Commissioner of Taxation of the Commonwealth v Citylink Melbourne Ltd [2006] HCATrans 3 (1 February 2006)

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Commissioner of Taxation of the Commonwealth v Citylink Melbourne Ltd [2006] HCATrans 3 (1 February 2006)

Last Updated: 1 February 2006

[2006] HCATrans 003

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Melbourne No M49 of 2005

B e t w e e n -

THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Appellant

and

CITYLINK MELBOURNE LIMITED (FORMERLY KNOWN AS TRANSURBAN CITY LINK LIMITED)

Respondent

GLEESON CJ
GUMMOW J
KIRBY J
CALLINAN J
HEYDON J
CRENNAN J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON WEDNESDAY, 1 FEBRUARY 2006, AT 10.19 AM

(Continued from 31/1/06)

Copyright in the High Court of Australia

GLEESON CJ: Yes, Mr Archibald.

MR ARCHIBALD: If the Court please, may we support various of the propositions we advanced yesterday with some reference to authority. In relation to the nominal value system and historical cost, may we refer the Court to the decision in Burrill v Commissioner of Taxation 67 FCR 519. We refer especially to the passages in the reasons of the court at page 523G, to page 525A. At page 523G the court, in the new paragraph, said:

It is a fundamental principle of Australian income tax law that rights to receive money and obligations to pay money are taken into account in calculating income and outgoings, gains and losses, at their nominal value.

The court then referred to the decision in this Court in Myer Emporium and the passage in which the Court said:

The accounting basis which has been employed in calculating profits and losses for the purposes of the Act –

that is the Tax Act –

is historical cost . . . not economic equivalence -

and so on. Then at page 524G in the final paragraph on the page the Court observed that having addressed “the profit, gain or income side of the coin”, it turned to the other side and said:

The other side is governed by the same principle. An accruals taxpayer brings to account a loss or outgoing incurred . . . even thought it may not be defrayed, discharged or borne for some time. The amount brought to account is the nominal value of the loss or outgoing at the time it is incurred, and not its actual value at that time.

Could we next refer the Court to another decision in the Full Federal Court - Commissioner of Taxation v Mercantile Mutual Insurance Workers Compensation Ltd [1999] FCA 351; 87 FCR 536? We refer especially to paragraphs 45 to 52 in the reasons of Justice Hill. Within that passage at paragraph 46 his Honour said in the second sentence of the paragraph:

However, the fact remains that present value discounting of outgoings payable in the future has never been suggested in Australian tax jurisprudence.

An observation in paragraph 49 is to one of the consequences if one were “to discount liabilities to present value” his Honour observed, and we made this submission yesterday –

If it were appropriate to discount liabilities to present value, there would then arise the question whether the same process should be applied to revenue.

That proposition is examined.

KIRBY J: Why would that be so? Why would, on the revenue question, it not simply be a question of fact as to whether the revenue has come in?

MR ARCHIBALD: Well, if the logic of discounting the liability is that although incurred, the actual economic burden is less than the face value because it will be discharged at a future date, by parity of reasoning similar considerations should - - -

KIRBY J: I understand the argument and I can understand the argument on the one side, but why, in the case of revenue, would that not simply be a question of whether the income has come in?

MR ARCHIBALD: Well, no, because the criterion is derivation not receipt.

GLEESON CJ: People derive income that they sometimes never receive, hence write-offs for bad debts.

MR ARCHIBALD: Yes, yes, and barristers, although they tend to conduct their tax affairs on a cash basis, may find considerable periods of time pass before receipts - - -

GLEESON CJ: There would be many taxpayers who would be delighted to know that you do not derive income until it comes in.

MR ARCHIBALD: Yes, so if one is to move at all - - -

KIRBY J: A barrister conducting his affairs on a cash basis either gets the cash or does not get the cash.

MR ARCHIBALD: Yes, he or she will not suffer that problem.

GLEESON CJ: It would be only a solicitor.

MR ARCHIBALD: Yes, I observe the phenomenon of work on day one, payment on day 796.

GLEESON CJ: That is what Carden’s Case is about.

MR ARCHIBALD: Yes, yes, exactly so. Next might we refer the Court to the decision in Nilsen in the Full Federal Court, perhaps to take up or make available to the Court generally the observation your Honour Justice Gummow made yesterday. We have copies of the report of the decision in 41 FLR.

We would refer the Court to the passage in the reasons of Justice Deane between page 44 at point 8 on the page and page 47 at point 8 on the page. We would draw special attention to the passage at page 45 commencing in the last paragraph at point 7 where his Honour observed:

While commercial and accountancy practice may be relevant in ascertaining the nature and incidence of a claimed deduction as a step towards determining whether it answers the test laid down by s 51(1) of the Act, it cannot be substituted for that test. The ascertainment of whether a claimed deduction satisfies the test laid down by s 51(1) is ultimately a matter of jurisprudence.

His Honour referred to James Flood and then continued:

There is probably no general area in which discrepancy between accountancy practice and the test postulated by s 51(1) is more likely than the area in which accountancy practice requires the raising of a provision before the ascertainment of the profits of a period.

So where accounting practice would require a provision because of an apprehended liability, it is not yet a liability, whereas the criterion under the Act is incurring of a present liability as a matter of jurisprudential analysis. His Honour’s analysis continued through the passages that we have referred the Court to. We indicated yesterday that we would provide to the Court the exposure draft material for the TOFA legislation. We provide that material.

In the bundles being provided to the members of the Court there is first the exposure draft of the legislation and separately stapled, I think, is the exposure draft explanatory material. Directing the Court’s attention to the explanatory material one observes that the proposed legislation is - - -

KIRBY J: Where are you going to, what page, what paragraph?

MR ARCHIBALD: Paragraph 3.22 at page 28 first, your Honour. The legislation is about taxation of financial arrangements. 3.22 summarises the new law and tells one what financial arrangements for the purposes of the legislation are. They are:

rights and obligations, or combinations thereof, to receive or provide something of economic value in the future.

But there are some exceptions. In relation to the inadequacy of the existing law, at page 9, paragraphs 2.4 and 2.5 are pertinent. In paragraph 2.4 the exposure draft says that:

Where the tax law has been amended to address new product developments –

this is in the financial arena –

the amendments have been largely in response to specific pressures and have tended to be of a limited, ad hoc and piecemeal nature. What has been lacking is an overarching framework –

and then 2.5 speaks of the operation of the accrual rules, which is to say, the particular legislative measures to alter the general incidence of the Act and observes that those special rules:

have been narrowly focused. Outside their purview, tax treatments did not adequately take into account the time value of money.

