Commissioner of Taxation v Top of the Cross Pty Ltd

[1981] FCA 192

Re: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
And: TOP OF THE CROSS PTY. LIMITED and TRAVEL HOLDINGS (AUSTRALIA) PTY.
LIMITED
(1981) 57 FLR 294
No. G3 of 1981
Income Tax

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Bowen C.J.(1), Deane(2) and Ellicott(1) JJ.

CATCHWORDS

Income Tax - Deduction claimed for expenditure on airport hotel - Taxpayer successful tenderer for construction of hotel - Whether contractual arrangements constituted franchise for purpose of section 62A of Income Tax (Assessment) Act 1936.

Income Tax (Assessment) Act 1936, s.62A

Income Tax - Allowable deductions - Commonwealth franchise granted to taxpayer to construct and maintain motel - Whether undertaking of public utility - Whether deduction available for expenditure of taxpayer in building motel - Income Tax Assessment Act 1936 (Cth), s. 62A.

HEADNOTE

The respondents in partnership built and subsequently operated a motel at Melbourne Airport pursuant to an agreement with the Department of Civil Aviation. They claimed deductions under s. 62A of the Income Tax Assessment Act in respect of the expenditure which they incurred in building the motel. The Commissioner disallowed the claims and the respondents successfully appealed to the Supreme Court of New South Wales. The Commissioner appealed.

Held, Deane J. dissenting, appeal dismissed, that, on the facts, the respondents' expenditure fell within the terms of s. 62A. The construction and maintenance of the motel was an undertaking of public utility. It was pursuant to a franchise granted by the Commonwealth authorizing the respondents to collect and retain the revenue earned by the undertaking. The franchise was in consideration of the construction and maintenance of the motel, and it provided that the motel would become the property of the franchisor Commonwealth on the expiry of the franchise. Section 62A therefore applied. The appeal should be dismissed.

HEARING

Sydney, 1981, November 6. #DATE 6:11:1981

APPEAL.

Appeal from the decision of Woodward J. of the Supreme Court of New South Wales allowing the appeals of the respondents against the disallowance by the appellant to their objections to assessments in respect of the years of income ended 30th June, 1975-1977 in the case of the first respondent and 30th June, 1975 and 1976 in the case of the second respondent.

The facts appear from the judgments.

T. Simos Q.C. and S. D. Robb, for the appellant.

L. J. Priestly Q.C. and D. H. Bloom, for the respondents.

Cur. adv. vult.

Solicitor for the appellant: B. J. O'Donovan, Commonwealth Crown Solicitor.

Solicitors for the respondents: Dawson Waldron.

J. H. TELFER

ORDER

THE COURT ORDERS THAT the appeal be dismissed with costs.

Appeal dismissed.

JUDGE1

This is an appeal by the Commissioner of Taxation from a decision of the Supreme Court of New South Wales. Travel Holdings (Australia) Pty. Limited objected to its assessments for the years ended 30 June 1975 and 1976 (No.681 of 1979) claiming the Commissioner had wrongly disallowed its claims for a deduction under s.62A of the Income Tax Assessment Act 1936 and when its objections were disallowed requested they be referred to the Supreme Court. Top of the Cross Pty. Limited similarly objected to its assessments for the years ended 30 June 1975, 1976 and 1977 (No.680 of 1979) and requested its objections be referred when they were disallowed. By consent the appeals were heard together, the evidence being tendered in matter No.681 of 1979. It was agreed that the decision in respect of that appeal for the year ended 30 June 1975 would operate as a decision in respect of all matters.

The Supreme Court upheld the appeals and each of the objections and ordered the Commissioner to pay the taxpayers' costs.

The taxpayers were equal partners in the transaction which gave rise to the claims for deduction under s.62A and also were partners in the conduct of various motels trading as T.H. Motels (later T.H.F. Motels). The claims for deduction were made in the partnership returns when the deduction was disallowed. This was reflected in the taxpayers' returns by the amount added to each taxpayer's share of partnership profits.

Late in 1967 the Department of Civil Aviation invited tenders for the erection and operation of a motel at Tullamarine Airport which was then in course of construction. In evidence was a document or brochure with a frontispiece as follows:

"Department of Civil Aviation Australia

TENDER FOR ERECTION

AND OPERATION OF THE

(Drawing of a Motel)

AIRPORT MOTEL

Melbourne (Tullamarine) Airport"

In this document it was stated, inter alia:

"Schedule No. C67/135

DEPARTMENT OF CIVIL AVIATION

TENDERS FOR DEVELOPMENT OF AIRPORT MOTEL - MELBOURNE (TULLAMARINE) AIRPORT

Public tenders are invited for the erection, establishment and operation of a motel at Melbourne (Tullamarine) Airport.

2. Closing Date for Tenders

Tenders enclosed in a sealed envelope endorsed "Tender Schedule C67/135" will be received until 2 p.m. on 23 JAN 1968 at the office of the Secretary, Central Business Board,

. . .

4. Period of Lease

The lease will be a building lease for a period of twenty-five years in the terms of the draft attached subject to such amendments as are necessary or are mutually agreed upon. Any reservations as to the terms of the draft lease should be stated in the tender.

