FEDERAL COURT OF AUSTRALIA

SPI PowerNet Pty Ltd v Commissioner of Taxation [2014] FCA 261

Citation:	SPI PowerNet Pty Ltd v Commissioner of Taxation [2014] FCA 261
Parties:	SPI POWERNET PTY LTD v COMMISSIONER OF TAXATION
File number(s):	VID 330 of 2012
Parties:	SP AUSTRALIA NETWORKS (TRANSMISSION) LTD v COMMISSIONER OF TAXATION
File number(s): Judge:	VID 331 of 2012 PAGONE J
Date of judgment:	25 March 2014
Catchwords:	TAXATION – construction of s 124R(5) of the Income Tax Assessment Act 1936 (Cth) – whether determination of amount of deduction depends upon exercise of discretion by Commissioner – whether taxpayer required to show error in exercise of discretion – relevance of value of unit of industrial property to determination of amount to be taken to be purchase price. TAXATION – Division 10B of the Income Tax Assessment Act 1936 (Cth) – determination of cost of unit of industrial property for purposes of s 124R(5) – where no separate purchase price allocated to unit of industrial property – determination to be made by reference to objectively ascertainable matters – whether value of unit of industrial property relevant to determination. TAXATION – application of s705-35(1)(c) of the Income Tax Assessment Act 1997 (Cth) – valuation of assets for purposes of allocation of remaining allocable cost amount – whether valuation report prepared prior to litigation admissible as independent expert report on value. TAXATION – challenge to penalty imposed pursuant to s 284-75(2) of Schedule 1 to the Taxation Administration Act 1953 (Cth) – whether taxpayer adopted ‘reasonably arguable position’ within meaning of s 284-15 – identification of what was argued for.
Legislation:	Income Tax Assessment Act 1936 (Cth) Part IVC, Division 10B, ss 124K, 124L, 124M, 124R, s 136AD(1), (4), Divisions 42, 58 Income Tax Assessment Act 1997 (Cth) Division 373, Sub-division 373-B, Division 40, ss 701-1(1), 701-10, 701-55, Subdivisions 705-A, 705-B, s 705-35 Income Tax (Transitional Provisions) Act 1997 (Cth) Taxation Administration Act 1953 (Cth) ss 284-15, 284-75(2)
Cases cited:	AAT Case 10,267 (1995) 31 ATR 1027 ACCC v Cement Australia Pty Ltd (No 3) (2010) 275 ALR 235, [107] Avon Downs Pty Ltd v Federal Commissioner of Taxation (1949) 78 CLR 353 Boland v Yates Property Corporation Pty Ltd (1999) 74 ALJR 209, [27] Case 98 (1953) 3 CTBR 605, [7] Commissioner of State Taxation (WA) v Nischu Pty Ltd [1991] 91 ATC 4371 Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 Federal Commissioner of Taxation v Murry (1998) 193 CLR 605, 625 Hollinrake v Truswell [1894] 3 Ch 420, 424 IceTV Pty Ltd v Nine Network Australia Pty Ltd (2001) 239 CLR 438, [26], [28] Investmentsource v Knox St Apartments [2007] NSWSC 1128, [50] Macmine Pty Ltd v Federal Commissioner of Taxation (1979) 24 ALR 217, 235 Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705, [59], [86] McCormick v Federal Commissioner of Taxation (1979) 143 CLR 284, 303 Pacific Film Laboratories Pty Ltd v Federal Commissioner of Taxation (1970) 121 CLR 154 WR Carpenter Holdings Pty Ltd v Federal Commissioner of Taxation (2008) 237 CLR 198 (High Court), [10], [30]; (2007) 161 FCR 1 (Full Federal Court), [32], [42], [43]
Date of hearing:	25, 26, 27, 28, 29 November and 5 December 2013
Date of last submissions:	5 December 2013
Place:	Melbourne
Division:	GENERAL DIVISION
Category:	Catchwords
Number of paragraphs:	56
Counsel for the Applicant:	L Glick SC with M Flynn
Solicitor for the Applicant:	Deloitte Lawyers Pty Ltd
Counsel for the Respondent:	H Symon SC with F Marks and E Wheelahan
Solicitor for the Respondent:	Maddocks Lawyers

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION	VID 330 of 2012

BETWEEN:	SPI POWERNET PTY LTD Applicant
AND:	COMMISSIONER OF TAXATION Respondent
JUDGE:	PAGONE J
DATE OF ORDER:	25 MARCH 2014
WHERE MADE:	MELBOURNE

THE COURT ORDERS THAT:

1.     The decision of the Commissioner of Taxation be set aside.

2.    The matter be remitted to the Commissioner of Taxation to re-determine the assessment in accordance with these Reasons.

3.    The respondent pay the applicant’s costs.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION	VID 331 of 2012

BETWEEN:	SP AUSTRALIA NETWORKS (TRANSMISSION) LTD Applicant
AND:	COMMISSIONER OF TAXATION Respondent
JUDGE:	PAGONE J
DATE OF ORDER:	25 MARCH 2014
WHERE MADE:	MELBOURNE

THE COURT ORDERS THAT:

1.    The decision of the Commissioner of Taxation be set aside.

2.    The matter be remitted to the Commissioner of Taxation to re-determine the assessment in accordance with these Reasons.

3.    The respondent pay the applicant’s costs.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION	VID 330 of 2012

BETWEEN:	SPI POWERNET PTY LTD Applicant
AND:	COMMISSIONER OF TAXATION Respondent
AND:		VID 331 of 2012

BETWEEN:	SP AUSTRALIA NETWORKS (TRANSMISSION) LTD Applicant
AND:	COMMISSIONER OF TAXATION Respondent

JUDGE:	PAGONE J
DATE:	25 MARCH 2014
PLACE:	MELBOURNE

REASONS FOR JUDGMENT

1    SPI Powernet Pty Ltd (“SPI PowerNet”) claims deductions in proceeding 330 of 2012 for each of the fiscal years from 1998 to 2006 for expenditure of a capital nature on the purchase of copyright. The claim was made in the 1998 year under Division 10B of Part III of the Income Tax Assessment Act 1936 but in subsequent years the claim was made under Divisions 373 and 40 of the Income Tax Assessment Act 1997 when Division 10B of the 1936 Act was substituted by the 1997 Act. SP Australia Networks (Transmission) Ltd (“SPANT”) claims deductions in proceeding 331 of 2012 for what was in substance the same underlying transaction but does so for the 2006 to 2011 years of income as a result of being the head company upon the formation of a tax consolidated group. Its claim is based on the value and re-set tax cost of the copyright as at 19 October 2005 under Division 40 of the 1997 Act. The facts underlying each claim, however, are the same although questions of valuation differ in the two proceedings, but for convenience the evidence was tendered in the proceedings as common to both, subject to relevance and challenge to admissibility or weight. There is a separate issue in the 2001 year of income (being the year of income which ended on 31 December 2000) in which SPI PowerNet is the applicant, concerning whether it is liable for the 25% penalty which the Commissioner had imposed. On that issue the principal matter in dispute is whether SPI PowerNet had a reasonably arguable case within the meaning of the relevant provisions of the Taxation Administration Act 1953.

2    There was little dispute about the evidence in the sense of contested versions of facts or events, but there was substantial dispute about the relevance of evidence which was given and whether the evidence was sufficient to discharge the taxpayers’ burdens of proof. I will not, therefore, recite the evidence at length other than to give context and where necessary to explain my reasons. The applicants’ respective claims for deductions arose from the acquisition by SPI PowerNet of the previously Victorian state owned electricity transmission business. The acquisition was made under an Asset Sale Agreement dated 12 October 1997 which was completed on 6 November 1997. SPI PowerNet was, at the time, named GPU PowerNet Pty Ltd (“GPU PowerNet”) and was a wholly owned subsidiary of the United States corporation GPU Inc. All of the shares in GPU PowerNet were subsequently acquired by SPI Australia Holdings Pty Ltd by an agreement for the sale of shares dated 30 June 2000 and on 2 July 2000 GPU PowerNet was renamed SPI PowerNet Pty Ltd. I will follow, for convenience, the practice adopted by the parties of generally referring to SPI PowerNet by that name even though its name was GPU PowerNet at the time it entered into the Asset Sale Agreement.

3    One of the assets acquired by SPI PowerNet under the Asset Sale Agreement was the copyright in drawings, plans and other works falling within the meaning of a “unit of industrial property” in Division 10B of the 1936 Act, which entitles a taxpayer to a tax deduction. The Asset Sale Agreement, however, did not specify what part of the purchase price was paid for that asset and, therefore, any deduction to which SPI PowerNet may be entitled depends upon the operation of s 124R(5) (which was part of Division 10B at the time). The Asset Sale Agreement required SPI PowerNet to pay the Total Purchase Price of $2,502,600,000 which was defined to be “the sum of the price of the Assets (including the Land) net of Contract Liabilities and Creditors (excluding Specified Contractors) assumed under [the] agreement” and, for the avoidance of doubt, was expressly defined to exclude the estimated duty. The Assets thus paid for by SPI PowerNet were identified in the definitions to mean:

(a)    the Plant and Equipment;

(b)    the Business Records;

(c)    the Contract Benefits;

(d)    the Land;

(e)    the Intellectual Property Rights;

(f)    the Licences;

(g)    all the Seller’s entitlements under the Real Property Leases;

(h)    inventories, raw materials and stores of the Seller used in the Business;

(i)    cash on hand and deposits and securities in the name of the Seller, other than with TCV;

(j)    entitlements under the Employment Contracts;

(k)    the Trade Debts; and

(l)    all other tangible or intangible assets (including goodwill and insurance proceeds) from the Seller’s insurance policies) owned by the Seller whether or not listed in the balance sheet of the Seller forming part of the 1997 accounts,

other than the Specified Assets.

Most of the items included within the definition of “assets”, for which SPI PowerNet paid the total purchase price, were themselves the subject of specific definitions. However, what is relevant for present purposes is that the assets for which the total purchase price was paid included any copyright belonging to the seller coming within the words “Intellectual Property Rights” in clause (e) of the definition of assets. The “Intellectual Property Rights” referred to in subclause (e) of the definition of the assets sold to SPI PowerNet were separately defined to mean the rights of the seller to all:

(a)    patents, copyrights or designs, registered or unregistered;

(b)    rights under each licence in respect of such patents, copyrights or designs; and

(c)    equitable rights in respect of such patents, copyrights or designs or such licences.

