Commissioner of Taxation v Citylink Melbourne Ltd

• Jurisdiction: Australia Federal only
• Judge: Gleeson CJ,Gummow J,Kirby J,Callinan J,Heydon J,Crennan J
• Judgment Date: 20 July 2006
• Neutral Citation: 2006-0720 HCA B,[2006] HCA 35
• Court: High Court
• Docket Number: M49/2005
• Date: 20 July 2006

[2006] HCA 35

HIGH COURT OF AUSTRALIA

Gleeson CJ, Gummow, Kirby, Callinan, Heydon AND Crennan JJ

M49/2005

The Commissioner of Taxation of the Commonwealth of Australia

Appellant

and

Citylink Melbourne Limited (Formerly Known as Transurban City Link Limited)

Respondent

Income Tax Assessment Act 1936 (Cth), s 51(1).

Income Tax Assessment Act 1997 (Cth), s 8–1.

Commissioner of Taxation v Citylink Melbourne Limited

Income tax — Allowable deductions — Respondent entered into contracts with the State of Victoria to design, construct, operate and maintain a major system of roads — The State conceded to the respondent rights to do all that was necessary to complete those tasks, with a view to transferring the infrastructure and all associated rights back to the State at the expiry of the concession period — Respondent paid concession fees as consideration for those rights — Whether concession fees were allowable deductions — Whether concession fees which accrued semi-annually were outgoings incurred in, and referable to, the relevant years of income, where the fees were ‘owing’ but ‘not due for payment’ — Whether payment was contingent or theoretical — Whether concession fees were on revenue or capital account — Whether concession fees were an outgoing in gaining or producing the taxpayer's assessable income — Whether the concession fees conferred a benefit on the taxpayer of an enduring nature — Whether acquisition of the benefit essential to the taxpayer's business — Whether concession fees were the purchase price paid for the road system as a capital asset — Whether concession fees were akin to a share of profits with the State or a dividend payable to a joint venturer — Whether payment of concession fees analogous to the payment of rent.

Words and phrases — ‘incurred’, ‘referable’.

1 Gleeson CJ. I agree with the orders proposed by Crennan J and with her reasons for those orders.

Gleeson CJ

2 Gummow J. The appeal should be dismissed with costs.

Gummow J

3 I agree with the reasons of Crennan J.

4 Kirby J. This appeal comes from a judgment of the Full Court of the Federal Court of Australia1. It involves questions that have provided a rich source of litigation in this Court concerning whether a claimed deduction from income tax liability arises on revenue account (and is thus prima facie deductible) or on capital account (and is thus not deductible). An additional question, if the classification on revenue account is upheld, is whether the obligation giving rise to the claimed deduction was ‘incurred’ in the 1996 to 1998 years of income (‘the income years’) and was ‘properly referable’ to income which the taxpayer derived in those years.

Kirby J

5 The answer to these questions is to be found, ultimately, in the operation of s 51(1) of theIncome Tax Assessment Act 1936 (Cth) (‘the 1936 Act’)2 and s 8–1 of the Income Tax Assessment Act 1997 (Cth) (‘the 1997 Act’)3. The appeal proceeded on the assumption that the respective provisions of the 1936 Act and the 1997 Act were identical in substance4. I agree with that assumption.

The facts

6 For the most part, the facts relevant to my reasons sufficiently appear in the reasons of Crennan J5. I incorporate and will not repeat them. In those reasons, her Honour describes the arrangements between Citylink Melbourne Limited (formerly known as Transurban City Link Limited) (‘Transurban’) and the State of Victoria (‘the State’) for the achievement of the City Link Project (‘the Project’). She explains the contents of the Concession Deed6, the issue of Concession Notes7, the controlling operation of the Master Security Deed8 and the terms of the Security Trust Deed9. I will not needlessly restate any of this material. I gratefully accept these descriptions. The facts at trial were complex. As Crennan J's reasons indicate, further details of the Project, to elaborate the

relationship and arrangements between Transurban and the State, may be found in the reasons of the primary judge and of the Full Court10.