5. Service of Liquor

The sale and service of intoxicating liquor in the motel will be authorized on the days, during the hours and under the conditions referred to in paragraph 10 hereunder.

6. Rent

Rental will consist of a yearly amount of $18,000 payable by monthly instalments in advance.

7. Other Consideration

A consideration for the granting of an authority to trade is to be tendered in accordance with the conditions set out in paragraph 13 of the tender form attached.

8. Standards

Melbourne Airport will be one of the most modern airports in Australia and will compare favourably with new international airports overseas. The Tenant will be expected to provide prestige service and the highest quality fittings and furnishings in the leased areas Air conditioning and sound proofed bedrooms are essential together with transport and direct phone facilities between the motel and the terminal building.

. . .

Tenders should be accompanied by sketch plans or other pictorial presentations showing the Tenant's intentions as to decor, including details of textures, textiles and colour schemes and the types and placing of light fixtures.

. . .

The Tenant will be required to engage the services of suitably qualified consultants to plan and supervise the furnishing of the premises and the building, mechanical and engineering works. All these works, as well as the furnishing of the premises, must comply with all relevant standards and regulations and will be subject to the approval of the Director-General.

Tenders should be accompanied by sketch plans or other pictorial presentations showing the Tenant's intentions. Developmental proposals may be submitted but these must be fully documented to show clearly the stage by stage development.

9. Commencement of Operations

Unless otherwise agreed between the Commonwealth and the Tenant the lease of the premises will commence on the date on which the passenger terminal building commences to operate at Tullamarine Airport for scheduled international passenger air services and the rent payable under the lease will accrue from that date, which is expected to be about December 1968. It is expected that the Terminal will be in full operation by December 1969 for international and domestic airline operations. The Commonwealth reserves the right to require that the lease shall commence on different dates whether because of non-completion of portion of the Terminal Building or otherwise. In that event the base rent payable by the Tenant under the lease will be appropriately adjusted. The Department will not be responsible for any delays in the opening of the airport for aircraft operations. However, tenderers are assured that the Tenant will be provided with adequate advance information on the commencing date of the operation of the International Airport Terminal.

10. Authority to Conduct the Business

The Tenant will be issued with an authority given by the Minister for Civil Aviation under the provisions of the Airports (Business Concessions) Act 1959-1966 to carry on the business referred to in the Tender Schedule. He will not be required to hold a licence under the Licensing Legislation of the State of Victoria for the sale or supply of liquor in the motel.

The Authority will specify that prices charged for intoxicating liquor and other goods and services by the Tenant shall not exceed those charged in similar premises in the City of Melbourne.

. . .

The Minister may cancel the Authority or suspend it for such period as he considers fit if the Tenant or a servant or agent of the Tenant fails to observe or perform any of the terms or conditions of the Authority on his part to be observed or performed or expressed to apply to him.

. . .

15. Conditions of Tender

Tenders shall be submitted on the form attached and supported by any other documents the Tenderer may desire to lodge. Tenderers must specify in the tender form the consideration which the Tenderer is prepared to pay to the Department for the issue of an authority to trade under the Airports (Business Concessions) Act. This consideration shall comprise a specified percentage of the gross revenue of the business from the sale and supply of intoxicating liquor and a separate specified percentage of the gross revenue derived from the sale and supply of other goods and services. Tenderers may increase the amount of the rent specified in the Tender if they so desire. The consideration payable will be reviewed every five years. The formula for reviewing the consideration payable will be mutually agreed with the successful tenderer prior to entering into a formal lease agreement.

Tenderers shall state on the tender form the amount of capital expenditure proposed to be spent in the establishment of the business and the estimated gross revenue for the first five years of operations of the business.

No tender will be considered unless at the time of tendering the Tenderer deposits with the Commonwealth a cheque for the sum of One thousand dollars ($1000) payable to the Commonwealth of Australia by way of security for performance of the contract.

The security lodged by the Tenderer may be retained by the Commonwealth until the Commonwealth determines to reject his tender or if a contract is made between the Commonwealth and the Tenderer, until the contract is made. No interest shall be payable by the Commonwealth on the securities lodged by any Tenderer irrespective of the period for which such securities are retained.

. . .

17. General

The highest or any tender shall not necessarily be accepted and the Commonwealth reserves the right to re-invite tenders.

Tenderers may submit alternative tenders for consideration if they so desire.

The Tender is made subject to and incorporating the terms of the draft Agreement.

The successful tenderer shall within 28 days after receipt of notice from the Director-General requiring him to do so execute an agreement in the form of the draft agreement attached hereto (with such amendments as may be agreed between the Tenant and the Commonwealth)."

