Commissioner of Taxation v AusNet Transmission Group Pty Ltd
[2015] FCAFC 60
•6 May 2015
FEDERAL COURT OF AUSTRALIA
Commissioner of Taxation v AusNet Transmission Group Pty Ltd [2015] FCAFC 60
Citation: Commissioner of Taxation v AusNet Transmission Group Pty Ltd [2015] FCAFC 60 Appeal from: SPI PowerNet Pty Ltd v Commissioner of Taxation [2014] FCA 261 Parties: COMMISSIONER OF TAXATION v AUSNET TRANSMISSION GROUP PTY LTD
COMMISSIONER OF TAXATION v AUSNET SERVICES (TRANSMISSION) LTD
File numbers: VID 216 of 2014
VID 218 of 2014Judges: KENNY, EDMONDS AND GREENWOOD JJ Date of judgment: 6 May 2015 Catchwords: INCOME TAX – purchase of assets of existing business, including assets in which copyright subsisted, for a fixed price – no allocation of purchase price amongst different assets – operation of Div 10B of Pt 3 of Income Tax Assessment Act 1936 (Cth) (repealed), in particular s 124R(5) – whether determination of Commissioner of amount of a capital nature incurred on the purchase of the copyright can be challenged otherwise than on grounds denying the power to make the determination were enlivened
INCOME TAX – owner of relevant assets becoming member of consolidated group – application of tax cost setting rules in Div 705 of Pt 3‑90 of the Income Tax Assessment Act 1997 (Cth) to owner’s assets, including assets in which copyright subsisted – valuation of all assets at joining date – refusal to admit expert valuation reports into evidence notwithstanding undoubted relevance and admissibility – diversity of view as to whether it was possible and appropriate to value the copyright as an asset separate from the value of the asset in which it subsisted in the circumstances of a notional acquisition of all assets of the owner on it becoming a member of the consolidated group
Legislation: Income Tax Assessment Act 1936 (Cth) ss 124K, 124M, 124R, 124S, 175, 177
Income Tax Assessment Act 1997 (Cth) ss 40-25, 701‑10, 705‑25, 705‑35, 705‑60
Income Tax (Transitional Provisions) Act 1997 (Cth) s 701A‑10
Taxation Administration Act1953 (Cth) s 14ZZOFederal Court of Australia Act 1976 (Cth) s 28
Cases cited: Federal Commissioner of Taxation v Futuris Corporation Ltd (2008) 237 CLR 146; 69 ATR 41
Deputy Commissioner of Taxation v Richard Walter Pty Ltd (1995) 183 CLR 168
George v Federal Commissioner of Taxation (1952) 86 CLR 183
McAndrew v Federal Commissioner of Taxation (1956) 98 CLR 263
FJ Bloemen Pty Ltd v Federal Commissioner of Taxation (1981) 147 CLR 360
Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614
Deputy Commissioner of Taxation v Richard Walter Pty Ltd (1995) 183 CLR 168
WR Carpenter Holdings Pty Ltd v Federal Commissioner of Taxation (2006) 234 ALR 451
Avon Downs Pty Ltd v Federal Commissioner of Taxation (1949) 78 CLR 353
WR Carpenter Holdings Pty Ltd v Federal Commissioner of Taxation (2007) 161 FCR 1
WR Carpenter Holdings Pty Ltd v Federal Commissioner of Taxation (2008) 237 CLR 198Acohs Pty Ltd v Ucorp Pty Ltd and Anor (2012) 201 FCR 173
Assistant Commissioner Condon v Pompano Pty Ltdand Anor (2013) 252 CLR 38
Byrne v Australian Airlines Limited (1995) 185 CLR 410
Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359
Federal Commissioner of Taxation v Sleight (2004) 136 FCR 211
Copyright Agency Limited v State of New South Wales (2008) 233 CLR 279
Re Minister for Immigration and Multicultural and Indigenous Affairs; Ex Parte Lam (2003) 214 CLR 1
TCL Air Conditioner (Zhongshan) Co Ltd v Castel Electronics Pty Ltd (2014) 311 ALR 387MacCormick v Federal Commissioner of Taxation (1984) 158 CLR 622
Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (2009) 239 CLR 27
Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355
Federal Commissioner of Taxation v Consolidated Media Holdings (2012) 250 CLR 503
Minister for Immigration and Citizenship v Li (2013) 249 CLR 332Date of hearing: 27 and 28 November 2014 Place: Melbourne Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 194 Counsel for the Appellant: H M Symon QC with E F Wheelahan Solicitor for the Appellant: Australian Taxation Office Counsel for the Respondent: L Glick QC with M Flynn Solicitor for the Respondent: Deloitte Lawyers Pty Ltd
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 216 of 2014
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: AUSNET TRANSMISSION GROUP PTY LTD
Respondent
JUDGES:
KENNY, EDMONDS AND GREENWOOD JJ
DATE OF ORDER:
6 MAY 2015
WHERE MADE:
MELBOURNE
THE COURT ORDERS THAT:
1.The appeal be allowed.
2.The whole of the judgment of Pagone J delivered on 25 March 2014 be set aside; and in lieu thereof order that the appeal against the appealable objection decision of 17 April 2012 be dismissed.
3.On or before 15 May 2015, the respondent file and serve submissions dealing with the costs of the proceeding before the primary judge and the costs of the appeal.
4.On or before 22 May 2015, the appellant file and serve submissions dealing with the costs of the proceeding before the primary judge and the costs of the appeal.
5.On or before 27 May 2015, the respondent file and serve any reply to the appellant’s submissions on costs.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 218 of 2014
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: AUSNET SERVICES (TRANSMISSION) LTD
Respondent
JUDGES:
KENNY, EDMONDS AND GREENWOOD JJ
DATE OF ORDER:
6 MAY 2015
WHERE MADE:
MELBOURNE
THE COURT ORDERS THAT:
1.The appeal be allowed.
2.The whole of the judgment of Pagone J delivered on 25 March 2014 be set aside.
3.The proceeding be remitted to Pagone J for further hearing and determination in accordance with the reasons for judgment of the Full Court delivered on 6 May 2015.
4.On or before 15 May 2015, the respondent file and serve submissions dealing with the costs of the proceeding before the primary judge and the costs of the appeal.
5.On or before 22 May 2015, the appellant file and serve submissions dealing with the costs of the proceeding before the primary judge and the costs of the appeal.
6.On or before 27 May 2015, the respondent file and serve any reply to the appellant’s submissions on costs.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 216 of 2014
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: AUSNET TRANSMISSION GROUP PTY LTD
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 218 of 2014
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: AUSNET SERVICES (TRANSMISSION) LTD
Respondent
JUDGES:
KENNY, EDMONDS AND GREENWOOD JJ
DATE:
6 MAY 2015
PLACE:
MELBOURNE
REASONS FOR JUDGMENT
KENNY J:
On 27 April 2012 two related companies instituted separate appeals to the Federal Court of Australia under Part IVC of the Taxation Administration Act 1953 (Cth) (TAA) against certain appealable objection decisions made by the Commissioner of Taxation (Commissioner). These companies were SPI PowerNet Pty Ltd (now AusNet Transmission Group Pty Ltd, referred to below as SPI PowerNet) and SP Australia Networks (Transmission) Ltd (now AusNet Services (Transmission) Ltd, referred to below as SPANT). Broadly speaking the appeal by SPI PowerNet concerned the company’s entitlement to claim deductions for capital expenditure on the purchase of the copyright in certain drawings and other documents depicting or otherwise relating to the electricity transmission system in Victoria purchased by SPI PowerNet (then known as Australian Transmission Corporation Pty Ltd) in 1997. The circumstances in which SPI PowerNet acquired the relevant copyright are sufficiently set out in the reasons for judgment prepared by Edmonds J.
SPI PowerNet claimed deductions in respect of the cost of the acquisition of the copyright under Division 10B of Part III of the Income Tax Assessment Act 1936 (Cth) (1936 Act) for the 1998 year of income and, for the 1999 to 2006 years of income, under Division 373 of Part 3-45 and Division 40 of Part 2-10 of the Income Tax Assessment Act 1997 (Cth) (1997 Act). In his reasons for judgment, the primary judge explains that SPI PowerNet’s claim for deductions for the copyright in each of the tax years after the 1998 tax year (ended 31 December 1997) turn on the terms of Division 10B of the 1936 Act: SPI PowerNet Pty Ltd v Commissioner of Taxation [2014] FCA 261 (PJ) at [4]. This is not in dispute; and, for the reasons explained by the primary judge, I accept that SPI PowerNet’s entitlement to deductions in all the years in question falls to be determined by reference to Division 10B of Part III of the 1936 Act.
A further issue arose before the primary judge in the SPI PowerNet proceeding as to that company’s liability for the 25% penalty imposed by the Commissioner in the 2001 year of income. His Honour touched on this issue in his reasons for judgment: see PJ at [55]. On the appeal, however, neither party made any submission on, or in connection with, this issue. I would not therefore address it further.
SPANT claimed deductions for the 2006 to 2011 years of income arising out of the same purchase transaction as SPI PowerNet, but as the head company of a tax consolidated group of which SPI PowerNet became a subsidiary member on 19 October 2005. SPANT’s claim was referable to different provisions to that of SPI PowerNet since SPANT’s claim was based on the value and reset tax cost of the copyright as at 19 October 2005 under Division 40 of Part 2-10 of the 1997 Act. SPANT’s claim is therefore not subject to the same considerations as that of SPI PowerNet.
The learned primary judge heard the two proceedings over six days and, in March 2014, ordered that the Commissioner’s decisions be set aside and the matters remitted to the Commissioner to re-determine each assessment in accordance with his Honour’s reasons. The Commissioner appealed against his Honour’s judgments in both matters. The Court is now concerned with the Commissioner’s two appeals.
The Court is agreed in the orders to be made in the appeals and in large part in the reasons that require those orders to be made. We differ about the effect of s 177(1) of the 1936 Act in the appeal in which SPI PowerNet is the respondent (VID 216 of 2014). Edmonds J would allow this appeal primarily because his Honour characterises the making of a determination under s 124R(5) of Division 10B of Part III of the 1936 Act as part of the process of making the assessment and concludes that, because of ss 175 and 177(1) of the 1936 Act, SPI PowerNet is not entitled to challenge the determination as it has sought to do. On reflection, I respectfully differ with Edmonds J about the operation of s 177(1) of the 1936 Act in appeal VID 216 of 2014.
Sections 175 and 177(1) of the 1936 Act have been part of the income tax regime for very nearly eighty years. These provisions have their clearest and most definitive operation outside the review and appeal processes for which provision is made in Part IVC of the TAA. They provide:
175The validity of any assessment shall not be affected by reason that any of the provisions of this Act have not been complied with.
…
177(1)The production of a notice of assessment, or of a document under the hand of the Commissioner, a Second Commissioner, or a Deputy Commissioner, purporting to be a copy of a notice of assessment, shall be conclusive evidence of the due making of the assessment and, except in proceedings under Part IVC of the Taxation Administration Act 1953 on a review or appeal relating to the assessment, that the amount and all the particulars of the assessment are correct.
As the majority observed in Federal Commissioner of Taxation v Futuris Corporation Ltd (2008) 237 CLR 146 (Futuris) at 166 [64], when operating as a conclusive evidence provision, s 177(1) is clearly designed to facilitate the recovery of tax in civil actions for recovery in courts of competent jurisdiction. The appeal in VID 216 of 2014 is not, however, concerned either with the recovery of tax or with the possible scope of a collateral challenge to an assessment outside the processes for which Part IVC provides. Decisions such as Futuris and Deputy Commissioner of Taxation v Richard Walter Pty Ltd (1995) 183 CLR 168 (Richard Walter), which principally concern the scope of a challenge to an assessment under s 39B of the Judiciary Act 1903 (Cth) and s 75(v) of the Constitution, can illuminate the width of an appeal under Part IVC of the TAA, but offer limited guidance about the potential scope of a challenge in a Part IVC appeal to a determination under s 124R(5) of Division 10B of Part III of the 1936 Act. Further, the views outlined in Richard Walter regarding the construction of ss 175 and 177(1) must now be read having regard to the development of cognate areas of law: see, for example, Futuris at 168 [70].
