Commissioner of Taxation v Citylink Melbourne Limited

[2005] HCATrans 304

[2005] HCATrans 304

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Melbourne  No M196 of 2004

B e t w e e n -

COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Applicant

and

CITYLINK MELBOURNE LIMITED (FORMERLY KNOWN AS TRANSURBAN CITY LINK LIMITED)

Respondent

Application for special leave to appeal

McHUGH J
HEYDON J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 29 APRIL 2005, AT 9.30 AM

Copyright in the High Court of Australia

MR B.J. SHAW, QC:   If the Court pleases, I appear with my learned friends, MR C.M. MAWELL, QC and MR I.B. STEWARD, for the Commissioner.  (instructed by Australian Government Solicitor)

MR A.C. ARCHIBALD, QC:   May it please the Court, I appear in this matter with my learned friend, MR M.N. CONNOCK, for the respondent.  (instructed by Freehills)

McHUGH J:   Yes, do not sit down, Mr Archibald.  Why should we not grant leave in this case?

MR ARCHIBALD:   Because none of the supposed special leave questions in fact raise matters of principle or general importance, in our contention.

McHUGH J:   But why not?  I mean, here you have a situation where you have been allowed a deduction of $95 million, which you do not pay until what, 2034?

MR ARCHIBALD:   2013 on the base case.

McHUGH J:   Why is it not a case where the Court should not look at the whole construction of the words of section 51 insofar as it talks about an outgoing?

MR ARCHIBALD:   Because, in our submission, the body of authority is clear and settled, and no circumstance which arises in this case affords any occasion to review or to be troubled about the central tenets of those principles.  What is clear from the body of authority, in our submission, is that the criterion is the existence of a present liability.  Whether there is or is not such a present liability is a matter of construction of the particular contract.  Here the primary judge, all the members of the Full Court of the Federal Court, and, if it matters, the Commissioner himself, in addressing the initial question of deductibility, reached the conclusion that the liability here was incurred.  Where a present liability exists, futurity of discharge does not derogate from the existence of the present liability ‑ ‑ ‑

McHUGH J:   Well, it does in substance, because it is a question of the time value of money, and it may be that this is the sort of case where we should look at this particular aspect of it.  From the point of view of the recipient of this rent, what is the present value of the rent they are getting?  About $1 million?  But you get a deduction of $95 million.

MR ARCHIBALD:   The reason we get a deduction of $95 million is that that is the subject matter of the liability with respect to which the concession fee is agreed and to which it relates.  No part – no part – of that liability in any way relates, on the evidence – it has not been suggested that it relates on the evidence – to any advantage flowing from the futurity of discharge.  That is to say, the $95.6 million fairly and accurately reflects the value of the advantage consumed and enjoyed in the particular period, the particular period to which that particular fee relates.

McHUGH J:   Well, I appreciate that, and form favours you.  But, arguably, this is a case of form triumphing over substance.

MR ARCHIBALD:   Well, the question is one of construction of the contract.  There is ‑ ‑ ‑

McHUGH J:   And the construction of the section.  After all, when you talk about “present liability” you are putting a gloss on the words of the section.  The section talks about:

outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business –

Now, here you have a situation where you pay rent, $95 million, you discharge the liability by issuing a note, and the concession note, on one theoretical view, may never be payable at all.

MR ARCHIBALD:   Were it to be the case that the content of the liability in some way reflected an ingredient referable to the futurity of discharge and was not confined solely to the present enjoyment which the liability for the fee gains the party in question, conceivably, the position would be different.  But, clearly, all the members of the court, the Federal Court, that have considered this case have concluded that on the contract that is not the circumstance; the position is different.  Where that is the case, the mere feature that discharge lies sometimes in the future is of no moment and causes no intrusion upon the integrity of the concept of “incurring” as in the cases. 

McHUGH J:   That is true, but, in the ordinary case, it would be because in a situation like this this would be classified under “accounts payable” because it would be a current liability dischargeable within the year.  But these concession notes on your balance sheet would be long‑term liabilities.  They are certainly not current liabilities.  That is why you may well succeed on the appeal.  After all, you have concurrent findings in your favour in the Federal Court on this issue, but it does strike me as an important question that this Court should look at.

MR ARCHIBALD:   The Federal Court substantially determined this issue unanimously on the foundation of the analysis of the Full Federal Court in the AGC Case – the deferred interest debenture cases and Alliance Holdings as well.  Those cases have stood unchallenged and uncontroversially since they were decided.  In AGC the interest that was payable under the debentures on a deferred footing was payable up to 20 years after the deduction was allowed.  Before the Full Federal Court the Commissioner did not challenge – and the Full Federal Court note this pointedly at paragraphs 30 and 31 of the reasons – did not challenge the correctness of the decision in AGC and did not there seek to distinguish that case.  Even now, all that the Commissioner does is not to challenge the correctness of AGC but to seek to distinguish it on the contingency footing.  Nothing to do with the principle, nothing to do with the correctness of application of the notion of “incurred” in that decision, but only on the basis of contingency.