Attached to this document was a form of tender which provided for the statement by the tenderer that he would pay a clear monthly rent of $1,500 and, as a consideration for the issue of an authority for trade under the Airports (Business) Concessions) Act, certain percentages (left blank) of gross revenue from the sale of the relevant goods and a statement of the amount proposed to be invested and a statement of the annual gross turnover estimated to be achieved in each of the first five years. Also attached was a draft form of lease which, although it is described in paragraph 4 of the invitation to tender as a "building lease", contains no covenant or other express provision imposing any obligation upon the lessee to build. Rather, it appears to be drawn upon the basis that it is a lease of premises on which there is already erected a building for use as a motel. The draft in clause 1, the habendum, provided for a term of 25 years and required the use of the demised premises for the purpose of establishing and operating a motel, the sale of liquor, and the supply of meals for a rental in respect of each month of the term of $1,500. It contained a mutual covenant (clause 4(3)) that the tenant should have no right to remove fixtures and improvements and additions thereto which the tenant had, with the approval of the Director-General, before or during the continuance of the lease, erected or constructed upon the demised premises. It would seem this covenant was intended to eliminate any tenant rights which the lessee might otherwise have had. Also attached was a draft form of authority to sell intoxicating liquor and other goods and to conduct an airport motel within the Melbourne Airport. The authority was to enter into force upon a date to be inserted in the form and was to continue in force for the term of 25 years. On 26 February 1968 the taxpayers made a tender in the following terms, omitting immaterial parts:

"Dear Sir,

We, the undersigned, tender in respect of the business described in Tender Schedule No. C67/135A and in accordance with the conditions of tender of that Tender Schedule the following amounts:

(a) a clear monthly rent of $1500; and

(b) as a consideration for the issue of an authority to trade under the Airports (Business Concessions) Act 1959-1966 an amount equivalent to six (6) per centum of the gross revenue of the business from the sale or supply of intoxicating liquor purchased or otherwise obtained from the licensed premises, and three (3) per centum of the gross revenue derived from the sale or supply of other goods and services during the month.

We propose to invest in the premises, furniture, fittings and equipment an estimated capital of approximately $1,496,000 to establish a business to the standards described in the Tender Schedule.

We estimate that we will achieve the following annual gross turnover from the business:

LIQUOR OTHER TOTAL

1st Year 97500 580500 678000

2nd Year 97500 580500 678000

3rd Year 97500 580500 678000

4th Year 97500 580500 678000

5th Year 97500 580500 678000

We have noted the form in which information supporting this tender is to be submitted and such information is attached hereto.

DATED the twenty-sixth day of February, 1968."

The tender was accompanied by a letter dated 26 February 1968. Enclosed with this letter were a cheque for $1,000 payable to the Commonwealth of Australia by way of security for performance of the contract, the form of tender, schedules setting out: the qualifications of the tenderer T.H. Motels; certain reservations as to the terms of the draft lease; details of goods and services proposed for sale and supply; sketch plans and pictorial presentations of the proposed development; a presentation showing two alternative sets of details of textures, textiles and colour schemes; a presentation showing details for suites and another for reception area; and a presentation showing types of light fittings. This letter dealt with other topics such as engineering services, five yearly reviews of rental and developmental proposals. The comments in the letter on the developmental proposals were as follows:

"3. DEVELOPMENTAL PROPOSALS. The sketch plans presented in Schedule E hereto include a projection of Stage Two of the development comprising a further 100 suites. Owing to the unavailability of statistics relating to motel occupancy rates of a comparable undertaking in Australia, we have been unable to forecast the demand over the next five years for airport prestige motel accommodation. Consequently the attached Tender is based only on Stage One of the building comprising 100 suites and ancillary services and this is reflected both in the estimated capital outlay and annual gross turnover. We do stress, however, that Stage Two of the development has been excluded from the first five years projection solely on the ground of our inability to forecast levels of demand with any degree of certainty. It is our expressed intention to commence construction of the planned Stage Two immediately upon the demand for such additional accommodation being in evidence."

A request was also contained in the letter for an opportunity to consider with the Department an amended rental formula which the taxpayers would be prepared to offer if they were able to negotiate a lease of longer duration than twenty-five years to reduce the affect of amortisation charges on buildings which were not deductible for federal income tax purposes.

In terms of the law of contract, at this stage the taxpayers had made an offer in response to the invitation to tender. Some discussion then appears to have taken place in which a measure of agreement was reached on amendments to the draft lease. However, there had been no acceptance of the tender when, on 5 June 1968, the taxpayers wrote a letter to the Secretary, Central Business Board, which, omitting immaterial parts, was as follows:

"Dear Sir,

Re: Tullamarine Airport Motel
Tender No. C67/135A

We refer to our Tender Letter of the 26th February, 1968, on behalf of TH Motels submitted in regard to the above Tender at Tullamarine Airport.

We particularly refer to the first paragraph on Page 3. of our Tender Letter in which we asked for consideration of an extention of the lease period of twenty-five (25) years so that we might consider an alternative rental formula.

We now confirm that, should the Department contemplate a lease of thirty (30) years instead of the twenty-five (25) years as proposed and, also, should the Department agree that rental adjustments should not be made in the first ten (10) years, we offer the following alternative rental formula:

(a) A clear monthly rent of $1,500; and

(b) As a consideration for the issue of an authority to trade under the Airports (Business Concessions) Act 1959-1966 an amount equivalent to nine percentum (9%) of the gross revenue of the business from the sale or supply of intoxicating liquor purchased or otherwise obtained from the licensed premises and four percentum (4%) of the gross revenue derived from the sale or supply of other goods and services during the month.