So this is the legislative initiative to seek to deal within the ambit of the proposed legislation with those phenomena. The objectives are set out in 2.15 at pages 11 to 12. The main objectives are said to include and then the first dot point:

facilitating the appropriate allocation over time of the gains and losses from financial arrangements for tax purposes -

There are several other points made. The second last point in the paragraph on page 12:

incorporating the concepts used in financial accounting standards, where possible, in the tax treatment of financial arrangements - - -

KIRBY J: How do you use that given that the purpose of this apparently is to repair defects in the current law and that the proposal has not yet been enacted?

MR ARCHIBALD: Well, we say two things. First it emphasises the nature of the principles embodied in the present legislation which are applicable to the determination of this case. None of the separate rules and provisions which have been legislatively addressed touch upon this case. It is confirmation of that, but it is also confirming incidentally the observations we have otherwise put by way of submission that the operation of the Act within the sphere within which this case is to be determined does not take into account, or allow the taking into account of concepts using financial accounting standards, does not take into account the time value of money, et cetera.

GLEESON CJ: It also demonstrates, does it not, the complexity of the considerations you have to take account if you are to depart from that kind of system?

MR ARCHIBALD: Yes, and that is the next point, your Honour. On page 13 of the exposure draft there is a table setting out the key features of the new law comparing them to the current law and the key features of the new law will provide for five different alternative optional tax-timing methods, set out in the left-hand column of the table, one only of which is fair value which might be a concept close to the present value notion that was the subject of submissions yesterday. This draws attention to the circumstance that at least the legislature is contemplating a variety of solutions tailored to and catering for different considerations in different circumstances. It could not be said, in any event, that a present value notion, a fair value notion, would be uniquely available as a concept to resolve any disconformity which might otherwise exist between economic substance on the one hand and the criteria of the Act on the other.

KIRBY J: I have not read all this, but at least one way of interpreting the proposition that there are five tax-timing methods is that a current tax-timing method is included as but one option and the first.

MR ARCHIBALD: Yes.

KIRBY J: So that it is not necessarily inconsistent with the drafter of this document having included in the various methods the one which it might be thought is applicable at the moment.

MR ARCHIBALD: Well, that would be directly contradictory of paragraph 2.5 of the same document which observes that outside the existing specific provisions tax treatments did not adequately take into account the time value of money. That is why it has been introduced. It needs to be done by way of legislative measure to deal with a phenomenon which is otherwise generated by the Act.

KIRBY J: Well, it is only facilitating time, facilitating the appropriate allocation over time of gain, making it more facile, ie, easier than it is at the moment.

MR ARCHIBALD: But the two authorities we have just referred to establish - - -

KIRBY J: They are Federal Court authorities and as far as I am concerned they will only affect me if they give proper effect (a) to the purpose of the Act as expressed by the elected representatives in Parliament and (b) as interpreted by this Court.

MR ARCHIBALD: Yes, your Honour. What was done of course in those authorities was to pick up references in this Court. We could separately go the Coles Myer Case if need be but this Court has said the same thing and the Federal Court adopted that, citing Myer Emporium in the passage I referred to a few minutes ago.

KIRBY J: I did not overlook that fact.

MR ARCHIBALD: Thank you, your Honour. That is why we provide TOFA to illustrate these matters, and we did mention it yesterday.

KIRBY J: It also has in fairness to be said that the Federal Court deals with these matters as a matter of routine and they are dealing with them all the time, so that they have developed a degree of expertise in this very complicated statute and this Court takes that into account in special leave applications as one of the reasons why we do not jump in unnecessarily and always enthusiastically.

MR ARCHIBALD: Yes, indeed. Your Honour Justice Kirby did inquire about the provisions of the Corporations Act requiring the accounts of corporations to be prepared in particular ways. Could we just provide that data for your Honour in case it is of continuing relevance. The requirement of the Corporations Act that accounts of a corporation comply with accounting standards is found in section 296 of the Act and the requirement that accounts give a true and fair view of the position of the company is found in section 297 of the Act.

In relation to the question of incurring of liabilities, might we refer to the - - -

KIRBY J: Could you just help me on this. Given that the Corporations Act requires that, what continuing weight is to be given to this rather jargonistic phrase “jurisprudential analysis”, given that the Parliament has provided that corporations have to provide true and fair financial records? Can it be said that that requires perhaps some reconsideration of the so-called jurisprudential analysis?

MR ARCHIBALD: No, your Honour, because the jurisprudential analysis is to be applied in identifying for the purposes of the Tax Act whether a liability is to be incurred.

GLEESON CJ: Was there ever a time when the current companies legislation did not require accounts to give a true and fair view of the financial results of a business?

MR ARCHIBALD: No. The language may have varied slightly in successive iterations but I think I would be correct in saying from the very outset of the Acts in the United Kingdom in the 19^th century, provisions of that kind, generally speaking, were included.

GLEESON CJ: I think “true and fair view” is an expression that goes back at least to the Companies Act 1936 (NSW).

MR ARCHIBALD: Yes, and I think even earlier in other forms. So it has always been there but - - -

KIRBY J: Given that that is part of the written law made by Parliament, it is part of the background against which so-called jurisprudential analysis has to be developed.

MR ARCHIBALD: Yes, but the burden of the - - -

KIRBY J: It is an absurd situation if the Parliament says with clear words that you have to in effect follow best practice accounting standards and then the tax law says do not worry too much about that; you have to do it according to so-called jurisprudential analysis.

MR ARCHIBALD: Yes, but the criteria of the accounting standards are different from, at least in the area we are concerned with, the criteria for identifying when a liability is incurred.

KIRBY J: Quite.

MR ARCHIBALD: That is the burden of the authorities we have just referred to.

KIRBY J: It is a worry that there is this disparity. As I remember a case which we saw about a year ago, it is not the way it is done in the United States of America or other countries. Unless there is something in our Tax Act that warrants our making a different approach, it may be that this so-called jurisprudential analysis needs to be deconstructed.

MR ARCHIBALD: Considerations of the kind to which your Honour adverts may well lie behind the preparedness of the legislation to countenance amendments such as the TOFA legislation.

GLEESON CJ: What did the legislature do, if anything, about the result in Nilsen?

MR ARCHIBALD: Nothing, I think, is the answer.

GLEESON CJ: Nilsen was a win for the revenue over accounting practice.

MR ARCHIBALD: Yes. I will have that checked but I think “Nothing” is the answer, your Honour.

KIRBY J: The thought that the legislature is standing there hovering, waiting to fix up every problem that is presented by so-called jurisprudential analysis is a delight that I do not think we should always indulge in.

CALLINAN J: There are lots of disparities. The Tax Act depreciation schedules may or may not reflect what are the true depreciation rates which would be quite different if shown according to the real position in the accounts.

MR ARCHIBALD: And the accounting standards themselves recognise some of the features produced by the taxation legislation and cater for the way in which tax effects are to be brought into the company’s accounts.

CALLINAN J: Exactly.

GUMMOW J: The same is true of taxation of trusts.

MR ARCHIBALD: Yes.

CALLINAN J: There are lots of examples everywhere.

