Star City Pty Limited (ABN 25 060 510 410) v Commissioner of Taxation
[2009] HCATrans 255
[2009] HCATrans 255
IN THE HIGH COURT OF AUSTRALIA
Office of the Registry
Melbourne No M22 of 2009
B e t w e e n -
STAR CITY PTY LIMITED (ABN 25 060 510 410)
Applicant
and
COMMISSIONER OF TAXATION
Respondent
Application for special leave to appeal
GUMMOW J
CRENNAN J
TRANSCRIPT OF PROCEEDINGS
AT SYDNEY ON FRIDAY, 2 OCTOBER 2009, AT 11.38 AM
Copyright in the High Court of Australia
MR G.J. DAVIES, QC: May it please the Court, I appear with my learned friend, MR A.T. BROADFOOT, for the applicant. (instructed by Allens Arthur Robinson)
MR A.J. PAYNE, SC: If the Court please, I appear my learned friend, MR D.F.C THOMAS, for the Commissioner. (instructed by Australian Government Solicitor)
GUMMOW J: Yes, Mr Davies.
MR DAVIES: Your Honours, the matter before the Full Court concerned the characterisation of an outgoing made pursuant to contract, the issue being one that arose under section 51(1) of the Income Tax Assessment Act 1936, and section 8‑1 of the Income Tax Assessment Act 1997. This application, your Honour, raises the issue as to whether where there is no suggestion of sham, the court is entitled to invoke business and practical considerations to reach a conclusion as to the character of the advantage sought by the outgoing. It is inconsistent with the legal rights that are obtained by the outgoing. In our submission, the court is not so entitled. In our submission, where the outgoing in question is incurred under a contract the character of the outgoing should not be determined in disregard of, or inconsistently with, the legal rights obtained by the outgoing.
Your Honours, in paragraphs 24 to 26 of our written submissions and paragraphs 4 and 5 of our reply we have set out some passages of authorities which, in our submission, make good that principle of law. I will not repeat them, your Honours, because they are set out in those submissions. May I add to those references one further reference which is contained in the case of J B Chandler Investment Company Limited v Commissioner of Taxation (1993) 47 FCR 588. It is behind tab 6 of our list of authorities.
May I go to a very short passage of that judgment. It was a judgment of the Full Court. We have repeated in our submissions what Justice Hill has stated at page 598. Might I also take the Court to page 591, a passage of your Honour Justice Gummow at paragraph C where it is stated that:
What was decided in Cooling is no support for the proposition that where the circumstances show that what appears to be a formal written agreement between the parties represents a bargain hammered out in negotiations, the terms of the agreement are to be disregarded in determining the revenue or other character of payments made pursuant to the agreement.
GUMMOW J: You had better read the next sentence.
MR DAVIES:
In the present case, the surrounding circumstances supported –
Your Honours, we do not quibble with the proposition that the agreements must be determined in accordance with the surrounding circumstances.
CRENNAN J: Inasmuch as the $120 million was a payment made pursuant to an agreement, do we need to understand why it was agreed at first instance that that represented fair market rental?
MR DAVIES: No, your Honour. It was a fact that it did represent fair market rental. Perhaps the only basis upon why it represented - what your Honours perhaps do have to understand is that it represented fair market value for premises that were to be used as a casino.
CRENNAN J: There just seems a big difference between that and what is obviously, I suppose, fair market rental after the first 12 years, which was of the order of a quarter of a million dollars, I think.
MR DAVIES: Yes. An explanation was provided in the hearing, your Honour, that for the first 12 years of the operation of the casino the licence holder had the comfort of knowing that no other licence would be issued within New South Wales. That comfort was provided by the combination of the statute and an exclusivity agreement.
CRENNAN J: Thank you.
GUMMOW J: It would be significant comfort.
MR DAVIES: It was, your Honour. In the bidding process it was put by the applicant, in those circumstances we will pay rent that reflects market value for a casino for the first 12 years, but we will not offer the same amount for the subsequent period.
GUMMOW J: But page 172 of the application book there is a perhaps significant observation by - I think it is Justice Dowsett. The last two sentences on page 172:
Star City has not suggested that the matter should be disposed of upon the basis of any apportionment of the sum of $120 million as between rent and other aspects of the transaction. The whole of the payment was of capital or of a capital nature.
MR DAVIES: We have made a point about Justice Dowsett’s observations in relation to apportionment. In our submission, that statement and the statement that appears on the previous page:
I see no sensible basis for apportioning the two up front payments amongst the licence, the exclusivity arrangements and the lease –
demonstrates the very error of law that we rely upon, and that is because of this, your Honours, that by reason of the legislative regime under which these various agreements were entered into, a number of agreements had to be struck between the negotiating parties. There is a whole raft of them. For our purposes, there are three relevant ones: the licence - the licence was relevant because without a licence to operate the casino the operation of it would be unlawful; secondly, there was an agreement which was entered into between the parties which determined the amount of tax and so on that was to be paid by the parties for the operation of the casino licence; and the third one was the lease.