We have had the opportunity of discussing with you minor amendments to the proposed lease document. For record purposes, we enclose herewith a summary of the amendments which we believe have been mutually agreed upon in the event that we should be the successful tenderers in this matter.

We now look forward, with keen interest, to the outcome of this Tender."

The suggestion that the term be thirty years instead of twenty-five years and the proposed basis of monthly rent and percentage payments appears to have been acceptable to the Department. Certainly, this term and these figures were those which were reflected in the lease and authority ultimately granted. At all events the hopes suggested in the last sentence of the above letter were realised shortly afterwards. The Department wrote to the taxpayers on 28 June 1968 two letters which, omitting formal parts, were as follows:

"Dear Mr. Haines,

My congratulations on the acceptance of your tender for the Melbourne Airport motel, the formal letter is enclosed.

Mr. Harris, Director of Business and Property, advised Mr. Manfred of the decision by phone prior to his departure for America.

I now will await your submission of detailed plans and specifications for the construction of the building. Should any data be required please do not hesitate to contact me at this office. I will be in America myself as from July 21st for some six weeks and during this period Mr. F. Walsh will be able to assist you with any queries.

So that the contract documents can be prepared with the least delay I would be grateful if you could forward the wording of your official sealing clause."

"Dear Sir,

I am pleased to advise you that your tender RLM:PMG dated 26th February as amended by your letter GAH:BJT of 5th June, 1968, has been accepted for the establishment and operation of a motel at Melbourne Airport.

Work is currently in hand to prepare the contract documents along the lines discussed at our meeting, which amendments were also set out in your letter of 5th June referred to above."

It appears to us that there was at this stage an acceptance of the offer made by the taxpayers, that the parties were now bound in contract and that the Department could no longer reject the taxpayers' tender and accept some rival tender.

It is true that the contract was of such a character that there were matters of detail to be worked out. For example, although sketch plans and pictorial presentations had been submitted, detailed plans and specifications would have to be submitted and would have to be approved by the Director-General. The parties appeared to anticipate no difficulties in arriving at any necessary subsidiary consensus. Of course, the parties were, as would be any other contractual parties, at liberty to negotiate and to agree upon additions or variations. But this does not mean they were not bound upon the acceptance of the tender. The phrase "contract documents" in the letter of 28 June 1968 is somewhat ambiguous - it may mean documents to constitute the contract or documents to give effect to the contract. The latter appears to be the sense in which the words were used. Two documents in particular had to be prepared, namely, the lease referred to in clauses 4, 9, 11 and 17 of the invitation to tender (in clause 17 referred to as the "draft agreement attached") and the authority under the Airports (Business Concessions) Act referred to in clauses 10, 11 and 15. These documents had to be prepared in order to carry the contract between the parties into effect. They did not together constitute the contract reduced to formal shape as was suggested in argument. For example, they say nothing as to the plans and specifications of the building or as to the payment and repayment of the deposit of $1,000. Indeed, when the authority and lease were entered into the taxpayers had already bound themselves by contract to a builder under which they were obliged to pay him $1,987,700. This would be a somewhat hazardous course if there were not then a binding contractual relationship between the taxpayers and the Commonwealth.

On 13 September 1968 the taxpayers wrote to the Director-General dealing with a number of matters of detail "to be finally agreed upon" in relation to the form of the lease. The letter contained the following:

"(b) Agreement to Lease - Normally when we enter into a lease for a motel development we enter into an agreement to lease in the first instance which enables us to enter into the property and undertake the construction with the firm and legal right to lease these upon a certain date. This was discussed at our meeting and our understanding is that you in turn would discuss this with the legal officers of the Department with a view to preparing such an agreement to lease."

On 25 October 1968 the Director-General replied to the various matters raised. The last paragraph of his letter is as follows:

"Secondly we do not consider it necessary or desirable to prepare a formal "Intention to Lease" document. In fact adequate evidence of this exists in terms of our correspondence and particularly our letter of June 28th. Your right of entry and entitlement to undertake construction work will be a Building Permit which will be issued by our Victoria-Tasmania Region on submission and approval of your construction drawings."

Further letters were exchanged on the form of the documents which were in preparation. The final letter in this series being a letter from the Department to the taxpayers dated 15 August 1969 which agrees to certain final agreed amendments to the lease being made in manuscript form and which agrees to amendment to the authority.