GUMMOW J: Trust income and income tax trust income are not coincident.

MR ARCHIBALD: Yes. Anyway, there is a tempering of the jurisprudential approach to the identification of the incurring of liabilities which is the subject of a passage of Justice Deane’s reasons in Coles Myer Finance [1993] HCA 29; 176 CLR 640 to which I now wish to come. The passage in his Honour’s reasons commences at page 669 at point 6 on the page and continues through until page 671, point 9 on the page. We wished to draw the Court’s particular attention to what his Honour said at page 670 at point 6. In the middle of the paragraph there is a sentence commencing, “To the contrary, the weight of authority”. At that point his Honour said:

the weight of authority supports the conclusion that, depending upon the circumstances, a liability to pay money can constitute, or give rise to, a “loss or outgoing” which is “incurred” within the meaning of that sub-section notwithstanding that the money is not payable until a future time and that the obligation to pay it is theoretically defeasible or contingent in that it is subject to a condition which remains unfulfilled.

KIRBY J: The key to that passage though is depending on the circumstances and here we have one interpretation of the circumstances urged on us by the appellant and another urged on us by you.

MR ARCHIBALD: Yes, but, for the reasons that we have urged yesterday, we submit that one can discern from the circumstances that there is a present liability not attended in any event by any contingency.

KIRBY J: That may be the ultimate question.

MR ARCHIBALD: Yes, but his Honour here is observing that even if one can discern features in the circumstances which render the obligation “theoretically defeasible or contingent” that does not deny the circumstance that the liability may be incurred.

GUMMOW J: What this passage illustrates really is an encapsulation by Justice Deane of this position. This phrase “jurisprudential analysis” has some elasticity in it.

MR ARCHIBALD: Yes, it is tempered with at least a modicum of practicality.

GUMMOW J: Yes, hence the phrase “as a practical matter”.

KIRBY J: Not too much though.

MR ARCHIBALD: Well, his Honour would say, and this is the passage I am coming to - - -

KIRBY J: Let a little light of practicality – let a little light of the reality that accountants and economists live in, but not too much because we are lawyers, we know better.

GUMMOW J: There is a great theory about whether economists are realistic people.

MR ARCHIBALD: The ultimate criteria are criteria which are of a practical character. Has the liability come home? Has it been run into, homely phrases? His Honour says that in approaching that the ultimate criterion is:

whether the taxpayer is, as a practical matter, “definitively committed” or “completely subjected” –

and that is the passage at the foot of the page. So that although there is reference to the jurisprudential approach and identification, one considers that as a practical matter so that the existence as a matter of jurisprudential analysis of some contingency does not preclude the conclusion that the liability is incurred.

KIRBY J: If Justice Brennan was still here, even at the risk of offending Justice Deane, he would say weasel words.

GLEESON CJ: I think you pointed out yesterday that the only motivation that the Commissioner has to complain about the outcome for which you contend in this case arises from the circumstance that the person on the other side of the transaction is not a taxpayer.

MR ARCHIBALD: Yes.

GLEESON CJ: If the entity or body on the other side of the transaction were a taxpayer, the result for which we would propound in the Full Court of the Federal Court would be a result which the Commissioner would regard with perfect equanimity.

MR ARCHIBALD: Yes, indeed, that will frequently occur where the Crown in right of a State or some other right engages in the transaction with a private sector party who is subject to the operations of the income tax legislation.

KIRBY J: That result in economic terms is that the Commonwealth, an unbidden and unpresent party, makes a substantial contribution to this enterprise. That is the economic result of your submission.

MR ARCHIBALD: It is the economic result of the circumstance that the Crown in right of State is not subject to the Act.

KIRBY J: We must get out of this business of calling it the Crown in right of the State. It is a constitutional corporation. It is the State.

MR ARCHIBALD: Yes, which is not subject to the Act and, therefore, does not bring to account for income tax purposes that which, were it subject to the Act, would be income derived by it, but that is the circumstance. That is the reason that that phenomenon occurs and it occurs in every case in which transactions of this kind are undertaken.

Now, having made those observations about the approach identified by Justice Deane, what the Commissioner seeks to do here really is to contend that the liability is not incurred because, by way of its assertion, it says there is a chance that the liability will not be discharged, a chance of defeasance effectively. But, of course, the discrimen of incurring of liability is not the likelihood of its being discharged. That is antithetical to the principles which have been established. But in any event, here we say that it is commercially certain, as a practical matter, that the concession notes will be paid.

The trial judge, in our submission, was right to find on the evidence that there was only a theoretical chance that the requirements of clause 1.9 would not be satisfied, that is to say, only a theoretical chance that the concession notes would not be paid.

CALLINAN J: Balance of probabilities is enough for your purposes.

MR ARCHIBALD: Indeed.

CALLINAN J: But do you satisfy that?

MR ARCHIBALD: We have, we say, on the evidence, and the Commissioner’s contention before the trial judge was to that effect; that payment - that the liabilities would be discharged in the ordinary course. One sees it at page 47.

KIRBY J: Mr Shaw really said that yesterday, did he not?

MR ARCHIBALD: Well, he came very close to it but the formal contention before Justice Merkel in paragraph 37 of the Commissioner’s contentions at page 47 was:

In the ordinary or expected course of events, the conditions for presentation of Concession Notes will be met during the Concession Period. The State will thereupon present the notes for payment and the Company will pay the amounts due, out of the “Distributions Account”.

KIRBY J: But he puts a footnote to that and says, but that is in the ordinary circumstances. There are other circumstances and possibilities that may accrue that will deprive that consequence of reality and you have to make allowances.

MR ARCHIBALD: Of course, one can conceive of future circumstances that will inhibit the discharge of any debt, any debt payable in the future and were the Commissioner’s contentions to be correct on every occasion where there is a present debt payable in the future, one would need to canvas the economic and business circumstances of the party having the liability to seek to evaluate whether there was a likelihood or a probability of discharge in fact occurring. That, in our submission, is not the process that is engaged in in order to identify whether a liability has been incurred. One discounts and jettisons, as Justice Deane said, within the practical sphere, these theoretical possibilities.

CRENNAN J: It would mean, would it not, almost every debt would need to be secured by a letter of credit?

MR ARCHIBALD: It would have all sorts of consequences. It would have the curious consequence that one might get different answers in different years. In year one, one assesses the prospect of X paying the liability, one says very high, pass the test. Year two - X is suffering some financial adversity, lesser likelihood of ability to pay, no deduction. Year after, retrieves the position. It would be intolerable.

KIRBY J: Well, you say that and I understand the argument that you put but on the other hand if you were looking for true value, if that is legally permissible contrary to jurisprudential analysis, then there is nothing shocking about the fact that true value will vary from one year to another. For example, in New South Wales there is an apparent boycott of motorists using express toll roads and those sorts of things can come about and when they come about true value is altered by them.