The lease was important for the parties to enter into because it was a condition of the statute that the casino could not be operated on anything other than premises owned by the Crown. So a separate agreement was entered into by the parties to confer upon the applicant the use of the land upon which the casino was to operate. That, your Honours, was separate than the right to operate the casino which was granted by the licence, separate matters.
The parties agreed the consideration to be paid in relation to each of them. The parties agreed that for the licence a sum of $256 million would be paid. The parties agreed that for the use of the premises a sum of $120 million for the first 12 years rent would be paid and thereafter annual amounts. So the parties themselves have agreed the consideration for the independent and discrete rights that needed to be obtained in order for the whole thing to get up and going, in order for (a) the right to operate the casino, and (b) to enable it to be operated.
CRENNAN J: Were the exclusivity arrangements for that term of 12 years?
MR DAVIES: They were, your Honour. The important thing about the exclusivity is that it was provided by two things. The first was it was provided by section 6 of the Casino Control Act provided at the time, which says that there shall be only one licence. That exclusivity relates to the holding of the licence, it does not relate to the use of the land under the lease. The second was that there was an agreement struck between the Casino Control Authority and the applicant that in the event that another licence was granted to somebody else, the applicant would be entitled to damages if that happened within 12 years.
When one refers to exclusivity that was the nature of it. It was a right to damages if another licence was granted. That also, your Honour, is a matter that goes to the operation of the casino as a licensee, not as a lessee entitled to the use of the property. Your Honours, might I say I was just dealing with what Justice Dowsett has then said ‑ ‑ ‑
GUMMOW J: And with what your opponent says at page 229, paragraph 29, the last paragraph of your opponent’s submissions there.
MR DAVIES: Yes, in relation to the apportionment. Our case always was, your Honour, in this sense that if one regards the whole amount that was offered as being all for something, so that it is not the 120 plus the 256, then in our submission the whole amount is to be apportioned in accordance with what the parties agreed. The parties agreed that 256 million was relevant to licence and exclusivity and they agreed that 120 million was relevant to use and what is more, your Honour, the facts showed that where the intended lessee also held a licence to operate a casino the amount agreed to be paid under the lease for the use was market rent.
Now, your Honours, the Full Court accepted that legal characterisation of what was granted under the agreement. Can I take your Honours to paragraph 44, Justice Goldberg, where his Honour accepts:
that the payment of rent in a lump sum pursuant to the terms of the leases ensured that the use and occupation of the casino premises was secured and protected for 12 years.
In our submission, the process of characterisation had to start from that basis. Might I go back, your Honours, to a matter that is not revisited by Justice Goldberg, but back to page 105 at paragraph 5 where his Honour accepts that a separate payment of $256 million was paid in consideration for the issue of the licence. That is at line 50 onwards.
Can I just add to that, your Honours, that the fact was, although Justice Goldberg did not record it, that the agreement was that that amount of 256 million was to be paid in consideration of both the grant of the licence and for the period of 12 years exclusivity. Your Honours will find that on page 12 of the court book in a passage from Justice Gordon’s judgment. At the foot of page 11 her Honour sets out some of the terms and conditions of the Casino Duty and the Community Benefit Levy Agreement. Over the page at page 12 recital D records that ‑
(a)a once only fixed amount, in consideration of the issue of the [Casino] Licence and the operation of the Casino Exclusivity Agreement -
and her Honour then records in paragraph 25, the next paragraph, that that “once only fixed amount” was for $256 million. So, they being the fundamental findings, your Honours, in our submission, the characterisation of the $120 million had to start from the basis that what it secured was use and occupation of leased premises, and that a separate sum of $256 million secured the licence and the exclusivity. However, their Honours made use of – I mean stated, look at surrounding circumstances and things, and then came to a conclusion, your Honours, that was contrary to and inconsistent with the very legal agreements entered into by the parties.
If your Honours go to page 127, paragraph 70, and here Justice Goldberg has been referring to three contemporaneous documents that were not part of the agreements entered into, but other documents which we had submitted were irrelevant and Justice Gordon had accepted were irrelevant, but the Full Court relied upon them. The critical thing though, your Honour, is to see what Justice Goldberg has done with them. That is to conclude –
that from a practical and business point of view, the characterisation of the advantage sought by the prepayment was the obtaining of the casino licence and a period of exclusivity . . . The prepayment comprised part of the consideration for the obtaining of the casino licence and the period of 12 years exclusivity of that licence. So characterised, the prepayment was a payment of a capital and not a revenue nature.
