Ausnet Transmission Group Pty Ltd v FCT: Allowable Deductions or Capital Outgoings

In Ausnet Transmission Group Pty Ltd v FCT [2015] HCA 25 (5 August 2015) the High Court of Australia, in a majority decision, has dismissed an appeal from a decision of a Full Court of the Federal Court of Australia (see SPI PowerNet Pty Ltd v Commissioner of Taxation [2014] FCAFC 36 (7 April 2014), which held that certain charges paid by the appellant (Ausnet) were outgoings of a capital nature and therefore, not tax deductible.

Background

August 1993: The Victorian Government announced its intention to disaggregate its State owned electricity commission as a result creating three new operating businesses which would undertake the generation, transmission and distribution of electricity.

October 1993: National Electricity, later known as PowerNet Victoria (PNV), established as a State body.

April 1997: Government announced its intention to privatise the business of PNV.

October 1997: Asset sale agreement executed between PNV and the appellant  and the Governor-in-Council of Victoria makes an order under section 163AA of the Electricity Industry Act 1993 (Vic) (EIA) declaring that the holder of the Transmission Licence would pay imposts to the Treasurer totaling $177,500,000 for the period to 31 December 2000. Ausnet paid these imposts and claimed them as deductions under section 8-1(1) of the Income Tax Assessment Act 1997 (Cth) (ITAA).

The respondent (Commissioner of Taxation) disallowed the deductions and Ausnet appealed to the Federal Court of Australia.

Trial – Primary Judge

In SPI PowerNet Pty Ltd v Commissioner of Taxation [2013] FCA 924 (12 September 2013) Gordon J, rejected Ausnet’s claim on the basis that the imposts under section 163AA of the EIA were not a cost of Ausnet deriving its income, but were payments out of Ausnet’s profits after the calculation of Ausnet’s taxable income. Justice Gordon also concluded that if it were necessary to decide, the payments were outgoings of capital, or of a capital nature.

Appeal – Full Court Federal Court

In SPI PowerNet Pty Ltd v Commissioner of Taxation [2014] FCAFC 36 (7 April 2014), the appellant, Ausnet appealed to the Full Court of the Federal Court. The appeal was heard by Edmonds, McKerracher and Davies JJ. The appeal was unsuccessful with the majority of the Court (Davies J dissented), holding that the imposts under section 163AA were outgoings of capital, or of a capital nature, because they were part of the cost incurred by Ausnet in acquiring the assets of the business, specifically, the Transmission Licence, which was unarguably a capital asset.

Critical in reaching the decision, was the view that the transfer of the Transmission Licence to Ausnet which carried with it the section 163AA liability of PNV and the section 163AA impost was not made on Ausnet post the transfer of the Transmission Licence. It was taken on by Ausnet on the transfer of the Transmission Licence, not by the Order under s 163AA, and as such, formed as much part of the cost of acquisition of the assets as the total purchase price.

The majority of the Full Federal Court disagreed with the primary judge regarding the application of the first limb of section 8-1 of the ITAA, but found that the imposts were incurred by Ausnet in relation to carrying on its business for the purpose of gaining or producing assessable income and that there was sufficient nexus between the expenditure and Ausnet’s income producing operations and activities.

Davies J in his dissenting judgment noted that the obligation to pay the imposts followed as a necessary consequence of holding the licence, so that the thing that produced the assessable income was the thing that exposed Ausnet to the liability discharged by the expenditure. The imposts were therefore, to be seen as an expense in the business operations of Ausnet and on revenue account rather than as a cost in securing the right to conduct the transmission business.

Appeal – Special Leave, the High Court

The appellant Ausnet, sought and was granted special leave to appeal to the High Court of Australia.

The High Court by a majority (Nettle J dissenting), held that, from a practical and business point of view, the appellant assumed the liability to make the payments in order to acquire the transmission licence and the other assets of PNV. The payments of the charges were therefore, outgoings of a capital nature and were therefore not tax deductible.

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Ausnet Transmission Group Pty Ltd v The Commissioner of Taxation of the Commonwealth of Australia [2015] HCA 25 (5 August 2015)

SPI PowerNet Pty Ltd v Commissioner of Taxation [2014] FCAFC 36 (7 April 2014

SPI PowerNet Pty Ltd v Commissioner of Taxation [2013] FCA 924