Federal Commissioner of Taxation v Citylink Melbourne Ltd
Document type: Decision Impact Statement
Venue: High Court (M49 of 2005)
Judgment date: 20 July 2006
Date published: 4 October 2006

Summary of decision:

Overview of facts:
In October 1995 Citylink Melbourne Limited (then known as Transurban City Link Limited) and the State of Victoria entered into a concession deed for the Melbourne City Link project. | The concession commenced in 1996 and is expected to end in 2034. It may be terminated early or extended in certain defined circumstances. | In consideration for the grant of the right to design, construct, commission and operate the City Link, to impose and collect toll, maintain and repair the road and raise other approved revenues, Transurban is obliged to pay concession fees to the State. | The fee was set at $95.6 million per annum for the construction period and the first 26 years of operations. For the remaining 9 years of the concession period a fee of $45.2 million per annum is payable. An annual fee of $1 million per annum is provided in the event that the concession period is extended beyond the expiry date. | The annual concession fee is payable by semi annual instalments in arrears in December and June each year. For any period of less than six months (relevantly at the beginning and end of the concession period) a pro rata amount is payable. | The concession fees may be satisfied, at Transurban's option, by the issue of concession notes to the State at or prior to the time that payment is due. Concession notes are a promise to pay the amount in the future subject to the presentation conditions being satisfied. The concession notes are not a negotiable instrument but are transferable. The concession notes do not bear interest. | Transurban issued concession notes for all of the concession fees that were payable in the years of income under consideration in the proceedings. | Under the security arrangement governing the project debt the obligation to pay concession fees and concession notes is subordinated to the debt due to the project lenders. While project debt is outstanding, Transurban is not permitted to pay concession fees or concession notes owing unless there is sufficient funds available in a special account maintained under the lending documents for the purposes of making distributions to equity holders and payments to the State. | The financial projections made at the commencement of the project indicated that payments to the State for concession fees (under the concession note presentation conditions) would not commence until 2013 or 2017. Further it was possible that the amounts payable could still be outstanding at the expiry date in 2034 if the traffic and toll revenue fell significantly short of the predictions. | Issues decided by the High Court | The question for the Court was whether the concession fees claimed were allowable deductions under subsection 51(1) of the Income Tax Assessment Act 1936 (years ended 30 June 1996 and 1997) and section 8-1 of the Income Tax Assessment Act 1997 (year ended 30 June 1998). In this regard there were two issues that had to be decided by the Court: 1. Whether, the amounts in question were outgoings incurred in, and properly referable to, the income year in respect of which they accrued payable; and 2. Whether the concession fees were outgoings of a capital nature. | 1. Whether, the amounts in question were outgoings incurred in, and properly referable to, the income year in respect of which they accrued payable; and 2. Whether the concession fees were outgoings of a capital nature. | Answer to the first issue | The majority of the High Court (Gleeson CJ; Gummow, Callinan and Heydon JJ adopting the written judgment of Crennan J) held: • The concession fees were incurred in the relevant year of income because Transurban was under a contractual liability to make the payments in the relevant year; • There was a contractual liability to pay the concession fees irrespective of the subordination of the State's right to payment or the concession note mechanism for discharging the liability; • Conditions affecting the timing of discharge (but not the creation of the liability) does not render the liability contingent; • Transurban was definitely committed and had completely subjected itself to the outgoings which the concession fees represent; • The concession fees were, like any periodic licence fee, payable for its period. The outgoings did not secure rights in future years and were referable to the income years in question. | • The concession fees were incurred in the relevant year of income because Transurban was under a contractual liability to make the payments in the relevant year; • There was a contractual liability to pay the concession fees irrespective of the subordination of the State's right to payment or the concession note mechanism for discharging the liability; • Conditions affecting the timing of discharge (but not the creation of the liability) does not render the liability contingent; • Transurban was definitely committed and had completely subjected itself to the outgoings which the concession fees represent; • The concession fees were, like any periodic licence fee, payable for its period. The outgoings did not secure rights in future years and were referable to the income years in question. | Answer to the second issue | The majority in agreeing with the reasons of Justice Crennan held that the concession fees were of a revenue nature. The concession fees were characterised as periodic licence fees in respect of the City Link infrastructure assets that ultimately must be surrendered to the State in contrast to periodic instalments of the purchase price of a capital asset.