In order to delineate the potential scope of a challenge to a determination under s 124R(5) of the 1936 Act, it is important to take account of the nature of an appeal for which Part IVC of the TAA makes provision. Sections 175 and 177 operate according to their terms in an appeal to the Federal Court, or in a review by the Administrative Appeals Tribunal, under Part IVC. Thus, whilst the production of a notice of assessment is “conclusive evidence of the due making of the assessment” in all proceedings, in an appeal or review under Part IVC (and only in such proceedings), a taxpayer is not precluded from contesting the amount and all the particulars of the assessment. With regard to an appeal or review under Part IVC, s 177(1) therefore distinguishes between such an amount (and its particulars) and “the due making of the assessment”; or, as explained in George v Federal Commissioner of Taxation (1952) 86 CLR 183 at 206-207, this provision distinguishes
between the procedure or mechanism by which the taxable income and tax is ascertained or assessed on the one hand and on the other the substantive liability of the taxpayer. The former involves the due making of the assessment.
This understanding of s 177(1) pervades the authorities: see, for example, McAndrew v Federal Commissioner of Taxation (1956) 98 CLR 263 at 271, 274-5, 279; FJ Bloemen Pty Ltd v Federal Commissioner of Taxation (1981) 147 CLR 360 at 373-4; Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 at 620, 632; Richard Walter at 182; and Futuris at 157 [24].
Notwithstanding this relatively long and continuous history, I cannot but agree with Lindgren J’s observation in WR Carpenter Holdings Pty Ltd v Federal Commissioner of Taxation (2006) 234 ALR 451 (WR Carpenter FCA) at 463 [49] that:
The distinction between two classes of procedural steps is a difficult one. A taxpayer is to be at liberty, by attacking procedural steps of one class, to prove in an appeal that the amount of the assessment is excessive, but may not attack other procedural steps which are left shielded by the “due making” of the assessment.
The difficulty in distinguishing between contestable and non-contestable steps by reference to the criterion in s 177(1) lies at the heart of the difference that has arisen between the members of this Court in appeal VID 216 of 2014. This difficulty was not alleviated by the arguments made by the parties to the appeal, who did not find it necessary to advert to this particular issue, although, as Greenwood J indicates in his reasons for judgment, they and the primary judge addressed related matters.
Other provisions in Part IVC throw light not only on the nature of the distinction that s 177(1) mandates but also on the nature of an appeal for which provision is made in Part IVC. First, s 175 (set out above) must be borne in mind. As Brennan J said in Richard Walter at 197, “the Parliament is not to be taken to have intended by s 175 to validate a purported assessment that does not comply with the general provisions of the Act to an extent that falls short of the evidentiary protection afforded by s 177(1)”; and nor should it be supposed that “Parliament intended the evidentiary protection afforded by s 177(1) to fall short of the validity of an assessment determined by reference to the provisions of s 175”. Secondly, whilst service of an assessment fixes the taxpayer’s income tax liability (subject to the processes in Part IVC), it also enlivens the objection, review and appeal processes prescribed by s 175A of the 1936 Act and Part IVC of the TAA. Thirdly, in a review by the Administrative Appeals Tribunal or on an appeal to the Federal Court under Part IVC of the TAA, the taxpayer is entitled to show that the assessment is “excessive or otherwise incorrect and what the assessment should have been”, although in so doing the taxpayer bears the burden of proof: see TAA, ss 14ZZK (Administrative Appeals Tribunal) and 14ZZO (Federal Court).
It would follow from these latter two provisions and, in any event, the authorities unequivocally confirm that on a review or appeal under Part IVC a taxpayer is entitled to dispute substantive liability to tax. Thus, Brennan J said in Richard Walter at 199:
The jurisdiction of the Federal Court on appeal from, or of the Administrative Appeals Tribunal on review of, a decision on an objection extends to every issue which affects the amounts ultimately included in the taxable income or tax liability of a taxpayer. If any of these issues be resolved in favour of the taxpayer, an amendment of the assessment so as to reduce the taxable income or the tax liability of the taxpayer must follow.
(Emphasis added)
As McHugh J succinctly observed in Richard Walter at 240, “matters affecting the substantive liability of the taxpayer are open to challenge in Pt IVC proceedings”.
It is for this reason that in a Part IVC proceeding a taxpayer is “at liberty to challenge the exercise of any relevant discretion by the Commissioner”, including that it was “affected by error of law”: Richard Walter at 188 (Brennan J); see also Avon Downs Pty Ltd v Federal Commissioner of Taxation (1949) 78 CLR 353 (Avon Downs) at 360 (Dixon J). Equally, if a taxpayer establishes that a condition precedent to the existence of a purported exercise of power by the Commissioner has not been met, then the taxpayer may succeed in showing that the assessment is excessive. If, in Part IVC proceedings, a taxpayer establishes that, in all the circumstances, the tax assessed exceeds the actual liability under the taxing provisions, then the taxpayer is entitled to appropriate relief: see TAA, s 14ZZP (Federal Court) and s 14ZZJ (and s 43 of the Administrative Appeals Tribunal Act 1975 (Cth)) (Administrative Appeals Tribunal).
Bearing in mind the legislative purpose to make all issues affecting a taxpayer’s tax liability contestable in the processes for which Part IVC provides and not otherwise (save for limited collateral review under s 75(v) of the Constitution or s 39B of the Judiciary Act 1903 (Cth)), the provisions in Part IVC of the TAA for appeal to the Federal Court, or for review by the Administrative Appeals Tribunal, are critical in ensuring the contestability of an assessment to tax in conformity with the requirements of the Constitution: see Futuris at 153 [9], 166 [65] and Richard Walter at 221-222 (Dawson J). This consideration favours a construction of those provisions affecting an appeal to this Court under Part IVC (such as s 177(1)) that allows for all elements of the taxpayer’s substantive tax liability to be examined in such an appeal.
In appeal VID 216 of 2014, the question is whether the fact that is determined by the Commissioner under s 124R(5), as opposed to the process of making the determination or the fact that the determination was made (all of which are sometimes mistakenly treated as the same thing) is properly characterised as a procedural step in ascertaining the taxpayer’s tax liability (and thus part of the “due making of the assessment”) or as a substantive element affecting that liability (accepting, of course, that the process of making the determination has a procedural dimension). In the latter case, though not in the former, the taxpayer is entitled to contest the fact as determined and thereby establish that the assessment is excessive.
Previous authorities provide no definitive answer although they indicate perhaps how best the question should be answered. The authorities establish that the question must be answered by reference to the actual operation of the taxing provision – here, s 124R(5) – and not by reference to any preconceived view about the per se nature of determinations made by the Commissioner in exercise of statutory powers under income tax legislation. As explained below, it seems to me that the fact that is determined by the Commissioner in exercise of the statutory power in s 124R(5) should be characterised as a substantive element in the taxpayer’s tax liability, even though the process of making the determination should not.
Under Division 10B, of which s 124R(5) is part, a taxpayer to whom the Division applies is entitled to an allowable annual deduction in respect of a unit of industrial property in the circumstances specified in that Division. The Division applies only to the owner of a unit of industrial property who incurred expenditure of a capital nature on the purchase of the unit of industrial property and, either in the year of income or previously, has used the unit of industrial property for the purpose of producing assessable income: see s 124L(1)(b). There is no dispute that SPI PowerNet was a taxpayer to whom the Division applied and that the copyright in the drawings and other documents depicting or relating to the electricity transmission system purchased by SPI PowerNet was a unit of industrial property for the purposes of Division 10B: see s 124K(1).
Section 124M is central to Division 10B, providing that the taxpayer is entitled to an allowable deduction based on “an amount equal to the residual value of the unit in relation to the taxpayer as at the end of the year of income” (emphasis added). It provides:
124M Annual deductions
(1)Where, at any time during the year of income, a taxpayer is the owner of a unit of industrial property to whom this Division applies, an amount equal to the residual value of the unit in relation to the taxpayer as at the end of the year of income divided by a number equal to the number of whole years in the effective life of the unit in relation to the taxpayer as at the commencement of the year of income shall, subject to this Act, be an allowable deduction in respect of the unit.
The effect of s 124S is that “the residual value of a unit of industrial property … in relation to the owner of the unit” is to be ascertained by deducting the specified items from “the cost of the unit to the owner”.
Section 124R sets out a number of ways in which “the cost of a unit of industrial property to the owner” shall be ascertained, depending on the circumstances. Section 124R relevantly provides:
124R Cost of a unit of industrial property
(1)For the purposes of this Division, the cost of a unit of industrial property to the owner of the unit shall, subject to subsection 124S(2), be taken to be:
…
(b) in the case of an owner referred to in paragraph 124L(1)(b):
(i)if subsection (3) or (5) of this section is applicable — the cost ascertained in accordance with that subsection; or
(ii)if neither of those subsections is applicable — the expenditure referred to in paragraph 124L(1)(b).
…
(3) Where, in the case of an owner referred to in paragraph 124L(1)(b):
(a)the Commissioner is satisfied, having regard to any connection between the owner and the person from whom the unit of industrial property concerned was purchased or to any other relevant circumstances, that the owner and that person were not dealing with each other at arm’s length in relation to the purchase; and
(b)the expenditure of a capital nature incurred by the owner on the purchase of the unit of industrial property:
(i)exceeds the amount that was the cost of the unit to the last preceding owner of the unit; or
(ii)does not exceed the amount that was the cost of the unit to the last preceding owner of the unit but exceeds the value of the unit at the time of the purchase;
the cost of the unit to the owner for the purposes of this Division shall be taken to be the cost of the unit to the last preceding owner of the unit or the value of the unit at the time of the purchase, whichever is the less.
…
(5)Where, in the case of an owner referred to in paragraph 124L(1)(b), the unit of industrial property was purchased by the owner of the unit with other property and no separate price was allocated to the unit, the amount of the expenditure of a capital nature incurred by the owner on the purchase of the unit for the purposes of this Division shall be taken to be so much of the purchase price of the unit and the other property as the Commissioner determines.
As already indicated, it was not in contest in appeal VID 216 of 2014 that the cost of the unit of industrial property was to be worked out in conformity with s 124R(1)(b), that SPI PowerNet was “an owner referred to in paragraph 124L(1)(b)”, and that s 124R(5), not s 124R(3), was applicable in the circumstances of the case. That is, the amount of the expenditure of a capital nature incurred by SPI PowerNet on the purchase of the copyright was taken “to be so much of the purchase price of the unit and the other property as the Commissioner determines”.
The Commissioner’s exercise of power under s 124R(5) does not involve an exercise of statutory discretion, notwithstanding that at one stage or another, both parties were persuaded that it did. This is because s 124R(5) does not operate by reference to the Commissioner’s state of mind. This is because the provision does not depend on the Commissioner’s opinion or state of satisfaction or like mental element.
Rather, in exercise of s 124R(5), the Commissioner is required to determine as a matter of fact how much of the undifferentiated purchase price was the capital expenditure by the owner on the purchase of the unit of industrial property, in this case, the copyright. If the fact as determined is properly characterised as a substantive element in the taxpayer’s liability and not merely part of the “due making of the assessment”, then in its Part IVC appeal SPI PowerNet is entitled to contest the fact that the Commissioner has determined (namely, that the capital expenditure was nil) and thereby establish that the assessment is excessive.