MR ARCHIBALD: But if true value is fair value and fair value is discounted net present value that takes no account whatsoever of the likelihood of payment. Net present value assessments are not an assessment of the likelihood of the liability being paid. They identify the sum of money which needs to be set aside so as to earn interest over the period in order to produce at the end of the period the amount of money that would be required on the nominal value to discharge the liability and that is taking no account at all of economic vicissitudes attending the party with the obligation to pay. So even net present value and fair value does not direct attention to the matter that the Commissioner contends for here.

I do not know that we need to get into the modelling evidence, really, but the modelling evidence showed - the table to which Mr Shaw drew the Court’s attention at page 783 yesterday - that $3 billion of concession notes would be paid from 2013 during the concession period under the base case scenario, $3 billion. Even on the lender’s model - notoriously more stringent, one might think than the project party’s evaluation – as much, indeed, I think a few million more of concession notes was paid during that period. On every scenario that was modelled, project debt was paid out on a timely basis in full, even allowing for lower traffic flows, lower revenues. In every case model, both on the lender’s model and on the base case model, project debt was paid out in full on a timely basis.

Therefore, when project debt was paid, clause 1.9 would fall away entirely and would no longer have any room for operation because clause 1.9, as we pointed out yesterday, applies only so long as project debt remains outstanding. I am sorry, I think I transposed some numbers in the reference to those modelling tables. The evidence is in volume 2 at pages 873 and 874.

We are of course concerned here not with the entirety of the liabilities in respect of concession notes but the concession notes for the first three years. In the first year the concession note was for a liability of some $31 million, year two some $96 million, year three some $96 million. So we are concerned here with the question, taking the Commissioner’s argument, is there a commercial certainty that the first $220 million of the $3 billion of concession notes would be paid?

The concession notes under clause 18.5(d) of the master security deed are to be numbered sequentially. Clause 18.5(d) is to be found at page 786, line 48. The provisions of the concession notes provide that they be paid out according to their numerical sequence. That is found in Part 4(b), for example, page 1120, line 45. So concession note 1 is the first to be paid. When asked the question is there commercial certainty that concession note 1 would be paid, we submit on the material there can be absolutely no doubt whatsoever, and the same with the remaining notes.

So that on the particular circumstances of the case before the Court, we do not suggest there would be any doubt about any of the notes in the future, but certainly for these notes there can be no doubt. The notes are numbered 1 to 23. They are at pages 1119 to 1187 in volume 3 of the appeal papers. There is a plurality of them because the State indicated denominations for notes in the subsequent years breaking them up into smaller parcels but the aggregate amounts are as I have indicated.

May we then make some submissions on the referability point. We submit that each liability under each concession fee is referable to the relevant year of income. Each note, each liability, is one of a series of recurrent liabilities. Clause 3.1 stipulates that each fee is an annual liability payable semi-annually, so that each fee liability is itself discrete and is allocated to a particular period, a year or a half-year. Importantly, for periods less than six months, the amount of the fee is adjusted pro rata. One sees that in each of the provisions of clause 3.1(a) in the final words of the subparagraphs.

GUMMOW J: What page?

MR ARCHIBALD: Page 235, volume 1, in the concession deed:

each such payment being adjusted on a pro rata basis for any period of less than 6 months.

So that the amount of the liability is calibrated precisely to the period to which it relates. It must be taken to be referable to that period. There is no other explanation for the adjustment than that the liability is yoked inexorably to the advantages of the period in question.

CALLINAN J: How is it calculated, Mr Archibald, the amount?

MR ARCHIBALD: The amount taking 3.1(a)(i), for a full year it is $95.6 million; for a half-year therefore it is half of that; for the pro-rata adjustment, if one had a period of three months, then it would be a quarter of the $95.6 million.

CALLINAN J: How is the $95.6 million calculated?

MR ARCHIBALD: It is simply identified by the parties as the annual fee.

CALLINAN J: And it does not turn upon road usage during the period?

MR ARCHIBALD: It does reflect usage, and I want to come to one of the reasons why one can discern that, but the fee is levied in respect of the advantages afforded by the concession and each fee reflects the advantages in each particular period of the concession. Another indicator of referability to the year in question is that the concession fee liability exists only if the concession period continues. I drew the Court’s attention yesterday to the provision in 3.1(a) that the liability exists provided the concession period then continues, so that if there are no advantages available because the concession period does not continue, there is no liability. The liability is tied to the advantage or the availability of the advantage in any event. The liability is commensurate with the advantage in our contention.

One clearer indication of the nexus between the fee and the use of the concession in a particular period is afforded by clause 3.1(d) at page 236. We have been speaking of concession fees – in truth and in substance they are really a base fee, for clause 3.1(d) allows for an additional concession fee in certain circumstances and the criteria by reference to which the additional fee is payable is referable to use of the concession. We submit that the base concession fee has the same fundamental character as the additional concession fee. The additional concession fee is manifestly referable to use of the advantages of the concession in each successive period.

CALLINAN J: Or revenue derived in any relevant period.

MR ARCHIBALD: Yes. The notion bespeaks that circumstance but the definitions confirm it. For these purposes “revenue” is defined in subparagraph (i) on page 237:

tolls, charges, fees and returns imposed or received in connection with the use or operation of vehicles on the Link . . .

“relevant periods” are successive periods each of which is a financial year –

So very clearly the additional concession fee is referable to use of the Link in the period because that is how the revenue, as defined, is derived. So as for the additional concession fee so for the base concession fee.

CALLINAN J: It is like an adjustable pre-estimate of revenue or proportion of revenue.

MR ARCHIBALD: Yes, but both the base and the additional fee referable to use within the period, hence, in our submission, unerringly leading to the conclusion of referability to the relevant year of income. The Commissioner’s submission is that fees are not referable to the year because the fees fall to be met out of future assessable income.

Well, discharge or circumstances of discharge of a liability are not the measure of the incidents of the liability, nor are they the measure of the referability of the liability. One does not look to the prospect of payment, the time of payment, still less, in our submission, to the source of funds for payment. But, in any event, it is a misconception that the concession fees are to be paid out of assessable income. They are to be paid out of the distributions account, the cash in the distributions account. There is a fundamental difference between cash and cash flow, on the one hand, and assessable income on the other. As we have been canvassing briefly this morning, the assessable income may be something that is not received, has not produced the cash.

So it is fundamentally wrong to contend, in our submission, that the concession fees are to be met out of future assessable income, but even if they were, it does not detract at all from the referability of the fee to the advantage in the particular year. The criterion of referability is what advantage is secured by the liability in question. The test is not from what source of funds will the liability ultimately be discharged.

We have made submissions about referability. There are, of course, some questions as to whether the referability criterion would apply here. It may be that the concept is confined to losses and to parties engaging in financial transactions. The Full Federal Court noted those possibilities in its reasons at paragraph 38, page 1417. We do not seek to get into that argument at all today. We say assuming that the criterion of referability does apply, it is clearly here well satisfied.

