City Link Melbourne Vs Commissioner of Taxation of the Commonwealth of Australia
City Link Melbourne Vs Commissioner of Taxation of the Commonwealth of Australia
Critical Case Analysis
Case: “City Link Melbourne vs Commissioner of Taxation of the Commonwealth of Australia”,
July 2006
Prйcis
Case Background
The City Link Melbourne Company formerly known as the ‘Transurburban City Link Limited’, was a roads and infrastructure development corporation. It was contracted by the Victorian government, through a competitive bid, to develop a system of roads to connect Melbourne’s freeway system in 1995. Specific contractual documents of particular relevance to this ‘project’ were the ‘Concession Deeds’, which outlined their rights to design, construct, commission and operate a tollway (para 100), along with other contractual stipulations. The deeds outlined that a ‘Concessionary’ payment was agreed upon, payable in arrears of at least $95.6million from 1996-2034, $45.2m for the subsequent nine years, and $1million for the remainder of the contractual period. At the end of this period, full ownership of the toll would be given to the government. This concessionary payment was consideration for government approval to develop infrastructure, utilise the land necessary to develop the tollway, and to operate the profit-making entity; raising issues concerning the capital or revenue nature of these payments.
In consideration for this liability, the company issued a series of ‘concession notes’, long-term bills which entitled payment to the government under specific stipulations. These included City Link meeting specific financial objectives such as achieving equity returns of over 10%, and no payment necessary until the company achieves revenue objectives (para 109). These financial stipulations in effect entitled the company not to pay the government any of the accrued liabilities till 2034, also leading to the valuation of the concession notes at nil. City-Link thus incorporated these accrued concessionary costs as being incurred for the periods between 1996-8, thus reducing the assessable income under S51(1) of ITAA 1936 and S8-1 ITAA 1997.
The company derived nil tax balances for those relevant years. City link was subsequently denied by the commissioner on the grounds that these costs were considered capital costs, and were deemed not to have been incurred during the relevant time periods.
A number of key ratios and obiter were established in the preliminary hearings with the Primary Judge Merkel J and at the Full Court level.
Preceding Courts Outcome Overview
At the preliminary hearing with Merkel J, it was determined that the concession fees were a liability that arose unconditionally, and that the ‘concession notes’ were appropriate consideration for the accrued costs. However, it was also established that the concessionary payment made was similar to that of a share in profits and/or dividend payment made to the government, in return for its operation of its profit making initiative. This payment was thus seen as a capital payment, for the right to operate the business structure, and not part of the profit making process of the company. This was appealed by City Link.
The Full Court then contrasted the preliminary hearings reasoning concerning the concession fees as being a cost of acquiring a profit-making enterprise, but rather, as a cost for the right to conduct the project. Under this reasoning, it was determined that the concessionary payment was on revenue account, and that the payments were (as per the preliminary hearing), relating to the relevant incurred periods. This was appealed by the Commissioner.
High Court Decision
The High Court decision was in favour 5:1 to City-Link, with Justice Crennan & Kirby discussing a number of broad issues in deciding the nature of the Concessionary payments per para 92 of the High Court Ruling ;
Whether the costs were ‘incurred’ ordinary expenses per s8-1(a), and the concessionary payments were incurred and referred to 1996-8
Whether the face value or present value of the liability should be deducted on an apportioned basis (para 95)
And whether or not the actual payment was capital in nature.
It was determined that the concessionary payments were incurred and referrable to the same period, and that the value of the concessionary payment need not be apportioned, but treated at it’s nominal value per period. It was also determined that