On the contingency footing, as the Court will appreciate, again, all the members of the Federal Court have been unanimous in concluding that there is nothing other than a theoretical contingency.  There is practical certainty as to payment, and that contingency does not affect the existence of the liability.  All that it bears upon is the prospect of, and the time at which, discharge of the liability would occur.

Now, in those circumstances, where there are two strong features here, one, the absence of challenge to a decision of the Full Federal Court squarely in point, and, secondly, the prominence and the decisiveness of the terms of the particular contract, we submit there is no warrant for this Court to take the matter before it to consider matters of principle.  The principle, so far as it bears upon these cases, is, in our submission, comfortably settled, was described in the AGC Case by Justice Beaumont even in 1984 as a settled course of authority.  Otherwise the features of the contract which led the court to that conclusion in the instant case, in our submission, are clear and there can be no substantial challenge to the correctness of the conclusion of the members of the Federal Court as to what the denotation of the contract is.

McHUGH J:   I know, but the transaction hardly passes the stomach test, does it?  After all, Justice Merkel said that an outcome that has been arrived at in this case might only be expected in a taxpayer’s heaven.

MR ARCHIBALD:   His Honour’s pejorative expression ‑ ‑ ‑

McHUGH J:   Intuitively, one thinks there has to be something the matter with a body of doctrine which produces the result in this case.

MR ARCHIBALD:   Justice Merkel found in favour of the taxpayer on the incurred issue.

McHUGH J:   I know he did.  He was against you on the income/capital distinction, and you successfully reversed it.

MR ARCHIBALD:   Well, primarily on the profit share issue and successfully reversed on that, and not pursued as a special leave point here.  So the burden of his Honour’s observations was directed to another matter altogether.  That concept, of course, his Honour’s pejorative phrase – if we may so characterise it – squarely before the Full Federal Court, and no expression of concern or untowardness by the members of the Federal Court, and no expression of concern or untowardness or anomaly in the deferred interest debenture cases.

McHUGH J:   I know, but accrual accounting in this context, in most cases, does not require any analysis of the time value of money, but maybe in these cases, such as this, and from the affidavit put on by the Commissioner, it would seem that on more than one of these cases then it may be that the Court has just got to look at the time value, or whether or not it can be really said to be referable to the income year, as well as whether or not an outgoing has been incurred.

MR ARCHIBALD:   Where the time value of money is part of the quantification of the consideration paid in respect of the liability, it may be so.  The important point here is that there is no component, no component whatsoever, of the liability here that addresses in any way the futurity of discharge.

McHUGH J:   Well, I know.  In substance, you say, “This is no different.  If you went to our banker, got a loan for $95 million, paid the authority and we had a liability to the banker”.  You say that is the substance of it.

MR ARCHIBALD:   The choice by the State to afford to the concessionaire terms of payment in respect of which the State did not insist upon some pecuniary compensation is a matter for the State and a matter which bears directly upon the nature and character and the quantification of the liability here.  Had the State been of a different mind, or had one been dealing with a financial institution, a commercial financial institution, who would necessarily seek to exact compensation for the time during which it would wait for payment, the position would no doubt be radically different.

One thing is clear.  Because there can be no apportionment here, as the Full Court said, that is an indelible indicator that there is no component of this liability which relates to any period beyond the immediate period, the commensurate period to which the particular liability relates.  So the answer on the apportionment question, which, in our submission, is clearly correct here, also is a strong indicator that there can be no room for a time value concern as to the liability itself.

McHUGH J:   But in the court below it seemed to me, reading the judgments, that the weight of argument was thrown on the word “incurred”.  It may be that one ought to look at whether or not there has really been an outgoing to the amount claimed.

MR ARCHIBALD:   Well, in our submission, with respect, while attention was paid to the word “incurred”, strong attention was also paid to the expression or the concept of “being referable to”.  In the area of discourse in which we are currently engaged, the feature that the Court is expressing some concern about really is referable – is concerned with the notion as to whether the liability is referable to the particular period to which the liability is said by the contract to relate, or in fact is spread over a longer period, identifying the futurity of discharge point.

McHUGH J:   In form, it certainly is related to the relevant years.  There is no doubt about that.  But, as a matter of substance, is it?