On 13 August 1969 the building permit was received. On 14 August 1969 construction commenced on the site. On 28 August 1969 a building contract was entered into between Austin Anderson (Australia) Pty. Limited as builder and the taxpayers as owners and this was apparently approved by the Director-General, although this approval was not committed to writing until 8 October 1969 when the Director-General, apologising for delay, communicated formal agreement with the building contract. By 28 August 1969 the contract between the parties was in course of being performed. Sketch plans and specifications had been submitted and approved, the building permit had been issued and the building was in course of construction. The two documents remaining to be executed had been by now agreed as to their form and in fact were on 29 August 1969 both executed by the parties. Clause 1 of the lease (the habendum) was as follows:

"1. THE Commonwealth HEREBY DEMISES unto the Tenant ALL THOSE the premises situate at the airport being the premises more particularly delineated and shaded red on the plan at Schedule "A" annexed hereto and being part of the land more particularly described in certificate of title volume 8390 folio 476 (hereinafter called "the motel") together with the improvements thereon (if any) (which premises and improvements together with all additional fixtures and other improvements from time to time erected constructed or made upon the land by the Tenant with the approval of the Director-General are hereinafter collectively referred to as 'the demised premises') TO HOLD the same unto the Tenant from the first day of June One thousand nine hundred and seventy or from the first scheduled international air movement from the airport whichever is the sooner for the term of thirty (30) years thence ensuing subject to the terms and conditions of this lease to use the demised premises for the purpose of establishing and operating a motel, the sale and supply of intoxicating liquor in a dining room and Club Bar and the sale and supply of meals foods drinks confectionery cigarettes tobacco newspapers magazines and stationery YIELDING AND PAYING as rent in respect of each month of the term the amount of One thousand five hundred dollars ($1500)."

Turning to the authority it may be mentioned that although executed on 29 August on the same day as the lease it takes the form of a notice that on 14 June 1968 in pursuance of powers conferred upon him by the Airport (Business Concessions) Act the Minister for Civil Aviation granted the authority. Clause 3 of the authority is in the following terms:

"(3) The consideration for this Authority shall be the undertaking by the Tenant to pay to the Commonwealth the rent and other moneys due under the lease."

On 9 October 1970 a certificate of substantial completion of the building was given. On 10 December 1970 subject to some minor requirements the building was approved by the Director-General for "occupancy operations".

The question is whether the taxpayers were entitled to a deduction under s.62A. This section is as follows:

"62A. (1) Where a franchise requires that the undertaking which is the subject of the franchise shall become the property of the authority granting the franchise after the expiration of the period of the franchise without reimbursement of any of the expenditure thereon, a proportionate part of the expenditure which the owner of the franchise is required by the franchise to incur, and which he has in fact incurred, shall be an allowable deduction to him so long as he continues to be the owner of the franchise.

(2) The proportionate part of the expenditure referred to in the last preceding sub-section shall be calculated by distributing the amount of that expenditure proportionately over the period of the franchise unexpired at the date when the construction of the undertaking is completed, or, where there is no period of years fixed as the duration of the franchise, over such period as the Commissioner determines:

Provided that, where any income is derived in respect of the undertaking before its construction is completed, the proportionate part of the expenditure which may be an allowable deduction shall be as determined by the Commissioner.

(3) The aggregate of the deductions allowed by this section to any person shall not exceed the expenditure which that person is required by the franchise to incur, and which he has in fact incurred, and where in any case the aggregate of the deductions equals the amount of that expenditure no further deduction shall be allowed in pursuance of this section.

(4) For the purpose of this section, "franchise" means a grant by the Commonwealth or a State, or by a public authority constituted by or under an Act or State Act, whereby in consideration of the construction and maintenance of an undertaking of public utility a person is, during some limited period, authorized to collect and retain the revenue earned by that undertaking."

The section was inserted in the principal Act by Act No.46 of 1938. It is designed to give to a franchisee of an undertaking of public utility the right to a deduction calculated as a proportionate part of the required and actual expenditure spread over the term of the franchise in circumstances where the undertaking will pass to the franchisor at the end of the term without reimbursement to the franchisee. It is in effect a form of amortisation allowed to the taxpayer who has incurred capital expenditure to operate an asset which, from his point of view, will be a wasting asset. The general purpose of taxation legislation is to raise revenue. This enactment in s.62A is directed to relieving particular taxpayers from the burden of taxation. Its purpose is not to raise revenue but rather to encourage taxpayers to enter into such franchise arrangements with the governments or authorities mentioned and to incur expenditure upon an undertaking which will inure ultimately for the benefit of the particular government or authority. We mention these general considerations because, as will appear from the discussion which follows, there are some ambiguities in the section. In choosing between possible interpretations, a construction which will promote the purpose or object underlying the Act is to be preferred (Acts Interpretation Act 1901, s.15AA).

We turn to the various questions of interpretation raised in argument.

Franchise

This word is used not in the technical sense discussed by Farwell J. in Attorney-General v. Trustees of the British Museum (1903) 2 Ch. 598 at p.612 but with the meaning assigned to it by the exhaustive definition contained in s.62A(4).

Grant

This word is used not in its technical conveyancing sense but as a word appropriate to the giving of the authority mentioned in s.62A(4).

"In consideration of"

In this phrase the word "consideration" is not used in the technical sense assigned to it in the law of contract. Rather, the phrase refers to the construction and maintenance of the undertaking as that in return for which the authority is given, the quid pro quo.

"Undertaking of public utility"

The phrase "public utility" used substantively is appropriate to refer to an electricity, gas or water supply. In s.62A the phrase is used adjectivally. An undertaking of public utility may mean either an undertaking of public usefulness or an undertaking in the nature of a public utility. It does not appear to be decisive of the present case which of these latter interpretations is adopted so it is not necessary to express a concluded view.