The Asset Sale Agreement, however, as stated above, did not allocate any specific part of the total purchase price to the copyright acquired by the purchaser.

4    SPI PowerNet’s claim for deductions for the copyright in each of the tax years from the 1998 tax year (ended 31 December 1997) to the 2006 year depended upon the terms of Division 10B of the 1936 Act. Any entitlement obtained under those provisions might then continue in subsequent years through subsequent provisions together with the operation of transitional provisions. In the 1999 to 2002 years of income (up to 30 June 2001) any entitlement to a deduction would continue under Sub-division 373B of the 1997 Act and the Income Tax (Transitional Provisions) Act 1997. That is because Division 10B of the 1936 Act was replaced with Division 373 of the 1997 Act and the replacement provisions allowed deductions for un-recouped expenditure for items of copyright which had been acquired before the 1999 year. The terms of Division 373 were not the same as those in Division 10B but SPI PowerNet’s claim for the 1999 to 2002 years depended upon the claim first coming within the terms of Division 10B as they had been in the 1936 Act. Its claim for deductions for the subsequent period from 1 July 2002 to the 2005 year of income arose under s 40-25 of the 1997 Act and other transitional provisions. That is because Division 373 was in turn replaced with Division 40 of the 1997 Act with effect from 1 July 2001. SPI PowerNet’s accounting period ended 31 December and its claims for the 2002 year were, therefore, under Division 373 for the period to 1 July 2001 and under Division 40 for the period to 31 December 2001. Its claims under Division 40 for capital allowance deductions were for the original un-recouped expenditure under the earlier provisions. In each case, however, the deduction claimed for the periods up to the 2006 year depended upon Division 10B (and s 124R(5) in particular) of the 1936 Act in the 1998 year of income. The claim of SPANT in proceeding 331 of 2012 for the period from 19 October 2005 to 31 March 2011 depends upon different provisions and will be dealt with separately below.

5    A taxpayer’s deduction under Division 10B was expressed to depend upon how Division 10B was made to apply to the taxpayer. Division 10B was, by s 124L, made to apply to the owner of industrial property who, amongst other matters, had incurred expenditure of a capital nature on the purchase of a unit of industrial property. Section 124M(1), in that division, permitted a taxpayer to deduct an amount, pursuant to a formula, for the residual value of “a unit of industrial property”, which was defined in s 124K to include the rights possessed by a person under a law of Australia as an owner of copyright. The provision read:

unit of industrial property means:

(a)    rights possessed by a person under a law of Australia as:

(i)    the grantee or proprietor of a patent for an invention; or

(ii)    the owner of a copyright; or

(iii)    the owner of a registered design; or

(iv)    a licensee under such a patent, copyright or design;

and includes equitable rights in respect of such a patent, copyright or design or in respect of a licence under such a patent, copyright or design; or

(b)    rights possessed by a person under a law of a foreign country that are equivalent to the rights referred to in paragraph (a).

An owner of copyright, therefore, had a unit of industrial property within the meaning of s 124K(a)(ii) in Division 10B and was entitled to an allowable deduction pursuant to the formula in s 124M. The copyright acquired by SPI PowerNet was, therefore, something for which it was able to claim a deduction.

6    An element in determining the amount of the allowable deduction under Division 10B was the cost of the unit of industrial property to the owner. The cost of a unit of industrial property for the purposes of Division 10B was to be ascertained under s 124R and depended upon the basis upon which Division 10B was made, by s 124L(1), to apply to the owner of a unit of industrial property. Division 10B was, by s 124L(1)(b), made to apply to SPI PowerNet in this case because it had become the owner of copyright by having “incurred expenditure of a capital nature on the purchase of the unit of industrial property”. That meant that SPI PowerNet was an owner referred to in s 124L(1)(b) which, in turn, required the cost of the copyright it acquired, being a unit of industrial property, to be ascertained under s 124R(1)(b).

7    Section 124R(1)(b) provided for the ascertainment of the cost of the unit of industrial property under one of three provisions, namely, s 124L(1)(b), s 124R(3) or s 124R(5) depending upon, in effect, three different circumstances:

For the purpose of this Division, the cost of a unit of industrial property to the owner of a unit shall…be taken to be:

[…]

(b) in the case of an owner referred to in paragraph 124L(1)(b):

(i)     if sub-section (3) or (5) of this section is applicable – the cost ascertained in accordance with that sub-section; or

(ii)     if neither of those sub-sections is applicable – the expenditure referred to in paragraph 124L(1)(b).

One circumstance which governed the basis upon which to ascertain the cost of a unit of industrial property was where the acquisition had been between parties who had not been dealing at arm’s length in relation to the purchase (in which case the cost was to be determined in accordance with s 124R(3)). The second circumstance was where the unit of industrial property had been purchased in a dealing where the parties had been dealing with each other at arm’s length in relation to the purchase but where no separate price had been allocated to the unit of industrial property by the parties (in which case the cost was to be ascertained by reference to s 124R(5)). The third circumstance was that of all other cases, that is, where the purchase did not come within the two other specifically mentioned circumstances (in which case the cost was to be the actual expenditure incurred by the owner as referred to in s 124L(1)(b)). The effect of these provisions, in general terms, was that an owner of a unit of industrial property would be entitled to claim as a deduction the actual cost of its acquisition unless (a) the Commissioner was satisfied that the parties to the acquisition had not dealt with each other at arm’s length in relation to the purchase or (b) there had not been a separate amount allocated by the parties to the acquisition: a taxpayer was entitled to a deduction for the value of the unit in the case of the first exception, and, in the case of the second exception, a taxpayer was entitled to a deduction for the amount of the total expenditure which the Commissioner determined was to be taken to be the amount of the purchase price of the unit.

8    In this case there is no suggestion that SPI PowerNet, as purchaser, had acquired the copyright other than in an arm’s length dealing in relation to the purchase of the copyright. Section 124R(3), therefore, did not apply. However, the copyright it acquired had been purchased with other property and no separate price had been allocated to it, making s 124L(1)(b) inapplicable as the basis of ascertaining the cost. Accordingly, it was s 124R(5) which applied to determine the cost of the unit of industrial property for the purposes of the application of Division 10B. In that event s 124R(5) provided that the amount of the expenditure on the purchase of a unit of industrial property coming within its terms was to be taken to be so much of the purchase price as the Commissioner determined. Section 124R(5) provided:

Where, in the case of an owner referred to in paragraph 124L(1)(b), the unit of industrial property was purchased by the owner of the unit with other property and no separate price was allocated to the unit, the amount of the expenditure of a capital nature incurred by the owner on the purchase of the unit for the purposes of this Division shall be taken to be so much of the purchase price of the unit and the other property as the Commissioner determines.

The reference in the section to the amount being determined by the Commissioner gave rise to a substantial dispute in the proceeding about the construction of s 124R(5), namely whether the amount of the deduction depended upon the Commissioner’s discretion or whether s 124R(5) operated objectively in the manner considered in WR Carpenter Holdings Pty Ltd v Federal Commissioner of Taxation (2008) 237 CLR 198 (High Court); (2007) 161 FCR 1 (Full Federal Court).

9    The position adopted by the parties on the WR Carpenter issue changed during the course of the dispute with each abandoning the position initially held in favour of the position which the other had first held but had then abandoned. SPI PowerNet had initially contended that the Commissioner had erroneously exercised a discretion which had been conferred by s 124R(5) rather than that the Commissioner had failed to determine the objectively ascertainable correct amount which was allowable under s 124R(5). The Commissioner’s position had initially been that the determination of the amount allowable under s 124R(5) did not depend upon the finding of error in the exercise of power by the Commissioner. By the time of the hearing, however, the respective positions had been reversed and the parties were given leave to file amended appeal statements to reflect their changed positions. The Commissioner’s case at the hearing was that s 124R(5) depended upon the exercise of a discretion and that SPI PowerNet had failed to show error in the exercise of the discretion. SPI PowerNet’s case at the hearing was that s 124R(5) did not make an assessment dependent upon the Commissioner’s discretion and that in Part IVC proceedings it was sufficient to establish, in accordance with the decision in WR Carpenter, that the assessment was excessive as considered in Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 without the need first to establish reviewable error as described in Avon Downs Pty Ltd v Federal Commissioner of Taxation (1949) 78 CLR 353.

10    The litigation in WR Carpenter had considered the distinction between statutory provisions where liability was imposed by reference to objective matters and those provisions where liability depended upon the Commissioner forming a state of mind, opinion or judgment as an integer in the liability. The issue arose in that case in the context of ss 136AD (1) and (4) in Division 13 of the 1936 Act which relevantly provided:

(1)     Where:

(a)     a taxpayer has supplied property under an international agreement;

(b)     the Commissioner, having regard to any connection between any 2 or more of the parties to the agreement or to any other relevant circumstances, is satisfied that the parties to the agreement, or any 2 or more of those parties, were not dealing at arm’s length with each other in relation to the supply;

(c)     consideration was received or receivable by the taxpayer in respect of the supply but the amount of that consideration was less than the arm’s length consideration in respect of the supply; and

(d)     the Commissioner determines that this subsection should apply in relation to the taxpayer in relation to the supply,

then, for all purposes of the application of this Act in relation to the taxpayer, consideration equal to the arm’s length consideration in respect of the supply shall be deemed to be the consideration received or receivable by the taxpayer in respect of the supply.

[…]

(4)     For the purposes of this section, where, for any reason (including an insufficiency of information available to the Commissioner), it is not possible or not practicable for the Commissioner to ascertain the arm’s length consideration in respect of the supply or acquisition of property, the arm’s length consideration in respect of the supply or acquisition shall be deemed to be such amount as the Commissioner determines.

Each of these subsections provided for assessments to be made by reference to amounts determined by the Commissioner. The taxpayer in WR Carpenter had contended that these provisions therefore made the assessments depend upon the exercise of discretion by the Commissioner, and sought to challenge the exercise of the discretion and to that end had sought particulars of the Commissioner’s exercise of the discretion in its case.

