Taxpayer loses High Court appeal in deductibility case
In AusNet Transmission Group Pty Limited v Commissioner of Taxation  HCA 25, the taxpayer (AusNet) appealed against the Full Federal Court decision in which the Court agreed with the Commissioner, that expenditure incurred by the taxpayer, being charges levied by the State of Victoria, were not tax deductible. The majority of the High Court held that the expenditure incurred was capital in nature, and accordingly was not deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997).
Briefly, Power Net Victoria (PNV) was a State-owned corporation which, from 1994, owned, maintained and operated the existing high voltage transmission network system or “grid” in Victoria. In 1997, AusNet acquired the assets of PNV under a sale and purchase agreement. In acquiring the business assets from PNV, a condition precedent to completion was that the licence to transmit electricity be transferred from PNV to AusNet. The transfer of the licence was effected on 28 October 1997, with completion of the sale occurring soon after.
As the holder of the licence, AusNet became liable to pay charges levied pursuant to section 163AA of the Electricity Industry Act 1993 (Vic). That section provided that “The Governor in Council, on the recommendation of the Treasurer, may, by Order published in the Government Gazette, declare that specified charges, or charges calculated in a specified manner, are payable as an impost by the holder of a licence at such times and in such manner as are so specified”.
Prior to completion, such an Order had been published in the Government Gazette, and that Order provided that the holder of a licence to transmit electricity issued under Part 12 of the Electricity Industry Act 1993 (Vic) was required to pay the following amounts to the Government:
- $37,500,000 in respect of the financial year ending 30 June 1998, payable in arrears in two instalments, being $25,000,000 on 31 March 1998 and $12,500,000 payable on 30 June 1998
$50,000,000 in respect of each of the financial years ending 30 June 1999 and 30 June 2000, payable in arrears in four equal instalments on 30 September, 31 December, 31 March and 30 June in each relevant financial year, and
- $40,000,000 in respect of the 6 months ending on 31 December 2000, payable in arrears in two equal instalments on 30 September 2000 and 31 December 2000.
AusNet sought to deduct these charges to the extent that they were incurred during the period that the taxpayer was the holder of the licence, and the Commissioner disallowed these deductions.
In addition to becoming liable to pay the charges through operation of law as outlined above, it is relevant to note, that pursuant to clause 13.3(d) of the sale and purchase agreement, AusNet acknowledged and agreed with the State of Victoria and PNV that:
- the amounts to be payable by [AusNet] pursuant to the Licence Fee Order are an integral part of the regulatory framework of the industry and [the taxpayer] accepts that it must pay the amounts set out in the Licence Fee Order in order to carry on the business transferred from [PNV]
- [AusNet] must not challenge the validity of the Licence Fee Order or the amounts, or the basis of calculating the amounts, specified in the Licence Fee Order
- [AusNet] agrees to pay to the Treasurer the amounts specified in the Licence Fee Order in accordance with the terms of, and at the times specified in, the Licence Fee Order, whether or not the Licence Fee Order is valid or enforceable, and
- [AusNet] must not transfer the Transmission Licence or allow any person to become a licensee under the Transmission Licence unless the proposed licensee has first delivered to the State a covenant (in form and substance satisfactory to the State) agreeing to be bound by this clause 13.3(d) as if it were the Buyer.
Additionally, clause 17 of the agreement provided that “Following Completion, the Buyer assumes with effect from Completion all liabilities of the Seller to the Creditors, including without limitation the Contract Liabilities, other than the Specified Creditors and agrees to pay all Creditors other than the Specified Creditors in the normal course of business for obligations of the Seller existing before or after Completion.”
With respect to this clause, the High Court (majority) said that “Given the definition of “Creditors’” in the Asset Sale Agreement, the obligation thus assumed [by the taxpayer] embraced PNV’s contingent liability, which existed when the agreement was signed, to pay the charges imposed by the Order in Council when they fell due.”
In deciding that the charges were capital in nature and thus not tax deductible, the High Court (majority) said that “the imposts under section 163AA were significant liabilities not inherently recurrent and able to be imposed at such times and in such manner as are specified in the exercise of the power conferred by that provision. They were a significant part of the consideration moving from AusNet for the acquisition of the Assets. From the perspective of AusNet, “‘from a practical and business point of view’ they were part of the consideration moving from it for the acquisition of the Asset”.
Importantly, the majority concluded that the assumption of the liability to pay the charges was calculated to effect the acquisition of the licence and the other transmission assets the subject of the sale and purchase agreement. By becoming the holder of the licence on acquisition of the transmission assets, the taxpayer simply became liable to pay the charges.