The word "undertaking" is appropriate to refer either to a physical structure or to a total business, the latter sense being particularly familiar to company lawyers.

The phrase "undertaking of public utility" in s.62A appears to refer to a physical structure. Section 62A(4) speaks of a person being authorised to collect and retain revenue "in consideration of the construction and maintenance of an undertaking of public utility". Section 62A(2) refers to "the period of the franchise unexpired at the date when the construction of the undertaking is completed". These words seem appropriate rather to a physical structure than to the fluctuating assets including goodwill of a going concern.

"The revenue earned by that undertaking"

We find this a difficult phrase. Although it may be appropriate to refer to, say, Commonwealth bonds as earning income, it is awkward to speak of physical assets as earning revenue. In the case of physical assets it is usually human beings (perhaps machines also in this day and age) who earn revenue by the use of them. In our opinion, the phrase here should be read as meaning the revenue earned by means of that undertaking.

"Requires" and "required"

In s.62A(1) the word "requires" is used with reference to a requirement that the undertaking shall become the property of the franchisor at the end of the term without reimbursement. The word "required" is used in s.62A(1) and (3) with reference to a requirement to incur expenditure. "Require" and "required" may be used in a sense involving a binding legal obligation. They may also be used in a sense involving need or necessity. For example, if A agrees to buy B's house for $X to be paid on completion, it may be said that A is legally obliged (required) to pay to B $X on completion. If B agrees that in the event of A paying him $X he will transfer his house to A, if A is to get the house he needs (is required) to pay to B $X but A is not legally obliged to pay anything to B.

On the present facts it does not appear to be decisive which interpretation is adopted.

It was submitted that a different interpretation should be given to the words on the two occasions where they are used in s.62A(1). We do not accept this submission.

Applying the section to the facts of this case, the first question which arises is whether the Airport Motel falls within the description of an "undertaking of public utility". The Airport Motel was required by the Commonwealth to be constructed on land owned by the Commonwealth and under the control of the Department of Civil Aviation adjacent to an international airport. It was designed to serve primarily members of the public travelling on international and domestic flights. In our opinion it is properly within the description of an undertaking of public utility.

The next question is whether there was a franchise granted by the Commonwealth authorising the taxpayers to collect and retain the revenue earned by that undertaking. In our opinion there was. The effect of the contract between the parties which was arrived at when the tender was accepted on 28 June 1968 and which was later modified in some respects was that the taxpayers would collect and retain the revenue from the Airport Motel over the term of thirty years. It is true that this revenue could not be earned simply from the empty shell of the building and that in order to produce revenue furnishings had to be added and services provided. But this does not mean that no revenue was earned by the use of the Airport Motel. If the addition of physical equipment and services is sufficient to take an undertaking of public utility outside s.62A, it is difficult to see what undertakings would fall within it. Even a toll road or bridge might well be excluded.

It is true that the taxpayers under the contract were bound to enter into and entitled to obtain a lease and an authority under the Airport (Business Concessions) Act. Under the lease and the authority which carried into effect the contract between the parties, the taxpayers were obliged to pay a monthly rent of $1,500 and certain percentages in respect of receipts. But this does not, in our view, mean that the taxpayers were not entitled to collect and retain the revenue. The revenue came to their hands beneficially in the first instance. It was not assigned to the Commonwealth. The taxpayers could make the payments of rent and the percentage payments to the Commonwealth out of any moneys which they had, including their considerable revenues from other activities.

The next question is whether the franchise was "in consideration of the construction and maintenance" of the undertaking. It is true there is no term in the contract between the parties which expressly imposes as consideration for the authority to collect and retain the revenue an obligation to construct and maintain the Airport Motel. But in truth this was what the contract was about. Starting with the invitation to tender which is headed on the front "Tender for erection and operation of . . . Airport Motel", the whole contract is directed to this end and to details of the way in which this objective will be achieved. It appears to us that upon acceptance of the tender the taxpayers were legally bound to proceed with the construction and maintenance of the Airport Motel. In other words, there was a requirement to construct and maintain the undertaking; the authority to collect and retain the revenue from the undertaking for thirty years can properly be said to be in consideration of the carrying out of that obligation.

The next question which arises is whether the franchise requires that the undertaking shall become the property of the franchisor after the expiration of the period of the franchise without reimbursement.

Clearly, under the contract between the parties the taxpayers were entitled to receive and retain revenue from the Airport Motel during the period of thirty years. To this end they were granted for that term a lease and given an authority under the Airports (Business Concessions) Act. Under the arrangements the position at the end of the term was that the leasehold interest would expire and the authority would terminate and the Airport Motel, that is the undertaking in which the Commonwealth had a reversionary interest throughout because it was affixed to the soil, would pass to the Commonwealth completely and without any reimbursement from the Commonwealth to the taxpayers. The lease itself contained two covenants bearing on this aspect. One by the taxpayers to yield up the premises in good repair and the other a mutual covenant that the tenants should have no right to remove any fixtures or improvements which they had before or during the continuance of the lease erected on the demised premises. The latter of these covenants excluded any tenant rights which the taxpayers might otherwise have had.

