A recent High Court judgement highlights the difficulties in characterising a payment as either capital or revenue and the importance, when characterising a payment, of looking from a practical and business point of view at what the money was really paid for.

Facts

The taxpayer purchased assets from Power Net Victoria (“PNV”), a state- owned electricity transmission company. PNV’s assets included a transmission licence which had been issued pursuant to the Electricity Industry Act 1993 (Vic) (“Transmission    Licence”).

Certain statutory charges were imposed on PNV as holder of the Transmission Licence and were payable to the State. The terms of the asset sale agreement included that the taxpayer would pay the

statutory charges to the State in addition to the total purchase price agreed to be paid by the taxpayer to PNV for its assets.

Issues

The taxpayer contended that the payment of the statutory charges to the State was deductible expenditure, and in particular, was not payment of capital or of a capital nature.  The Commissioner however had disallowed the deductions.

Decision

The High Court by majority held that the payment of the statutory charge by the taxpayer was capital or of a capital nature and therefore not deductible.

According to the majority of the High Court, the critical question was “what was the character of the advantage sought,” that is, “what was the money really paid for.” Addressing this question from a “practical and business point of view,” the majority

of the High Court found that the taxpayer assumed the liability to pay the statutory charge as part of the price of acquiring the assets of PNV, including the Transmission Licence, which was an essential element of the transmission business.

Impact

This judgement highlights the difficulty and sometimes unpredictability in the outcome of characterising a payment as capital or revenue.  Neither the fact that a payment is payable once and for all, nor on a recurrent basis, is determinative of its character.  A taxpayer should look to what the money was really paid for from a practical and business point of view. When drafting transaction documents, it is imperative to have regard to the above critical question, and to ensure that the transaction documents correctly reflect what the money is really paid for.