May we then move to the question as to whether the liabilities are on capital or revenue account. The features of the concession fees which yield the conclusion that the fees are referable to the period of income also show, in our submission, that those fees are on revenue account, so all of the features that we have just referred to as showing the nexus between the liability and the advantage afforded in a particular period within the concession period go to establish that the fees are on revenue account.

The advantage conferred by each liability is consumed during the period to which the fee relates, the corresponding year of income. It does not survive that period. It is commensurate with and does not exceed the advantage. Likewise, the additional concession fees assist in pointing to the revenue character of the base concession fees liability, the recurrent periodicity of those fees tied to the use of the advantages afforded by the concession.

The concession fees are not, in our submission, a single capitalised sum payable by deferred instalments. They are not part of the purchase price for the acquisition of any capital asset. No acquisition of any subject matter which endures beyond the concession period occurs. The periodical outlay does not secure an advantage beyond the particular period commensurate with the liability. At the end of the concession period the company is to effect a surrender to the State of the Link. One sees that in clause 3.4 of the concession deed at page 239 in volume 1. Clause 3.4(a) provides:

At the end of the Concession Period the Company and the Trustee shall:

(i) surrender the Link and deliver to the State:

(A) the Plant; and

(B) such other plant and equipment required and used for the Project . . .

including all rights, title and interest in the Link, such Plant –

et cetera.

GUMMOW J: I could not quite understand the connection between 3.4 and the relevant real property law. It seems to be section 20A of the Melbourne City Link Act transmutes this land into land for public purposes under the Crown lands legislation. For the purposes of the project that is treated as a public purpose.

MR ARCHIBALD: Yes, it is a little complex. There are leases of the land – leases from the State to the company, on the one hand, and the trustee, on the other hand, for sections of the Link but - - -

GUMMOW J: And they come to an end presumably as you - - -

MR ARCHIBALD: They come to an end at the end of the term likewise, and then one superimposes the highway provisions onto those portions of the leased land that are the subject of the roadway. One might say that in the ordinary course the improvements effected by the company and the trustee to the land would be fixtures and would naturally pass. There may have been room for a view that they were tenant’s fixtures which the tenant may have a right to remove at the end of the period. One of the functions of clause 3.4 may be to eliminate any of those chances.

GUMMOW J: Yes, that is what I was wondering.

MR ARCHIBALD: So that may be the work that it is ultimately doing, but of course 3.4 goes beyond fixtures because one sees that it picks up “plant and equipment required and used for the Project” and there seems to be an indication that some of that plant at least may be movable, but then it also picks up manuals. Clause 3.4(a)(ii):

(A) the manuals for the Tolling System and the Plant;

(B) the Operation and Maintenance Manuals;

(C) the maintenance records –

and so on, so it does get into areas that would clearly not otherwise go back to the State. There are also intellectual property rights which go across or go back. Clause 3.4(a)(iv) on page 240, there is to be a grant:

of such Intellectual Property Rights as shall enable the State or its nominee to be in a position to operate the Link and the Tolling System –

and (v) on the same page, the company is to do “all other acts and things to give effect” to the foregoing matters:

in order to enable the State or its nominee to be in a position to operate the Link and the Tolling System at performance levels –

So clearly, in our submission, under these provisions what is occurring at the end of the period is that there is a resumption by the State of all of the freedoms and opportunities and capabilities that it had before the grant of the concession to establish and operate a road and, if the State wished to, to toll it. Some of those freedoms were granted away by the grant of the concession period. A constraint was imposed upon the State. It could not operate, it could not toll, because those rights were with the company during the concession period, but at the end of the concession period those rights revive or spring up again in the State in an untrammelled form, enabling the State to do again what it could always have done but may have chosen not to do before the grant of the concession but with the added advantage of getting the infrastructure, in no doubt pristine and maintained form, plus intellectual property rights, plus rights to use the tolling system, ready to go, and the State could do it itself. It could grant rights to a third party, or conceivably it could regrant them to the present taxpayer. So all of that happens at the end of the concession period.

That, in our submission, is reversion in the same way as reversion occurs at the end of a lease of real estate. The grant to the tenant is of limited duration. The tenant’s rights expire at the end of the lease period. The tenant’s rights do not, so to speak, cross back to the landlord. What occurs is that the previous freedoms that the landlord had revive, spring up. Again, the landlord is untrammelled in that which it wishes to do with the relevant subject matter, so too with the State here. So, if it matters, there is a relevant analogy between the position of the landlord, on the one hand, at the end of a lease and the position of the State, on the other hand, at the end of the concession.

The burden of some of our learned friend’s submissions yesterday was to the effect that the right to toll does not go back to, does not revert to the Crown, to the State. That may be so, but there was only a limited carve-out of tolling opportunities and operational opportunities. Once granted they constrained the State, as the grant of a lease constrains the owner of the fee simple. At the end of the lease the landlord, the owner of the fee, is again able to exploit the land untrammelled by any grant that has been made, so too here with the State.

Nothing turns, in our submission, ultimately on the character of the right to toll. It was a right within the limited period which did effect a constraint during the currency of the concession period upon the State. Those constraints are removed at the end of the period. In any event, however, none of that tells one that there was an acquisition of an enduring subject matter; rather, all the elements to which we have referred establish, in our contention, that the concession fees are for the use of the advantages of the concession during the currency of the period and are on revenue account. If the Court pleases.

GLEESON CJ: Thank you, Mr Archibald. Yes, Mr Shaw.

MR SHAW: If the Court pleases. May I first deal with two matters which were raised yesterday in relation to the notice of appeal. The first relates to the notice of appeal insofar as it deals with straight line apportionment. The Court will recall that yesterday my learned friend referred to a passage in the judgment of the Full Court at page 1417 in which the court said that it might be unfair to grant leave to argue straight line apportionment because it had not been argued below. In our submission, that statement may or may not be true but it gives an impression which is different from what actually occurred. What actually occurred was the new argument was raised in our outline of submissions and - - -

GLEESON CJ: This is in the Full Court?

MR SHAW: This is before the Full Court. In their reply submissions my learned friends accepted that. They stated that this was a new argument, which is true. They said – and I will hand up this part of their outline:

If the Appellant’s and the trial judge’s primary position were not upheld then apportionment . . . will be the appropriate alternative.

So they embraced the idea. Perhaps more significantly than that, we examined the transcript before the Full Court last night. At page 144 on 18 August 2004 at line 16, Justice Hill raised the question about whether leave was needed to put the argument about the straight line, that is to say “the straight line incurring in – over a period of years”. Then there was some discussion about that and at line 42 Mr Maxwell, who was appearing for the Commissioner, said:

If your Honour pleases. To the extent I need leave I seek it . . .