From this it would seem that the arrangement fell within the description in s.62A(1). However, it was argued that the building which constituted the undertaking when erected became part of the land and thus the property of the Commonwealth in a legal sense at that stage. We do not consider that when erected the building became the absolute property of the Commonwealth. Even before the grant of the formal lease there was, in our view, in existence as part of the contract between the parties an agreement for lease. A form of lease was attached to the invitation to tender. After the acceptance of the tender the Commonwealth had bound itself to grant a lease and therefore had an interest only in the nature of a reversionary interest in the undertaking when erected. Yet this does not resolve the question entirely. It was submitted that the section does not say "shall become the absolute property" of the franchisor. It says "shall become the property" of the franchisor. It was argued that this requirement cannot be satisfied if the Commonwealth already owns the property, or at least a reversionary interest in it, from the outset. The word "property" is the most comprehensive of all terms which may be used to describe legal interests in land and buildings. The argument put on behalf of the Commissioner would seem to exclude from s.62A any case where the franchisor had any interest in the subject matter of the undertaking, in other words, any case where it could not be said that the whole bundle of rights constituting the property in the undertaking would pass and only pass upon the expiration of the franchise period. If this argument is accepted it would seem to exclude most cases from s.62A, even those cases of toll roads or bridges where the authority had any interest in the soil on which they were erected. Generally speaking, the authority will have some interest in the land on which the undertaking of public utility is erected, although in order to obtain the revenue under the franchise the franchisee will no doubt need to have defined rights of occupancy or possession. Looking at s.62A it seems it was not designed to encourage franchise arrangements only in those cases where the full ownership in the undertaking was at all times during the term vested in the franchisee and to exclude all other cases.

Even where the franchisor has some interest such as a reversionary interest from the outset it is only at the expiration of the franchise period that he acquires the property in the fullest sense. Before that he has something less than the property as referred to in s.62A. To express the matter in another way, it is only at the expiration of the period that the undertaking can be said without qualification to become the property of the authority.

We would dismiss the appeal with costs.

JUDGE2

The relevant facts and the issues involved in this appeal appear from the joint judgment of Bowen C.J., and Ellicott J. I shall refrain from repeating them and from setting out the provisions of s.62A of the Income Tax Assessment Act, 1936 ("the Act") which govern the outcome of the appeal.

It would seem reasonably clear that, if the respondent taxpayers and the Commonwealth had directed their attention to the matter and had so desired, the overall transaction between the Commonwealth and the taxpayers could have been structured in such a way that, subject to the question whether the finished motel at Melbourne's Tullamarine Airport was "an undertaking of public utility" for the purposes of s.62A, the respondents would be clearly entitled to a deduction in respect of an appropriate proportion of their expenditure on the construction of the motel. The material before the Court discloses, however, that the negotiations between the Commonwealth and the respondents proceeded on the basis that the respondents would not be entitled to the benefit of any deduction for income tax purposes in respect of such expenditure. It is apparent that the overall arrangements between the Commonwealth and the respondents were neither structured nor documented with the provisions of s.62A of the Act in mind. In the result, the respondents' entitlement to the deductions in question falls to be determined by reference to the question whether, as a matter of good luck rather than good management, it so happens that the somewhat technical requirements of s.62A have been satisfied.

Section 62A entitles a taxpayer to a deduction in respect of a proportionate part of the expenditure which the owner of a "franchise" is required by the "franchise" to incur, and which he has in fact incurred, on the construction and maintenance of an undertaking of public utility. A taxpayer is not entitled to the benefit of such a deduction unless the "franchise" requires that the undertaking becomes the property of the authority granting the franchise without any reimbursement of the taxpayer in respect of his expenditure.

For the purposes of s.62A, a "franchise" means "a grant" by the Commonwealth, a State, or a public authority, "whereby", in consideration of the construction and maintenance of an undertaking of public utility, a person is, during some limited period, authorized to collect and retain the revenue earned by that undertaking (s.62A(4)). I am prepared to assume that the motel at Melbourne's Tullamarine Airport was an "undertaking of public utility". Plainly, at some stage, the taxpayers were authorized to collect and retain the revenue earned by the use of that undertaking. The question which arises is the identification of a "grant" by the Commonwealth "whereby" they were so authorized. Only an identified grant of such authority can constitute a "franchise" for the purposes of s.62A.

Much of the argument on the hearing was concerned with the question whether the overall arrangements between the Commonwealth and the taxpayers resulting from the acceptance by the Commonwealth of the taxpayers' tender were binding in contract. I can see little point in pursuing that argument. There plainly was an arrangement between the Commonwealth and the taxpayers which was carried into effect and which led to enforceable legal rights and obligations. Neither the Commonwealth nor the taxpayers ever questioned the existence or binding nature of their obligations under that business arrangement. In these circumstances, the inquiry whether the terms of the business arrangement, which the parties recognized, honoured and performed, would or would not have been contractually enforceable in the hypothetical event that dispute between the parties had arisen, seems to me to be a barren one. If, by arrangement between the Commonwealth and the taxpayers, the taxpayers were granted a franchise of the relevant type, they will, prima facie, be entitled to a deduction in respect of a proportionate part of the expenditure which they were required by the franchise to incur, and which they did in fact incur, on the construction and maintenance of the undertaking regardless of whether those arrangement would or would not have been contractually enforceable if they had not been fully carried into effect and a dispute had arisen between the parties.

