Mussalli & Ors v Commissioner of Taxation of the Commonwealth of Australia [2021] HCATrans 196 (12 November 2021)

Last Updated: 15 November 2021

[2021] HCATrans 196

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Sydney No S84 of 2021

B e t w e e n -

BENJAMIN MUSSALLI

First Applicant

RONALD MUSSALLI

Second Applicant

SARONCORP PTY LTD

Third Applicant

SANDRA MUSSALLI

Fourth Applicant

DANIEL MUSSALLI

Fifth Applicant

and

COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Respondent

Application for special leave to appeal

KIEFEL CJ
GAGELER J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA BY VIDEO CONNECTION TO BRISBANE AND SYDNEY

ON FRIDAY, 12 NOVEMBER 2021, AT 11.30 AM

Copyright in the High Court of Australia

____________________

KIEFEL CJ: In accordance with the protocol for remote hearings, I will announce the appearances for the parties.

MR D.J. McINERNEY, SC appears with MR N.C. DOUR for the applicants. (instructed by Halperin & Co Pty Ltd)

MR E.F. WHEELAHAN, QC appears with MS M.L. BAKER for the respondent. (instructed by MinterEllison)

KIEFEL CJ: Yes, Mr McInerney.

MR McINERNEY: May it please the Court. This application raises two important questions of principle. The first question arises by reason of what the plurality says on page 121 of the application book. If I might take the Court to that page? At paragraph 97, your Honours, you will see – part way through the paragraph – the sentence starting:

The way in which the upfront payments were calculated by MAL was an objective fact centrally relevant to the question of what the payments were made for and the character of those payments.

In the applicant’s submission, that proposition – that the counterparty’s calculations are central to the analysis – cannot stand with the statement of the plurality in AusNet that undue influence should not be placed on the purpose of a counterparty to a transaction.

In our submission, the two propositions are inconsistent, and they leave the law unclear. In our submission, the issue is not just important from the perspective of legal principle but practicality. In the present case, the question of characterisation was resolved by reference to internal MAL documents and expert evidence. The need to have regard to those sorts of documents and that sort of expert opinion, creates an almost insurmountable task for taxpayers. How would most ever know how a counterparty was approaching a transaction or calculating the consideration payable.

GAGELER J: Mr McInerney, you had an expert.

MR McINERNEY: We did have an expert in reply, your Honour. We did have an expert in reply, that is correct.

GAGELER J: And he was not accepted.

MR McINERNEY: His evidence was not accepted, your Honour, no. But that was perhaps a side issue that diverted from the real issue, which was always our position in the case, that the question has to be approached from the perspective of the taxpayer.

GAGELER J: But surely you are not saying that the label “prepayment of rent” was conclusive?

MR McINERNEY: No, your Honour, we are not. That is certainly not our case. But here, the question - the way the plurality particularly approached the decision – and I will come to Justice Thawley shortly – but the way the plurality approached the question of characterisation, if I can take your Honours to page 116 at paragraph 76, you will see there, your Honours, that the plurality refer to MAL valuing the stores in a particular way at:

five to five and a half times yearly earnings -

and they refer in that paragraph to the:

business value and its equipment -

They go on at paragraph 70 to analyse or describe the way that MAL used that value to come up with its calculation of the prepayment of rent. At paragraph 78 in the first line, the plurality adopt what the Commissioner says that the payment, having regard to the way it was calculated:

offered an existing profitable business -

and approached the exercise of characterisation from the perspective of MAL. The issue we have is that, as this Court will well know, a business is not an asset of itself. However lay people might describe it, a business is an activity. What we had here was not the sale of a business, but the entry by the taxpayer into a lease and license. That, in our submission, has been lost in the way the plurality approached the exercise by looking at the value – or the way MAL valued the business.

KIEFEL CJ: In paragraph 78, their Honours refer to Sharpcan and that seems to be common, I think, to both of the judgments, the reliance on Sharpcan as holding that something is – payment is of capital nature because it improves profit making.