HILL J: Well, the court will – to the extent it’s necessary the court will give leave.

So leave was granted.

GLEESON CJ: Now, apportionment is a different thing from a calculation of net present value, is it not?

MR SHAW: I am coming to that, yes, but it was just that yesterday it was left that maybe it was all left in limbo about the straight line apportionment. Well, the fact is it was not. Leave was sought and granted.

GLEESON CJ: Thank you. Now, was anything said about net present value either before Justice Merkel or before the Full Court?

MR SHAW: Something was said about it, but not relevantly because – perhaps if I could hand up those extracts.

GLEESON CJ: The net present value exercise that was referred to I think by Mr Phillips, but by one of the witnesses, for accounting purposes has nothing to do with apportionment, does it?

MR SHAW: No, I accept that, your Honour, but your Honour did ask me was anything said about it either before Justice Merkel or before the Full Court. In the judgment of his Honour Justice Merkel at page 1347 and going over to 1348 his Honour refers to what was said by Justice Deane in Coles Myer and then discusses whether that is of any relevance. He says on page 1348:

However, while there may be much to be said for the view that in Transurban’s accounts it would be appropriate to value the amounts presently due, but not payable, on a discounted basis to net present value, neither party sought to put such a case. Accordingly, as it was not contended that the valuation of the liability or, put another way, the net present value of the liability, rather than the nominal amount of that liability, should be deductible, it is inappropriate to pursue this aspect of the matter further.

So the matter was referred to.

GLEESON CJ: And it was not pleaded in any different way in the Full Court?

MR SHAW: No, your Honour. In view of what your Honour said to me yesterday about net present value and my accepting that the two things were really quite different, I have had drawn up an amendment to the grounds of appeal which seeks to raise that point. If I could hand up to the Court copies of the proposed amendment.

GLEESON CJ: I think Mr Archibald has indicated that he opposes the amendment.

MR SHAW: Yes, he has.

GLEESON CJ: We can simply take on board your application for leave to amend and deal with it as necessary.

MR SHAW: If your Honour pleases.

GLEESON CJ: It is clear that what you seek to do by this amendment is to raise a point that was not taken either before Justice Merkel or in the Full Court.

MR SHAW: Yes, it is.

CALLINAN J: And in respect of which evidence could have been called.

MR SHAW: Well, no, that is not clear. The reason I say that, your Honour, is if one looks at what Justice Deane said in Coles Myer in the passage in which he discussed the question of net present value, for him at any rate it did not turn on evidence.

KIRBY J: But I find that a bit difficult, Mr Shaw, because in order to ascertain, say, the net present value in a case like the present, one would have thought you might well need evidence directed to what the net present value was, having regard to the knowledge at the moment of the tolling and the traffic flow and so on.

MR SHAW: Your Honour, there are two questions. One question is: what was the net present value? The other question is: should whatever the net value was be the criterion used to - - -

KIRBY J: But is that not something you would have to fight out at the trial before Justice Merkel?

MR SHAW: The answer to the question of whether you should use net present value, no.

KIRBY J: But if you do not, as it were, raise it before the trial judge and the evidence relevant to the issue is not then adduced, you are really seeking to have another bite of the cherry, are you not, on an entirely different legal principle which would have relevance to evidence that would be called at the trial?

MR SHAW: Your Honour, the appropriate course, if it was decided that net present value is the correct criterion, is the matter would have to be sent back to the Commissioner to determine whatever the net present value was. All I am saying is this - - -

KIRBY J: It does involve your having two goes though, does it not? I mean, if you had raised it at the trial, in the objection to the assessment or at the trial, then that gives the parties the opportunity to adduce the evidence relevant to that point contingently on the legal point being upheld later in the process.

MR SHAW: Your Honour, all I can say is in one sense what your Honour puts to me is true, in another sense it is commonplace for matters to be sent back to the Commissioner to determine what an appropriate amount is in matters of this kind.

GLEESON CJ: Mr Shaw, it is more complicated, is it not, for this reason? If the Commissioner had sought to contend at trial that the net present value was the proper way to calculate the allowable deduction and had sought to sustain that argument on the basis of accounting practice, then you would need to have comprehensive evidence as to all the implications for accounting practice of adopting that kind of approach in a case such as the present.

MR SHAW: Your Honour, I accept that.

KIRBY J: Having regard to the material we were handed today concerning various possibilities in the Tax Laws Amendment Bill that are suggested as impediments to change, would that not be a relevant consideration to whether we should now permit this amendment to be made? You do seem to be challenging - - -

MR SHAW: What his Honour the Chief Justice put to me is a relevant matter. In our submission, the fact that there is proposed to be some changes of law which may or may not occur is not really relevant.

KIRBY J: But they do demonstrate, do they not, that this is quite a complicated matter upon which you really would need evidence of experts to indicate what the complexities were to change course at this rather late stage in the history of so-called jurisprudential analysis of the tax law.

MR SHAW: Really what his Honour was putting to me was that if the Commissioner had approached the case in a particular way, then the evidence of experts might be necessary and that that might be relevant to the question of whether leave should be granted or not, and I accepted that.

GLEESON CJ: Leave to amend is refused.

MR SHAW: If your Honour pleases. If I might go to the symmetry argument first, it was suggested - - -

KIRBY J: At some stage in your argument in reply, either today or in a written document, will you deal with the suggested impediments to your overall argument of the dicta or observations made in Burrill, Mercantile Mutual and Nilsen, or are you content to rely on what you have said in your submissions in support of the appeal?

MR SHAW: We would not wish to say that what was said in those cases was wrong. We say that what we want to do is consistent with that.

KIRBY J: Is that consistent with the refusal of the amended ground of appeal?

MR SHAW: Yes. It is because in Coles Myer itself, straight line apportionment was adopted which had the effect of some of the nominal amount being deductible in one year and another in another year. If I could go to the symmetry argument - - -

KIRBY J: If you do want to say anything more about those cases which Mr Archibald powerfully presented today, I at least would be helped by a submission on them.

MR SHAW: If your Honour would - - -

KIRBY J: You may feel that it is sufficiently covered in the written submissions and in the oral submissions that you have already made, but if there is anything else you want to say about them then I would be helped. Do not assume that everybody has spent their life in the mysteries of tax law – I have not – but I am anxious to reach a correct and lawful conclusion and if that requires some more assistance, I would be grateful for it.

MR SHAW: We will give your Honour a note on that matter.

GLEESON CJ: I would apprehend that the principles stated in those cases are principles that the Commissioner relies on as often as the principle - - -

MR SHAW: I said to his Honour that we accepted what was said.

KIRBY J: You are both relying on them then. That is a happy coincidence of submission, so rare in this Court.

MR SHAW: A point was made yesterday and again today that all the taxpayer wants is symmetry because if the State had not been the State and it was subject to tax then the concession fees would be assessable to it. That may be true but for the purposes of symmetry one has to ask the question, “When?”, and, in our submission, it is perfectly plain that had the State been a taxpayer it would not bring the concession fees to account as income at the time when the taxpayer seeks to deduct them.

