see an example of such a warning in the Nilsen Development Case 144 CLR 616 at 628. At 628, about the middle of the page in the judgment of Justice Gibbs, as his Honour then was:

This decision may be explained by the fact that under the English legislation it is necessary to compute the profits or gains of the taxpayer in the year in question . . . In deciding how the profits are to be ascertained the courts have regard to ordinary commercial principles.  Under the Australian legislation, however, the question what losses and outgoings arising in the course of a business are to be deducted is a matter covered by s. 51(1) and depends, inter alia, on the question whether the loss or outgoing has been “incurred”.

Ultimately, of course, as this Court recognised in its earlier decision in Boulder Perseverance, the very relevance of whether a payment is out of profits or not turns upon the particular statutory regime.  There is no a priori principle out there a payment of tax on profits is never deductible.  It just depends upon the language of the statute. 

Now, could I take you back momentarily on this topic to appeal book 1, page 99, because my learned friend placed reliance upon this and persistently stated that the imposts were designed to ensure that the taxpayer had the right level of profits.  Bearing in mind that we are looking at this from the perspective of the taxpayer, knowing that the government has undertaken a calculation designed to reflect those three things tells one very little, if anything at all, about the quality of the payment when made by the taxpayer.  All the taxpayer knows is that he must pay fixed sums over a particular period and if the taxpayer were to ask, why do I have to pay this, he is told in the information memorandum it is because your gross revenues are too high and they must be reduced.  That is about as high as it gets.

But even then, if one looks at (a), (b) and (c) in the middle of paragraph 99, and asks the question by reference to the statutory language of 8‑1, if one has to make a payment that is calculated to reflect those integers, why is it denied deductibility?  Each of those integers reflects calculations that may or may not reflect profits under various iterations of various accounting standards.  Take, for example, the straight line depreciation.  This information memorandum tells you at page 229 of the appeal book that the depreciation there adverted to, second paragraph, is significantly different to the depreciation available under the Income Tax Act.

We then go back to United Energy and ask the question, what is one to do with Justice Lockhart’s judgment?  His Honour did not refer to Midland Railway.  He did not advert to the correct test.  We do not know why, but he did not.  My learned friend said nothing about this at all on her feet today.  We submitted that the result is right, but we do submit that the course of reasoning of his Honour Justice Lockhart is problematic, because it appears that the key decision of this Court was not deployed and addressed.  Moreover, it did not take account of the fact that in Midland Railway a deduction was allowed by this Court for a payment out of profits.

We also maintain that the regulatory regime addressed in United Energy is significantly different.  We can see that very obviously – if I could take the Court to page 187 of the judgment briefly.

FRENCH CJ:   I notice that Mr Shaw and Mr Pagone are both appearing.

MR STEWARD:   I noticed that too, your Honour.  You will see just under point F on page 187 the very specific statutory monopoly given to distributors for a period of five years.  They had a legal monopoly over customers called “non‑contestable customers” for five years.  After five years, under the Victorian regime, there would be full competition.  We do not have anything like that here.

Then at page 194, Justices Sundberg and Merkel address the submission made by Mr Shaw, which is very similar to the submission we make here, in the last paragraph:

Counsel for the taxpayer contended that the franchise fee is a compulsory exaction to redress the excess profits obtained from the statutory monopoly, and that therefore no enduring benefit enured to the taxpayer.

It has a ring of familiarity about it.  But that was rejected because of the particular regime in place, and we see that in the next paragraph, where their Honours say:

In our view the submission takes too narrow a view of the franchise fee.  Immunity from competition in respect of franchise customers in the licence area is secured by the exclusivity conferred under ss 162(2B) and 163A.  The franchise fee is payable under s 163A for that exclusivity.

We do not have that here and it was not put below that we did.  No judge below decided that the payment here was a payment for legal exclusivity in the way that their Honours concluded in United Energy.  Then there was the proposition put that the manner of calculation was critical for the proposition that we failed the first limb.  That is not correct.  Again, we need to return to Midland Railway where something similar was said.  This is Midland Railway in the Full Court, if I could briefly take the Court to, I think it is page 317 in the judgment of Justice Dixon as his Honour then was, in the top of the page at about point 3, his Honour says, at the end:

“it is the quality of the payment that matters and not its admeasurement”.

