United Energy Ltd v Commissioner of Taxation

[1998] HCATrans 43

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Melbourne  No M80 of 1997

B e t w e e n -

UNITED ENERGY LIMITED

Applicant

and

COMMISSIONER OF TAXATION FOR THE COMMONWEALTH OF AUSTRALIA

Respondent

Application for special leave to appeal

GAUDRON J
McHUGH J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 13 FEBRUARY 1998, AT 9.34 AM

Copyright in the High Court of Australia

MR I.V. GZELL, QC:   If the Court pleases, I appear with my learned friend, MS A. RICHARDS, for the applicant.  (instructed by Freehill Hollingdale & Page)

MR G.T. PAGONE, QC:   If the Court pleases, I appear with my learned friend, MR C.M. MAXWELL, for the respondent.  (instructed by the Australian Government Solicitor.

MR GZELL:   The Court will see from the papers that each member of the Full Court - Justice Lockhart on an alternative basis - concluded that the franchise fees were outgoings on capital account, and I wish to address that issue first because from it arises the basis upon which we seek special leave.

Franchise fees are a tax.  They are compulsorily exacted if one is the holder of an exclusive licence.  Your Honours, the inquiry about deductibility of taxes, until this case, had been whether the tax was met in the process of generating profits or whether it was met from the profits once earned.  If it fell within the first category the decisions of the Court indicated that the tax was deductible, like the land tax in Moffatt v Webb; if the tax was an exaction once profits had been earned and therefore played no part in the generation of those profits, the tax was not deductible such as the income tax in Davies Coop v Commonwealth.  There was not, until this case, an inquiry as to the character of the advantage sought in paying a tax or the purpose of paying a tax, no doubt, we say, because, like the theft in the Charles Moore Case, tax is an outgoing involuntarily incurred, and as Justice Brennan as he then was in the Magna Alloys Case said, purpose is not a relevant inquiry with respect to an involuntary loss.

GAUDRON J:   But is the inquiry, at the end of the day, still not whether it was on capital or revenue account?  These are just convenient yardsticks, are they not?  They are not principles as such.

MR GZELL:   No, because one ultimately goes back to the section and the words of the section.  But until this case there never was a suggestion that the payment of tax might be on capital account.

GAUDRON J:   Perhaps until relatively recent times there was not privatisation of public corporations in a manner that was effected in this case, either at all or in the particular matter.

MR GZELL:   Yes, quite, and I will grapple with that proposition, but the point that I am at pains to make is that this case is novel in the sense that it is the first case which looks beyond the mere discharge of the statutory obligation and attributes some other characterisation of advantage sought.

One would think, with respect, that if one is compulsorily required to pay a tax, there is no advantage in paying the tax other than the discharge of that liability, just as if one is held up and money is stolen, there is no advantage sought in handing over the money other than preserving one’s life.  So that until now - and your Honour is quite right that the question has never arisen in terms of the privatisation of monopolies - and what is novel about this case is that the courts have always simply looked at the question of whether or not the discharge of the statutory liability is associated with the ongoing process of generating profits, in which case it is deductible, or whether it is an exaction after the derivation of the profits, in which case it is not.

Now, your Honours, the advantage sought which the court attributed to this payment of tax was the purchase price of an asset and in that, with respect, we say the court was wrong.  We say it was wrong for a number of reasons.  Firstly, there is no justification for attributing the purpose of the government in raising the tax to the applicant.  That was a fallacy which was highlighted by the High Court in Commonwealth v Williams which was a case which dealt with an obverse situation. 

This was a case, your Honours, in which three husbands acquired a parcel of land with the intention of resale at a profit, so that it would have been subject to tax in their hands.  Instead of doing that, they made an unsolicited gift to their wives.  The Commissioner argued that the purpose of the husbands could be attributed to the wives and the High Court rejected that proposition in one of the bases upon which it arrived at its decision.  Sir Garfield Barwick, at page 240 said this:

The intention with which the respondent’s husband purchased his interest in the land and his purpose in divesting himself of that interest are, in my opinion, irrelevant to the determination of the character for the purposes of the Act of the receipt by the respondent of the proceeds of the sale of her interest in the land. 

And then further down:

There is no warrant, in my opinion, for coalescing the intentions and purposes of the respondent’s husband with those of the respondent in realising her interest in the land so as to attribute to her an intention to conduct a business.

And then later:

I find it difficult to conceive of the unsolicited receipt of a gift as purposive in any relevant sense on the part of the beneficiary.

McHUGH J:   But that has hardly anything to do with this case, has it?

MR GZELL:   We say, with respect, your Honour, that is precisely what the court did in this case.  They analysed the purpose.

McHUGH J:   What the court did was to make a finding of fact.  They said, at page 44:

The essential character of the advantage calculated to be gained and in fact gained by the franchise fee is freedom, until the year 2001, from competition from other distribution companies for franchise customers in the licence area.

MR GZELL:   Yes, and in arriving at that conclusion, your Honour, what the court did was to analyse the purpose of the government in bringing forward the legislation to the Parliament which brought about the privatisation of the - - -

McHUGH J:   You say that.  Where, in precise terms, does the court say that?