11    The Court in WR Carpenter rejected the taxpayer’s application for particulars of the Commissioner’s determination, holding that the assessment did not depend, as an integer of liability, upon the exercise of the Commissioner’s discretion. The judgment of the Full Federal Court explained that Division 13 identified a number of objectively ascertainable criteria, the satisfaction of which would create liability. The Court identified those objective criteria as being:

    an international agreement

    between parties not dealing with each other at arm’s length

    under which property

    is supplied

    for less than the arm’s length consideration in respect of the supply or for no consideration.

The Court went on to observe that the matters in respect of which the taxpayer in that case had sought particulars did not concern the existence or otherwise of any of those (objective) criteria; rather, the taxpayer sought particulars about matters seeking to challenge, on judicial review grounds, the exercise of the Commissioner’s discretion. In that context the Full Federal Court explained that sub-section 136AD(4) operated like an averment clause as an exceptional case to the ordinary operation of the provisions. The Court said at [32]:

Once it is seen that subs (4) is there for the exceptional case, its function in the Div 13 machinery becomes apparent. It operates like an averment clause. It does not create an irrebuttable presumption. It simply provides the Commissioner with a means of proof. Presumably in the present case the applicants will endeavour to show that the arm’s length consideration would have been the amount in fact received or receivable by them, or at any rate would have been something less than the figure deemed by the Commissioner. It is difficult to see how the possibility or practicability of ascertainment that faced the Commissioner at the time of assessment would be relevant to the applicants’ argument, before the court, that the figure advanced by them is in fact the correct arm’s length consideration.

At [42] the Court held that the exercise of the powers under ss 136AD(1)(d), (2) and (4) could not be challenged on judicial review grounds and added at [43]:

Before we turn to examine some of the authorities, we would make the general observation that, in our view, the answers to the questions posed by this appeal lie in the analysis of the language of Div 13 in the light of s 177(1) itself rather than an intermediate classification of provisions as turning on the Commissioner’s state of mind or otherwise. This is not to suggest that a distinction of the kind drawn by his Honour below between “state of mind” cases and “determination” cases is neither valid nor appropriate, but arguably it does not fully explain why s 177(1) does not prevent examination of the due formation by the Commissioner of his state of mind or satisfaction, whereas it does prevent examination of the due making by the Commissioner of his determination. In our view, the explanation is to be found in the fact that the first goes to substantive liability whereas the second is merely procedural. Where Parliament intended that the criteria for liability should include the due formation by the Commissioner of his state of mind, opinion or judgment, either in lieu of objective criteria, or as an addition to incomplete objective criteria, s 177(1) has never denied the ability of a taxpayer to examine the due formation of that state of mind on judicial review grounds. But where Parliament has exhaustively set out the criteria for liability by reference to objective matters, but has made the application of those criteria dependent upon a step being taken by the Commissioner, the step is procedural in the sense that it is not a step which forms part of the criteria for liability. The due making of such a determination is not subject to examination on judicial review grounds.

It was held, therefore, that the taxpayer was not entitled to the particulars which had been sought because the assessments did not depend upon the exercise of discretionary powers. The “determination” which the Commissioner was authorised to make was not in the nature of a discretionary power but gave the Commissioner the ability to make an objective finding which was reviewable on objective grounds in Part IVC proceedings rather than upon judicial review grounds. The High Court dismissed an appeal from the decision of the Full Federal Court: (2008) 237 CLR 198. The judgment of the High Court at [30] explained that the opinions of the Commissioner underlying the exercise of discretion under s 136AD(1) were not evidence of the facts “which exist or do not exist irrespective of the attitude of the Commissioner”. The Court did not disapprove the observations which had been made by the Full Federal Court concerning s 136AD(4) and the Commissioner did not contend in this proceeding that the High Court had disapproved the dicta by the Full Federal Court in this respect.

12    The Commissioner contended, however, that s 124R(5) of the 1936 Act is different from the provisions considered in WR Carpenter because s 136AD (4) was said to contain the criteria of liability, namely, “arm’s length consideration”, while s 124R(5) was contended to provide no criteria of liability beyond the Commissioner’s “discretion” to determine an amount. It is true that the amount the Commissioner could determine under s 136AD(4) was described as “the arm’s length consideration in respect of the supply or acquisition”, but the amount the Commissioner is to determine under s 124R(5) is similarly able to be discerned as an objective fact, namely that part of an actual purchase price paid by the purchaser of a unit of industrial property which is to be taken to be the amount of the whole which was paid for its purchase where no separate price had been allocated in the purchase. In the case of both provisions an element of the criteria for liability is made to depend upon the determination by the Commissioner of an objective fact: in the case of s 136AD(4) it was the Commissioner’s determination of the arm’s length consideration, and in the case of s 124R(5) it is the Commissioner’s determination of that part of an actual total purchase price which is to be allocated to the unit of industrial property (assuming that s 124R(3) did not apply, namely that it was not a case where the parties “were not dealing with each other at arm’s length in relation to the purchase”). In neither case are the criteria for liability made to depend upon the formation by the Commissioner of a state of mind, opinion or judgment in lieu of objective criteria.

13    The determination which the Commissioner is to make under s 124R(5) is that of part of an actual un-dissected sum which is objectively referable to the acquisition of a unit of industrial property. That may be seen by the purpose and function of s 124R(5) in the machinery of Division 10B as a whole. Its purpose and function is to enable the Commissioner to determine the actual cost of something where it was not separately agreed between the parties. The general scheme of the provisions in Division 10B is for a taxpayer to obtain a deduction for the actual cost of acquiring the unit of industrial property unless (a) the agreed cost was not in an arm’s length dealing or (b) the agreed cost was part of an unallocated overall purchase price. Section 124R(5) applies where the parties to the transaction had not allocated part of an overall purchase price to the unit in question but have otherwise dealt with the purchase at arm’s length. The presumption made by the section is that it is possible to take part of the total purchase price actually paid as that amount paid for the unit of industrial property. The section does not make the Commissioner’s determination depend upon discretionary considerations but only upon an inquiry, like that in s 136AD(4) considered in WR Carpenter, of the amount properly attributable to the purchase price of the unit of industrial property. Indeed, it would be curious if the Commissioner, under s 124R(5), could determine as an allowable deduction an amount that was neither the actual cost allowable under s 124R(1)(b)(ii) (or an objectively ascertained portion of the actual cost under s 124R(5)) nor the arm’s length value of the property allowable under s 124R(3). It would be curious for the legislature to prevent the arm’s length buyer of a unit of industrial property, in an arm’s length purchase, from getting the arm’s length value as the cost of the unit of industrial property whilst requiring a purchaser who was not dealing at arm’s length in an acquisition to do so. Section 124R(3) applies where parties are not dealing with each other at arm’s length in respect of an acquisition and provides that the cost to the owner is to be the lesser of the cost of the unit to the preceding owner or the value of the unit at the time of purchase. The purpose of s 124R(5) is to enable the Commissioner to determine what the section presumes to be the objectively ascertainable portion of the total purchase price which the buyer of a unit of industrial property must be taken to have paid for the unit of industrial property. It operates where it is assumed that something was paid for the unit of industrial property but that its amount (that is, its cost) was not separately identified. The task may involve questions of judgment similar to those which go to determining the arm’s length consideration in provisions like s 136AD(4), but it is a task directed to determining objectively that part of an un-dissected sum which was the cost for the purchase of a deductible asset.

14    It is, therefore, unnecessary to consider whether SPI PowerNet has established error in the exercise of any discretion by the Commissioner. Had it been necessary to do so, it would have been necessary to consider what matters the Commissioner could take into account in the formation of an opinion. Such matters must, as was said by the High Court in WR Carpenter, be “guided and controlled by the policy and purpose of the enactment”, and the exercise of the power will be examinable in the way explained by Dixon J in Avon Downs Pty Ltd v Federal Commissioner of Taxation (1949) 78 CLR 353: see WR Carpenter Holdings Pty Ltd v Federal Commissioner of Taxation (2008) 237 CLR 198 at [10]. On that basis the considerations which the Commissioner could take into account in the exercise of a discretion under s 124R(5) must be those which bear upon the determination of that part of an unallocated entire sum which should be taken to be the cost to SPI PowerNet of the unit of industrial property. The criteria for the exercise of any such discretion must lie primarily in those matters which also inform and tend to produce the correct identification of that part of the total purchase price which is to be taken to be the amount paid for the acquisition of the unit of industrial property. In this case that will, therefore, give rise to substantial overlap, if not complete identity, in those matters which the Commissioner may consider in exercising any discretion in s 124R(5) and those matters relevant to the operation of s 124R(5) if it is to be applied as was considered in WR Carpenter.

