AusNet Transmission Group Pty Ltd v Commissioner of Taxation
Document type: Decision Impact Statement
Venue: High Court (M35 of 2014)
Judgment date: 5 August 2015
Date published: 23 September 2015

Summary of decision:
Outlines the ATO's response to the High Court decision that certain statutory imposts paid by AusNet Transmission Group Pty Ltd (AusNet) to the State of Victoria in connection with the purchase of an electricity transmission business were not deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997).

Overview of facts:
In 1993, the Victorian Government disaggregated the State owned electricity business into generation, transmission and distribution businesses. The Government established National Electricity (renamed Power Net Victoria (PNV)) to carry on the transmission business. In 1995, pursuant to powers granted by the Electricity Industry Act 1993 (Vic.), the Governor-in-Council made a Tariff Order which imposed a cap on the revenue PNV could derive from certain services. | Before privatising the transmission business (in 1997), the Government was advised that some of the assumptions which underpinned the Tariff Order were no longer correct. The revenue cap was higher than necessary to enable a reasonable return on capital. The Government was advised that the excess revenue should be recovered by imposing a 'special licence fee'. Section 163AA of the Electricity Industry Act 1993 (Vic.) was enacted to allow statutory imposts, payable to the Treasurer of Victoria, to be imposed until the Tariff Order expired in December 2000. | On 12 October 1997, AusNet acquired the transmission business from PNV. The assets acquired included a transmission licence. | The Asset Sale Agreement was subject to conditions precedent, including that the State procure the publication in the Government Gazette of an order imposing section 163AA imposts. On 28 October 1997, the Governor in Council made the relevant order. AusNet also made a contractual promise under the Asset Sale Agreement to pay the imposts. | The Asset Sale Agreement completed on 6 November 1997. | In the income years 1999 to 2001, AusNet made impost payments in the total sum of $177,500,000. AusNet claimed deductions for these payments under section 8-1 of the ITAA 1997. The Commissioner disallowed the deductions on the basis that they were not incurred in gaining or producing AusNet's assessable income or that the impost payments were outgoings of capital or of a capital nature. | The primary judge affirmed the Commissioner's position. AusNet's appeal to the Full Federal Court was dismissed by the majority. | Issues decided by the court/Tribunal | The majority (French CJ, Kiefel, Bell and Gaegler JJ) dismissed AusNet's appeal. | In a joint decision, French CJ, Kiefel and Bell JJ decided that the imposts "were part of the consideration for the acquisition of the business" and therefore of a capital nature. | In a separate judgment, Gageler J concluded that the impost payments, together with the amount AusNet was willing to bid to acquire the transmission business, were 'in a real commercial sense the price which AusNet committed to pay to the State in order to acquire the assets of PNV.' | These conclusions did not require the majority to consider the Commissioner's Notice of Contention, which sought to affirm the primary judge's decision that the impost payments were not deductible because they were not a cost of AusNet deriving its income. | Nettle J dissented finding that the impost payments were incurred by AusNet in gaining or producing its assessable income and were not on capital account. His Honour was of the view that the impost payments were an annual obligation intrinsically connected with the transmission licence and were paid for the maintenance of the means of producing AusNet's assessable income.

Issues decided:
The majority (French CJ, Kiefel, Bell and Gaegler JJ) dismissed AusNet's appeal. In a joint decision, French CJ, Kiefel and Bell JJ decided that the imposts "were part of the consideration for the acquisition of the business" and therefore of a capital nature. In a separate judgment, Gageler J concluded that the impost payments, together with the amount AusNet was willing to bid to acquire the transmission business, were 'in a real commercial sense the price which AusNet committed to pay to the State in order to acquire the assets of PNV.' These conclusions did not require the majority to consider the Commissioner's Notice of Contention, which sought to affirm the primary judge's decision that the impost payments were not deductible because they were not a cost of AusNet deriving its income. Nettle J dissented finding that the impost payments were incurred by AusNet in gaining or producing its assessable income and were not on capital account. His Honour was of the view that the impost payments were an annual obligation intrinsically connected with the transmission licence and were paid for the maintenance of the means of producing AusNet's assessable income.