MR GZELL:   Your Honour, one has to read the entire judgment.

McHUGH J:   Yes, I have read the entire judgment and I must say, Mr Gzell, it is not a view I would take of the judgment.

MR GZELL:   Your Honour, in our submission, that is the way in which the majority judgment proceeds, that it looks at the intention of the government in bringing forward legislation to the Parliament and goes into some depth in the analysis of the explanatory memoranda and statements of the government about its intentions to privatise the industry.

GAUDRON J:   But whether you go to anybody’s purpose or not, the plain fact is that was what it was all about, that was how it was going to work.

MR GZELL:   No, with respect, and my next point is to take your Honours to the history of this legislation.

McHUGH J:   Yes, I know, but their Honours quoted GP International Pipecoaters.

MR GZELL:   Yes.

McHUGH J:   And you have to say that, notwithstanding that they set out the critical passage in that judgment, that they misunderstood what they were doing.

MR GZELL:   Yes.  Your Honour, we do not shy from that task.  What we say is notwithstanding that they quoted that passage and correctly quoted the passage, in stating that the payer of a compulsory impost, a tax, could be seen to have the character of seeking the advantage of purchasing the monopoly rights, in order to achieve that end result, what they did was to look at the purpose of the government in seeking to extract from licensees the possibility of making excess profits and to attribute that as the purpose of the payer of the tax in paying it.

McHUGH J:   But they did not do that, did they?  What they did was, even accepting that they examined what the purpose of the government was, they looked at the effect from the point of view of the taxpayer and they came to the view that the profits were extracted as monopoly rent, being immunity from competition granted by the government in respect of the taxpayer’s franchise customers.

MR GZELL:   In the course of saying that, your Honour, to pass to the next point, they took the view that the payment of this franchise fee was the quid pro quo for exclusivity of market granted under the Act and in that respect, your Honour, we say, the court erred.  Perhaps I should develop that proposition.

The court seems to have thought that the franchise fees which were payable under section 163A were proposed by the government as the quid pro quo for the exclusivity which they saw emerging under section 162(2B), and if I can take your Honours to page 44, about line 8, one sees that the conclusion reached by the majority was:

Accordingly, the franchise fee is payable by the taxpayer for and by reason of the exclusivity provided for under ss 162(2B) and 163A(4) -

Now, we do not cavil with the proposition that the franchise fee is paid by reason of that exclusivity but we certainly cavil with the proposition that it was paid for it and it is that concept which led the court to its final conclusion and we say, with respect to the court, it was in error in that regard.

McHUGH J:   How do you deal with what the court says at 44, line 25?

In determining the advantage sought by payment of the franchise fee ‑

Now that, in terms, looks at it from the point of view of the taxpayer.

MR GZELL:   Yes.  Your Honour, it is difficult to say how a taxpayer sees any advantage in paying a franchise fee other than discharging the statutory liability that - - -

McHUGH J:   But their Honours say “from a practical and business point of view” it is unrealistic to say that because they took the view that what you were really getting for the payment of this franchise fee was a monopoly.

MR GZELL:   Yes, your Honour, and that is the point that I wish to address because we say the monopoly sprang from the licences.  The licence is granted upon the payment of a licence fee and that monopoly gave rise to the possibility that excess profits might be made by some of the distributors.  Therefore, as a consequence of the monopoly which existed under the licences, 163A was introduced to exact portion of those profits.  So that it was not a quid pro quo for the grant of exclusivity, it was because the licences conferred an exclusivity with respect to the market that the government needed to introduce 163A to extract the profits.

Let me make good that proposition, if your Honours please.  Part 12, control provisions, was introduced to the Act on 3 October 1994 and on that day the licences were granted to the applicant and other distributors and the licences conferred exclusivity because it was a provision of Part 12 that unless that one had a licence to distribute to franchise customers one was guilty of an offence.  Administratively, the exclusivity was conferred by the office of the Regulator-General granting a licence to distribute and sell only with respect to a discrete geographical area.  So that if the applicant in this case sought to distribute and sell to franchise customers outside that geographical area, they would be guilty of an offence.

McHUGH J:   I know, but what you have just been outlining hardly raises a special leave point.  We are not going to be granting special leave to determine whether or not the court said that the fee was a payment for the right of exclusivity or, as you contend, simply a payment in consequence of a right which is conferred annually.  That is what seems to be the difference between your submission and the Full Court’s judgment.  It hardly seems a special leave point.

MR GZELL:   Your Honour, perhaps if I just conclude the submission and then address the special leave point.  What I am seeking to do is to establish that 163A had nothing to do with the obtaining of the monopoly because, as I have indicated to your Honour, the monopoly arose by reason of the definition of the geographical area under the licences.  That was in October 1994.  Section 163A was not in the Act at that stage.  It did not come into the Act until December of that year.  In December of that year the other section, 162(2B) was not in the Act.  In December 1994, 163A came into the Act and simply said that if you are the holder of a licence you shall pay a fee, a fee set in an amount by the Governor in Council.