15     I need not, therefore, to the extent of the overlap, consider separately whether the Commissioner erred in the exercise of any discretion. However, it may be useful to make three observations about whether the Commissioner erred in the exercise of any discretion before turning to the application of s 124R(5) on the basis considered in WR Carpenter. The first is that, unsurprisingly, the Commissioner had in fact not made the determination under s 124R(5) on the basis of having actually exercised a discretion in the Avon Downs sense. That is unsurprising because it was not until some time after these proceedings had commenced that he altered his view about the nature of the power conferred by s 124R(5) and until then had maintained that the power did not confer a discretion. The failure to exercise the power on the basis subsequently maintained in this proceeding may be sufficient to show reviewable error, in the sense of a failure to exercise the discretion, although the case was not conducted upon that basis and no submissions were made on that issue by either party. The second is that to the extent that the Commissioner must be taken to have considered the matter from the point of view of discretionary factors he appears to have proceeded on the basis that the amount of the purchase price that was to “be taken to be” the purchase price for the copyright in this case was a question to be answered by an objective valuation of the copyright. The relevance of the valuation of the copyright is otherwise a critical issue in dispute between the parties in this proceeding and its answer will, therefore, largely govern any question about whether the Commissioner erred in the exercise of any discretion. The third is that, as SPI PowerNet contended, the Commissioner appeared to have taken into account at least three considerations which were irrelevant to his stated basis of determining the amount to be taken as the value of the copyright. The first was whether any amount allowable under s 124R(5) had already been taken into account in obtaining depreciation deductions under Division 42 and the former Division 58. The Commissioner was of the view that any amount otherwise to be included as a deduction under s 124R(5) had been allowed or was allowable as a deduction by way of depreciation for plant and equipment under other provisions and, therefore, that it could not be taken into account in valuing the copyright for the purpose of s 124R(5). The Commissioner’s contention that the amount had actually been claimed as a deduction depended largely upon the view that the copyright did not have a separate value but formed part of the value of the plant and equipment. The evidence, however, for reasons to be considered below, does not support the Commissioner’s contention that there was in fact an allowance of a deduction for the value of the copyright through the depreciation provisions; that is, the evidence of those called to give evidence concerning the value of the copyright was predominantly that the copyright had a separate value. The terms of s 124R(5) would not, however, otherwise permit the exclusion of an amount as a deduction if it were otherwise available under another provision but not claimed under the other provision. The second matter taken into account by the Commissioner that would be extraneous to the exercise of any discretion was that the tax group which included SPI PowerNet had not recognised the copyright as a separate asset in the balance sheet, the financial statement or in the other reported document or prospectus. The fact of a failure by a taxpayer to include an amount as a separate asset in its financial accounts is not relevant to the exercise of any discretion if the amount was found to exist as a separate asset. The third was that the Commissioner considered that the valuation of the copyright was relevant to the exercise of the power in s 124R(5), but rejected the valuation which the Commissioner had obtained on 3 August 2011 of $26 million from Value Adviser Associates Pty Ltd (“VAA”). That valuation was not in evidence in the proceeding except to the extent of the fact of it having been obtained and referred to, but rejected, by the Commissioner in making his decision. SPI PowerNet had relied upon, and claimed, a higher valuation to claim a deduction. The Commissioner had considered the value of the copyright to be relevant to a decision under s 124R(5) but rejected even the lower value. The Commissioner’s rejection of any valuation as the basis of the deduction under s 124R(5) was based upon the view that the copyright had no separate value and the correctness of that view is best considered below in the context of the objective operation of the section. The exercise of the Commissioner’s discretion will be erroneous where the Commissioner, having chosen valuation of the copyright as a relevant factor, describes the facts in a way that makes clear that he has misconceived the facts: see Duggan v Federal Commissioner of Taxation (1972) 129 CLR 365, 369, 370. The exercise of any discretion will, accordingly, be found to be erroneous if his exclusion of any value for the reason given was shown to be wrong. Each of these three considerations may be sufficient to find reviewable error if it had been necessary to do so. Another error alleged against the Commissioner is that he misdirected himself about the meaning of copyright, but that issue (and the Commissioner’s contrary contention that the valuers failed to value the correct copyright) may also best be dealt with below in the context of the valuations relied upon by the applicants. It is also unnecessary and undesirable to consider the more general challenges to the exercise of any discretion on the grounds of unreasonableness in the sense of being an exercise of discretion that no reasonable decision maker could have made.

16    The proper construction of s 124R(5), however, is not one that makes its application depend, as an element of liability, upon the formation by the Commissioner of some discretionary opinion, state of mind, or the like, but upon an objective determination (no doubt based in part upon considered judgment of relevant facts) of that amount of an actual purchase price which is to be taken as that paid for a discernible part of what was acquired. Even so, however, the application of the section is not without difficulty. The statutory task required by s 124R(5) is, in effect, that of allocating or apportioning part of a known purchase price to part of what the total amount purchased but the basis of allocation, and the relevance of value, is not easy. The section is directed to allowing to the taxpayer a deduction for that part of a known larger amount which is to be taken to be the cost of the deductible item rather than allowing a deduction for the independent value of the item in question. The task is not, in terms, that of valuing the relevant part of what was acquired, although its value may be relevant to the process of allocation. A similar issue was considered by the Administrative Appeals Tribunal in the context of apportioning an amount for the purposes of depreciation in AAT Case 10,267 (1995) 31 ATR 1027 where the Deputy President observed at [9]:

The Commissioner’s (and the role of this tribunal) is to apportion the consideration for the whole among the various assets or interests acquired in such fashion as is, in all the circumstances of the transaction, appropriate. This apportionment may or may not reflect the market value. [See also Case 98 (1953) 3 CTBR 605, [7]].

The individual market value of an item purchased with others for a composite amount may not be the appropriate portion of the total purchase price which is to be taken to have been paid for the item. That may be so for various reasons and the adoption for the purposes of s 124R(5) of the value of the unit of industrial property which was acquired may not produce the outcome intended by the section. The section assumes that part of the total purchase price was a taxpayer’s actual cost of acquiring the unit of industrial property and that the amount to be allocated can be determined.

17    The experts in this case had not been asked specifically to opine on methods by which part of an actual total purchase price might be taken to be the cost of the copyright in question, but were asked whether there was a generally accepted methodology or methodologies for valuing copyright in drawings and documents for a transmission system. That, however, is not the question to which s 124R(5) directs attention. The section is directed to the allocation or apportionment of a known total amount to part of the composite of the assets which the whole amount paid for: it is not directed to valuing the relevant asset except to the extent that the value may inform the task of allocation or apportionment. The dispute between the parties, however, was largely conducted upon the basis that the question posed by s 124R(5) was to be answered by valuing the copyright; although the parties reached radically different outcomes on that basis. Senior counsel for the taxpayer submitted in final submissions that it should be inferred that the experts had agreed, and had assumed, that the allocation of part of the total amount of the price paid for the transmission assets was to be undertaken on the basis of valuing the copyright. The Commissioner did not entirely disavow that approach and, indeed, relied upon the views of one of the valuers to maintain the position that no part of the total purchase price was to be allocated to the copyright because, as a matter of valuation, it had, in his opinion, no ascertainable separate value. The independent value of the copyright may be relevant to the question upon which the application of s 124R(5) depends, and in many cases will suggest or inform the answer to the question posed by the section (where, for example, the unit of industrial property has a ready market for its purchase and where that value can reliably be taken to have been largely reflected in the composite purchase price).

18    The unit of industrial property in question, and which was the subject of valuation evidence, was in excess of 100,000 drawings which were acquired by SPI PowerNet on 6 November 1997. What was valued was identified in several places in the evidence, including an affidavit of Mr Gary Ronald Towns dated 29 November 2012. Mr Towns is a consulting engineer and had been employed by the applicants from November 1997 to December 2011. He had spent his entire working life in the Victorian electricity industry, beginning as a junior electrical engineer in 1978 in the transmission business of the State Electricity Commission of Victoria (“the SEC”). The assets which Mr Towns knew to have been acquired by SPI PowerNet from the Victorian Government as at 6 November 1997 were described by him as including copyright in the drawings and various procedure manuals as:

1.    Some 90,000 drawings saved in electronic form on a laptop

2.    Easement plans – lines and stations

3.    Standard maintenance instructions

4.    Plant and equipment policy documents

5.    Plant defects report

6.    Primary practices and procedures

7.    Standard oil procedures

8.    Secondary practices and procedures, and relay test instructions (including in secondary practices and procedures)

9.    Secondary circuit isolation

10.    Solid state principles

11.    Electrical instrumentation manual

12.    Transducers

13.    Demand recording equipment

14.    Power system protection

15.    Line practices and procedures

16.    Live line procedures

17.    Transmission field work procedures

18.    Electrical plant and equipment – descriptive manual

19.    Asset manual strategy

20.    Standard lab test procedures and instructions

21.    Training materials – TTO training protection

22.    Vision 2020

23.    Environmental manuals

24.    Earthing code for stations

25.    Plant and equipment training slides & manuals

26.    Bushfire mitigation manual

27.    Authority to receive – electrical access permits

28.    Lab relay test instructions

29.    Wholesale metering manual test procedures

30.    GPU PowerNet Yarraville Quality Management Manual

31.    NATA Laboratory Quality Management Manual

32.    Relay settings software (RESIS).

On 2 November 1998 Sinclair Knight Merz (“SKM”) was retained to undertake a valuation of the copyright assets acquired by SPI PowerNet as at 6 November 1997 including those in the 32 categories listed above and also:

33.    Lines On line rating software

34.    Transformer On line rating software

35.    Cables On line rating software

36.    Secondary Equipment Doble Test Routines & Data.

Mr Towns was the person at SPI PowerNet primarily responsible for engaging SKM and he dealt primarily with Mr Bill Toohey at SKM.

19    The precise identity of the drawings upon which the deduction was claimed under s 124R(5) was a matter of controversy between the parties. Senior counsel for the Commissioner submitted that a reason for rejecting the taxpayer’s case was that the number of items which had been valued was not consistent and, therefore, that the valuations could not be relied upon by the Court. However, the evidence does not support that contention. It is true that the number of drawings valued is not identical in all places in which the subject matter valued was identified. However that difference is not material and was sufficiently reconciled by senior counsel for the taxpayers by reference to the evidence. The number of drawings which were valued, given their nature and size, were always understood and described as approximate. There is no reason to reject the evidence that the number chosen was sufficiently accurate to provide a reliable foundation for the valuation of the assets acquired as copyright. A written table headed “Reconciliation of Drawings” provided in submissions by senior counsel for the taxpayers explained how, and why, the number differed in different references in the evidence. It is not necessary to repeat the reconciliation in detail other than to note my acceptance that there was shown to be sufficient identity in the subject matter, and the number of the drawings in that subject matter, which was valued by SKM and subsequently by PriceWaterhouseCoopers (“PwC”). The evidence included a detailed and carefully referenced report by SKM in 1999. It identified that some 130,410 drawings had been acquired in November 1997. Of these 25,000 were excluded from valuation as being cancelled, superseded, obsolete, replaced or blank, leaving to be valued by SKM the total estimated number of drawings at 105,410. At one point SKM referred to 99,477 documents to be valued, but a supplementary report dated 10 March 1999 added a further 5,933 which reconciled precisely with the 105,410 estimated number of documents which were valued at that time. The evidence of Mr Toohey, together with the reconciliation provided by counsel, explains the apparent discrepancy in the number of drawings valued. The number of documents considered subsequently by PwC was not materially different. PwC referred to some 141,910 drawings of which some 46,000 were excluded. A taxpayer’s burden of proof does not require proof with certainty; it requires proof upon the balance of probabilities upon probative evidence. The evidence was that there were about 105,410 documents falling within the 36 categories acquired by SPI PowerNet as at 6 November 1997 which SKM valued.