If your Honours then go to ‑ ‑ ‑
GUMMOW J: What do you say about paragraph 63 of Justice Goldberg’s reasons? Do you dispute it?
MR DAVIES: No, your Honour. He makes the comment that it is not a sham, and he says that where a label used is “rent” then the court can have a look to see whether it is rent. This is not a label case, your Honour. Their Honours have already found that it was in truth rent, that the payment did secure the use and occupation of the leased premises for 12 years.
CRENNAN J: His Honour, though, is looking at the effect from a practical and business point of view. That is what underpins what his Honour says in paragraph 70.
MR DAVIES: He is, your Honour, and when he is doing so, his Honour ignores the legal rights, the legal things that the payment secures which was use and occupation of the premises, and what is more, your Honour, that is something that is ignored under the very contract that the payment is made. It also ignores the fact, your Honours, that the licence and exclusivity were obtained by agreement by reason of the payment of another amount, the $256 million.
So, in our submission, the court has erred in the process of characterisation. It has appeared to have had recourse to things that they call “business and practical considerations” that have had the effect that they have simply recast what the parties agreed, and they have disregarded the legal rights that were created. If the Court pleases.
CRENNAN J: Can I just ask you this, if the applicant were granted leave and indeed won, would the matter then need to be remitted for the Part IV section of the case?
MR DAVIES: I think that it would, your Honour, because it has always been a matter that the Commissioner has relied upon as a reason for the amount not being deductible. The Commissioner lost at first instance and unfortunately ‑ ‑ ‑
CRENNAN J: Two of the judges did not deal with it.
MR DAVIES: ‑ ‑ ‑ has not been dealt with on appeal.
CRENNAN J: Thank you.
MR PAYNE: If the Court please. It is submitted that the application should be refused because it has insufficient prospects of success. Can I take the Court directly to the Full Court’s treatment of the central issue on this application at application book 109 commencing at paragraph 16. There Justice Goldberg, with whom the other members of the court generally agreed, set out the starting point for his consideration, namely that the key decision of this Court in Sun Newspapers (1938) 61 CLR 337 and Colonial Mutual ‑ ‑ ‑
GUMMOW J: The use of the word “really” by Justice Fullagar indicates something, does it not?
MR PAYNE: Yes, your Honour, we rely on that and it is an echo of Justice Dixon’s famous dicta in Hallstroms, which I will come to in a moment, picked up by this Court in City Link. This application is addressed by Justice Goldberg at paragraph 18. At paragraph 19 – just taking up your Honour Justice Gummow’s point - Justice Goldberg cites the unanimous decision of this Court in Citylink (2006) 228 CLR 1, at paragraph 148, where the Court unanimously affirmed that the character of the advantage sought by a taxpayer in making an outgoing is to be determined from “a practical and business point of view”.
We submit that the Full Court correctly found that the emphasis on a practical and business point of view is premised on an assumption that the court, when determining the advantage sought by a taxpayer in making an outgoing, is not limited to an examination of the legal rights obtained by the taxpayer under the applicable contract. We submit that the correct application of the principle identified by this Court is set out by Justice Allsop in Tyco Australia Pty Ltd (2007) 67 ATR 63, which is set out by the Full Court at paragraph 20, namely, the principle being that:
The mere identification of the correct description of the legal rights obtained or transferred by any transaction is generally too narrow a focus –
to answer the question of what the outgoing is calculated to affect from a practical or business point of view. The relevant inquiry –
looks to the business and practical effects and advantages sought in the whole context -
The requirement that a court adopt a practical and business point of view necessarily contemplates that documents extraneous to the transaction documents may be examined to determine the advantage sought by the taxpayer, and thus properly characterise the outgoing of one of capital or revenue.
In the present case, the Full Court found, the terms of the construction lease and the permanent lease - there being two leases relevantly - themselves suggested that the payment was made to secure an enduring advantage properly on capital account. If we can go directly to the Full Court’s treatment of that matter at application book 118, commencing at paragraph 41.
Three factors in the documents themselves suggested to the court that the prepayment was more likely on capital than revenue account, and that is before going to any extraneous material. First, at paragraphs 41 and 42, the outgoing in this case was only refundable in circumstances where the parties mutually agreed to terminate the lease, and also agreed –
that “rent paid in advance was to be refunded”.
Absent agreement about those matters, upon termination of the construction lease, for example, after a period of six months, even before the permanent casino here was even built, none of the $120 million outgoing described as “rent” would be refundable. Second, at paragraphs 44 to 47, that the outgoing was paid in advance as a lump sum. We do not accept that the Full Court in this case acted upon extraneous evidence which contradicted the legal rights here in question. What the Court did was to take into account all the relevant circumstances. The fact that the prepayment was a lump sum and paid in advance is an indication of a badge of capital.