MR McINERNEY: Well, your Honour, I suppose the general proposition about profit making, we do not say it necessarily governs the ‑ ‑ ‑

KIEFEL CJ: It is a strong indication that something is of a capital nature, is it not, if it is paid to improve increasing the revenue of a business?

MR McINERNEY: In our submission, many things might be paid to increase the revenue of a business that will not be covered ‑ ‑ ‑

KIEFEL CJ: Not rent.

MR McINERNEY: Rent may ‑ ‑ ‑

KIEFEL CJ: No, rent allows you to make a profit. It does not increase your profits.

MR McINERNEY: Well, what we are talking about here, though, is a payment in consideration – under a lease, in consideration. So, certainly, if I make a payment early of my rent – if I pay next year’s rent early – next year’s profit will be higher, but that does not answer the question of characterisation, in our submission.

If I might, your Honour, one of the things that we do take out of Sharpcan is that it is necessary, when one is looking at what an outgoing is calculated to affect – you need to take into account legal rights and obligations. So, the amorphous concept of buying a business or acquiring a business structure does not answer the question of what are the legal rights and obligations that arose in the particular transactions.

It might be convenient at this point to see how Justice Thawley approached the issue, because I think his Honour’s judgment really highlights the difficulty we have with the Full Court’s approach. That is at page 123 of the application book, and you will see there at paragraph 103, his Honour refers to MAL valuing the business, and he goes on to refer to – at paragraph 104 – his Honour refers to the:

methods for the acquisition of Erina Fair II –

the store:

including the associated lease -

and at paragraph 105 refers again to:

the acquisition of the business -

We say that simply cannot be correct.

KIEFEL CJ: But his Honour is only referring to the options that were presented and what, for the purpose of saying, as he does at 107:

The relevant issue is what the outgoing was calculated to effect from a practical and business point of view -

referring to Sharpcan:

Here, the correct characterisation . . . the so‑called “prepayment of rent” was incurred to acquire the Erina Fair II and its associated business structure

MR McINERNEY: That highlights the two issues we say arise. Firstly, underpinning his Honour’s characterisation was MAL’s valuation of a business and, we say that, like the plurality, places MAL’s perspective central to the analysis, in contrast to what was said by the plurality in AusNet that undue emphasis should not be placed on the counterparty – on the purpose of the counterparty – and we say on the valuation of the counterparty.

However MAL wanted to approach the exercise, if it considered that it was selling a business, that was a matter for it – that is not what the legal documents show – and it is not what the Mussalli Family Trust entered into. It is not what it acquired, your Honour. It leaves – however it might be approached – the way the Full Court approached the question - leaves taxpayers looking over the fence at what their counterparty has done to work out what that taxpayer needs to undertake in order to characterise an outgoing. Your Honours, we say that is, as I say ‑ ‑ ‑

KIEFEL CJ: Just going back to the judgment of Justices McKerracher and Stewart at paragraph 77 - paragraph 77 and going on to 78, their Honours accept the Commissioner’s contention that the prepayment of rent was to obtain a more profitable business structure. What is wrong with that approach?

MR McINERNEY: Your Honour, the concept of a business structure, we say, is as amorphous as the concept of a business. One needs to look at what are the legal rights and obligations being entered into. A business structure does not stand itself as an asset, as a business itself does not stand as an asset. One has to look at the lease, and their Honours were not looking at the terms of the lease when they undertook the question of characterisation. They were looking at – yes, your Honour, I beg your pardon.

KIEFEL CJ: It is a correct approach to look to the benefits that are gained by the payment that is made?

MR McINERNEY: Well, the strict approach is to look at the character of the advantage sought. Yes, your Honour.

KIEFEL CJ: But your characterisation is informed by the business benefit, is it not, what they.....from the payment?

MR McINERNEY: Yes, that is correct, your Honour, and we say in this case, what Mussalli got from the payment was in combination with recurrent payments of monthly rent under the lease – well, not Mussalli, the Family Trust obtained use and occupation of the premises.

KIEFEL CJ: Well, you have to pay a month at a lower – it got to pay monthly rent at a lower percentage of gross turnover, and it got to pay lesser fees because it made more profit, because the lessor was charging fees on existing turnover, and with the lower rent, it was able to make a higher profit.