20    The SKM valuation was undertaken primarily by Mr Toohey, an engineer in the electrical works section for SKM, who valued the assets at $171 million as at 6 November 1997 using the replacement cost methodology. On 29 August 2006 PwC were engaged to comment on the reasonableness of the SKM valuation as at 6 November 1997 (“the first PwC report”). Mr Towns also managed the first PwC report for SPI PowerNet and dealt with Mr John Studley at PwC. A key assumption in that report was that in estimating the cost to recreate the critical copyright it was not possible to copy the drawings and procedure manuals. The first PwC report estimated the range of the value of the assets as between $173 million and $262 million and concluded that the SKM value of $171 million was reasonable. On 22 November 2006 PwC was engaged again to provide advice in connection with the value of the copyright assets, this time as at 19 October 2005, for the purposes of the consolidations provisions upon SPANT having become the head company of a tax consolidated group (“the second PwC report”). PwC valued the copyright as at that time to be between $230 million and $332 million. Two other experts gave evidence concerning the value of the copyright drawings. Mr Wayne Lonergan was retained for SPI PowerNet and agreed generally with the methodology adopted by PwC. Mr Tony Samuel was retained by the Commissioner and expressed the view that the copyright had no value separate from the other assets which were acquired.

21    The substance of the dispute about the value of the drawings depended less upon their number than upon the impact on their value of their significance to the operation of the electricity transmission business conducted by SPI PowerNet. Both the taxpayer and the Commissioner contended that the drawings were significant to those operations but, in part for the same reason, they reached opposite conclusions about their value.

22    Mr Ficca and Mr Towns, amongst others, gave evidence explaining the significance of the drawings to the operation of the electricity transmission business. Mr Ficca had spent his professional working career in the energy industry commencing as an electrical engineer within the SEC. He gave detailed evidence about the critical importance of the drawings to the transmission business in their use for such purposes as responding to emergency situations, augmenting works, maintaining and modifying works, replacing and refurbishing works, isolation works, proximity works, decommissioning, to satisfy contractual obligations to other entities in the electricity industry, and to satisfy technical regulators and various workplace safety and bushfire mitigation laws. Mr Towns also explained the importance of the drawings and procedure manuals whenever works are required to the transmission network. Such works included those to augmentation, maintenance and modification, replacement and refurbishment, isolation, proximity, decommissioning and communications.

23    Many examples of the drawings were tendered in evidence and Mr Ficca was asked in oral testimony to explain some to illustrate their use and importance. One of the drawings, which may be used as illustrative of the very many others, was a single line diagram for the West Melbourne terminal station depicting the 220 kV network in Victoria and its subsidiary 66 kV switchyards. Its particular importance lay in the switchyard which provides services to the distribution businesses in the metropolitan area of Melbourne. The diagram does not depict the plant as a two dimensional picture of a three dimensional object but, rather, depicts the electricity movements of the circuitry and the key elements within it. Information contained in boxes at the bottom of the first page of the drawing identified who drew it and who was involved in its design and checking. It also included such information as the various revisions which had been made to the drawing and who had done those revisions and the dates upon which they had been done. It was possible from the diagram, for example, to identify that on 21 June 1994 there had been a revision which had deleted something from part of the system depicted in the drawing. A user of the drawing would be informed, for example, that there was a capacitor bank (being a type of equipment) connected to a common point of voltage via a circuit breaker. A number of switches were identified in the drawings as being on either side of the capacitor bank, thus enabling a person to switch that piece of equipment in and out relative to the common points of voltage. The diagram is filled with marks and symbols which convey meaning both in themselves and, importantly, in relation to each other. Earthing points are identified in relation to the capacitor bank and another earthing switch. Following the line down vertically, a circuit breaker is shown which picks up the flow of current in that circuit and operates various protections. The circuit breaker is depicted as a square box below which is depicted a symbol for a switch. Information of that kind does not just record historical detail; it is essential information for maintenance operations because it informs a user of the drawing of the points where the circuit breaker can be opened safely for servicing. The drawing was not just a visual depiction of information but expressed the information in a way that informed a user about the individual details in the drawing and also about the relationship those details have to each other. Copyright does not protect facts or information (IceTV Pty Ltd v Nine Network Australia Pty Ltd (2009) 239 CLR 458 [28]) but does protect the particular form of expression of the information, namely the words, figures and symbols in which the information is expressed and the selection and arrangement of that information (Ice TV Pty Ltd v Nine Network Australia Pty Ltd (2009) 239 CLR 458 [26], [28]). There were very many drawings of this kind and very many others which differed in detail and presentation of information, but all which expressed information necessary for the use and ongoing operation of the transmission network. The form of expression of the facts and information in the drawings and other documents was useful, critical, necessary and valuable to SPI PowerNet in its transmission business.

24    The Commissioner accepted that copyright subsisted in the drawings and other documents but contended, principally, that they had no separate value capable of being taken as part of the amount paid by SPI PowerNet as part of the Total Purchase Price. Three experts were called to give concurrent evidence concerning the appropriate methodology for valuing copyright in drawings and documents for a transmission system. There was substantial agreement between them but there was a sharp difference on critical matters. The three expert witnesses were Messrs Lonergan, Studley and Samuel who agreed that there were three generally accepted methodologies for valuing intellectual property, but they could not agree that there was a generally accepted methodology for valuing copyright in drawings and documents for a transmission system. The three agreed that the accepted methodologies for valuing intellectual property are an income approach, a market approach and a cost approach. They also agreed in general terms that a replacement cost methodology was appropriate but could not agree about its application in these proceedings. The critical point of difference was between Mr Samuel and the other two. Mr Samuel was of the view that a market approach was relevant to the issues to be determined in the proceedings because there had been contractor agreements which had provided evidence of the amount which a willing buyer was prepared to pay for the relevant copyright from a willing seller. Mr Samuel’s opinion, however, was, in essence, that the copyright could not possibly be sold separately from the transmission business any more than a key could be sold separately from the only car it could open. The other two experts were of the view that the market approach was not appropriate for valuing the copyright assets in drawings and documents for a transmission system because of the unique nature of the copyright assets and that there was no readily observable market for such assets. They considered that the existence of the contractor agreements did not provide evidence that the value of the copyright was nil but only that there was no additional payment for the copyright over and above the composite price for the contract performance. Another aspect of disagreement, again dividing Mr Samuel and the other two, concerned whether it was appropriate to make allowance for any costs associated with being deprived of the drawings and documents when calculating the value by the replacement cost approach in these circumstances.

25    The approach taken by Mr Samuel, upon which the Commissioner relied, does not accord with the task to be undertaken under s 124R(5). It may readily be accepted that there is no separate market for the copyright in the drawings and other documents, or for the drawings and other documents themselves, which were acquired by SPI PowerNet in 1998 any more than there might be a market for a key which will open only one car. However, the task contemplated by the section assumes that some part of the purchase price for the total assets has been paid for the unit of industrial property constituted by the drawings in the same way that it may be assumed that some part of an amount to purchase a car with a key may pay an amount for the car and an amount for the key to operate it. It is not a sufficient answer to the application of the section that the unit of industrial property may not be capable of independent sale in a hypothetical market. It may be that little of the total purchase price is to be taken as having been paid for the item of industrial property but that conclusion will not necessarily follow just because items which are sold together could not be sold separately. Similarly, as a matter of general principle, the task required by s 124R(5) is not answered by determining the separate value of one of a number of assets which were acquired together with the payment of one un-dissected purchase price. It may well be that the separate value of the copyright may best be determined by the replacement cost methodology, and that value may inform the answer to the question posed by s 124R(5), but it does not necessarily determine how much of the price actually paid is to be taken as the amount paid for the copyright. The application of any methodology for valuing an asset for the purposes of s 124R(5) will be of assistance only to the extent that it informs the inquiry required by that section: namely, how much of the actual agreed total sum is to be taken to have been paid for the item in question.

26    There may be cases in the application of provisions like s 124R(5) in which the value of a unit of industrial property acquired as part of the composite acquisition of assets may not be relevant. For that to be so, however, it must be clear that no part of the purchase price was paid for the unit of industrial property. The acquisition of the copyright by SPI PowerNet in this proceeding is not such a case and I do not consider the evidence to permit such a conclusion. Even the evidence of Mr Studley did not go that far: his view as an expert was, rather, that it had no separate value because, like his car key example, it could not be sold separately. The evidence of the other experts, and of those who were involved in the business activities of SPI PowerNet and in the purchase of the copyright, was that the copyright had value, that its separate value was capable of determination and that it had been purchased. Indeed, the evidence of those engaged in SPI PowerNet’s business, which I accept, was that the copyright was critical to the proper operation of the business. The information conveyed in the drawings and documents, and the ability to reproduce the drawings and documents, was essential to the operations of the transmission system. The tasks for which the documents were created typically required reproduction of the documents by display on computer screens or portable hand-held devices, or as printouts for staff to take for use on-site. Reproduction with tracing paper was used before photocopying became possible, as was microfiche. The drawings and documents have been digitized since the 1980s and imported to a management system called “Objective”.

27    The preponderance of the expert evidence was that the separate value of the copyright acquired by SPI PowerNet was properly to be determined, and able to be determined, by the replacement cost methodology. The three experts who gave evidence were required to prepare a joint report answering five questions before giving concurrent evidence in which their answers, and the differences between them, were explored. Their joint report was as follows:

Question 1: Is there a generally accepted methodology or methodologies for valuing copyright in drawings and documents for a transmission system?

The Experts agree that there are 3 generally accepted methodologies for valuing intellectual property (IP), but no generally accepted methodology for valuing copyright in drawings and documents for a transmission system.

Question 2: If yes, what is that generally accepted methodology or methodologies?

Matters agreed

The 3 generally accepted methodologies for valuing IP are:

•    An Income approach

•    A market approach

•    A cost approach

The Experts agree in general terms that a replacement cost methodology is appropriate, however they disagree as to its application in these proceedings.

The Experts agree that an income approach is not appropriate in these proceedings.

Matters not agreed

The Experts do not agree as to the usefulness of the market approach in these proceedings.

Reasons for disagreement

Mr Samuel is of the view that the market approach is also relevant in this proceeding, as there are contractor agreements which provide evidence of the amount incurred by a willing buyer in acquiring relevant copyright from a willing seller. In Mr Samuel's opinion, these contractor agreements, which in many instances specify an acquisition cost for copyright of nil, should be given some weight, but should not be considered to be definitive as to the market value of the relevant copyright.