The overall arrangements between the Commonwealth and the taxpayers resulting from the acceptance of the taxpayers' tender on 28 June, 1968, regardless of whether those arrangements were contractually enforceable, did not, in themselves, effect an actual "grant" by the Commonwealth to the taxpayers of authority to collect and retain the revenue earned by the motel. Those arrangements involved a promise by the Commonwealth to grant, in the future, to the taxpayers: (i) a lease of the land upon which the motel was to be erected and (ii) an authority under the provisions of the Airports (Business Concessions) Act 1959 to carry on the motel business on that land. The actual grant of the authority to collect and retain the revenue was effected not by the overall arrangements but by the lease which conferred upon the taxpayers the right to possession of the land and, as against the Commonwealth as owner of the land, the right to receive and retain the receipts of the motel business carried on upon it. It follows that, as I see the matter, the overall arrangements between the Commonwealth and the taxpayers did not, in themselves, constitute a "franchise" for the purposes of s.62A for the reason that they did not effect or constitute a grant of the relevant authority. They involved no more than a promise to grant such an authority effective as from some future time. Neither a "purposive" reading of s.62A nor the provisions of s.15AA of the Acts Interpretation Act, 1901 can convert a promise to grant an authority into the actual grant of an authority which the provisions of s.62A(4) require. In this regard, it is relevant to note that it was never contemplated that the lease which would ultimately be granted would commence before the passenger terminal building at Tullamarine Airport commenced to operate. In the event, the lease which was executed on 28 August, 1969, was for a term commencing on 1 June, 1970 or the first scheduled international air movement from the airport whichever was the sooner. The term of the lease accordingly commenced after the lease itself had been executed. In these circumstances, the equitable doctrines which are applicable to an agreement for lease under which possession has been given (see Walsh v. Lonsdale (1882) 21 Ch.D 9 at p.14-15; Williams v. Frayne (1937) 58 C.L.R. 710 at p. 719) cannot be availed of to convert the promise to grant a lease into an actual grant of authority to collect and retain the revenue earned by the motel.

Nor, in my view, did either the lease or the authority under the Airports (Business Concessions) Act, 1959 constitute a "franchise" for the purposes of s.62A. The erection of the motel building no doubt constituted consideration for the grant of the lease and the authority pursuant to the overall arrangements. However, neither the lease nor the authority authorized the collection and retention of revenue "in consideration of the construction and maintenance" of the undertaking. The consideration for the rights which the lease conferred was stated in the lease. It was the rent which the taxpayers were obliged to pay. The authority under the Airport (Business Concessions) Act, 1959 was a license to carry on the motel business on land within the airport boundaries: it neither authorized the collection or retention of revenue nor required, as a quid pro quo, the construction or maintenance of the motel. Even if I be mistaken in that regard and the lease or the lease and the authority constituted a "franchise" for the purposes of s.62A, the only deduction to which the taxpayers would be entitled pursuant to that section is a "proportionate part of the expenditure" which they were "required by the franchise to incur" on the construction and maintenance of the undertaking. Neither the lease nor the authority "required" that the taxpayers incur expenditure in erecting and maintaining the motel. That was required under the overall arrangements in pursuance of which the lease and the authority were granted.

A question arises as to whether one can, by adopting a global approach, construct a "franchise" for the purposes of s.62A by grouping together the overall contract or arrangement, constituted by the acceptance of the taxpayers' tender, and the lease and the authority under the Airport (Business Concessions) Act, 1959. I have found this question a difficult one. There is plainly some merit in the view that, if the substance of s.62A can be satisfied by a combination of related transactions, structure or form should not be allowed to stand between a taxpayer and a deduction under the section. Ultimately, however, I have come to the view that, attractive though it may be, this approach is not a permissible one. The definition of "franchise" in s.62A requires an identification of a grant of the relevant authority: the grant will only constitute a franchise if the consideration for the continuing authority to collect and retain revenue is the construction and maintenance of the undertaking: a deduction is only allowable in respect of expenditure which the taxpayer is required to incur by that grant on such construction and maintenance. In the present case, the grant was constituted by a written lease: that lease conferred the authority to hold the demised premises in consideration of the rent which it reserved: that lease required no relevant expenditure. The grant of the relevant authority was neither a franchise for the purposes of s.62A nor required expenditure of the type in respect of a proportion of which that section allows a deduction.

In the result, it appears to me that none of the expenditure incurred by the taxpayers in respect of which a deduction is claimed was expenditure which they were, as owners of a "franchise" for the purposes of s.62A of the Act, required by the franchise to incur. It follows that I would allow the appeal, set aside the decision of the Supreme Court of New South Wales and confirm the assessments.