Some assistance in identifying the correct analysis may be derived from WR Carpenter FCA, WR Carpenter Holdings Pty Ltd v Federal Commissioner of Taxation (2007) 161 FCR 1 (WR Carpenter FCAFC) and WR Carpenter Holdings Pty Ltd v Federal Commissioner of Taxation (2008) 237 CLR 198 (WR Carpenter HCA) (referred to below collectively as the WR Carpenter Cases). To appreciate these case correctly, one must have regard to what was in dispute in them.
In WR Carpenter FCA, the taxpayers challenged determinations made under s 136AD of Division 13 of Part III of the 1936 Act in two ways. First, they attempted to show that the objective conditions enlivening the Commissioner’s powers to make the determinations did not exist; and, secondly, they sought to show that the Commissioner took into account irrelevant considerations or failed to take into account relevant considerations in making the determinations: see WR Carpenter FCA at 457 [27]. In aid of the second limb, the taxpayers applied for particulars of matters that the Commissioner had taken into account in making the determinations.
The primary judge, Lindgren J, decided that the taxpayers were not entitled to such particulars, holding that the Commissioner’s reasoning process was not an element going to the taxpayers’ substantive liability: see WR Carpenter FCA at 458 [33] and 480-1 [153]. In so doing, his Honour, who was upheld in the subsequent appeals, observed that whether or not the taxpayers were entitled to the particulars depended on s 177(1) of the 1936 Act and s 14ZZO of the TAA; and, in ruling against them, his Honour focussed on the “statutory architecture” of Division 13, in particular s 136AD: see WR Carpenter FCA at 455-6 [16]-[18]; WR Carpenter FCAFC at 6 [22].
In relation to s 136AD, Lindgren J observed (at 479 [144]):
With one exception, all of the conditions are “objective” (the exception is the condition in s 136AD(1)(b) and (2)(b) (and (3)(b), not presently relevant) that the commissioner is satisfied that the parties to the international agreement were not dealing at arm’s length with each other). Neither section makes the existence of any particular state of mind of the commissioner in relation to the making of the determination, a condition of the power to make it.
This meant that there was no discretion that would have entitled the taxpayers to contest an assessment on Avon Downs grounds: see [15] above and that the taxpayers’ attempt to challenge the assessments on relevant and irrelevant considerations grounds failed in limine because the proposed grounds were not directed to any element of substantive liability. Further, the architecture of s 136AD was such that, if the taxpayers could contest the conditions precedent to the Commissioner’s exercise of power to make the determinations, they could in substance contest the elements of substantive liability to tax: see WR Carpenter FCA at 457 [25], [28]. In this regard, the architecture of Division 10B, and in particular s 124R, is significantly different.
On appeal, a Full Court of the Federal Court consisting of Heerey, Stone and Edmonds JJ upheld the judgment of the primary judge, for much the same reasons, noting that “Division 13 sets up a number of objectively ascertainable criteria, the satisfaction of which will create liability”: WR Carpenter FCAFC at 8 [27]. Their Honours also focussed on the operation of the Division and s 136AD so as to identify what would be contestable in the Part IVC appeal, having regard to s 177(1) of the 1936 Act and s 14ZZO of the TAA and, in so doing, isolated the elements of substantive liability that might be put in issue on that appeal: WR Carpenter FCAFC at 9-10 [31]-[37]. Like the primary judge, their Honours held the particulars that the taxpayers sought did not touch any of the criteria of tax liability, because the taxing provisions did not make the Commissioner’s state of mind a criterion of liability: WR Carpenter FCAFC at 8 [28], 11 [43]. Their Honours affirmed (at 11 [43]) that:
[W]here Parliament has exhaustively set out the criteria for liability by reference to objective matters, but has made the application of those criteria dependent upon a step being taken by the Commissioner, the step is procedural in the sense that it is not a step which forms part of the criteria for liability. The due making of such a determination is not subject to examination on judicial review grounds.
This observation highlights the difference between the appeal in VID 216 of 2014 and the WR Carpenter Cases. Division 10B, including s 124R(5), has a significantly different structure; and it would be inapposite to describe these provisions in the same way.
In WR Carpenter HCA the High Court upheld the judgment of the Full Federal Court, again by reference to the operation of the specific provisions on which the taxpayers’ liability depended (as well as what was described as the fishing character of the taxpayers’ request for particulars): see WR Carpenter HCA at 210-211 [30]-[31].
Relevantly for the appeal in VID 216 of 2014, their Honours also observed (at 203-4 [6]-[7]):
The adjective “substantive” is used in this field of discourse to contrast those provisions of the [1936] Act which relate to what is characterised as the procedure or mechanism of assessment. An error or slip by the Commissioner in following that procedure or in the operation of that mechanism does not necessarily produce any error in the amount of the substantive liability of the taxpayer, a point made by Brennan J in Federal Commissioner of Taxation v Dalco [(1990) 168 CLR 614 at 623].
What is at stake in the Pt IVC appeals by the appellants are the amounts of income tax otherwise due and payable under s 204 of the [1936] Act and s 255-5 to the [TAA] as debts due to the Commonwealth and payable to the Commissioner. The phrase “substantive liability” which appears in the case law does not appear in the statutory provisions, but it is to be understood as epexegetical or explanatory of them. It is with this in mind that the issues for determination in the Pt IVC appeals are to be seen.
With the WR Carpenter Cases in mind, I turn to the architecture of Division 10B, to borrow the language of others, and s 124R(5) in particular. As already noted, an exercise of power under s 124R(5) does not involve an exercise of discretion and there is therefore no basis on which a taxpayer might invoke the grounds of challenge referred to in Avon Downs at 360 or any other cognate grounds to show that an assessment is excessive. The point may be put another way: the process of making the determination is not part of the criteria affecting the substantive liability to tax. I agree in this regard with Edmonds J that the making (or perhaps more accurately the process of making) a determination under s 124R(5) is not a criterion of liability and is not therefore contestable in a Part IVC appeal.
In exercise of the power conferred by s 124R(5), however, the Commissioner is required to determine as a fact how much of the undifferentiated purchase price was capital expenditure by the owner on the purchase of the unit of industrial property; and this fact, as determined by the Commissioner, affects or goes to the taxpayer’s substantive liability, in the sense that it directly affects or goes to the amount of income tax that the taxpayer is liable to pay. This being so, the authorities show that in an appeal or review under Part IVC a taxpayer is entitled to contest this fact, as determined by the Commissioner, by showing that as a matter of fact a greater part of the undifferentiated purchase price than the Commissioner determined was, or was attributable to, the capital expenditure on the purchase of the unit of industrial property.
In an appropriate case it may also be open to a taxpayer in a Part IVC proceeding to show that an assessment was excessive by demonstrating that s 124R(5) had no application in the circumstances of the taxpayer, for instance because the purchase contract had in fact allocated a separate price to the purchase of the unit of industrial property. Whether such a challenge is utile from the taxpayer’s perspective will depend on the facts of the case at hand.
Accordingly, I agree with the primary judge that it is open to SPI PowerNet to contest the Commissioner’s determination that the amount of its capital expenditure on the purchase of the copyright is nil, by showing as a matter of fact that a greater amount of the undifferentiated purchase price is capital expenditure on the purchase of the copyright and thereby establishing that the assessment is excessive.
The taxpayer is not, in my view, precluded by s 177(1) from contesting this fact, which goes to substantive liability. In this sense, the determination involves more than a procedural step and has a substantive dimension, the examination of which is not precluded by s 177(1) as involving simply the “due making of the assessment”.
Like Edmonds J and Greenwood J, however, I respectfully disagree with the primary judge that s 124R(5) “operates where it is assumed that something was paid for the unit of industrial property but its amount (that is, its cost) was not separately identified” (emphasis added). Section 124R(5) leaves open the possibility that no part of the undifferentiated purchase price is attributable to the purchase of the unit of industrial property.
Accepting as I do that SPI PowerNet was entitled to contest the fact, as determined by the Commissioner, that no amount of the purchase price was attributable to capital expenditure on the purchase of the copyright, in the circumstances of the case and for the reasons stated by Edmonds J and by Greenwood J, it is difficult to resist the conclusion that no part of the purchase price is attributable to capital expenditure on the purchase of the copyright. I agree, moreover, with Greenwood J that, for the reasons his Honour states, the experts whose evidence was relied on at trial on this matter of fact have addressed the wrong question and SPI PowerNet has therefore failed to discharge its burden of proof that the assessment is excessive. Accordingly, the appeal in VID 216 of 2014 should be allowed. The parties should have an opportunity to file written submissions on costs.
In appeal VID 216 of 2014, I would make the following orders:
(1)The appeal be allowed.
(2)The whole of the judgment of Pagone J delivered on 25 March 2014 be set aside; and in lieu thereof order that the appeal against the appealable objection decision of 17 April 2012 be dismissed.
(3)On or before 15 May 2015, the respondent file and serve submissions dealing with the costs of the proceeding before the primary judge and the costs of the appeal.
(4)On or before 22 May 2015, the appellant file and serve submissions dealing with the costs of the proceeding before the primary judge and the costs of the appeal.
(5)On or before 27 May 2015, the respondent file and serve any reply to the appellant’s submissions on costs.
In appeal VID 218 of 2014, substantially for the reasons stated by Edmonds J, I would make the following orders:
(1)The appeal be allowed.
(2)The whole of the judgment of Pagone J delivered on 25 March 2014 be set aside.
(3)The proceeding be remitted to Pagone J for further hearing and determination in accordance with the reasons for judgment of the Full Court delivered on 6 May 2015.
(4)On or before 15 May 2015, the respondent file and serve submissions dealing with the costs of the proceeding before the primary judge and the costs of the appeal.
(5)On or before 22 May 2015, the appellant file and serve submissions dealing with the costs of the proceeding before the primary judge and the costs of the appeal.
(6)On or before 27 May 2015, the respondent file and serve any reply to the appellant’s submissions on costs.
I certify that the preceding forty (40) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Kenny. Associate:
Dated: 6 May 2015
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 216 of 2014
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: AUSNET TRANSMISSION GROUP PTY LTD
Respondent
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 218 of 2014
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: AUSNET SERVICES (TRANSMISSION) LTD
Respondent
JUDGES:
KENNY, EDMONDS AND GREENWOOD JJ
DATE:
6 MAY 2015
PLACE:
MELBOURNE
REASONS FOR JUDGMENT
EDMONDS J:
INTRODUCTION
These are two appeals from orders of a judge of this Court setting aside objection decisions of the appellant (“Commissioner”) and remitting the matters to the Commissioner to re-determine assessments in accordance with the primary judge’s reasons.
The first appeal, VID 216 of 2014, concerns claims for deductions by AusNet Transmission Group Pty Ltd (formerly SPI PowerNet Pty Ltd) (“SPI PowerNet”) in each of the years of income 1998 to 2006 for expenditure of a capital nature on the purchase of assets of the previously Victorian State-owned electricity transmission business, which included the copyright in drawings, plans and other works falling within the meaning of “unit of industrial property” in Div 10B of Pt III of the Income Tax Assessment Act 1936 (Cth) (“1936 Act”). In the 1998 year of income (the year ended 31 December 1997), the claim was made under Div 10B, but in subsequent years the claims were made sequentially under Div 373 of Pt 3-45 of the Income Tax Assessment Act 1997 (Cth) (“1997 Act”) and then under Div 40 of Pt 2-10 of the 1997 Act.
The second appeal, VID 218 of 2014, concerns claims for deductions by AusNet Services (Transmission) Ltd (formerly SP Australia Networks (Transmission) Ltd) (“SPANT”) in each of the years of income 2006 to 2011. These claims arise out of the same underlying purchase transaction referred to in [42] above, but by SPANT as head company of a consolidated group of which SPI PowerNet became a subsidiary member on 19 October 2005: see Pt 3-90 of the 1997 Act.