That proposition was deployed by the taxpayer in CityLink successfully.  It is referred to in footnote 79 at paragraph 135 in the judgment of Justice Crennan, where a similar argument was deployed by Mr Shaw again to say that the payment in CityLink was truly not incurred because of the waterfall structure which ensured that the payments would not in fact be made until 2013, and the Court decided that that fact did not prevent its incurrence in each of the 1997, 1998 and 1999 years because the way it was measured did not matter.  Yes, it was measured in a way which made it deeply subordinated to other creditors, but so what.

Can I then very briefly address the assumption proposition?  We say, and we repeat, that as a matter of practicality, we could not and did not assume any liability to pay the imposts because the asset sale agreement ensured that PNV would never be the holder of the licence when the time came to pay it; nothing to assume from PNV.

Let us assume that I am wrong about that.  Let us assume that there was a liability assumed.  With respect, that tells you nothing about the quality of the payment when the time comes to pay it.  Let me give you an example.  You can sell a business and the purchaser can assume liability for the employee entitlements that had accrued up to that point and, indeed, the purchaser in calculating how much to pay for the business will take into account that liability, but when the time comes to pay out that holiday leave, that sick leave or whatever it might be, that payment will be deductible.

Some liabilities assumed will be on capital account.  Some liabilities assumed will be on revenue account.  Be that as it may, it will depend upon their quality and nature when they are incurred.  So, here, saying that the liability has been assumed, it takes us nowhere. 

Then my learned friend said that the imposts were really for securing such things as the natural monopoly and the other advantages of being the owner of the business.  We disagree.  What secured that was paying $2.5 billion.  The $2.5 billion bought the assets and bought the licence which provided those advantages and benefits such as a natural monopoly.  The regulatory regime, the tariff order, that my learned friend said was secured by these payments did not confer upon the appellant taxpayer any particular advantages at all.  The tariff regime restricted its revenue, not enlarged it.  Indeed, we can see that the very proposition it put was rejected by the learned primary judge.  If I could take the Court briefly to it?  I think it is paragraph 86 at appeal book 3, page 1002.  No ‑ if the Court just bears with me for one moment.  I do not think it is page 1002.  

FRENCH CJ:   I think it is paragraph 86.

MR STEWARD:   I beg your pardon, your Honour.

FRENCH CJ:   Paragraph 86 appears to be apposite to the point.

MR STEWARD:   Yes, I am indebted to the Court.  You will see that her Honour specifically rejected the proposition that my learned friend put.  Then my learned friend made the submission that some taxes may be on revenue account and some on capital account.  It is very difficult to predict with certainty whether that will be so or not, but the one feature of a tax which we emphasise and which we do say is relevant to the negative limb is that a true tax is not a fee for services.

If one recalls the famous definition of tax from the Chicory Marketing Board Case, the compulsory exaction for public purposes that is not a fee for service.  In United Energy, inferentially, because of the finding of Justices Merkel and Sundberg, what they paid was not a tax.  It was the consideration for the grant of statutory exclusivity.  Our point is, is that if it is truly a tax, by its very nature, you are not supposed to be getting something back, no exchange, no payment for services and that will impact and infect and be relevant to the proper characterisation of the burden of the tax being on capital account or revenue account.

As it happens many taxes are deductible.  Petroleum resource rent tax is deductible.  Sales tax was deductible and stamp duty incurred - I call it duty actually now, incurred on an acquisition of land, may be deductible.  The fact that it is connection with a capital transaction is neither here nor there.  This Court in Steele’s Case 197 CLR 459 debunked that theory. You will recall that in Steele’s Case, Mrs Steele had borrowed money to build a hotel.  She incurred interest and the Federal Court denied the deductibility of the interest because they said it was a cost of funding the capital project.  It was bound up with and integral with this capital project, the hotel. 