Issues decided:
The question for the Court was whether the concession fees claimed were allowable deductions under subsection 51(1) of the Income Tax Assessment Act 1936 (years ended 30 June 1996 and 1997) and section 8-1 of the Income Tax Assessment Act 1997 (year ended 30 June 1998). In this regard there were two issues that had to be decided by the Court: 1. Whether, the amounts in question were outgoings incurred in, and properly referable to, the income year in respect of which they accrued payable; and 2. Whether the concession fees were outgoings of a capital nature. 1. Whether, the amounts in question were outgoings incurred in, and properly referable to, the income year in respect of which they accrued payable; and 2. Whether the concession fees were outgoings of a capital nature. | Answer to the first issue: The majority of the High Court (Gleeson CJ; Gummow, Callinan and Heydon JJ adopting the written judgment of Crennan J) held: • The concession fees were incurred in the relevant year of income because Transurban was under a contractual liability to make the payments in the relevant year; • There was a contractual liability to pay the concession fees irrespective of the subordination of the State's right to payment or the concession note mechanism for discharging the liability; • Conditions affecting the timing of discharge (but not the creation of the liability) does not render the liability contingent; • Transurban was definitely committed and had completely subjected itself to the outgoings which the concession fees represent; • The concession fees were, like any periodic licence fee, payable for its period. The outgoings did not secure rights in future years and were referable to the income years in question. • The concession fees were incurred in the relevant year of income because Transurban was under a contractual liability to make the payments in the relevant year; • There was a contractual liability to pay the concession fees irrespective of the subordination of the State's right to payment or the concession note mechanism for discharging the liability; • Conditions affecting the timing of discharge (but not the creation of the liability) does not render the liability contingent; • Transurban was definitely committed and had completely subjected itself to the outgoings which the concession fees represent; • The concession fees were, like any periodic licence fee, payable for its period. The outgoings did not secure rights in future years and were referable to the income years in question. | Answer to the second issue: The majority in agreeing with the reasons of Justice Crennan held that the concession fees were of a revenue nature. The concession fees were characterised as periodic licence fees in respect of the City Link infrastructure assets that ultimately must be surrendered to the State in contrast to periodic instalments of the purchase price of a capital asset.

ATO view of decision:
The result of this case flows from the disposition of the majority to view the concession as a licensing arrangement and the concession fees as periodic licence fees. | The decision entrenches a jurisprudential approach for the determination of when an outgoing is incurred for the purposes of the general deduction provisions. In this regard it places importance on a legal analysis of the arrangements to distinguish between conditions that concern the creation of liability and conditions that merely affect discharge. | Other than distinguishing the situation in Coles Myer Finance , the decision does not shed any further light on the properly referable principle as previously articulated and applied by the High Court. | As the majority view amounted to an application of existing principles governing the deductibility of losses and outgoings under the general deduction provisions, it is not proposed to amend current Tax Office Rulings (most relevantly TR 94/26 and TR 97/7 dealing with the meaning of incurred and the application of the properly referable principle) or issue further interpretative advice dealing with the decision.

Administrative treatment:
Subject to the possible application of the general anti avoidance provisions where the necessary conditions are present, the decision supports the allowance of deductions for similar payments in similar public infrastructure concession arrangements. In each case the Tax Office will carefully consider whether the facts and circumstances are in material respects comparable to those in Transurban. | Compliance monitoring, risk assessment and audit activities will be adapted to detect and respond to non-commercial arrangement that seek to exploit the decision to avoid tax.

Legislative references: Income Tax Assessment Act 1936 51(1) Income Tax Assessment Act 1997 8-1
Case references: City Link Melbourne Ltd v Commissioner of Taxation (2004) 141 FCR 69 City Link Melbourne Ltd v Commissioner of Taxation (2004) 135 FCR 356 Federal Commissioner of Taxation v James Flood Pty Ltd (1953) 88 CLR 492 New Zealand Flax Investments Ltd v Federal Commissioner of Taxation (1938) 61 CLR 179 Nilsen Development Laboratories Pty Ltd v Federal Commissioner of Taxation (1981) 144 CLR 616 Coles Myer Finance Limited v Federal Commissioner of Taxation (1993) 176 CLR 640 Emu Bay Railway Co Ltd v Federal Commissioner of Taxation (1944) 71 CLR 596 Commercial Union Assurance Co of Australia Ltd v FCT (1977) 7 ATR 435 Federal Commissioner of Taxation v Australian Guarantee Corporation Ltd (1984) 2 FCR 483 Commonwealth Aluminium Corporation Ltd v Federal Commissioner of Taxation (1977) 77 ATC 4151 Federal Commissioner of Taxation v The Midland Railway Company of Western Australia Limited (1951-52) 85 CLR 306 W. Nevill and Company Limited v Federal Commissioner of Taxation (1937) 56 CLR 290 Sun Newspapers Limited v Federal Commissioner of Taxation (1938) 61 CLR 337 Hallstroms Pty Ltd v Federal Commissioner of Taxation (1946) 72 CLR 634 Cliffs International Inc. v Federal Commissioner of Taxation (1979) 142 CLR 140 Tata Hydro-Electric Agencies, Bombay v Income Tax Commissioner [1937] AC 685 Commissioner of Stamp Duties (NSW) v Commonwealth Funds Management Ltd 95 ATC 4756 Ogilvy and Mather Pty Ltd v Federal Commissioner of Taxation (1990) 95 ALR 663 Steele v Deputy Federal Commissioner of Taxation (1999) 197 CLR 459 Commissioner of Taxation (NSW) v Ash (1938) 61 CLR 263 at 282. Commissioner of Taxes (SA) v Executor Trustee and Agency Co of South Australia Ltd (1938) 63 CLR 108
Subject references: The meaning of loss or outgoing incurred The application of the properly referable principle Characterisation of the outgoing - whether of a capital or revenue nature