The proceedings in the Federal Court

7 Before the primary judge: The primary judge11 (Merkel J), whose orders were reversed by unanimous decision of the Full Court of the Federal Court of Australia12, concluded that Transurban incurred a loss or outgoing in respect of the concession fees because the liability in respect of them arose unconditionally13, and was satisfied by Transurban's electing to issue the Concession Notes, under which there was a present liability to pay the amounts due at a future time14. The primary judge also concluded that the fees were ‘referable to the period in respect of which the liability for the fees is incurred’15. However, he reached these conclusions notwithstanding an intuitive opinion, which he expressed, as to their artificiality and unreality. Indeed, he suggested that such an outcome could normally only be expected in ‘a taxpayers' heaven’16.

8 Despite the foregoing findings, the primary judge held that the concession fees were not deductible because they were akin to a promised share of profits or payment of a dividend to the State in return for the advantage flowing to capital which the State had contributed to the Project17. The concession fees were thus outgoings expended ‘on the structure within which the profits were to be earned’. They were not ‘part of the money earning process’18. They were outgoings on capital and not on revenue account19.

9 It was on this basis that the primary judge rejected Transurban's ‘appeal’ to the Federal Court against what it claimed was the erroneous decision of the Commissioner of Taxation (‘the Commissioner’) disallowing Transurban's objection to the Commissioner's disallowance of deductions claimed by Transurban in respect of concession fees for the income years.

10 In the Full Court: In allowing Transurban's appeal, the Full Court found that Transurban had incurred the concession fees in the income years although they were years during which the tollway was still under construction and therefore not generating (as it later did) substantial revenues from vehicular tolls. Moreover, the Full Court found that the concession fees were referable to the income years and that the State and Transurban were not joint venturers and did not, in any legal sense, share profits20. Finally, the Full Court concluded that the concession fees were payable for use and operation of, or the right to conduct, the Project. They were therefore a cost of conducting the business operation rather than a cost of acquiring a profit-making enterprise21. On this footing, the Full Court rejected the primary judge's conclusion that the concession fees were outgoings on capital account.

11 By special leave, this appeal is now brought to this Court to permit the Commissioner to propound his arguments defensive of the orders made by the primary judge.

The applicable legislation

12 Primacy of the legislation: Problems of income tax law, such as the present, cannot be resolved by generalities. In each case, it is the duty of the decision-maker to apply the relevant legislation to the facts as found. Income tax law is not a mystery unto itself, to be preserved separate from other parliamentary law as a legal canon reserved to a specialised priestly caste22. It is a law enacted by the Federal Parliament and, in its new form especially, it is intended to be generally understood by taxpayers, most of whom do not have ready access to countless decisions, many of them contradictory, written on the legislation these past seventy years.

13 In deriving the meaning and application of income tax law, as in other areas of the written law, wisdom lies in maintaining fidelity to the statutory text and the purpose of the legislation as found in its language and elucidated by authority and admissible material23. This has been a constant, and unanimous, theme of decisions of this Court, in many fields, in recent years24. Where the outcome is governed by legislation, the starting point is always the legislative text. Income tax law is no different. We sit here to apply the legislation, not judicial approximations of it.

14 The legislation: The applicable legislation, in its successive forms in the 1936 Act and the 1997 Act, is set out in Crennan J's reasons25. It is unnecessary for me to repeat the provisions. Effectively, both enactments allow the taxpayer to deduct from its assessable income any losses or outgoings to the extent that (relevantly) they were necessarily incurred in carrying on a business for the purpose of gaining or producing its assessable income. No such loss or outgoing may be deducted if (relevantly) it is a loss or outgoing of capital, or of a capital nature26. Here are the two sides of the legislative coin. In the case of the income of a business (such as Transurban) the statutes envisage a division of the world between losses or outgoings on revenue account and on capital account. In the case of revenue account, the deduction is available only to the extent that it is ‘incurred’ in ‘gaining or producing … assessable income’ or ‘necessarily incurred’ in ‘carrying on a business for the purpose of gaining or producing’ assessable income. The statutory language is relatively simple. It is expressed in ordinary, not technical, language. Courts should not burden it with undue elaboration. I say this whilst acknowledging that the application of the

legislation will often require explanation and justification so as to make its meaning clear and to ensure a consistency and accuracy of approach27.

15 From the remarks of successive judges, explaining the application of the legislation to particular facts, have come observations that have sometimes hardened into supposedly fixed rules28. Every now and again, it is necessary to pause and return to the legislation itself so as to ensure that...