This Court rejected that proposition and said the fact of the association with capital, the fact of association with profit‑yielding structure, is not sufficient to reach the conclusion necessarily that the relevant impost is for that capital advantage.  In Steele’s Case, the interest was for the regular use of the money, the recurrent use of the money over the period of the loan and thus it was held to be deductible.

Similarly, in CityLink – if I may advert to that case once more – there was no doubt that the concession fees that were incurred in each of the years in dispute were bound up with the profit‑making structure of the tollway, no doubt at all.  But that is not enough.  The proposition put by my learned friend is, with the most profound respect, too broadly stated.

Could I say something very briefly about the significance of the adjustment that my learned friend relied upon?  We in fact rely upon the adjustment that was made to the impost precisely because it demonstrates the close connection between the payment of the impost and the derivation of income from being the owner of the transmission licence. 

As Justice Nettle observed, originally it was intended that you would be the owner of the licence earlier than what in fact happened.  The reason for the adjustment was because in that first quarter of that year we were not going to be the owner of the transmission licence and thus not deriving MAR, so the adjustment was made to ensure that the thing did not kick in until we became the owner of the licence and came to enjoy MAR.

In that respect, my learned friend relied upon certain aspects of the evidence below concerning the negotiation of the asset sale agreement.  There were some aspects of those negotiations that she did not take the Court to.  If I could ask the Court to go appeal book 1, briefly, page 61.  This is the affidavit of Mr Keller who was the CEO at the time.  Paragraph 21 of Mr Keller’s affidavit, the final paragraph, Mr Keller notes:

GPU submitted its bid . . . on 10 October 1997.  The bid offered a purchase price . . . $2,469,000,000 . . . The section 163AA fees were payable over and above this purchase price.

The reason why I advert to that is that Mr Keller’s evidence was unchallenged.  There was no cross‑examination of him whatsoever.  These statements were not submitted to be incorrect.  Earlier in his affidavit, paragraph 20, he correctly deposes that of course the imposts were taken into account in determining the bid price.  All future liabilities, whether revenue or on capital account, are looked at in order to do a cash flow model that is then discounted and then tells you what an appropriate bid price should be.

Then if I could take the Court very briefly to the affidavit of Mr Cohen who acted for the government – appeal book 2, page 78 - I beg your pardon, it cannot be 78, appeal book 2, paragraph 30, which appears at 783, there Mr Cohen deposes that he was a member of the Victorian Government’s negotiating team:

There were a number of competing bidders . . . and I attended a number of meetings with bid teams and their advisors.

Critically, he says -

The requirement to pay the section 163AA licence fee had already been announced by the Government and was not a matter for negotiation with bidders and indeed it was not negotiated or discussed at any of the meetings I attended.

Again, Mr Cohen was not cross‑examined.  He was not challenged on that.  That evidence strongly supports the proposition that we put this morning, namely that the impost was a fact of the regulatory environment that would arise regardless of who was the successful bidder.  It certainly was not – and let there be no doubt about this – the impost was certainly not disguised consideration.  That was not suggested below, it was not put to any witnesses that it was, the opportunity to put it was there, not taken. 

Two more matters:  the reliance upon the quality of the payments being fixed in number and limited.  The explanation for that arises from the regulatory regime.  Your Honours will recall that two aspects of that regime, (a) the State Government was not able to reduce the MAR because it had already had its tariff order out there and the distributors were already running their businesses; (b) the opportunity to reduce the MAR would first arise at the end of 2000.  That tells you why the imposts run over those years.  It is derived from the regulatory explanation.

All we would say in closing is at the end of the day one must ask the question on the evidence what were the imposts for and they were for the purpose of reducing gross revenue.  That is plain.  They were not, with great respect to our learned friends, for the assets purchased.  We paid a separate sum for that.  If the Court pleases, those are the submissions in reply.

FRENCH CJ:   Thank you, Mr Steward.  The Court will reserve its decision.  The Court adjourns until 10.00 o’clock tomorrow morning.

AT 4.09 PM THE MATTER WAS ADJOURNED