Mr Lonergan is of the view that the market approach is not appropriate for valuing the Copyright assets in drawings and documents for a transmission system because of the unique nature of the copyright assets and as there is no readily observable market for such assets . (Mr Studley agrees) Mr Lonergan considers the contractor agreements are not evidence that the value of copyright is nil. The agreements state a composite price for everything and merely state that there is no additional [emphasis added] payment for copyright over and above the composite price for the contract performance. They do not state that "the acquisition cost is nil". (Mr Studley agrees).

Question 3: If yes, do any such generally accepted valuation methodologies include replacement cost methodology?

Yes, replacement cost is a form of a cost based approach.

Question 4 (a): If yes, what is the generally accepted meaning amongst valuers of replacement cost methodology?

Matter agreed

The Experts agree that the generally accepted meaning amongst valuers of replacement cost for a tangible asset is the current direct cost of replacing the asset as at the valuation date.

The Experts agree that the generally accepted meaning amongst valuers of replacement cost for an intangible asset is the current direct cost of replacing the asset plus relevant opportunity costs depending on the circumstances.

Matter not agreed

The Experts disagree as to the application of replacement cost methodology in these proceedings relating to intangible assets.

Messrs Lonergan and Studley agree that replacement cost in this circumstance includes both direct costs of replacement and opportunity costs. This is consistent with International Valuation Standards and generally accepted valuation practice.

Mr Samuel agrees that direct costs of replacement are relevant in all circumstances. He agrees that opportunity costs are relevant in some circumstances but not in this circumstance. He notes that the International Valuation Standards do not address the circumstance in which the intellectual property cannot sensibly be separated from the tangible asset to which it relates.

Reasons for disagreement

Mr Samuel takes this view because he understands that each item of copyright in this instance is specific to a tangible asset and was acquired simultaneously with that tangible asset. It would not sensibly be acquired by any willing but not anxious buyer (WBNAB) separately from that tangible asset. It is therefore necessary to assume that the hypothetical market value transaction between the WBNAB and the willing but not anxious seller (WBNAS) takes place in the same context -l,e, that the copyright should be valued as if it were being acquired at the same time as the tangible asset. It follows, on this basis, that the cost of acquiring the copyright would not include deprival (opportunity) costs.

In Mr Samuel's opinion, the inclusion of deprival costs assumes a hypothetical market that is nonsensical. This nonsensical hypothetical market is a monopoly for the assumed WBNAS that did not in fact exist. By assuming the separate sale of the copyright from the specific tangible assets to which they relate (being the Transmission System) allows for the inclusion of deprival costs that would not occur (and did not occur) in the actual market.

Mr Lonergan's view is that the market value requirement under the Spencer Test is the price that would be negotiated by a WBNAB and WBNAS. As a matter of practicality it is true that the copyright may often be acquired simultaneously with the tangible asset, but as a matter of valuation practice (hypothetical market value transaction) it is not. It is possible to transact in copyright and plant and machinery each on a stand alone basis and this is also supported by many examples in practice

where copyright is bought and sold independently .

Furthermore, Mr Lonergan is of the view that there are frequently market transactions in other forms of copyright and there is no reason to believe that in reality there would not be some financial institution willing to bid for the copyright on the basis that it would reasonably be able to expect that it could licence the copyright back to the owner of the Transmission System at a commercial rate of return. There are many other commercial situations in which copyright is licensed separately from the tangible assets to which they relate. Mr Lonergan further notes that the 2005 transaction was part of a public listing of a 49% minority interest and the joining of a tax consolidation group . There is thus no "sale of copyright at the same time as the tangible asset". The valuation issue arises under the tax consolidation provisions of the Tax Act.

Furthermore, Mr Lonergan considers that the market value should not be different for different purposes as Mr Samuel does . Mr Studley agrees with Mr Lonergan .

Mr Studley's view is that the market value requirement under the Spencer Test is the price that would be negotiated by a WBNAB and WBNAS . The willing buyer in this hypothetical transaction would consider both current direct cost of replacing the asset plus relevant opportunity costs because the WBNAB and WBNAS hypothetical scenario requires that the asset be valued on an independent, stand alone basis. (Mr Lonergan agrees)

Question 4b: If yes, does it include costs of re-gathering information for the purposes of creating a replacement set of drawings and documents?

The Experts agree that a replacement cost approach to valuing the drawings and documents would include information re-gathering costs.

Question 4c: If yes, does it include costs associated with being deprived of the drawings and documents?

The Experts repeat their response to Question 4a.

Question 5: Where the assessed market value of freehold land, easements, the transmission system and items of copyright as at 19 October 2005 exceeded the enterprise value of SPANT, is there a generally accepted method for dealing with that excess?

Matters agreed

The Experts agree that there is no generally accepted methodology for dealing with the excess as it depends on the context.

The Experts agree that if there is an excess, it would be sensible for (a) the valuation of each category of assets to be revisited to ensure those valuations were not excessive, and (b) the enterprise value to be checked to ensure it was not understated (or overstated).

The Experts agree that the definition of enterprise value is the market value of interest bearing debt plus the market value of equity on a controlling interest basis.

Subject to Mr Samuel's and Mr Lonergan's comments below, it is agreed that a proportional reduction may be a pragmatic and reasonable approach where having done (a) and (b) there is still an excess.

Matters not agreed

In Mr Samuel's opinion, assuming generally accepted valuation principles have been applied, SPANT's enterprise value would not have been determined having regard to the opportunity cost of being deprived of the transmission system. It follows that the first adjustment for the purpose of dealing with the excess would be to remove the deprival costs from the valuation of the copyright.

Mr Lonergan also notes the following:

(Mr Samuel does not provide an opinion on Mr Lonergan's notes as insufficient information has been provided to enable him to do so.)

The sum of the underlying individual assets' market values may exceed enterprise value for a number of reasons including:

•    Bargain purchase

•    Overstated liability values

•    Assets funded by creditors, non-interest bearing liabilities etc not reflected in enterprise value

•    Regulatory constraints on allowable rates of return and allowable asset bases

•    Onerous contracts, management agency issues, etc

In the time available to prepare this report it has not been possible to quantify these issues accurately.

Mr Lonergan also notes that the PWC 14.8% proportionate write down from enterprise value for ACA purposes may be based on minority interest share values rather than controlling share values . The end result being that the enterprise value set out on pages 12 and 13 in PWC's 2007 report may be understated. Therefore the 14.8% pro rata write down of asset values appears to be overstated for this reason (in addition to the easement values being in excess of their market value (1997 and 2005) and the licence value being very significantly overvalued (1997)).

Mr Lonergan's preliminary "bottom line" conclusion is that after correcting for the last mentioned issues that there may be no excess in this case.

The application of the replacement cost methodology in this case produced a value for the copyright as at the date of acquisition of $171.8 million by the process undertaken by SKM.

28    The first valuation of the copyright was undertaken by SKM between November 1998 and January 1999. An earlier valuation by SKM had been undertaken in 1994 of the network but that had not taken into account the replacement cost of the in situ assets and “did not purport to, nor did it in fact, value the drawings of the actual transmission system in 1994”. The methodology involved in the valuation subsequently undertaken from late 1998 was explained in reports by SKM and by the evidence of Mr Toohey who had been responsible for SKM’s valuation and the report. The exercise undertaken by SKM in late 1998 was to determine the replacement cost of the intellectual property contained in the copyright. The basis of the assessment included an estimate of the time it would take similarly qualified personnel to undertake the necessary work to replace the intellectual content of the drawings and other documents. The report produced by SKM in 1999 included a detailed explanation of the work undertaken to produce the estimated value of the intellectual property acquired as at 6 November 1997.

29    The report by SKM was based upon the documents made available by SPI PowerNet and SKM relied upon sampling to determine document content and to establish development times and replacement costs, and also to audit document numbers. The subject matter was considered to fall within the three categories of “Drawings or Survey Plans”, “Documents” and “Software” which were each dealt with in a separate section of the report. The methodology adopted by SKM to determine replacement cost differed as between the three categories of documents but the general approach was described in paragraph 2.5 of the 1999 report:

This review focuses primarily on the quantity, intellectual content and “cost to replace” the intellectual content of the drawings reviewed. The cost to replace the physical form of the drawings, documents etc. has not been included in the assessment ie folders, papers, printing, films.

The assessment of Replacement Cost has been based on the replacement work being undertaken by personnel with experience in the type of work (eg drafting, document writing etc in the electricity industry) using modern tools (eg software drafting packages, word processing software etc) working efficiently. The man-hour estimates per task and the hourly rates applied to the various categories of personnel reflect those that would have been offered by the “competitive market” as at November 1997. Allowance has been made for expense’s [sic] such as travel and accommodation where it would be necessary to visit SPI PowerNet’s existing sites. It has been assumed that the programme of replacement would be such that any field survey activities which require plant outages could be integrated into maintenance activities. No additional allowance has been made for the cost of outages of equipment to allow survey/investigation for the purpose of collecting required information.

Replacement of information has been based on total replacement of all documents and information contained there in, where it has been determined during the review and in consultations with GPU PowerNet representatives that the information is relevant to GPU PowerNet assets as at the 6th November 1997 and where the information is not duplicated to a major extent in other documentation.

The report does not attempt to comment on all issues identified within the available information but presents a view of those issues considered notable and/or relevant. Items not considered unusual or which do not affect functionality have not necessarily been discussed in the report.

Sinclair Knight Merz has not verified ownership or entitlement to claim the value of the Intellectual Property contained in these documents.

The representative sample of the documents valued on this basis had been provided to SKM by Mr Towns who took care to identify drawings and documents in which the purchaser acquired copyright and to exclude those in which copyright might belong to a third party manufacturer. Over 130,000 were identified in which SPI PowerNet acquired copyright upon the acquisition, of which SKM valued 105,410 that were in existence as at 6 November 1997. The 25,000 excluded were those which, upon review, were allocated a nil cost to replace them because they had been cancelled, superseded or the like.