Before the primary judge there was a separate issue in the 2001 year of income (the year ended 31 December 2000) in which SPI PowerNet was the applicant, concerning whether it is liable for the 25% penalty which the Commissioner had imposed. The primary judge’s conclusions in favour of SPI PowerNet on the substantive issue concerning liability made it unnecessary for his Honour to deal with the penalty issue, but his Honour did express some views about the identification of the position about which the issue arose. His Honour’s views, in particular at [55] of his Honour’s Reasons for Judgment (“R”), were not challenged on appeal.
BACKGROUND
Pursuant to an Asset Sale Agreement dated 12 October 1997, SPI PowerNet, then known as Australian Transmission Corporation Pty Ltd, purchased the assets of the Victorian electricity transmission system, up until then owned and carried on by PowerNet Victoria, a body corporate established by the Electricity Industry Act 1993 (Vic), for $2.55 billion. Completion took place on 6 November 1997.
Australian Transmission Corporation Pty Ltd was a wholly owned subsidiary of GPU Inc, a United States corporation, and later changed its name to GPU PowerNet Pty Ltd.
All of the shares in GPU PowerNet Pty Ltd were subsequently acquired by SPI Australia Holdings Pty Ltd (“SPIAH”), a wholly owned subsidiary of Singapore Power International Pte Ltd (“SPI”), pursuant to an agreement dated 30 June 2000, and on 2 July 2000 GPU PowerNet Pty Ltd changed its name to SPI PowerNet.
On 19 October 2005, SPI transferred all its shares in SPIAH to SPANT for $1,100 million. The SPANT tax consolidated group, comprising SPIAH, SPI Australia Finance Pty Ltd and SPI PowerNet, was formed and SPI PowerNet ceased to be assessable for income tax as a separate identity.
ASSET SALE AGREEMENT OF 12 OCTOBER 1997
The Asset Sale Agreement of 12 October 1997 relevantly reads:
THIS ASSET SALE AGREEMENT is made on 12 October 1997 between the following parties:
1.THE HONOURABLE ALAN ROBERT STOCKDALE in his capacity as Treasurer of the State of Victoria for and on behalf of the Crown in the right of the State (“State”);
2.POWER NET VICTORIA a body corporate established by the Electricity Industry Act 1993 (“Seller”);
3.AUSTRALIAN TRANSMISSION CORPORATION PTY LTD ACN 079 798 173 of Level 35, 101 Collins Street, Melbourne (“Buyer”); and
4.GPU, INC. of 100 Interpace Parkway, Parsippany, NJ, USA (“Guarantor”).
RECITALS:
A. The Seller is the owner of the Assets.
B.The Seller agrees to sell and the Buyer agrees to buy the Assets (excluding the Land which will be allocated from the Seller to the Buyer) on the terms and conditions set out in this agreement.
C.The State agrees to guarantee the obligations of the Seller under this agreement.
D.The Guarantor agrees to guarantee the obligations of the Buyer under this agreement.
E.The total value attributed by the parties to the sale of Assets (net of Creditors and Co … [illegible] Liabilities) the subject of this agreement is $2,555,000,000 made up of:
Total Purchase Price $2,502,600,000
Estimated Duty $52,400,000
_____________
$2,555,000,000
F.The parties agree that the total payments to the State in connection with the privatisation of the Seller are $2,732,500,000 (including future licence fees of $177,500,000 payable by the Buyer, which the State values in net present value terms at approximately $161,000,000).
THE PARTIES AGREE as follows:
1. DEFINITIONS AND INTERPRETATION
1.1 Definitions
…
“Assets” means:
(a) the Plant and Equipment;
(b) the Business Records;
(c) the Contract Benefits;
(d) the Land;
(e) the Intellectual Property Rights;
(f) the Licences;
(g) all the Seller’s entitlements under the Real Property Leases;
(h) inventories, raw materials and stores of the Seller used in the Business;
(i)cash on hand and deposits and securities in the name of the Seller, other than with TCV;
(j) entitlements under the Employment Contracts;
(k) the Trade Debts; and
(l)all other tangible or intangible assets (including goodwill and insurance proceeds from the Seller’s insurance policies) owned by the Seller whether or not listed in the balance sheet of the Seller forming part of the 1997 Accounts,
other than the Specified Assets.
…
“Business” means the business of the design, ownership, augmentation and maintenance of the parts of the Victorian electricity transmission system owned by the Seller (and subsequently the Buyer), the provisions of connection services and other activities carried on by the Seller (and subsequently the Buyer) including diagnostic testing.
…
“Business Records” means all of the Seller’s financial and business data, employee data, technical data and all the Seller’s other records, data, information and documents, with the exception of any documents relating to the Specified Assets.
…
“Intellectual Property Rights” means the rights of the Seller to all:
(a) patents, copyrights or designs, registered or unregistered;
(b)rights under each licence in respect of such patents, copyrights or design; and
(c)equitable rights in respect of such patents, copyrights or designs or such licences.
…
“Total Purchase Price” means $2,502,600,000 being the sum of the price of the Assets (including the Land) net of Contract Liabilities and Creditors (excluding Specified Creditors) assumed under this agreement and, for the avoidance of doubt, does not include the Estimated Duty. The sum of $2,502,600,000 is fixed, notwithstanding that the components referred to above may be shown collectively to have a different value.
…
2. SALE AND PURCHASE
2.1 Sale of Assets
Subject to the terms of this agreement, on the Completion Date:
(a) the Seller must sell free of Security Interests the Assets (excluding the Land);
(b) the Buyer must:
(1) buy the Assets (excluding the Land);
(2)assume the Creditors (except the Specified Creditors) and the Contract Liabilities;
(3) pay the Total Purchase Price to the Seller; and
(c) the State must procure that the New Allocation Statement becomes effective.
2.2 Method of Payment
All payments to be made under this agreement must be made by bank cheque or in such other method as may be agreed in writing between the Seller and the Buyer.
…
THE FIRST APPEAL: VID 216 OF 2014
Analysis of the Asset Sale Agreement
The “Assets” sold and purchased under the Asset Sale Agreement of 12 October 1997 include “the Business Records”, itself a defined term, of PowerNet Victoria, and “the Intellectual Property Rights”, again a defined term, of PowerNet Victoria. The business records undoubtedly included the various drawings, plans, instructions, manuals, reports, principles, procedures and other documents referred to at R [18]; and the intellectual property rights undoubtedly included such copyright as existed in those drawings and documents at the time.
The Asset Sale Agreement provided that the “Total Purchase Price” was a fixed sum of $2,502,600,000 and was expressed to be “net of Contract Liabilities and Creditors (excluding Specified Creditors) assumed under this agreement”, but did not include the Estimated Duty. No part of this sum was allocated to any particular asset sold and there was no evidence to suggest that the parties had agreed some allocation of that sum outside the confines of the instrument that is the Asset Sale Agreement. Moreover, significantly, in my view, the definition of the term “Total Purchase Price” concluded:
The sum of $2,502,600,000 is fixed, notwithstanding that the components referred to above may be shown collectively to have a different value.
The reference to “the components referred to above” is a reference to the “Assets” as defined. This sentence makes clear that the price has been fixed without reference to the collective value of the assets sold. Arguably, that denies any ability on the part of either of the parties to allocate the purchase price among the “Assets”, by reference to their respective values. The relevance of this will become apparent below.
Division 10B of Part 3 of the 1936 Act
In the 1998 year of income, Div 10B relevantly provided:
124K Interpretation
(1) In this Division, unless the contrary intention appears:
…
unit of industrial property means:
(a) rights possessed by a person under a law of Australia as:
(i)the grantee or proprietor of a patent for an invention; or
(ii) the owner of a copyright; or
(iii) the owner of a registered design; or
(iv) a licensee under such a patent, copyright or design;
and includes equitable rights in respect of such a patent, copyright or design or in respect of a licence under such a patent, copyright or design; or
(b)rights possessed by a person under a law of a foreign country that are equivalent to the rights referred to in paragraph (a).
…
(2)Subject to subsection (2A), a reference in this Division to expenditure of a capital nature does not include a reference to:
(a)expenditure in respect of which a deduction has been allowed or is allowable under a provision of the previous Act or of this Act, other than a provision of this Division, or which has been or is taken into account in ascertaining the amount of an allowable deduction under such a provision; or
…
124L Application
(1)This Division applies to the owner of a unit of industrial property who:
…
(b)incurred expenditure of a capital nature on the purchase of the unit of industrial property;
…
and, in the year of income or a previous year of income, has used the unit of industrial property of which he is the owner, or the invention, work or other subject-matter or design to which that unit relates, for the purpose of producing assessable income.
…
124M Annual deductions
(1)Where, at any time during the year of income, a taxpayer is the owner of a unit of industrial property to whom this Division applies, an amount equal to the residual value of the unit in relation to the taxpayer as at the end of the year of income divided by a number equal to the number of whole years in the effective life of the unit in relation to the taxpayer as at the commencement of the year of income shall, subject to this Act, be an allowable deduction in respect of the unit.
…
124R Cost of a unit of industrial property
(1)For the purposes of this Division, the cost of a unit of industrial property to the owner of the unit shall, subject to subsection 124S(2), be taken to be:
(a)…
(b)in the case of an owner referred to in paragraph 124L(1)(b):
(i)if subsection (3) or (5) of this section is applicable – the cost ascertained in accordance with that subsection; or
(ii)if neither of these subsections is applicable – the expenditure referred to in paragraph 124L(1)(b).
…
(3) Where, in the case of an owner referred to in paragraph 124L(1)(b):
(a)the Commissioner is satisfied, having regard to any connection between the owner and the person from whom the unit of industrial property concerned was purchased or to any other relevant circumstances, that the owner and that person were not dealing with each other at arm’s length in relation to the purchase; and
(b)the expenditure of a capital nature incurred by the owner on the purchase of the unit of industrial property:
(i)exceeds the amount that was the cost of the unit to the last preceding owner of the unit; or
(ii)does not exceed the amount that was the cost of the unit to the last preceding owner of the unit but exceeds the value of the unit at the time of the purchase;
the cost of the unit to the owner for the purposes of this Division shall be taken to be the cost of the unit to the last preceding owner of the unit or the value of the unit at the time of the purchase, whichever is the less.
…
(5)Where, in the case of an owner referred to in paragraph 124L(1)(b), the unit of industrial property was purchased by the owner of the unit with other property and no separate price was allocated to the unit, the amount of the expenditure of a capital nature incurred by the owner on the purchase of the unit for the purposes of this Division shall be taken to be so much of the purchase price of the unit and the other property as the Commissioner determines.
124S Residual value
(1)Subject to this section, the residual value of a unit of industrial property at any time in relation to the owner of the unit shall, for the purposes of this Division, be ascertained by deducting from the cost of the unit to the owner the sum of:
(a)any deductions allowed or allowable under this Division in respect of the unit in assessments in respect of income of the owner of a year or years of income which ended prior to that time; and
(b)the consideration receivable by the owner in respect of any disposal by him of the unit in part prior to that time.
What the Commissioner did
It was common ground, both before the primary judge and on the hearing of this appeal, that there was no allocation of the “Total Purchase Price” amongst the various assets sold, either by the Asset Sale Agreement or pursuant to some other instrument of agreement between the parties; and the Commissioner was entitled to make a determination, pursuant to s 124R(5) of the 1936 Act, as to how much of that purchase price was to be allocated to the unit of industrial property, namely, the copyright in the drawings, plans and other works.
The Commissioner determined, pursuant to s 124R(5), that no part of the “Total Purchase Price” was to be allocated to the copyright in the drawings, plans and other works. It does not appear to have been suggested before the primary judge, and it certainly was not suggested on the hearing of the appeal (to the contrary, see T 81.10–86.37), that such a determination was not a valid determination for the purposes of s 124R(5); in other words, it was not suggested that it was not open to the Commissioner to make a “nil” determination, merely that it was erroneous by reference to the assumption of the experts “that the allocation of part of the total amount of the price paid for the transmission assets was to be undertaken on the basis of valuing the copyright”, and the view of the majority of such experts that it did have an “ascertainable separate value”: see R [17] at [59] below.