McHUGH J:   I appreciate the force of what you say and 163A was predicated on the basis that one did have an exclusive licence but that is not to say that from the moment that came in that the payment of the fee was not, henceforth, to be seen as the payment of what the Full Court called a monopoly rent.

MR GZELL:   Yes.  That is the central issue with which we cavil, your Honour, obviously, because we would say that if that monopoly right pre-existed, section 163A, then the only logical inference to draw from it is that 163A was introduced not as the purchase price for the monopoly but because the monopoly already existed and the government saw a need to draw off some of the profits which might be made by some of the Dbs.  Section 163A could not be the basis for the monopoly with respect to one of the country DBs because that country DB is not subject to any franchise fees under 163A and yet it has a monopoly in its area.  How?  The monopoly arises from the terms of its licence.

So that we say that the court went wrong in the characterisation of the advantage sought by attributing to section 163A an operation which it does not have on a proper analysis of the Act.  Your Honours, to address the special leave point, this ‑ ‑ ‑

McHUGH J:   You know what we have said in Westfield and other cases.

MR GZELL:   Yes, I do, your Honour.  I appreciate that, your Honour.  Let me give you an example of the sorts of ramification that would flow if this case stands, if this decision stands.  There is in this State a requirement that bookmakers be licensed and pay a licence fee for the privilege of competing in a limited market of bookmakers, similar to what is required of the electricity distribution.

McHUGH J:   They do not get any monopoly rights.

MR GZELL:   Well, not monopoly, but they do compete in a limited market and there is exacted from them under the Stamp Act a betting tax, being a portion of each bet that they place, no doubt because the government wishes to share in the profits that are capable of being earned from that limited market.  It does not matter, we would say, whether the market is a monopoly or a limited one, the same sort of principle would apply to the betting tax if this decision stands.

McHUGH J:   The betting tax is on a bet, is it not?  It is not on a licence.

MR GZELL:   Nor is this, your Honour; nor is this.  There is a licence fee payable annually with respect to the licences.  Thereafter, if one has the licences, there is exacted the franchise fee under section 163A.

Your Honours, I see that a light is flashing at me.  I was going to address - - -

McHUGH J:   You have still got a quarter of your time left.

MR GZELL:   Thank you, your Honour.  I was going to address the second issue, but perhaps if I conclude by saying that we say the special leave question is whether and to what extent a court, in looking at a section 51(1) question with respect to a tax, should go beyond the object of discharging the statutory liability.  If one can, as was done in this case, we say for the first time, look beyond the mere discharge of the statutory liability and attribute some other purpose to the payment of the tax, that is an important question and it is one which, we would submit, ought to be addressed by the Full Court. 

I have given your Honours one example of its ramification.  Another more obvious example would be that a royalty may no longer be deductible because it might be said that the payment of the royalty represents the purchase price for the right to use the intellectual property and at risk, then, is the deductibility of outgoings such as royalties.  Rent gives one an exclusive possession of demised premises, very much like the monopoly situation here.  Does it follow from this decision that the payment of rent on a recurring basis might be recharacterised as on capital account, as being the purchase price for those exclusive rights?

Your Honours, very quickly, so far as the second point is concerned, we had interpreted what the majority said in referring to Justice Lockhart’s alternative basis of saying this was a tax on profits and not a tax before profits.  We had interpreted what the majority said as agreeing with him.  If we are wrong about that, it does not form part of the judgment of the court, but if we are right about it, then we say that approach was in error for the reasons that I have already expressed.  It was a tax that occurred before the determination of the profit.

A similar view has been expressed in the United Kingdom, in Harrods (Buenos Aires) Ltd, which is on our list.  In that case there was an Argentinian tax of 1 per cent on capital of companies operating in the Argentine.  It was claimed as a deduction for UK tax purposes and Lord Justice Diplock said this: 

I agree.  The only thing which has caused me doubts as to the correctness of Buckley, J.’s judgment is that I have had none.  Can a tax question really be as simple as I think this is?  But the only question here is:  was the money paid by the Company in settlement of its liability for Argentine substitute tax, “money wholly and exclusively expended for the purpose of the trade” which is carried on in the Argentine?  In order to engage lawfully in its trading activities in the Argentine at all, whether or not it made a profit by doing so, it had to pay the substitute tax.  That was the purpose for which the money was expended by the Company.  None other is suggested.  Why, then, is it not deductible?

Those are our submissions, if the Court pleases.

GAUDRON J:   Thank you, Mr Gzell.  We need not trouble you, Mr Pagone. 

This case involves the application of settled principles to the particular and unusual circumstances surrounding the privatisation of the Victorian energy supply.  As such, it is a matter which ought be determined by decision of the Federal Court.  Moreover, it raises no question appropriate to attract the grant of special leave.  Special leave is refused.

MR PAGONE:   We seek costs, your Honours.

MR GZELL:   I cannot resist that, your Honour.

GAUDRON J:   It is refused with costs.

AT 9.57 AM THE MATTER WAS CONCLUDED