03 June 2004
Key Points:
Non-legal advisers (including accountants, economists and investment bankers) should be wary of producing documents which could have tax implications (especially in relation to tax effective structuring). Arrangements to share profits in PPP transactions by tax effective means will need to be examined or re-examined in the light of the Melbourne City Link Tax Case.
There are a number of interesting issues arising from Justice Merkel's recent decision in Transurban City Link Limited v Commissioner of Taxation (the Melbourne City Link Tax Case) and the judgment may well have a significant adverse effect for Transurban. Transurban lodged an appeal on 23 February 2004, but if Transurban is unsuccessful, its distributions from 2006 will only be partly tax deferred.
The central issue in the case was the deductibility of concession fees paid by Transurban to the State of Victoria. The Concession Deed entered into by the parties provided that in consideration for the right to design, construct and operate the Melbourne City Link (and collect tolls), Transurban would pay annual concession fees to the Victorian Government, including concession fees calculated on the basis of revenue (not profit).
The Commissioner submitted three main arguments for the non-deductibility of these concession fees:
The Commissioner was unsuccessful on the first two grounds but succeeded on the third and Justice Merkel held that the fees were akin to a profit-sharing arrangement. In the alternative, he found that the concession fees were of a capital nature essentially because the rights were not granted on a periodic basis but rather were of a "once and for all" nature.
Justice Merkel accepted that, in a legal sense, the concession fees were payable regardless of the profit earned by Transurban. However he did not accept that "in a practical and business sense, any significant return to the State in respect of the concession fees... is unrelated to profit or profitability." In fact Justice Merkel's judgment contains several uses of the words "practical" and "business" and this thinking appears to have significantly influenced his conclusions.
Justice Merkel's reasoning was that because the obligation to pay concession fees was related to profit or profitability in a practical and business sense, the obligation was akin to a profit-sharing arrangement or payment of a dividend and accordingly was not deductible.
An important point for non-legal advisers to draw from the case is that a memo entitled "Super Profit Sharing Arrangements" prepared by Transurban's corporate adviser was adduced into evidence and was extracted in Justice Merkel's judgment. While this label given by the corporate adviser was not determinative of the issue, it was one of the elements considered by Justice Merkel in deciding that the concession fees were akin to a profit-sharing arrangement.Financial and other non-legal advisers should therefore bear in mind that written documents they produce are not privileged and may well be used as to assist the Commissioner in constructing an argument against the taxpayer. Transurban was not able to adduce evidence to counter the damaging effect of the corporate adviser's memo (ie. that the "practical" or "business" effect was that the payments were in the nature of a profit-sharing arrangement).
Conclusion
The Melbourne City Link case stands as a cautionary tale for sophisticated non-legal advisers to be aware that labels can be important. For tax advisers, it will be worthwhile to examine payments which might be re-characterised as profit-sharing from a practical/business point of view whether the relevant taxpayers are in the infrastructure industry or other industries.
For further information, please contact Allan Blaikie.