MR McINERNEY: Yes, your Honour, in some respects, except that requires one to ignore the fact that there was an outlay in the first place. In my very simple example, if I pay next year’s rent today, next year’s profit will be higher, but if you look at it holistically, if you take into account the payment that you make at the outset, those profits are not necessarily going to be higher at all.

That is what we say the nub of the upfront payment is here. It changed the timing of the overall consideration due under the lease, and in some respects, it changed the risk of turnover being higher or lower, as much as Mr Mussalli was confident that he would be able to run the store well, there were no guarantees about that, so there was a risk it could have gone the other way and he could have ended up paying more overall, leaving aside any concept of present value calculations, just on a dollar for dollar term.

But again, coming back, our concern is the way the Full Court plurality and Justice Thawley approached the issue was as a starting point as a base for their analysis evaluation by MAL. There are references throughout the judgment as to the Excel spreadsheets and the hard coding of data in those Excel spreadsheets obtained by subpoena from MAL.

That creates not just an issue of principle, but an issue of practicality. Even in AusNet, and your Honours may recall at trial before Justice Gordon, her Honour correctly excluded a number of documents that had sought to be tendered on the basis that they were internal documents of the State Government. The information memorandum that was discussed in the High Court’s decision was a document that had been provided to the taxpayer. That is not the situation here.

So, for those reasons, we say that the special leave question, one, raises an important question of principle. It raises an important question of practice, and ought to be resolved by this Court.

Your Honours, if I might move on to the second special leave question. We accept this is of subsidiary importance to the first special leave question. This is a question of whether a payment made to commute future revenue outgoings will be on revenue account. If one turns to page 125 of the application book, you will see there his Honour Justice Thawley accepts the propositions in a general sense about putting an end to an ongoing revenue expense, on the one hand, or a payment being made in substitution of a future revenue expense, on the other hand, would often constitute a revenue expense.

The caveat he places on both propositions is “absent other purposes” associated with the expenditure. It is plain, from his Honour’s reasons, when one turns over the page to page 126, that the other purposes his Honour refers to are the purpose:

to acquire a business and its associated structure.

We say, of course, that there was no such acquisition of a business and associated structure here, even though we might accept – and we do not cavil with the proposition that there will be limitations to the general principle – but we do think it is a matter worthy of consideration by this Court, particularly, as we will see – back to paragraph 111 – his Honour refers to W Nevill v Commissioner of Taxation in support of the proposition:

that a payment which is made to put an end to an ongoing revenue expense would . . . often itself be a revenue expense –

The plurality and the Commissioner both say that W Nevill does not relate to the capital revenue distinction. In our submission, it does. There is plainly a divergence of views simply on that point. After 80 years, that may, of itself, be worthy of consideration by this Court.

In our submission, resolving this issue would provide a sound test for deductibility in circumstances where effectively a future revenue expense is converted to a present outgoing – to adopt the language from Myer Emporium. In our submission given the divergent approaches within the Full Court below – and I will not take your Honours to it – but the plurality, too, reject the proposition that the authorities do establish any general principle on this issue and also the fact that this Full Court decision – or the rejection of a principle – sits uncomfortably with the decision of the Full Federal Court in NAB where their Honours said that would be a curious result to characterise a lump sum and recurrent payments payable for the same advantage differently.

So, the second question, we say, squarely arises on the facts of the case, which are not in dispute, and is worthy of consideration by this Court. Nonetheless, regardless of question 2, question 1 raises a very important issue of principle and practicality that requires clarification. If the Court pleases, those are the applicant’s submissions.

KIEFEL CJ: Thank you, Mr McInerney. The Court will adjourn to consider the course that it will take.

AT 11.49 AM SHORT ADJOURNMENT

UPON RESUMING AT 11.54 AM:

KIEFEL CJ: Mr Wheelahan, we need not trouble you.

This application for special leave raises no question of general principle, but rather the application of settled principles to the facts of this case. There is no reason to doubt the correctness of the decision below. Special leave is refused with costs.

The Court will now adjourn.

AT 11.55 AM THE MATTER WAS CONCLUDED