GLEESON CJ: Would it bring them to account as income ever?

MR SHAW: Yes, when it got them.

GLEESON CJ: Because they are not on capital account.

MR SHAW: No.

KIRBY J: Or subject to your second argument.

MR SHAW: Yes, but all I am saying is, if symmetry matters, we win. If I might go to the question of what the effect of clause 1.9 of the master security deed is on clause 3.1 of the concession deed and, in our submission, it is useful to look at the case of Emu Bay [1944] HCA 28; 71 CLR 596. In that case the relevant provisions of the trust deed appear at page 603 of the report and at about point 2 on the page it says:

Clause 5 provides that until redemption the company shall pay to the stock holders whose stock remains outstanding interest on such respective stocks at the respective rates of 4½ per cent and 5 per cent per annum –

So there appears there to be an absolute liability to pay interest. Then clause 7, going down to about point 3 or 4 provided that:

During the period of ten years ending on the 31st of December 1933 the interest on the 5 per cent Stock shall be payable only out of the net income of the company from time to time available after payment of the interest upon the 4½ per cent Stock and after making proper provision for the upkeep of the Company’s railways rolling stock workshops buildings plant and tools including the setting aside of reasonable sums for depreciation and –

making certain other payments. So there was here the same sort of prioritisation, as my learned friend calls it, as there is in the case before the Court. If I might then go to page 605, the paragraph at the bottom:

The second part of the third schedule contains a form of stock certificate. This stock certificate (to be issued to the holder of the stock) contains the following provision: “The interest is non-cumulative until after the 31^st of December 1933 and is payable only out of the net income of the Company of each year as provided in the Trust Deed”.

Then going over to the top of page 606, line 4:

What is important is the definite provision, applying to all the 5 per cent interest, that the interest is payable “only out of the net income of the Company.”

As there has never been any such net income, the interest which the company claims is allowable as a deduction did not become payable, has not become a debt, and may never become a debt. As the cumulative period has now been reached, it might become a debt (if the company should have net income hereafter), and in that case it could certainly, if it were paid, and possibly even if it were not paid, be a proper deduction from the income of the company for income tax purposes. The words -

and then there is a discussion about what “incurred” means and then going down to about point 5 on the page:

But the alleged liability in the present case does not even answer this description. As things stand at present, the interest has not become payable, and all that can be said is that there exists at the present time the possibility of a liability accruing in the future, such possibility depending, not only upon the derivation of net income, but also upon the amount of such income derived. In my opinion, such a possibility cannot be regarded as an outgoing incurred - - -

GLEESON CJ: On that approach, the accounts in the present case for the year ended 30 June 1998 were wrong in showing this as a current liability.

MR SHAW: Yes, your Honour.

KIRBY J: Did that case turn on the very particular terms of the trust deed, “only out of net income”? I notice that it was a decision where the court was divided 3:2.

MR SHAW: It was, but his Honour’s judgment was one of the majority. No, your Honour, it does turn in one sense on the sentence that says, “out of net income”.

KIRBY J: I just wondered if they were trying to give meaning to the very particular words of the trust deed.

MR SHAW: In one sense they were, but if one goes to clause 1.9 the Court will remember that in clause 3.1 of the concession deed the provision was that the company shall pay to the State during the period an annual concession fee of $95.6 million. Clause 1.9 of the master security deed says:

For so long as any Project Debt is owing and notwithstanding the express terms of any Project Document to the contrary, any payment to be made by the Company of the Trustee to the State under, or for breach of, any Project Document . . . shall be owing to the State but shall not be due for payment until sufficient money is available for withdrawal from the Distributions Account -

So it is submitted that those words permit of no other conclusion than that, in the circumstances obtaining, the concession fees were not due for payment. The question is does the fact that they were not due for payment mean that they are not deductible and, in our submission, they are not deductible and they are not deductible for similar reasons to the reasons given in Nilsen.

In Nilsen there was, in one very real sense, a liability for annual leave and long-service leave because the people had all qualified and it did not matter whether they died or not, the employer was still liable. But because the time for payment had not been arrived, deduction was not allowed and, in our submission, the position is the same here. My learned friend made two different submissions. He said, one, there is no contingency. In our submission, that simply will not withstand the terms of clause 1.9. There is a contingency. He then said if there is a contingency, it is commercially certain that, as a practical matter, the concession notes will be paid and any possibility that they will not be paid is theoretical only.

Now, in our submission, for him to succeed in that argument he has to show at the very least that it is practically certain or commercially certain - - -

KIRBY J: I thought you came very close to that, as he said, yesterday in saying it is practically certain that they will fall to be paid in 2013.

MR SHAW: Yes, and your Honour Justice Callinan observed during the course of argument that the balance of probabilities is enough. In our submission, that is not so.

GUMMOW J: Why not?

MR SHAW: Because commercial certainty is required. That is what Justice Deane says in Coles Myer and what he says is what one places to one side is possibilities which are theoretical only.

CALLINAN J: Who else said that in Coles Myer? Did other judges agree with that?

MR SHAW: Well, he delivered a separate agreeing judgment.

CALLINAN J: But what commercial certainty as to any consequence is necessary for taxation law, is that what you are saying?

MR SHAW: No, your Honour, and this is - - -

CALLINAN J: Because it seems to me to be a very extreme proposition, if that is what it is.

MR SHAW: No. What we are submitting is this, not that you have to look at the likelihood of payment of all debts, not at all. What we say is if the debt is a contingent one then the debt is not deductible if the contingency has not been fulfilled unless it is commercially certain that it will be fulfilled.

CALLINAN J: Where do I find the passage?

MR SHAW: I do not have it before me, but it is something like 672.

GLEESON CJ: I think his Honour was not dealing with the sort of uncertainty that would be involved in the financial incapacity of the taxpayer?

MR SHAW: No, of course, he was not, your Honour. He gave what he meant to be a ridiculous example, namely, whether the population was 2000 on some date when it was obviously more. He probably had not taken bird flu into account, but leaving that out he was giving a ridiculous, as it were, example.

GLEESON CJ: A person who is on the verge of bankruptcy does not get a lesser tax deduction than a wealthy person for a liability incurred?

MR SHAW: No, that is true, your Honour, but all I am submitting is this. First of all the submission is that the liability has become relevantly contingent by reason of the provisions of clause 1.9. That being so, the question is, has the contingency been fulfilled, answer no. Then the next question is: is it certain, for practical purposes, that the contingency will be fulfilled, and in our submission, the answer to that, that is to say a positive answer to that, is not produced simply by saying that the models produced by the financiers and the taxpayer and whoever show that they expect that the concession notes will be paid. Of course they did that.

