The Federal Court has found the imposts under s 163AA of the Electricity Industry Act 1993 (Vic) paid by a taxpayer to the State Treasurer (Vic) were not deductible under s 8-1 of the ITAA 1997 for the relevant years.
The taxpayer derived assessable income from providing access to its electricity transmission network in Victoria and held a licence to transmit that electricity under the Electricity Industry Act. In June 2000, the taxpayer acquired the transmission business and then self-amended its 1999 and 2000 tax returns to claim deductions for the s 163AA imposts paid. It also claimed a deduction for the s 163AA impost it paid in the 2001 tax year. The payments totalled id=”mce_marker”77.5m.
The Court held the s 163AA imposts did not satisfy either limb of s 8-1(1). The Court found the imposts were not a cost of the taxpayer of deriving its income – rather, it found the imposts were payments out of the taxpayer’s profits after the calculation of its taxable income. It held the s 163AA imposts were not an outgoing incurred in gaining or producing the taxpayer’s assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing such assessable income. Furthermore, it held the s 163AA imposts were an outgoing of capital or of a capital nature.
(SPI PowerNet Pty Ltd v FCT [2013] FCA 924, Federal Court, Gordon J, 12 September 2013.)
[LTN 180, 17/9/13]
[2013] FCA 924
The Commissioner’s main authority against the Taxpayer was United Energy Ltd v FCT (1997) 78 FCR 169, where (as part of the same privatisation of Victoria’s electricity industry) compulsorily extracted ‘franchise fees’ were held to be not deductible. Justice Gordon had this to say about why.
69. Section 163A(2) expressly provided that the Treasurer’s calculation of the franchise fee [in the United Engery case] was to be undertaken after, or at least in part by, determining the distribution company’s taxable income, not its assessable income: see [58] above. One step in the calculation was to determine the amount of income the company derived from the sale of electricity to franchise customers (the assessable income) less the costs of deriving that income (giving rise, in general terms, to the company’s taxable income). A further step was then to deduct the taxes payable in deriving that income. Two further amounts were then calculated – a reasonable return on the capital used in deriving the assessable income and any “surplus”. The “surplus” was expressed by s 163A to be the amount that reasonably represented the amount by which the assessable income was likely to exceed the total of the taxable income and the return on capital. The excess was “taxed” as the franchise fee. As is apparent, the franchise fee was a payment out of profits but a payment out of profits after the calculation of the entity’s taxable income. It was not an outgoing incurred in gaining or producing the assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing such assessable income.
70. Section 163AA is in different terms. It does not prescribe how the impost is to be calculated. Having regard to the express terms of s 163AA alone, the Court could not be satisfied that the impost payments were payments of “profits”, being a payment out of profits after the calculation of the entity’s taxable income. Put another way, there is nothing on the face of s 163AA to suggest that SPI made the payments for any reason other than discharging an obligation to pay imposed upon it as the holder of the transmission licence.
71. The next question which arises is whether other material alters or affects that conclusion? The answer to that question is yes.
Her Honour then went on to say that certain extra-statutory material showed that s163AA was intended to operate and did operate in the same way as s163A of the Electricity Industry Act, which had been the subject of Full Federal Court’s deliberations in United Energy.
77. The question will often arise whether a payment that is calculated by reference to a percentage of profits represents a payment of profits (in the sense of it being a charge on the ultimate fund representing profits), or, instead, remuneration for services rendered, a reward for the use of money, or some other payment laid out for the purpose of earning profits: see, for example, Boulder Perseverance at 229-230 [and the Midlands Railway case]. However, such difficulties do not arise in the present case. Here the payments were not ascertained as a percentage of actual profits. Instead they represented amounts to be derived by the licence holder from the provision of the “Prescribed Services” that were over and above all capital and operating costs (including borrowing costs) and after allowing for an appropriate return to shareholders.
78. As is apparent, although the integers in the calculation of the MAR and the licence fee were not disclosed in the express terms of s 163AA, the structure of the imposition of the franchise fee in s 163A and the licence fees under s 163AA was the same – in substance and effect, a share of the profits leaving the holder of the licence with an amount determined to be a reasonable return on the capital of the company deriving that income. The residue, or surplus, was taken by the State as its share of profits.