30    In 2006, as mentioned above, PwC was asked to evaluate the reasonableness of the previous SKM valuation. Mr Towns was again the person at SPI PowerNet primarily responsible for the task and dealt at PwC primarily with Mr Studley. Mr Towns was asked for the purposes of the PwC report to classify the assets into the categories of “critical”, “important” or “useful”. Mr Towns also estimated the cost per man hour of recreating the copyright assets and the number of employee days to recreate the copyright asset. The first PwC report did not include the costs associated with: recreation of assets classified as important or useful; loss of the transmission licence as a result of non-compliance with the strict conditions attaching to the holder of a licence; the fact of not owning the control centre; the risks of litigation; and the risks of breaking debt covenants as a result of litigation. PwC concluded that the $171.8 million value adopted by SKM was reasonable. Mr Lonergan subsequently reviewed the PwC methodology and also supported the valuation.

31    Valuation is essentially a matter for expert evidence, as are the details of such established methods as the replacement cost method which was undertaken in this case to value the copyright assets acquired by SPI PowerNet. The burden of proof upon a taxpayer is to be discharged upon the balance of probabilities (McCormick v Federal Commissioner of Taxation (1979) 143 CLR 284, 303; Macmine Pty Ltd v Federal Commissioner of Taxation (1979) 24 ALR 217, 235), and the evidence in this case establishes that the drawings and documents in evidence were acquired, or were updated versions of what was acquired, pursuant to the Asset Sales Agreement as at 6 November 1997, and that the copyright in them had an identifiable separate value which was capable of valuation by established methods. The valuation of copyright is unlike the question of law which arose in Federal Commissioner of Taxation v Murry (1998) 193 CLR 605 concerning the attribution of goodwill to a licence or the other assets used to carry on a taxi business. In that case it was said at 625 that the value of the goodwill of a business, itself a separate asset, may be small where it is derived from using an identifiable asset or assets. The valuation in this case is also unlike including a claim of “special value” to a purchaser when seeking to determine the market value of an item: see Boland v Yates Property Corporation Pty Ltd (1999) 74 ALJR 209 [27]; cf Commissioner of State Taxation (WA) v Nischu Pty Ltd [1991] 91 ATC 4371. The copyright in this case is one of the assets which were acquired for a total amount and the question, in essence, is how much of that amount did SPI PowerNet pay for the copyright.

32    The evidence that the value of intellectual property acquired by SPI PowerNet at the relevant time was $171.8 million does not, however, of itself necessarily determine the amount of the deduction to be allowed under s 124R(5). The value of the unit of industrial property, in this case the copyright acquired by SPI PowerNet, might not be the amount which is to be taken as that part of the total purchase price which is to be taken to be the cost for its acquisition. The replacement cost method does not seek to determine the actual cost of the copyright sold by the vendor, and may produce an amount which differs from that which should be taken to be that part of the total price actually agreed between the parties (see: GV Smith & RL Parr, Valuation of Intellectual Property and Intangible Assets (Third Edition), 72, 157, 160-4, 197-8, 205-9, 212-4, 464, 471; W Lonergan, The Valuation of Businesses, Shares and Other Equity (Fourth Edition), 310, 318). The Commissioner relied in submissions on the views expressed in the book by Smith and Parr to support the proposition that any value of the copyright must be relatively low independent of the other assets with which the copyright was used (see Smith and Parr especially at 209 and 464); but (assuming it is proper to have regard to the opinions expressed in a text book that were not put to the experts who gave evidence at the hearing) it is not the independent value of the copyright that is required to be determined for the purposes of s 124R(5): what is to be determined is what part of the total amount paid is properly to be regarded as the amount paid for the copyright (even though it might not be capable of independent sale). The replacement cost methodology as employed by SKM seems best able to capture the amount required by s s124R(5) to be determined. The replacement cost approach was explained by Smith and Parr at 197-8 as seeking “to measure the future benefits of ownership by quantifying the amount of money that would be required to replace the future service capability of the subject intellectual property”. The copyright in contention in this proceeding was necessary to the operation of the transmission business and had to be acquired with the other assets. The cost of the acquisition of the copyright is likely to be reflected in the cost to create the copyright as the replacement cost method aims to determine.

33    The valuation undertaken by SKM in 1999 does not contain such costs as ought not to be included for the purposes of s 124R(5). The method adopted by SKM was not to determine what the copyright had cost someone to create, and, therefore, excluded historic costs which had been incurred in the initial creation of the copyright which would not be incurred if it had to be created by, for example, modern techniques. SKM was also careful to exclude from its valuation any copyright in material which, although acquired, was “cancelled, superseded, obsolete, transferred [or] not issued”. The methodology itself, as explained above, was based upon assumptions which took into account modern efficiencies and expertise rather than historic costs that could not ordinarily be recouped from a buyer. The specific application of the methodology to the three categories of copyright was also directed to capturing in the value of the copyright the cost benefit in what was acquired. In relation to the first of the three categories they assigned a value, SKM said in the 1999 report:

Assign Replacement Cost

For each category a “cost to replace” the “intellectual property” was assessed. In assessing the replacement cost it was considered that the benefit of the drawings document existing installations owned by GPU PowerNet. Broadly speaking the recreation of the “intellectual property” would involve two elements:

-    field survey to collect the data about the existing assets,

-    documenting this in an appropriate form.

(This is different to when the drawings were originally created. Those drawings were in part produced to assist in construction of those installations. They would originally have had to be “designed” where as now to create the benefit, they would need to be recreated based on the actual features of the physical assets they correspond to.)

There is an “economy of scale” effect to be considered in assessing the Replacement Cost. This applies in two ways.

Firstly, the efficiency of the field survey and documentation would be much lower if only a very small number of drawings for a particular station or line had to be recreated.

Secondly there is some similarity between drawings of the same type, all be it that they may relate to different physical assets.

Thus, due to the requirement to provide a total Replacement Cost, the costs as used, are indicative of a bulk or substantial level of replacement in staged incremental steps of a minimum of 10% of total drawings. It is felt this will allow maximum economy of scale in the replacement process and allow maximum efficiency in the use of modern electronic documentation methods. Ie. drafting, aerial survey and field investigation.

In relation to the second category the report explained:

Review and Categorise Documents

The documents were individually assessed and their content characterised, the number of pages noted and their contents reviewed for currency and applicability to GPU PowerNet’s asset base. The smaller documents were reviewed in total. A representative sample of each larger document was reviewed.

All documents were visually inspected and reviewed for complexity and relevance of content. The types of content included

    Highly technical

    Light technology

    Maintenance Policy and Procedures

    Management Policy and Procedures

The contents of some documents were noted to be twofold, namely

    broadly characterised in a particular way eg highly technical, but

    having a portion which was introductory or repetitive (and presenting relatively little or no additional information).

A “Content Mix” was assigned which represented the % of the document which contained “intellectual property” and which served to discount repetition or verbiage.

The “Applicability” of the document to GPU PowerNet’s asset base was also assessed. While most documents were considered to be 100% applicable, some were not.

For example Item 10 – Solid State Principles was a document produced many years ago, and the information would now be substantially contained in good reference books. Only a small portion is specific to assets of GPU PowerNet and not readily available from such general reference books.

Assessment of Replacement Cost

For each document a “cost to replace “the “intellectual property” of the typical page was assessed. The Replacement Cost of each document was calculated based on the following factors:

    number of pages

    $ rate per page for a typical page

    the content mix (which discounted for duplication and verbiage)

    the applicability.

Further, consideration was given as to whether entire drawings/documents duplicated information. No such duplication between documents was noted.

In relation to the third category the report explained:

The intellectual property of software could be characterised as providing “tools” which allow more effective operation of GPU PowerNet’s physical assets.

5.2 Methodology

The value of the software can be considered to be in its functionality. In some cases the functionality of the software developed by GPU PowerNet can now be found, at least in part, in commercially available software packages. Where this is the case, the replacement cost has been assessed as the cost of the software package plus the cost of “customising” it to suit the particular application and functionality provide by the existing software. If this is not the case, then the cost of redeveloping the software has been assessed.

Software was reviewed and evaluated for intellectual development time or equivalent commercial replacement cost. Necessary reference database records were also audited and collation research times estimated.

5.3 General – Software

All software was reviewed and information obtained on development time or replacement cost by commercially available software capable of obtaining equivalent results.

Where physical data was necessary for operation of the software a cost for collation or testing time was included in the total replacement cost.

The task undertaken by SKM in 1999 establishes with sufficient probability the cost of the copyright as acquired by SPI PowerNet on 6 November 1997. The process undertaken by SKM determined the value of the copyright to SPI PowerNet in its transmission business at the time of acquisition. The copyright was a necessary incident of what was acquired and, had it not been acquired, it would have had to be created to enable the business to function. The parties expressly provided for the acquisition by SPI PowerNet of the copyright and in doing so acquired something which was reliably estimated to have the separate value of $171.8 million at the time of acquisition. That amount can be taken as that part of the Total Purchase Price paid by SPI PowerNet for the copyright for the purposes of s 124R(5) unless there is some aspect of the calculation of the amount that requires modification to make it accord with the purpose of the section.

34    In this case the experts disagreed about whether the application of the replacement cost methodology in this proceeding required that some allowance also be made for indirect, or opportunity, costs. Messrs Lonergan and Studley maintained, whilst Mr Samuel disagreed, that the replacement cost methodology included both the direct costs of replacement and the opportunity cost that might be occasioned by, for instance, the loss of operation of the power plant in the hypothetic circumstance of the copyright needing to be replaced. Mr Samuel’s opinion was that the direct costs of replacement were always relevant but that the valuation assumptions required by the methodology in this case made it inappropriate to include deprival or opportunity costs.