KIRBY J: Is there any other passage other than Justice Deane’s that uses the criterion of certainty because as Justice Callinan has pointed out it seems an overly stringent requirement for the purpose of the operation of this Act. You must never forget this is just another statute of the Federal Parliament, and we have to give it meaning as such. Now, why would one import certainty into it?

MR SHAW: Your Honour, it is for this reason. The question is has an outgoing – not a liability but an outgoing – been incurred? One is applying, despite your Honour’s distaste for the proposition, in answering that question, a jurisprudential approach.

KIRBY J: I just do not like the jargon, Mr Shaw.

MR SHAW: I know, but anyway - - -

CALLINAN J: Mr Shaw, it is the passage at 672, I think.

MR SHAW: Yes.

CALLINAN J: About point 4:

The obvious category of case in which the fact that a single liability is contingent will not necessarily prevent it from, of itself, constituting or founding a “loss or outgoing” which has been “incurred” for the purposes of s 51(1) is where it is apparent that a condition giving rise to theoretical contingency can be treated, for practical purposes, as certain to be satisfied.

Is that the passage?

MR SHAW: Yes.

KIRBY J: That sounds more like probabilities.

CALLINAN J: Yes, and practical purposes is a fairly important qualification, is it not?

KIRBY J: I thought you came very close yesterday to saying to us that for practical possibilities the concession notes would fall to be paid in 2013.

MR SHAW: I said, your Honour, yesterday that the expectation was, at the time the parties entered into the documents, that commencement of repayment would start about 2013, but it is perfectly obvious that if there was a fall off of traffic flows of 20 per cent, because there was evidence of that, then the commencement of the repayment would not be until 2034.

KIRBY J: And there is nothing in that Act that permits in that eventuality the Commissioner to claw back?

MR SHAW: No.

KIRBY J: There is a little section that could be added.

CRENNAN J: Mr Shaw, whether or not the concession period is finished early or whether it is extended and finished late, and bearing in mind the complexity of the contracts involved, why is it particularly that you would say this does not fall within the commercially certain test?

MR SHAW: Well, your Honour, for this reason. The parties have inserted conditions in their project documents. One of the things they have inserted is clause 1.9. If it were from a practical point of view certain that those conditions would be fulfilled, they would not have put them there.

All that my learned friend is relying on is the expectations of the parties demonstrated in the base case model and perhaps what is in the lender’s financial model, but as his Honour the Chief Justice observed, financial arrangements between entrepreneurs, and indeed between entrepreneurs and the State, involve all sorts of risks and, in our submission, the mere fact that they entered into these arrangements on the basis that they thought it would be a good thing does not mean the outcome which they hope for and expected is commercially certain. That is all.

We go on to say, my learned friend sought to say you should not read 1.9 as saying what its words apparently say because what that is really concerned with is merely the prioritisation of the payment of debts or the prioritisation of debts and all it is doing is regulating the order in which they will be paid and for that reason the clause should not be treated as imposing a condition. For whatever reason - one does not know what the reason was - it was thought by the parties important to put these provisions in, no doubt because it gave the financiers a greater feeling of comfort, made it cheaper, I guess, but they felt they had to go to the extent of saying that, for so long as the project debt is owing then the moneys for the concession fees are not due for payment until there is enough in the distributions account.

In our submission, that is simply not enough to give rise to an outgoing incurred and the sense that the submission is, it is submitted, demonstrated by the fact that nothing will go out for years and may never.

CALLINAN J: Mr Shaw, I would be assisted, not now, by a note indicating if there is any such instance – any other instance of a judge adopting as a test in Australian revenue law commercial certainty.

MR SHAW: I know of one, your Honour. It is Justice Newton, and I have forgotten what the name of the case is, your Honour. It is Commonwealth Aluminium Corporation Case. That was a case about - - -

GUMMOW J: What is the citation?

MR SHAW: 77 ATC 4151.

CALLINAN J: What year was that, Mr Shaw?

MR SHAW: That was 1997.

CALLINAN J: So was that adopting what Justice Deane - - -

MR SHAW: I am sorry, 1977, your Honour. Before passing from the incurred point, might I remind the Court of the final words of Justice Barwick in the paragraph in Nilsen at the top of page 624 where he says:

That part of Sir Owen Dixon’s statement in New Zealand Flax Investments Ltd v Federal Commissioner of Taxation which presently needs emphasis is that the word “incurred” in s 51(1) “does not include a loss or expenditure which is no more than pending, threatened or expected”: and I would for myself add “no matter how certain it is in the year of income that that loss of expenditure will occur in the future”.

If I might then go to the referability point, my learned friend says that our test for referability is the incorrect one and his test is correct. In answer to that proposition we remind the Court that in Coles Myer where the referability test assumed great significance for present purposes the Court relied on what was said by Justice Dixon in New Zealand Flax. In New Zealand Flax his Honour, as I pointed out yesterday, adopted the test of referability which we put forward and his Honour had put forward that same test in Ash. My learned friend’s assertion that our test is wrong and his is right is assertion without proof. We have, for our part, assayed proof.

KIRBY J: May I just say that is where I need your assistance on the dicta in Burrill and so on because they talk of a fundamental rule of tax law which, as I understand it, is why the respondent says that his submission was right, that the way you are interpreting what is said in Ash and Flax is inconsistent with the fundamental law of tax law.

MR SHAW: If your Honour pleases. There are two things which we would say about my learned friend’s argument about whether the payments are on capital account. The first thing is that when one looks at the terms of the grant, the terms under which the promise to make the concession fee payments, it is stated to be in consideration of the grant of the rights in clause 2.8, and the grant of the rights in clause 2.8 can, in our submission, not be regarded as anything other than the grant of rights which constitute the profit-earning structure of the taxpayer.

The second thing we would say is this. It has been said again and again that these payments are really like payments under a lease. In our submission, that places to one side as if it were of no significance the fact that in this case there was not only the grant of a concession but there were also leases and rent. How can the grant under the concession deed really amount to a lease under which rent is paid if in fact there are leases of the land and rent is payable under them? In our submission, that makes clear that this payment is on capital account. If the Court pleases.

GLEESON CJ: Thank you, Mr Shaw.

MR SHAW: Perhaps I should say, I take it, your Honour, that we should address the note to all members of the Court.

GLEESON CJ: Thank you, Mr Shaw.

MR ARCHIBALD: Your Honour the Chief Justice asked me whether the Act was amended after Nilsen. The Act was amended to deal with leave entitlements, I think, during the progress of the Nilsen litigation. Section 51(3) deals specifically with the deductibility of leave entitlements.

GLEESON CJ: Thank you, Mr Archibald. You could let us have that note within seven days, if you would, Mr Shaw.

MR SHAW: If your Honour pleases.

GLEESON CJ: We will reserve our decision in this matter and we will adjourn for a short time to reconstitute.

AT 11.53 AM THE MATTER WAS ADJOURNED