What the Primary Judge said
At R [15], his Honour, the primary judge, said:
The Commissioner’s rejection of any valuation as the basis of the deduction under s 124R(5) was based upon the view that the copyright had no separate value …
The submissions made to his Honour (see T 86) indicate that this was not the only basis on which the Commissioner contended that no part of the Total Purchase Price could be allocated to the copyright in the drawings, plans and other works; it was also contended that, on the facts of this case, no such allocation was possible. However, for reasons which I shall come to below, in my view, it is irrelevant to the outcome of the first appeal as to why the Commissioner made the determination he did; provided the statutorily specified conditions precedent to the making of the determination were satisfied, the determination could not be challenged and the cost of the copyright to SPI PowerNet was nil: s 124R(1)(b)(i).
At R [16], his Honour said:
The statutory task required by s 124R(5) is, in effect, that of allocating or apportioning part of a known purchase price to part of what the total amount purchased but the basis of allocation, and the relevance of value, is not easy. The section is directed to allowing to the taxpayer a deduction for that part of a known larger amount which is to be taken to be the cost of the deductible item rather than allowing a deduction for the independent value of the item in question. The task is not, in terms, that of valuing the relevant part of what was acquired, although its value may be relevant to the process of allocation.
…
The individual market value of an item purchased with others for a composite amount may not be the appropriate portion of the total purchase price which is to be taken to have been paid for the item. That may be so for various reasons and the adoption for the purposes of s 124R(5) of the value of the unit of industrial property which was acquired may not produce the outcome intended by the section. The section assumes that part of the total purchase price was a taxpayer’s actual cost of acquiring the unit of industrial property and that the amount to be allocated can be determined.
With respect, I have difficulty with the last sentence. The section, s 124R(5), does not make any assumption that part of the total purchase price was a taxpayer’s actual cost of acquiring the unit of industrial property. Nor does s 124R(5) assume that the Commissioner can and should allocate, or apportion, the amount of the total purchase price referable to the unit of industrial property. No determination of the Commissioner pursuant to s 124R(5) is conditioned, or conditional, upon any such assumptions.
A similar observation is made at R [25], where his Honour says:
However, the task contemplated by the section assumes that some part of the purchase price for the total assets has been paid for the unit of industrial property constituted by the drawings in the same way that it may be assumed that some part of an amount to purchase a car with a key may pay an amount for the car and an amount for the key to operate it.
The assumption has no predication in the terms of s 124R(5).
At R [17], his Honour said:
The experts in this case had not been asked specifically to opine on methods by which part of an actual total purchase price might be taken to be the cost of the copyright in question, but were asked whether there was a generally accepted methodology or methodologies for valuing copyright in drawings and documents for a transmission system. That, however, is not the question to which s 124R(5) directs attention. The section is directed to the allocation or apportionment of a known total amount to part of the composite of the assets which the whole amount paid for: it is not directed to valuing the relevant asset except to the extent that the value may inform the task of allocation or apportionment. The dispute between the parties, however, was largely conducted upon the basis that the question posed by s 124R(5) was to be answered by valuing the copyright; although the parties reached radically different outcomes on that basis. Senior counsel for the taxpayer submitted in final submissions that it should be inferred that the experts had agreed, and had assumed, that the allocation of part of the total amount of the price paid for the transmission assets was to be undertaken on the basis of valuing the copyright. The Commissioner did not entirely disavow that approach and, indeed, relied upon the views of one of the valuers to maintain the position that no part of the total purchase price was to be allocated to the copyright because, as a matter of valuation, it had, in his opinion, no ascertainable separate value. The independent value of the copyright may be relevant to the question upon which the application of s 124R(5) depends, and in many cases will suggest or inform the answer to the question posed by the section (where, for example, the unit of industrial property has a ready market for its purchase and where that value can reliably be taken to have been largely reflected in the composite purchase price).
Again, it is the last sentence of this extract from his Honour’s reasons that I have difficulty with; and that difficulty goes to the relevance of the independent value of the copyright to the determination of the Commissioner under challenge assuming, of course, that the statutory pre-conditions for the Commissioner to make the determination have all been satisfied.
Finally, at R [26], his Honour said:
There may be cases in the application of provisions like s 124R(5) in which the value of a unit of industrial property acquired as part of the composite acquisition of assets may not be relevant. For that to be so, however, it must be clear that no part of the purchase price was paid for the unit of industrial property. The acquisition of the copyright by SPI PowerNet in this proceeding is not such a case and I do not consider the evidence to permit such a conclusion. Even the evidence of Mr Studley did not go that far: his view as an expert was, rather, that it had no separate value because, like his car key example, it could not be sold separately. The evidence of the other experts, and of those who were involved in the business activities of SPI PowerNet and in the purchase of the copyright, was that the copyright had value, that its separate value was capable of determination and that it had been purchased. Indeed, the evidence of those engaged in SPI PowerNet’s business, which I accept, was that the copyright was critical to the proper operation of the business. The information conveyed in the drawings and documents, and the ability to reproduce the drawings and documents, was essential to the operations of the transmission system.
With respect, in my view this misconceives both the statutory question and the process of its resolution and answer.
Analysis and Consideration
Section 124R is an exclusive code for fixing the cost of a unit of industrial property to the owner of the unit for the purposes of Div 10B, subject only to s 124S(2), which is not relevant for present purposes.
In the case of an owner of a unit of industrial property who incurred expenditure of a capital nature on the purchase of the unit of industrial property (s 124L(1)(b)): if s 124R(3) or (5) is applicable, the cost is ascertained in accordance with the relevant subsection (s 124R(1)(b)(i)); if neither of those subsections is applicable, the cost is the expenditure referred to in s 124L(1)(b) (s 124R(1)(b)(ii)).
It is common ground that s 124R(3) is not applicable in the present case.
It is also common ground that s 124R(5) is applicable in the present case.
The Commissioner is only entitled to make a determination pursuant to s 124R(5) where the following condition is fulfilled: the unit of industrial property was purchased by the owner with other property and no separate price was allocated to the unit.
It is not in dispute that this condition was fulfilled entitling the Commissioner to make the determination he did. In my view, the outcome of the first appeal turns on the terms of s 124R(5), having regard to ss 175 and 177 of the 1936 Act. Section 177(1) provides that the production of a notice of assessment (or a relevant copy) will be conclusive evidence “of the due making of the assessment”, even in proceedings in this Court under Pt IVC of the Taxation Administration Act1953 (Cth) (“TAA”) where the issue on the appeal is whether the assessment is excessive. Section 175 provides that the validity of an assessment is not affected by reason that any provisions of the Act have not been complied with.
The phrase, “due making of the assessment” in s 177(1), is “intended to cover all procedural steps, other than those if any going to substantive liability and so contributing to the excessiveness of the assessment”: see George v Federal Commissioner of Taxation (1952) 86 CLR 183 at 207. Because of s 177(1), the distinction between the making of a determination as a procedural step and a determination “going to substantive liability” (to adopt the language of Mason CJ in Deputy Commissioner of Taxation v Richard Walter Pty Ltd (1995) 183 CLR 168 (“Richard Walter”) at 184) must always be kept in mind. The making of a determination under s 124R(5) is a procedural step in the making of the assessment; it is not therefore open to a taxpayer to challenge the assessment by showing some error in that making. The making of the s 124R(5) determination is merely a step in the making of an assessment because the making of the determination is not itself an element or criterion for liability to tax. The fact that a determination is made, however, does go to substantive liability and, as a consequence, it would be open to a taxpayer in Pt IVC proceedings to establish in an appropriate case that an assessment was excessive by showing that the Commissioner had not in fact made a determination under s 124R(5), or that the requisite statutory condition enlivening the Commissioner’s power under s 124R(5) had not been met.
Here, the Commissioner, being entitled to make a determination pursuant to s 124R(5) and having made such a determination, the amount so determined, namely, “nil”, is the cost of the relevant unit of industrial property by force of the terms of s 124R(1)(b)(i). In my view, it is not open to SPI PowerNet to challenge that determination on the basis that some error was involved in the making of the determination. The making of the determination is part of the process of making the assessment and carries the benefit of ss 175 and 177 of the 1936 Act: see Richard Walter at 184; Commissioner of Taxation (Cth) v Peabody (1994) 181 CLR 359 at 382; Commissioner of Taxation v Sleight (2004) 136 FCR 211 at [105]–[110] per Hill J; and W R Carpenter Holdings Pty Ltd & Anor v Federal Commissioner of Taxation (2007) 161 FCR 1 at [45]–[56]; at first instance, (2006) 234 ALR 451 at [143], [144] per Lindgren J.
It is regrettable that the parties did not advert to the operation of s 177(1) on the hearing of the appeal or (it would appear) before the primary judge. The failure to do so led his Honour into error. The statutory force of this provision cannot, however, be ignored.
If it were possible for SPI PowerNet to show that an assessment based on the s 124R(5) determination in the present case is excessive, that burden has not been discharged in the present case. This is because, under the terms of the Asset Sale Agreement, it is not possible to allocate any part of the Total Purchase Price to any particular asset, specifically and relevantly to the copyright in the drawings, plans and other works.
That being so, the first appeal must be allowed. The parties should be given an opportunity to make submissions on the question of costs.
THE SECOND APPEAL: VID 218 OF 2014
The Basis and Calculation of SPANT’s Claims
As noted in [43] above, the claims for deductions by SPANT are in respect of the period from 19 October 2005 to 31 March 2006, and the years ended 31 March 2007 to 2011 inclusive, in lieu of the succeeding 30 June. On that first-mentioned day, SPI PowerNet became part of a tax consolidated group of which SPANT was the head company.
Under the tax cost setting rules in Div 705 of Pt 3-90 of the 1997 Act, SPANT was required to reset the tax costs of the SPI PowerNet assets, including the previously acquired copyright in the drawings, plans and other works (“the copyright”). For the purpose of determining the tax cost setting amounts of these assets, it was necessary to value them as at 19 October 2005.
In reliance on a report dated 26 February 2007, referred to in the reasons for judgment below as “the second PwC report”, but not admitted into evidence, the value of the copyright as at 19 October 2005 was said to be in a value range of $230 million to $332 million. So much was adduced in oral evidence from Mr Studley (T 286.20–40).
The mid-point of this range, which was about $280.7 million, was adjusted to reflect the enterprise value of SPI PowerNet at 19 October 2005 (because the individual values of the assets could not total more than the value of the business). The valuation was adjusted in proportion to the value of the copyright compared to the values of other assets. Based on this approach, the value of the copyright for tax consolidation purposes as at 19 October 2005 was determined to be $239 million, as follows –
Proportional Reduction of Market Values Asset Category Original Market Value Percentage of Total Value Adjusted Market Value Freehold land $281,809,700 8.8% $240,013,467 Easements
1,350,263,792 42% 1,150,001,202 Transmission System 1,304,706,000 40.6% 1,111,200,254 Copyrights 280,740,343 8.7% 239,102,710 Total $3,217,519,835 100% $2,740,317,632
The copyright adjusted market value figure of $239,102,710 was adduced in oral evidence from Mr Studley (T 286.20–40), but the other calculations are taken from SPANT’s Appeal Statement at [10].
Section 705-35 identifies how the tax cost setting amount is to be calculated in respect of each asset. Section 705-35(1), as it stood in the 1997 Act at the relevant time, provided:
For each asset of the joining entity (a reset cost base asset) that is not a retained cost base asset or an asset (an excluded asset) covered by subsection (2), the asset’s tax cost setting amount is worked out by:
(a)first working out the joined group’s allocable cost amount for the joining entity in accordance with s 705-60; and
(b)then reducing that amount by the total of the tax cost setting amounts in accordance with s 705-25 for each retained cost base asset (but not below zero); and
(c)finally, allocating the result to each of the joining entity’s reset cost base assets (other than excluded assets) in proportion to their market values.