MR ARCHIBALD:   Well, our submission is that the answer that the Full Court gave, and, indeed, the primary judge gave, on the “referable” question is a complete and sufficient answer to any cosmetic concern that one might otherwise have as to whether there is not here some element that suggests the liability includes a component referable to future periods.  So the answer on the referable point, which we say is clearly correct, is an indicator and more or less a litmus test by way of answering any incipient concern as to whether there is a problem with the “incurred” aspect.

The two run together, and it is a long way of answering the point your Honour the presiding judge is raising.  Did the court not focus on “incurred”?  The answer is no.  They focused on “incurred” and “referable”, and the twin considerations attending those issues provided a clear and sufficient answer to the point based on the very particular contract, which is why we say whatever might be the position in some of the other infrastructure project cases, or, indeed, beyond those particular areas, no guidance would be afforded by any conclusion by the Court upon the issues in this matter. 

All of the cases emphasise the significance, and, indeed, the dominance, of the particular terms of the contract.  We cannot tell from what we have seen from the Commissioner about these other two cases.  We, of course, are not privy to their tax affairs.  One of them is not litigious, and we know that the operator there has already publicly announced that it considers that its circumstances are distinguishable from the circumstances of this case. 

As to the other matter, the primary consideration, so it seems from the affidavit of the Commissioner’s determination there, is the profit share point, and the profit share point here is not a special leave point.  Those cases themselves must necessarily turn on the particular circumstances that arise from the contracts in those cases.

One might also, apart from the matters to which we have so far referred, have thought that if there were some concern about contrivance in the present case, then Part IVA would have been raised at the outset and would be pursued.  Part IVA has never been mentioned and never pursued ‑ ‑ ‑

McHUGH J:   I know.  It is difficult to see how it can be a Part IVA case.

MR ARCHIBALD:   Yes.  So we accept that there may be circumstances in which transactions may give rise to legitimate concerns, may involve considerations as to whether there are in fact features which would suggest that a bare answer on the present liability is not a sufficient assessment of the position of the parties, but that is not the case here, in our submission.  Our submission is that special leave is not warranted on the incurred point, nor in respect of any of the other points that are raised.  The other points raised simply are particular instances of application of established principle.  They are, again, peculiar to the instant case, and in themselves afford no reason for the grant of special leave.  If the Court pleases.

McHUGH J:   Thank you, Mr Archibald.  Yes, we need not hear you, Mr Shaw.  There will be a grant of special leave in this matter.

MR SHAW:   If the Court pleases.

MR ARCHIBALD:   Might we raise one point about the ambit of the special leave grant?  First, we would submit that the grant should be confined in the special leave points, which would exclude the grounds in the draft notice which relate to the profit share point.

McHUGH J:   Ground 10 and 11?

MR ARCHIBALD:   Yes, 10 and 11, starting at page 127.  Similarly, we submit that grounds 8 and 9 should not be the subject of the appeal.  Grounds 8 and 9 were avowedly eschewed by the Commissioner, as the Full Court recorded in its reasons.  It did not contend on the capital point that there should be apportionment.  The apportionment argument was confined to the incurred point.  As we would read draft grounds 8 and 9, they relate to apportionment on the capital ground.

The observation of the Full Court that the Commissioner eschewed that argument appears at page 118 of the application book, lines 25 to 28:

It is, however, not necessary for this matter to be considered as the Commissioner eschewed any possibility of apportionment and the case was argued upon the basis that either the whole Concession Fee was on capital account and thus non deductible, or alternatively the whole Concession Fee was on revenue account and thus wholly deductible.

So the appeal should not include grounds 8 to 11, in our submission.

McHUGH J:   What do you say about those four grounds, Mr Shaw?

MR SHAW:   Your Honour, I cannot ‑ ‑ ‑

McHUGH J:   It is hard to press 8 and 9, is it not?

MR SHAW:   I cannot support 10 and 11, but 8 and 9 go with 7.

McHUGH J:   Well, what do you say about the concession at page 118?

MR SHAW:   It is true that we did not seek apportionment.

McHUGH J:   Well, that is what you are seeking at least in 9, are you not?  And 8 for that matter.

HEYDON J:   Grounds 8 and 9 are alternative to 7.

MR SHAW:   I am sorry, your Honour?

HEYDON J:   Grounds 8 and 9 are expressed to be alternative to 7.  So 7 can survive and ‑ ‑ ‑

MR SHAW:   Yes, that is true, your Honour, yes.

McHUGH J:   Thank you.  There will be a grant of special leave in this matter confined to grounds 1 to 7 inclusive of the draft notice of appeal, set out at pages 127 to 129 of the application book.

AT 9.50 AM THE MATTER WAS CONCLUDED