The High Court has dismissed the final appeal by AusNet Services, Victoria’s largest energy distributor, which means that amounts paid by AusNet to the Victorian government as part of AusNet’s 1997 acquisition of Power Net Victoria were capital in nature (and not deductible).
Under the sale agreement, AusNet agreed to pay certain imposts to Victoria under section 163AA Electricity Industry Act 1993 - $37.5m in 1998, $50m in 1999, $50m in 2000, and $40m in 2001. The imposts related to the acquisition by AusNet of Power Net Victoria’s transmission licence. AusNet argued that the imposts were deductible on the basis that they were outlays accrued in deriving its assessable income.
The High Court dismissed AusNet’s appeal, finding that the imposts constituted a ‘loss or outgoing of capital or of a capital nature’ that were not deductible. The majority (French CJ, Kiefel and Bell JJ) held that ‘from a practical and business point of view’, the imposts formed part of the consideration paid by AusNet for the assets of Power Net Victoria.
The majority held that the ‘advantage’ sought by AusNet in paying the imposts was the purchase of all Power Net Victoria’s assets, which included the transmission licence. In their Honours’ view, the transmission licence formed an integral part of Power Net Victoria’s overall business structure, and that without the licence, '…acquisition of the rest of the assets was pointless'.
Similarly, Gageler J held that the imposts were part of the total purchase price of the assets. His Honour held that, commercially speaking, the imposts constituted part of the price which AusNet agreed to pay Victoria to acquire the assets. On that basis, his Honour also dismissed AusNet’s appeal.
Considerations for taxpayers
In evaluating the character of the advantage sought, taxpayers should therefore apply a ‘practical and business point of view,’ and consider the totality of legal rights and obligations secured by the relevant outlay.
In structuring and documenting the acquisition of assets, taxpayers should ensure the documentation correctly reflects the substance of what is actually being acquired.
Finally, taxpayers should never assume that an outlay (or portion of an outlay) is revenue in nature without turning their minds to the threshold question - what kind of advantage will this outlay secure?