It is common ground, that the amount in para (a) – the joined group’s allocable cost amount (“ACA”) for SPI PowerNet in accordance with s 705-60 – was $2,124,334,718. It is also common ground that the amount in para (b) – the total of the tax cost setting amounts in accordance with s 705-25 for each retained cost base asset – was $57,601,240. It is only the allocation of the result under para (c) that is in dispute, and that is solely due to the different positions taken by the parties with respect to the copyright as at 19 October 2005: SPANT contending, in its Appeal Statement, that it was possible to separately value the copyright (separately from other related assets) and contending for a separate value of the copyright of $223,691,397; which amount is said to represent the market value of the remainder of the copyright after bifurcation of copyright created internally between 6 November 1997 and 26 June 2002, pursuant to the internally generated asset integrity rule in s 701A-10 of the Income Tax (Transitional Provisions) Act 1997 (Cth), said to have an adjusted market value of $15,411,313; and the Commissioner contending that the copyright had no separate value as at 19 October 2005.
In its Appeal Statement at [14], SPANT values were used for ACA allocation purposes to work out the tax cost setting amounts of SPI PowerNet’s reset cost base assets, as shown below –
Asset Description Market Value Terminating Values ACA Allocated Retained Cost Base Assets 57,601,240 57,601,240 57,601,240 Reset Cost Base Assets Depreciable property, plant and equipment [excl. WIP] 1,111,200,254 885,890,351 690,485,664 Easements 1,150,001,202 579,533,827 836,504,155 Land 240,013,467 80,996,077 174,584,394 Stores & consumables 15,871,495 15,871,495 11,544,833 Capital Works in Progress 84,950,897 84,950,896 61,792,786 Remaining copyright 223,691,397 113,058,297 162,711,808 Pre 27/6/02 internal copyright 15,411,313 0 11,210,106 Deferred Tax Assets 19,335 0 14,064 Foreign Exchange Hedge Derivatives 124,773 0 90,760 TOTALS 2,898,885,374 1,817,902,183 2,006,539,810
SPANT claimed deductions in respect of the copyright after formation of the SPANT tax consolidated group under s 40-25 of the 1997 Act, based on an opening adjustable value of $162,711,808. Section 40-25, broadly speaking, provides an annual deduction for an amount equal to the decline in value of a depreciating asset (which includes the copyright) that a taxpayer holds. The amounts that SPANT deducted are as follows –
Tax Year Taxpayer Deductions claimed 2006 SPANT $2,924,355 2007 SPANT 6,508,472 2008 SPANT 6,508,472 2009 SPANT 6,508,472 2010 SPANT 6,508,472 2011 SPANT 6,508,472
The Conduct of the Hearing before the Primary Judge
On the second day of the hearing, the primary judge embraced an invitation from senior counsel for the respondents (T 150.15) that the expert valuers have a conclave by reference to questions agreed between the parties and that they produce a joint report on the outcome of that conclave. The invitation further envisaged that the experts would be concurrently examined on the joint report by counsel for each party. Senior counsel for the Commissioner initially suggested that the conclave, and therefore the joint report, should not include Mr Studley, the author of what is referred to as “the second PwC report” and co-author of “the first PwC report”, but be confined to Mr Lonergan, engaged by the respondents, and Mr Samuel, engaged by the Commissioner. In the events that occurred, Mr Studley joined the conclave and participated in the production of the Joint Report dated 27 November 2013 (“the Joint Report”).
What was not raised with counsel at the time, was the view of the primary judge that pursuit of this course would render it unnecessary to admit the individual expert reports into evidence. This prospect was first raised by the primary judge before lunch on the third day (T 205 and 207), but only came to the surface later that day, after the experts had given concurrent evidence. Indeed, by this time his Honour had come to the view that he would not admit the individual expert reports into evidence despite their admissibility and the attempts of both counsel to tender them. The following exchange took place (T 284.19–286.10):
MR GLICK: Before Mr – Mr Samuel is – Mr Studley, I beg your pardon. This had something to do with the other two gentlemen. Mr Studley is staying. We will, as part of our case, seek to tender his reports.
HIS HONOUR: Well, the whole process that we’ve gone through is the substitute for the reports. I said this before lunch.
MR GLICK: I know you did, your Honour.
HIS HONOUR: And I don’t want the process that we’ve gone through to be [completely] wasted by now tendering the reports. It’s not going to happen.
MR GLICK: It’s – if you don’t have that report, you will not know what the value is that Mr Studley [attributed] to the copyright.
HIS HONOUR: If you need to ask – if you need to ask a question about valuation, this is your last opportunity. You will not be tendering the reports.
MR GLICK: Your Honour pleases. Then I will then need to ask some questions to get into evidence that [he] conducted a valuation on the replacement [cost] methodology and he came to a certain result.
HIS HONOUR: All right. And who’s that – [who] – do we need to bother with that? Mr Studley, is it?
MR GLICK: I beg your pardon?
HIS HONOUR: Who do you want to ask of that?
MR GLICK: Mr Studley.
HIS HONOUR: Right. So, Mr Lonergan, you’re off the hook. You may go. Thank you for your attendance.
MR LONERGAN: Thank you, your Honour.
…
HIS HONOUR: Mr Samuel, I think you’re still off the hook. You may go. Thank
you for your attendance.MR SAMUEL: Thank you, your Honour.
…
MR GLICK: Thank you, your Honour. Thank you, gentlemen.
MR SAMUEL: Thank you.
MS SYMON: I’m sorry, your Honour. I apologise.
HIS HONOUR: No. That’s all right. I assume that Mr Glick – if he wants to ask two or three questions about valuation – about the value rather, not valuation – the value. He ought to go first and then you can ask whatever questions you want to. Is that convenient or not?
MS SYMON: It is, your Honour. Perhaps he – Mr Glick can ask his questions and I will see where that gets us. I’m just concerned about questions of reasoning and the information on which the number that he wants to get to is based.
HIS HONOUR: Well, I’m not going to stop –––
MS SYMON: But it – so it might – in some ways, it’s simpler to read the report because one understands how the number is arrived at.
HIS HONOUR: Well, I’m not going to repeat what I’ve said before.
MS SYMON: I do understand that.
HIS HONOUR: The entire process is wasted if what we then do is add to the sum total of everything by putting them all back in. It’s just not – we’ve had the discussion earlier on. You had plenty of opportunities to deal with it. You could have said, “No, no, no, no, no. We insist on going back to the old method. We want to do the reports.” It has been decided, ruled upon, acted upon, finished – too late. If you’ve got discrete bits of evidence you need to put in, by all means, put it in. Anything that will help me decide the case will obviously be admittable. You will – what you won’t do is undo the helpful work that has been done.
MS SYMON: Well, I think this is my learned friend’s problem at the moment, your Honour.
HIS HONOUR: Right. It certainly is.
A little later, the following exchange took place (T 288.4–289.31):
MS SYMON: ... Your Honour, this is going to take some time and I am rather thrown by the fact that your Honour is not going to receive the report, because there is a good deal of ---
HIS HONOUR: You can put the matters in the report to him.
MS SYMON: Well, I can, your Honour. But that’s going to take quite a while, and I just need to gather together what it is ---
HIS HONOUR: You’ve got ---
MS SYMON: I mean ---
HIS HONOUR: You’ve got whatever time you need. It’s unfair, as between the parties, if past reports now go on as evidence that were not the subject of the way in which the concurrent evidence went in. But that’s not to stop you from being able to cross-examine Mr Studley on any of the matters that you need to cross-examine that will, somehow or other, bear upon the valuation that has purportedly been given by way of his testimony. So I’m not stopping you, in any way, shape or form.
MS SYMON: I understand that, your Honour. The difficulty I’m having is that there’s a lot of material here.
HIS HONOUR: Yes.
MS SYMON: And it’s late in the afternoon.
HIS HONOUR: Yes. If you need some time.
MS SYMON: And I would appreciate the opportunity to resume with Mr Studley in the morning.
HIS HONOUR: Of course.
MS SYMON: Because what you’re being asked to do at the moment is to accept a number ---
HIS HONOUR: Yes.
MS SYMON: --- which is entirely unsupported.
HIS HONOUR: I’m happy ---
MS SYMON: And what I’d like to consider is whether that is my learned friend’s
problem or my problem.HIS HONOUR: No.
MR GLICK: If it’s my problem [indistinct]
MS SYMON: Well, I’m not sure at the moment. And I don’t want to think it’s your – I don’t want to be in here at five to four thinking it’s my learned friend’s problem and not cross-examined material and which, perhaps, should be in the event that it’s my problem.
HIS HONOUR: Sure. No. I’m conscious of the fact that the party have had to accommodate an unusual day today for other reasons, and I’m perfectly happy to give you some time and, given the time of day, if need be, for Mr Studley to come back tomorrow.
MR SYMON: If your Honour would be so good ---
HIS HONOUR: Of course.
MS SYMON: --- I would appreciate the time.
HIS HONOUR: Of course. As long as you all realise that what won’t happen is that you won’t get the report in and undo the work that you’ve done. The process of the concurrent evidence was designed to streamline the process. And all you then do is say, well, now, thank you very much, but on top of all that we want all of the report in as well. That’s just not going to happen. By all means ask Mr Studley tomorrow about the bases upon which he’s reached the number, and presumably what you will want to do, if you think it necessary, is to expose the fact that, presumably, it was taken into account by application of the process that was described earlier so that it would be desirable, I suppose, for you to indicate where in the $239 million there is the taking into account of opportunity costs that may or may not be double counting, or costs referable to copyright that may or may not be appropriate.
The primary judge concluded at [13] as a matter of construction of s 124R(5) that the subsection applies “where the parties to the transaction had not allocated part of an overall purchase price to the unit [of industrial property] in question but have otherwise dealt with the purchase at arms‑length”. Thus, the primary judge concluded that the precondition to the application of the subsection was satisfied and that SPI PowerNet was not seeking to challenge a procedural step characterised as part of the due making of the assessment. Rather, it was seeking in Pt IVC proceedings to prove that the assessment was excessive by contesting, within the framework of the taxpayer’s objection, substantive liability to an amount of tax by testing whether the Commissioner’s determination of that part of the un‑dissected purchase price of the Assets under the Agreement, objectively referable to the purchase of the unit of industrial property, was the amount “properly attributable” to the purchase of that unit. The primary judge at [13] observes that s 124R(5) operates within the following construct:
The purpose of s 124R(5) is to enable the Commissioner to determine what the section presumes to be the objectively ascertainable portion of the total purchase price which the buyer of a unit of industrial property must be taken to have paid for the unit of industrial property. … The task may involve questions of judgment similar to those which go to determining the arm’s length consideration in provisions like s 136AD(4), but it is a task directed to determining objectively that part of an un‑dissected sum which was the cost for the purchase of a deductible asset.
Thus, it followed for the primary judge that SPI PowerNet was entitled to seek to prove that the assessment was excessive by challenging in Pt IVC proceedings whether the Commissioner’s determination was “objectively correct” because that determination relates to the amount of the taxpayer’s substantive liability in the sense in which that term is understood in this field of discourse as a contrast to the procedure or mechanism of assessment itself. It follows from the discussion at [9] to [13] of the reasons that the primary judge did not regard ss 175 and 177(1) as foreclosing SPI PowerNet’s challenge to the Commissioner’s determination under s 124R(5) as an impermissible examination of a procedural step forming part of the “due making of the assessment”. In George v Federal Commissioner of Taxation, the plurality said this at 206‑207:
The clear policy of s 177 is to distinguish between the procedure or mechanism by which the taxable income and tax is ascertained or assessed on the one hand and on the other hand the substantive liability of the taxpayer. The former involves the due making of the assessment.
The plurality in George regarded the following notion as axiomatic at 207:
Obviously the “due making of the assessment” was intended to cover all procedural steps, other than those if any going to substantive liability and so contributing to the excessiveness of the assessment, the thing which is put in contest by an appeal.
