Miranda Stewart, ‘Tax and Power in the High Court: The Capital Cost of an Electricity Monopoly: Ausnet Transmission Group Pty Ltd v Federal Commissioner of Taxation‘ (26 November 2015).

The High Court has dismissed an appeal from a decision of the Full Federal Court on the deductability of imposts. The appellant company held an electricity transmission licence in Victoria. Pursuant to an Order of the Governor in Council made under s 163AA of the Electricity Industry Act 1993 (Vic), as a ‘holder of a licence’ and as part of its acquisition of another company under a privatisation scheme, it was required to pay a series of imposts to the State. The appellant claimed that the imposts were deductible under s 8-1 of the Income Tax Assessment Act 1997 (Cth) as costs of deriving assessable income. The primary judge rejected this argument on the basis that the imposts were paid out of the company’s profits after its taxable income had been calculated (failing the first requirement of s 8-1), and that in any case they were ‘a loss outgoing of capital or of a capital nature’ and thus fell outside the deduction entitlement in s 8-1(2)(a). The FCAFC unanimously disagreed with the first conclusion, holding that the imposts were a cost of the company deriving its income. However, a majority of the FCAFC (Davies J dissenting) agreed that the imposts were outgoings. The appeal was only made against this point.

A majority of the Court (French CJ, Kiefel and Bell JJ, and Gageler J) dismissed the appeal. The joint judgment (French CJ, Kiefel and Bell JJ) held that the payment of the charges were of a capital nature because they were paid by the appellant as part of the price of acquiring the assets and the transmission licence, which was an essential element of the transmission business because it was required by the statutory scheme. The joint judgment rejected each of Ausnet’s submissions against the charges being of a capital nature (see at [66]–[71]): principally, from a practical and business point of view, Ausnet’s assumption of the liability to pay the charges was calculated to allow it to obtain the licence and other assets, and while the licence was an intangible asset it was central to the business structure. Gageler J likewise held that the payments were of a capital nature because from a practical and business perspective the expenditure was required to obtain the licence and a cost of the acquisition, rather than just a cost to use the licence during those years (at [80]). Gageler J emphasised that this was, at base, dependent on the structure and context of the statutory liability (rather than any contractual liability) (see [81]–[82]), which, in this case, was a prospective liability to pay an impost that was required if the acquisition was to proceed (see [84]–[88]). Consequently, it was a transaction of a purely business nature and the imposts were part of the price that Ausnet paid to acquire the company: [90]. Nettle J, in dissent, held that the charges were incurred in gaining or producing assessable income, rather than as capital expenditures, and should be deductible. Analogising to the payment of rent under a lease (see [147]ff), Nettle J held that as each charge was paid to satisfy an annual obligation inhering in the licence acquired, those charges should be seen as the maintenance of the means of production of assessable income (at [160]).