ATO view of decision:
The decision was in accordance with established principles.

Administrative treatment:
Implications for impacted ATO precedential documents (Public Rulings, Determinations, ATO IDs) | N/A | Implications for impacted Law Administration Practice Statements | N/A

Legislative references: Electricity Industry Act 1993 (Vic) 163A 163AA Income Tax Assessment Act 1997 paragraph 8-1(2)(a)
Case references: John Fairfax & Sons Pty Ltd v FCT (1959) 101 CLR 30 [1959] HCA 4 SPI PowerNet Pty Ltd v FCT 2013 ATC 20-416 SPI PowerNet Pty Ltd v FCT (2014) 220 FCR 355 Inland Revenue Commissioners v British Salmson Aero Engines Ltd [1938] 2 KB 482 Hallstroms Pty Ltd v FCT (1946) 72 CLR 634 [1946] HCA 34 BP Australia Ltd v FCT (1965) 112 CLR 386 Vallambrosa Rubber Co Ltd v Inland Revenue [1910] SC 519 Broken Hill Theatres Pty Ltd v FCT (1952) 85 CLR 423 British Insulated and Helsby Cables v Atherton [1926] AC 205 Henriksen v Grafton Hotel Ltd [1942] 2 KB 184 Royal Insurance Co v Watson [1897] AC 1 W Nevill & Co Ltd v FCT (1937) 56 CLR 290 Tata Hydro-Electric Agencies, Bombay v Income-tax Commissioner, Bombay Presidency and Aden [1937] AC 685 Colonial Mutual Life Assurance Society Ltd v FCT (1953) 89 CLR 428 [1953] HCA 68 Cliffs International Inc v FCT (1979) 142 CLR 140 Law Shipping Co v Inland Revenue [1924] SC 74 Sun Newspapers Ltd v FCT (1938) 61 CLR 337 Van den Berghs Ltd v Clark [1935] AC 431 Federal Cmr of Taxation v South Australian Battery Makers Pty Ltd (1978) 140 CLR 645 Federal Commissioner of Taxation v Citylink Melbourne Ltd (2006) 228 CLR 1 [2006] HCA 35 Queanbeyan City Council v ACTEW Corporation Ltd (2011) 244 CLR 530 Matthews v Chicory Marketing Board (Vict) (1938) 60 CLR 263 Parton v Milk Board (Vict) (1949) 80 CLR 229 Air Caledonie International v Commonwealth (1988) 165 CLR 462 Harper v Minister for Sea Fisheries (1989) 168 CLR 314 Browns Transport Pty Ltd v Kropp (1958) 100 CLR 117 GP International Pipecoaters Pty Ltd v FCT (1990) 170 CLR 124 City Link Melbourne Ltd v Commissioner of Taxation (2004) 141 FCR 69 Western Gold Mines NL v Commissioner of Taxation (WA) (1938) 59 CLR 729 Moffatt v Webb (1913) 16 CLR 120 Commissioner of Taxation v Morgan (1961) 106 CLR 517 Emu Bay Railway Co Ltd v FCT (1944) 71 CLR 596 Federal Cmr of Taxation v Midland Railway Co of Western Australia Ltd (1952) 85 CLR 306 (1952) 9 ATD 372 Nilsen Development Laboratories Pty Ltd v FCT (1981) 144 CLR 616 Egerton-Warburton v DFCT (1934) 51 CLR 568 H R Sinclair & Son Pty Ltd v FCT (1966) 114 CLR 537 Grey v Australian Motorists & General Insurance Co Pty Ltd [1976] 1 NSWLR 669 Dovuro Pty Ltd v Wilkins (2003) 215 CLR 317
Subject references: Income tax Deductions Capital or a capital nature