At [13] of the reasons, the primary judge adds this observation as to the construction of the language of s 124R(5):
It operates where it is assumed that something was paid for the unit of industrial property but that its amount (that is, its cost) was not separately identified.
[emphasis added]
Although the primary judge makes no express reference to the guiding principles of statutory construction at [9] to [13] of the reasons, applying the principles established in Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (2009) 239 CLR 27 at 46 [47]; Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355; and FCT v Consolidated Media Holdings (2012) 250 CLR 503, s 124R(5) applies and is engaged where the parties to a s 124L(1)(b) transaction for the purchase of a unit of industrial property, purchased together with other property (in this case assets), have not allocated a separate price to the unit. In that event, the amount of expenditure of a capital nature incurred by the owner on the purchase of the unit shall be taken to be so much of the purchase price of the unit, and the other property, as the Commissioner determines, for the purposes of Div 10B, by the Commissioner identifying the objectively ascertainable portion of the total price the buyer must be taken to have paid for the unit in the circumstances of the transaction and taking into account (where put to the Commissioner) any relevant conduct of the parties in isolating (if at all) a portion of the purchase price referable to the unit.
That step is not simply a procedural step.
It is a step which goes to the substantive liability of the taxpayer. In Pt IVC proceedings, the taxpayer is entitled having regard to s 124R(5) to call into question and seek to prove to the relevant standard that the assessment is excessive by seeking to prove that there is no proper objective foundation for the determination. It may be that upon proper analysis of the objective foundation for an allocation, the parties will be taken to have made no allocation of any part of the purchase price to the purchase of the unit of industrial property. In that sense, I would respectfully depart from the observations of the primary judge at [13] of the reasons that s 124R(5) according to its language taken in conjunction with the statutory purpose and function of Div 10B, operates upon a presumption that some part, other than nil, of the total purchase price is to be taken as a part allocated by the buyer to the purchase of the unit of industrial property.
Because, as a matter of construction, s 124R(5) involves a step taken by the Commissioner which is one going to substantive liability and so contributing to the excessiveness of the assessment, being the thing which is put in contest by the application (appeal) to the Federal Court under Pt IVC, the taxpayer’s entitlement to challenge the objective foundation for the making of the determination is not, in my view, foreclosed by ss 175 and 177(1) read together with s 175A.
Moreover, the Commissioner did not contend at the hearing or as part of its case that ss 175 and 177(1) foreclosed the taxpayer’s challenge to the making of the determination. Rather, the Commissioner’s position was that s 124R(5) engaged the exercise of a discretion and that SPI PowerNet had failed to show error in the exercise of the discretion. In my view, that analytical foundation of s 124R(5) is incorrect but nevertheless, the Commissioner did not conduct the case on the footing that ss 175 and 177(1) operated as a complete answer to any challenge to the making of the determination under s 124R(5). In that sense, I would respectfully disagree with the observations of Edmonds J that ss 175 and 177(1) preclude an examination of the objective grounds upon which the Commissioner’s determination was made under s 124R(5).
If s 124R(5) is characterised as the exercise of a discretion, the exercise of such a discretion might be called into question in Pt IVC proceedings having regard to the Avon Downs grounds and, as to the proper basis for demonstrating that the exercise of a statutorily conferred discretion has miscarried on the grounds of unreasonableness, Minister for Immigration and Citizenship v Li (2013) 249 CLR 332.
SPI PowerNet sought to prove the objectively ascertainable portion of the total purchase price referable to the purchase of the unit of industrial property by undertaking a valuation of the copyright as an analogue for that part of the purchase price to be attributed to the purchase of the copyright. At [16], the primary judge observed that the statutory task required by s 124R(5) is, in effect, that of allocating or apportioning part of a known purchase price to a part of that which was purchased “but the basis of allocation and the relevance of value, is not easy” [emphasis added].
The primary judge also said this at [16]:
The section is directed to allowing the taxpayer a deduction for that part of a known larger amount which is to be taken to be the cost of the deductible item rather than allowing a deduction for the independent value of the item in question.
[emphasis added]
The primary judge considered at [16] that “the task is not in terms, that of valuing the relevant part of what was acquired”. However, the primary judge observed that the value of the copyright may be relevant to the process of allocation required by s 124R(5). The question of the relevance of value troubled the primary judge further at [16] when his Honour observed that the individual market value of an item purchased with others for a composite amount may not be the “appropriate portion of the total purchase price” which is to be taken to have been “paid” for the item. Moreover, the primary judge observed at [16] that the value of the unit of industrial property which was acquired may not produce the “outcome intended by the section”. The primary judge also observed at [16] that s 124R(5) assumes that part of the total purchase price was a taxpayer’s “actual cost” of acquiring the unit of industrial property and that “the amount to be allocated can be determined”. That proposition may be true if it is accepted that the part of the total purchase price might be nil as, transactionally, the parties may have attributed no part of the purchase price to the acquisition of the unit of industrial property in question.
At [17], the primary judge notes that the experts in the case had not been asked to express an opinion on the methods by which “part of an actual total purchase price might be taken to be the cost of the copyright in question” but rather, had been asked whether there was a “generally accepted methodology or methodologies for valuing copyright in drawings and documents for a transmission system”. The primary judge at [17] notes, however, that “[t]hat is not the question to which s 124R(5) directs attention” and observes that the section is directed to the allocation of a known total amount to part of the composite assets for which the total purchase price was paid. Thus at [17], “it is not directed to valuing the relevant asset except to the extent that the value may inform the task of allocation or apportionment” [emphasis added].
The primary judge made this further observation at [17]:
The dispute between the parties, however, was largely conducted upon the basis that the question posed by s 124R(5) was to be answered by valuing the copyright; although the parties reached radically different outcomes on that basis. Senior counsel for [SPI PowerNet] submitted in final submissions that it should be inferred that the experts had agreed, and had assumed, that the allocation of part of the total amount of the price paid for the transmission assets was to be undertaken on the basis of valuing the copyright. The Commissioner did not entirely disavow that approach and, indeed, relied upon the views of one of the valuers to maintain the position that no part of the total purchase price was to be allocated to the copyright because, as a matter of valuation, it had, in his opinion, no ascertainable separate value.
[emphasis added]After that observation, the primary judge returned to the relationship between value and the question posed by s 124R(5) and observed at [17] that the “independent value of the copyright” may be relevant to the question upon which the application of s 124R(5) depends, and in many cases “will suggest or inform” the answer to the question posed by the section where, for example, there is a ready market for its purchase.
I have already identified the field of the materials or works which were the subject of the valuation exercise. The Commissioner contended before the primary judge that the taxpayer’s case ought to be rejected because the number of items which had been valued was not consistent and therefore the valuations could not be relied upon by the Court. The primary judge rejected that contention and accepted at [19] that there was shown to be “sufficient identity in the subject matter and the number of drawings in that subject matter, which was valued” by two particular valuers, SKM and PriceWaterhouseCoopers (“PWC”). Put simply, SKM valued 105,410 documents relevant to the transmission system. PWC undertook its valuation exercise in relation to 95,910 documents. The primary judge considered that the taxpayer had discharged the burden of proof on the balance of probabilities by probative evidence in demonstrating that there were “about 105,410 documents falling within the 36 categories acquired by SPI PowerNet”.
At [20], the primary judge observes that the SKM valuation was undertaken primarily by Mr Toohey an Engineer in the Electrical Works Section for SKM. He valued the copyright at $171 million using the replacement cost methodology. Mr John Studley of PWC was retained to comment upon the reasonableness of that valuation. The primary judge at [20] observes that a key assumption in Mr Studley’s report was that in “estimating the cost to recreate the critical copyright it was not possible to copy the drawings and produce manuals”. Mr Studley estimated the range of value as between $173 million and $262 million and concluded that the SKM value of $171 million was reasonable. Two other experts gave evidence before the primary judge. Mr Lonergan was retained by SPI PowerNet and agreed generally with the PWC methodology. Mr Samuel was retained by the Commissioner and expressed the view that the copyright had no value separate from the other assets which were acquired.
At [21], the primary judge observes that both the taxpayer and the Commissioner contended that the drawings were significant to the operation of the electricity transmission business “but, in part for the same reason, they reached opposite conclusions about their value”. The primary judge observes that Mr Ficca, an Electrical Engineer, who had spent his professional working career in the energy industry gave evidence of the critical importance of the drawings to the transmission business for such purposes as:
… responding to emergency situations, augmenting works, maintaining and modifying works, replacing and refurbishing works, isolation works, proximity works, decommissioning, to satisfy contractual obligations to other entities in the electricity industry, and to satisfy technical regulators and various workplace safety and bushfire mitigation laws.
As to the criticality of the documents to the transmission undertaking, the primary judge said this at [26]:
Indeed, the evidence of those engaged in SPI PowerNet’s business, which I accept, was that the copyright was critical to the proper operation of the business. The information conveyed in the drawings and documents, and the ability to reproduce the drawings and documents, was essential to the operations of the transmission system. The tasks for which the documents were created typically required reproduction of the documents by display on computer screens or portable hand‑held devices, or as printouts for staff to take for use on‑site. Reproduction with tracing paper was used before photocopying became possible, as was microfiche. The drawings and documents have been digitized since the 1980s and imported to a management system called “Objective”.
[emphasis added]At [39], the primary judge said this:
The evidence was that the value of the drawings to the business lay in the expression of the information they contained. It may be that the information could be expressed differently but the expressions in the drawings were vital to the operations of the business which SPI PowerNet acquired. It was the expression of that information which SPI PowerNet needed to acquire and did acquire.
[emphasis added]The three expert witnesses, Mr Lonergan, Mr Studley and Mr Samuel agreed that there were three generally accepted methodologies for valuing intellectual property but could not agree about a generally accepted methodology for valuing copyright in drawings and documents for a transmission system. The three methodologies were an income approach, a market approach and a cost approach. A replacement cost methodology was also appropriate but the experts could not agree about its application in the circumstances the subject of these proceedings. Mr Samuel was of the view that a market approach was relevant because there had been “contractor agreements” which had provided evidence of the amount a willing buyer was prepared to pay for the relevant copyright from a willing seller. The primary judge notes that Mr Samuel expressed the view that the copyright “could not possibly be sold separately from the transmission business”. The other two experts were of the view that the market approach was not appropriate for valuing the copyright in drawings and documents for a transmission system “because of the unique nature of the copyright assets and that there was no readily observable market for such assets”.
The primary judge at [25] observes that the approach adopted by Mr Samuel upon which the Commissioner relied did “not accord with the task to be undertaken under s 124R(5)”. The primary judge at [25] said this:
However, the task contemplated by the section assumes that some part of the purchase price for the total assets has been paid for the unit of industrial property constituted by the drawings in the same way that it may be assumed that some part of an amount to purchase a car with a key may pay an amount for the car and an amount for the key to operate it. It is not a sufficient answer to the application of the section that the unit of industrial property may not be capable of independent sale in a hypothetical market. It may be that little of the total purchase price is to be taken as having been paid for the item of industrial property but that conclusion will not necessarily follow just because items which are sold together could not be sold separately.
[emphasis added]After that passage, the primary judge returned to the difficulty of the relationship between the statutory question posed by s 124R(5) and the valuation exercise and said this:
Similarly, as a matter of general principle, the task required by s 124R(5) is not answered by determining the separate value of one of a number of assets which were acquired together with the payment of one un‑dissected purchase price. It may well be that the separate value of the copyright may best be determined by the replacement cost methodology, and that value may inform the answer to the question posed by s 124R(5), but it does not necessarily determine how much of the price actually paid is to be taken as the amount paid for the copyright. The application of any methodology for valuing an asset for the purposes of s 124R(5) will be of assistance only to the extent that it informs the inquiry required by that section: namely, how much of the actual agreed total sum is to be taken to have been paid for the item in question.