Third, at paragraphs 51 to 53, the most significant matter raised by your Honour Justice Crennan with my friend, there was a significant disparity between the annualised rent payable for the first 12 years, and the annual rent payable for the remaining 87 years of $250,000 non‑indexed. The trial judge found that this disparity was connected with a period of exclusivity of the casino licence ending at the point where the rental changed. At paragraph 52 Justice Goldberg, we say correctly, considered that this was a significant indication that this outgoing was on capital account, subject only to any question of apportionment which case was eschewed by our learned friends.
If I can take the Court then to Justice Jessup at application book 194 to 195 where his Honour addressed those aspects of non‑refundability and the disparity of the rent during the exclusive licence period and held that those factors required explanation and suggested that this was a case where the construction lease did not paint the full picture of the advantage sought by the prepayment. It was in that context and having reached conclusions about the nature of the outgoing based on the lease documents alone, that the court considered the surrounding evidence to determine whether that evidence supported or undercut a preliminary conclusion that the payment was made to secure an advantage other than mere quiet enjoyment of the casino site.
CRENNAN J: At the bottom of 256. his Honour speaks in terms of the “commercial reality of the arrangements”.
MR PAYNE: He does. We respectfully submit that is a shorthand for what your Honour said in Citylink “business and practical considerations” which is set out and his Honour adopts.
GUMMOW J: Paragraph 268 of his Honour’s reasons may be important too.
MR PAYNE: Yes, I was going to take the Court directly to this because it answers the question that your Honour Justice Crennan asked - at 267 going
on to 268. In relation to one of those documents, and his Honour is there dealing with ‑ ‑ ‑
GUMMOW J: His Honour sets out the letter and he says:
This letter goes a long way to explaining the apparent oddity ‑ ‑ ‑
MR PAYNE: Yes. We rely on it. We say it is orthodox, and an approach it is untainted by error. Finally, your Honour, the Commissioner submits that this is not an appropriate vehicle because, as my learned friend said, only Justice Dowsett dealt in full with the Part IVA determination which was made in the alternative below, and for those reasons we respectfully submit that special leave should be refused.
GUMMOW J: Thank you. Yes, Mr Davies.
MR DAVIES: Your Honours, in our submission, those passages that my learned friend took your Honours to raised the very issue that we seek to argue for and particularly in that last passage on page 200 – paragraph 268 – the reference to “commercial”. First of all, it was part of the business justification and commercial considerations. What their Honours did not consider, which their Honours were required to consider was, characterise the outgoing starting from the basis that the outgoing achieved for the applicant the use of the premises. It recharacterised it as being for something else. Your Honours, had it characterised it – started the characterisation as being for the use of the premises, which is what it was paid for pursuant to an agreement reached at arm’s length between, and with no suggestion of sham, in a competitive bidding situation their Honours would have realised that, from a business and practical point of view, use of the property was the very thing that that payment was made for.
His Honour Justice Jessup recognises that at page 193 at paragraph 254 where he starts off and says it:
derives considerable support from a number of circumstances. First, since it was a requirement by statute that the casino be constructed on Crown land, the operator was always going to have something less than a freehold interest in the land. A lease was perhaps the most obvious contractual arrangement under which the operator’s right of occupancy of the land might have been contemplated. And a lease was in fact contemplated by the Authority from the outset. Secondly, and conformably with the first point, Star City’s right of occupancy of the land in fact derived from the Construction Lease and the Permanent Lease.
Your Honour, once that finding is made, then this payment has to be characterised from that point of view, not recharacterised by reference to some other commercial considerations or what the motivation was for the overall investment. It is this particular payment. Not the lot, not why Star city was bidding to get the winning bid; this particular payment.
His Honour then refers at paragraph 255 to reasoning of her Honour which we say is correct. In our submission, once those things are accepted, it must follow that the process of characterisation must start with a consideration from the fact that what it achieved for the parties was use of the land which is not what, in our submission, the court has done. It has gone to look at other documents and decide by reference to something else and come up with a conclusion that disregards the legal relations created by the parties. If the Court pleases.
GUMMOW J: There are insufficient prospects of success on an appeal to this Court to warrant a grant of special leave. The particular circumstances respecting the Part IVA branch of the case and the matter of apportionment referred to in argument today also make this an inappropriate occasion for the consideration of any general matters of principle. Accordingly, special leave is refused with costs.
We will adjourn to reconstitute.
AT 12.08 PM THE MATTER WAS CONCLUDED
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