[emphasis added]
At [26], the primary judge observes that there may be cases in which the value of a unit of industrial property compositely acquired may not be relevant. His Honour further observes that for value to be irrelevant, “it must be clear that no part of the purchase price was paid for the unit of industrial property”. The primary judge observes that the acquisition of the copyright by SPI PowerNet in these proceedings is not such a case. His Honour observes that Mr Samuel had taken the view that the copyright had no separate value because, like his car key example, it could not be sold separately. The primary judge observes that the evidence of the other experts was to the effect that the copyright had value; its separate value was capable of determination; and that it had been purchased.
At [27], the primary judge observes that the preponderance of the expert evidence was that the separate value of the copyright acquired by SPI PowerNet was properly to be determined and able to be determined by the replacement cost methodology and the application of that methodology produced a value for the copyright at the date of acquisition of $171.8 million according to SKM. At [28], the primary judge observes that the exercise undertaken by SKM involved determining the “replacement cost of the intellectual property contained in the copyright” and further observes:
The basis of the assessment included an estimate of the time it would take similarly qualified personnel to undertake the necessary work to replace the intellectual content of the drawings and other documents. The report produced by SKM in 1999 [the valuation having been undertaken between November 1998 and January 1999] included a detailed explanation of the work undertaken to produce the estimated value of the intellectual property acquired as at 6 November 1997.
[emphasis added]
Applying that method, PWC concluded that the $171.8 million value adopted by SKM was reasonable. Mr Lonergan also supported the valuation. However, Mr Samuel did not accept that the replacement cost methodology was an appropriate method to apply.
At [32], the primary judge returned to the relationship between the evidence of value and the statutory task and said this:
The evidence that the value of intellectual property acquired by SPI PowerNet at the relevant time was $171.8 million does not, however, of itself necessarily determine the amount of the deduction to be allowed under s 124R(5). The value of the unit of industrial property, in this case the copyright acquired by SPI PowerNet, might not be the amount which is to be taken as that part of the total purchase price which is to be taken to be the cost for its acquisition. The replacement cost method does not seek to determine the actual cost of the copyright sold by the vendor, and may produce an amount which differs from that which should be taken to be that part of the total price actually agreed between the parties.
[emphasis added]At [32], the primary judge again observes that:
… it is not the independent value of the copyright that is required to be determined for the purposes of s 124R(5): what is to be determined is what part of the total amount paid is properly to be regarded as the amount paid for the copyright (even though it might not be capable of independent sale). The replacement cost methodology as employed by SKM seems best able to capture the amount required by [s 124R(5)] to be determined. The replacement cost approach was explained [in a particular text] as seeking ‘to measure the future benefits of ownership by quantifying the amount of money that would be required to replace the future service capability of the subject intellectual property’. The copyright in contention in this proceeding was necessary to the operation of the transmission business and had to be acquired with other assets. The cost of acquisition of the copyright is likely to be reflected in the cost to create the copyright as the replacement cost method aims to determine.
[emphasis added]At [33], the primary judge finds that the task undertaken by SKM in 1999 establishes with sufficient probability the cost of the copyright as acquired by SPI PowerNet on 6 November 1997. The primary judge finds that the copyright was a necessary incident of what was acquired and that had it not been acquired, “it would have had to be created to enable the business to function”: [33]. At [33], the primary judge also says this:
The parties expressly provided for the acquisition by SPI PowerNet of the copyright and in doing so acquired something which was reliably estimated to have the separate value of $171.8 million at the time of acquisition. That amount can be taken as that part of the Total Purchase Price paid by SPI PowerNet for the copyright for the purposes of s 124R(5) unless there is some aspect of the calculation of the amount that requires modification to make it accord with the purpose of the section.
[emphasis added]
The primary judge then considers the role of deprival costs in reaching a final valuation figure.
Before the primary judge, the Commissioner contended that no amount of the total purchase price could be allocated to the copyright in part because the copyright was limited to the right to reproduce the drawings and that this right was relatively worthless independently of the information to be reproduced or would be worthless because SPI PowerNet would enjoy an implied licence to use the works in the transmission business. The Commissioner also contended that the experts had valued the wrong thing by seeking to identify the time value of replacing the materials and ought to have sought to value the right to reproduce or modify the drawings as an aspect of use of those drawings.
The primary judge at [40] rejects those submissions on the part of the Commissioner and concludes that the SKM valuation “did not value the wrong asset when seeking to determine the cost to replace the drawings”.
The unit of industrial property in this case is the copyright said to subsist in a range of materials which are said to qualify as original works for the purposes of the Copyright Act 1968 (Cth). The materials have been described in these reasons and they represent either literary works or artistic works for the purposes of the Copyright Act. The computer works also represent literary works. The bundle of rights subsisting in those works are those rights conferred by s 31(1) of the Copyright Act and relevantly for present purposes, in respect of the literary works, the nature of the copyright in original works includes the right to reproduce the work in a material form; publish the work; communicate the work to the public; and make an adaptation of the work. In the case of the artistic works, the copyright comprises the right to reproduce the work in a material form; publish the work; and communicate the work to the public. Some of the works may be unpublished works. I do not propose to examine the provisions of the Copyright Act which govern all of the relevant “connecting factors” concerning the subsistence of copyright in particular works. The case before the primary judge seemed to proceed on the footing, for the purposes of the Div 10B issue, that the works in question were regarded as original works in which copyright subsisted.
The question of whether a person is engaging in infringement of the copyright is, relevantly for these proceedings, governed by s 36 of the Copyright Act. Section 36(1) provides that subject to the Act, the copyright in a literary or artistic work (drawings, plans, maps, computer software) is infringed by a person who, not being the owner of the copyright, and without the licence of the owner of the copyright, does in Australia, or authorises the doing in Australia of, any act comprised in the copyright. I will return to the relevance of s 36(1) later in these reasons.
To the extent that undertaking a valuation of the copyright is relevant to or might properly inform the statutory task of allocation required by s 124R(5), the relevant valuation exercise is one of determining the value of the particular bundle of rights so described within s 31 of the Copyright Act comprised in the copyright and exercisable by the owner of the copyright. The statutory task of allocation is one of attributing so much of a known un‑dissected (non‑separate) purchase price of the copyright and other property, to the copyright asset. That, however, is not the task the experts undertook. First, the experts failed to answer the precise question asked by the section, as the primary judge has observed. That question might have been: What are the objectively identifiable considerations going to determining the proper basis upon which, as to method (and the facts relevant to method), a part of an agreed non‑separate price for a collection of assets might be allocated, to the copyright subsisting in the various categories of works in question? Second, to the extent that the value of the relevant bundle of rights comprised in the copyright informs either the allocation task under s 124R(5) or the question which might have been asked of the experts, the relevant rights must be valued taking into account the following circumstances.
First, SPI PowerNet by operation of the Agreement has ownership of all of the physical (and electronic) versions of the documents necessary to conduct the transmission business. The primary judge found that there are thousands of documents relating to the conduct of the transmission undertaking. For the purposes of the copyright argument in relation to Div 10B, the primary judge found that there were about 105,410 documents falling within 36 separate categories of documents and all of those documents were “vital” and “essential” to the conduct of the electricity transmission undertaking.
Second, as a function of ownership of the physical and electronic versions of the documents and the copyright in the documents, SPI PowerNet is in an unconstrained position to use the documents as it may choose in the conduct of the transmission undertaking. Let it be assumed, however, that SPI PowerNet had not acquired the copyright subsisting in the relevant documents under the Agreement, a question would then arise as to the extent to which SPI PowerNet was subject to any constraint in its use of the documents (in particular, reproduction rights and the capacity to port drawings and other documents to hand‑held devices) derived from the Copyright Act.
Third, any exercise by SPI PowerNet of any of the rights comprised in the copyright would only amount to an infringement of the copyright (had SPI PowerNet not acquired the ownership of the copyright under the Agreement) if SPI PowerNet exercised any of those rights without the licence of the owner of the copyright. Let it be assumed that SPI PowerNet had not acquired the copyright subsisting in the 105,410 documents. Could it be reasonably inferred in such a case, having regard to the terms of the Agreement under which SPI PowerNet acquired all of the relevant assets necessary to conduct the electricity transmission undertaking, that Power Net Victoria (the Victorian government owned corporation which formerly owned the copyright in the documents), would have been the source of an implied licence in favour of SPI PowerNet to use all of the documents in connection with that undertaking in a way which included exercising any and all rights falling within the rights comprised in the copyright? The answer to that question seems plainly enough yes, in which event any exercise of any of the rights subsisting in the copyright would have occurred with the licence of the owner of the copyright.
Fourth, in those circumstances, it is not necessary to undertake a time‑based analysis of the value of work which would have been necessary to recreate the 105,410 documents in a way which could have expressed the information contained in those documents in a non‑infringing form. Such a valuation exercise does not aid or inform the statutory task under s 124R(5). I respectfully disagree with the finding of the primary judge at [33] that had the copyright not been acquired, SPI PowerNet would have had to create the field of documents in which copyright subsisted in a way which conveyed the same information but in a non‑infringing way to enable the business to function.
Since SPI PowerNet, upon the hypothesis that it had not acquired the copyright under the Agreement, would have been entitled to exercise without infringement all of the relevant rights comprised within the copyright subsisting in the documents, the statutory question is: What portion of the known and actual un‑dissected purchase price is to be attributed to the acquisition of the ownership of the copyright having regard to the circumstances in which SPI PowerNet found itself by reason of having entered into the Agreement?
For my part, I respectfully depart from the conclusions of the primary judge on the question of the extent to which determining the value of the copyright, according to the methodology adopted by the experts, informs the answer to the statutory question. Once it is seen that upon the hypothesis that SPI PowerNet had not acquired the copyright but was in the position to meaningfully exercise all of the rights necessary to conduct the electricity transmission undertaking (and to that end deal with the documents in a way which would otherwise involve exercising rights comprised in the copyright), the question to be determined is what part of the non‑separate purchase price is to be attributed to the acquisition of the legal ownership of the copyright as part of the Agreement. It seems to me that the answer to that question is either nil, or alternatively if not nil, for the purposes of these proceedings the taxpayer has failed to prove its case and has failed to discharge the burden under s 14ZZO of showing that the assessment is excessive. That follows because the analytical exercise undertaken by the experts engaged the wrong question and thus the taxpayer has failed to show error on the part of the Commissioner in making the determination and has thus failed to show that the assessment is excessive.
It follows that the first appeal must be allowed.
I agree with the orders proposed by Kenny J.
As to the second appeal, the claims for deductions by AusNet Services (Transmission) Ltd, formerly SP Australia Networks (Transmission) Ltd (“SPANT”) are made in respect of the period from 19 October 2005 to 31 March 2006 and for the years ended 31 March 2007 to 2011 inclusive. On 19 October 2005, SPI PowerNet became part of a tax consolidated group. SPANT was the head company for that group. Under the tax cost setting rules in Div 705 of the 1997 Act, SPANT was required to reset the tax costs of SPI PowerNet’s assets including the copyright it had previously acquired under the Agreement. For the purposes of determining the tax cost setting amounts of the assets, it was necessary to value them as at 19 October 2005. For the purposes of the second appeal, the question of value of the copyright was directly relevant.
The question of the value of the copyright as at 19 October 2005 was the subject of an expert report from PriceWaterhouseCoopers dated 26 February 2007. That report was not admitted into evidence although Mr Studley gave oral evidence of a value range of $230 million to $323 million.
I have had the benefit of reading the reasons for judgment in draft of Edmonds J in relation to the second appeal. I respectfully agree with the conclusions reached by his Honour in relation to the second appeal and generally agree with the reasons in support of those conclusions.
I agree with the orders suggested by Kenny J in relation to the second appeal.
I certify that the preceding ninety (90) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Greenwood. Associate:
Dated: 6 May 2015
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