35    The valuation of SKM by Mr Toohey, however, as previously mentioned, did not take into account deprival or opportunity costs. The absence of an allowance for deprival or opportunity cost was not shown to be inappropriate in the context of an exercise undertaken for the purposes of s 124R(5). The usefulness of the replacement cost methodology for the purposes of s 124R(5) is only to the extent that it produces an amount that may be taken to be the value of what was in fact paid for. The fact of acquisition of the copyright ensured that there was no occasion for loss or deprival costs to be incurred. The process undertaken by Mr Toohey was best designed to produce an amount, reflected in his valuation, which could be said to be that which SPI PowerNet was to be taken to have paid for the copyright. A further opinion from him was sought in October 2012 and by a report dated 27 November 2012 Mr Toohey confirmed his earlier opinion. In addressing whether the earlier opinions remained accurate, Mr Toohey wrote:

1)    The opinions I expressed in the SKM Valuation are still accurate

2)    In summary as described in those reports:

a)    I determined that the total replacement cost valuation, as at 6 November 1997, of the Copyright Assets subsisting in the 36 document categories listed in items 2-3 (at page 2) of the Original SKM Report and the additional drawings in the Supplementary SKM Report was $172,408, 265, as noted in the February SKM letter.

b)    Pursuant to the Original SKM Report and the Supplementary SKM Report, I originally determined a total replacement cost valuation of $159,593,838, comprising of $146,924,236 from the Original SKM Report and an additional $12,669,592 from the Supplementary SKM Report. Due to summation errors in these reports, I subsequently revised the total replacement cost valuation to $172,408,265, as noted in the February 2001 SKM letter, which included the revised Appendices to the Original SKM Report and the Supplementary SKM Report.

Mr Toohey was cross-examined and his opinions were not shown to be erroneous or unreliable. The amount he assessed for the value of the copyright is well within the total purchase price of $2,502,600,000. The amount is also within the amount of unallocated assets as at 31 December 1997. The balance sheet for SPI PowerNet (then called GPU PowerNet Pty Ltd) for the period ended 31 December 1997 disclosed unallocated non-current assets of $852,913,616. The amount assessed by SKM is also consistent with earlier valuations. A valuation had been made by SKM in 1994 on behalf of the Victorian State Government of the transmission assets, resulting in a valuation, without taking into account the replacement cost of the in situ assets, of $1.409 million.

36    The Commissioner also challenged both the admissibility and the probative value of Mr Toohey’s evidence. The Commissioner’s comprehensive and detailed objections in written submissions had been prepared in advance of the hearing and took many points which might not have been maintained, or raised, with the benefit of reflection after hearing all of the evidence. The Commissioner’s written submissions, however, challenged Mr Toohey’s expertise to express the opinions he gave and the reliability of the basis upon which the opinions were based. Mr Toohey’s valuations in 1999 had not been made for the purposes of this proceeding and, therefore, did not comply with the requirements for expert evidence in some respects. The fact that an expert opinion may have been prepared as an adviser to SPI PowerNet rather than as an independent expert to assist a court is something to be borne in mind when evaluating the weight, if any, to be given to the evidence of an expert: ACCC v Cement Australia Pty Ltd (No 3) (2010) 275 ALR 235 [107]; Investmentsource v Knox St Apartments [2007] NSWSC 1128 [50]. The evidence of an expert, to be useful, must also comply with the “prime duty of experts in giving opinion evidence: [namely,] to furnish the trier of fact with criteria enabling evaluation of the validity of the expert’s conclusions”: Makita (Aust) Pty Ltd v Sprowles (2001) 52 NSWLR 705 [59], [86]. In that regard the Commissioner pointed to the fact that Mr Toohey did not, when making his report in 2012, have available the “detailed workings and information [his] team and [he] used” in 1999. Without them, the Commissioner submitted, Mr Toohey could not confirm the original SKM report and the Court can be in no better position.

37    I am not persuaded by the Commissioner’s challenges either to Mr Toohey’s expertise or to the probative value of his expert opinions. Mr Toohey was engaged by SPI PowerNet to provide it with an independent expert opinion upon which SPI PowerNet was to rely. He was not engaged as an advocate but to provide his independent view and his report was expressed as that of an independent, and cautious, expert with considerable experience in valuation by the replacement cost approach in relation to electricity businesses. The task he undertook was complex and detailed and his approach was sufficiently explained to be understood and tested by the Commissioner, by subsequent experts and by the Court. It may be that in 2012 he did not then have the earlier detailed workings and information but he did have the reports he had been responsible for producing from them. It is an unfair criticism by the Commissioner of Mr Toohey to say that he, therefore, “can say no more than he has no reason to doubt” the original SKM report. Mr Toohey was not a stranger to the earlier report and when in 2012 he expressed the view that he has no reason then to doubt his earlier report he effectively affirmed his earlier conclusions. He maintained that view in oral testimony.

38    Another of the Commissioner’s challenges to the valuations was that the replacement cost method failed to value the relevant copyright. In the written submissions the Commissioner contended:

Application of principles to SPI Powernet’s replacement cost methodology

92.     Under the replacement cost methodology adopted by SPI Powernet, it is proposed that information must be gathered in the field to make new drawings, apparently to avoid infringing copyright by simply copying the drawings acquired by the Asset Sale Agreement. On consideration of the above principles, however, this reasoning is misconceived:

(a)    having regard to SPI Powernet’s access to the original works there would, likely, be a sufficient causal connection between the new drawings and existing drawings. Having regard to the nature of the drawings, (engineering drawings) new drawings would be likely, objectively, to look similar to the existing drawings. In the result, the new drawings would, likely infringe copyright in existing drawings in any event;

(b)    obtaining information independently by taking measurements of 3 dimensional structures, which are original works, so as to reverse engineer them into 2 dimensional drawings would infringe any copyright in the 3 dimensional structures.

93.    Having regard to the above, one sees that the matters that a valuer ought to have regard to, are:

(a)     the extent to which the way drawings and documents were used by SPI Powernet in the conduct of its business might infringe a third party owner’s copyright (and not the usefulness to SPI Powernet of drawings and documents or the ability to copy them); and

(b)     the consequences of any infringement of copyright.

94.    When the drawings and documents and the copyright in them had no utility outside the transmission system business, it is reasonable to expect (quite apart from the issue of an implied licence, already discussed) that any loss to the third party owner of the items of copyright would be, at best, nominal. Consequently, that third party owner would not, likely, command a high price for them.

The Commissioner conceded that copyright subsisted in the drawings acquired by SPI PowerNet but that there was no amount of the total purchase price that “one can allocate to copyright, because one can’t sensibly distinguish the benefit that copyright contributes”. A critical aspect of the Commissioner’s argument in this respect was that the relevant right to be valued was limited to the right to reproduce the drawings and that this right was relatively worthless independently of the importance of the information in what was to be reproduced, or would be worthless because the right to copy the works would be the subject of an implied licence upon the sale of the business. The Commissioner also contended that the valuable information in the drawings could be produced differently than by copying the drawings themselves if copyright had not been assigned.

39    The evidence was that the value of the drawings to the business lay in the expression of the information they contained. It may be that the information could be expressed differently but the expressions in the drawings were vital to the operations of the business which SPI PowerNet acquired. It was the expression of that information which SPI PowerNet needed to acquire and did acquire. The relevant task for the application of s 124R(5) was to determine what part, if any, of the purchase price was to be allocated or attributed to that copyright which was acquired. The experts’ evidence was that the drawings could be valued using the replacement cost methodology and the lay witnesses gave evidence of the business value of the expression conveyed in them. The expression of the information in the drawings was that which gave them value, and any need to copy them lay in the importance of what was expressed in them. I do not, therefore, consider that the valuation undertaken by SKM was misconceived or unreliable.

40    A variation of the Commissioner’s challenge to the SKM report was that it “valued the wrong thing”; that is, that the valuation assessed “the replacement cost of documents or information” whereas it ought to have valued “the right to copy or modify the drawings, manuals and other documents in question”. Central to this argument was the distinction between copyright in a work and both the property in that work (see Pacific Film Laboratories Pty Ltd v Federal Commissioner of Taxation (1970) 121 CLR 154) and the facts or information contained in that work (see IceTV Pty Ltd v Nine Network Australia Pty ltd (2009) 239 CLR 458, [28]). The Commissioner reasoned that the relevant right to be valued was that of copying the drawings and that none of the information contained in them added to their value. The Commissioner’s written submissions put the matter by contending:

60.     Like the drawings and documents, the items of copyright were used only internally. SPI PowerNet did not use the items of copyright to attract, or contribute to, an identifiable income stream.

61.     In the case of the items of copyright, once their limited nature is properly understood, it may be seen that they were used only incidentally to enable workers to use the information contained in the drawings and documents in an efficient and convenient manner. For example, field workers might take copies or use laptops to view digital reproductions of some of the drawings or other documents to retrieve information that they needed to undertake a specific task on the system. Whilst it is recognised that SPI Powernet required a right to copy the drawings and documents on a regular basis in the ongoing operation and maintenance of the transmission system, this does not mean that the right to copy is a separate asset to be allocated material value.

62.     Neither the relevant documents, which contain valuable information and explain the transmission system, nor the right to copy or modify those documents, attract, or contribute to, an identifiable income stream. The right to copy is an incidental asset which does no more than facilitate making use of the information in the relevant documents. One might distinguish here between assets which are sold for the purpose of generating income (such as a book which is not sold with the right to copy) and assets which are not sold for the purpose of generating income. In the latter case, the right to copy or modify would usually be acquired in conjunction with the document which contains information of use only to the organisation which acquires it, in this case, the operator of the transmission system. (References omitted)

It is true that copying the drawings was an incident of the business of SPI PowerNet and that, to that extent, the ability to copy (and thereby use) the drawings was important. However the reason it was important was because of the information expressed in the copyright works. The protection given by copyright is not a bare right of reproduction independently of the information contained in the work but, rather, is given in respect of “the particular form of expression in which an author convey[s] ideas or information to the world”: IceTV Pty Ltd v Nine Network Australia Pty Ltd (2009) 239 CLR 458 [26]; quoting from Hollinrake v Truswell [1894] 3 Ch 420, 424 per Lord Herschell LC. The SKM valuation did not value the wrong asset when seeking to determine the cost to replace the drawings (or other works in which copyright subsisted). An aspect of this contention by the Commissioner was that the information needed by SPI PowerNet could have been produced in drawings and works which differed from those it acquired in the purchase, but that fact does not establish that the copyright assets which were acquired did not have the value estimated by SKM and, on one view, makes good the contention for SPI PowerNet that part of the purchase price was paid for that which would otherwise have to have been created to operate the system.

41    I need not consider separately the first valuation undertaken by PwC in 2006 commenting upon the reasonableness of the earlier SKM valuation beyond observing that it adds support to the reliability of the SKM valuation albeit that it was undertaken on a different basis.

42    I turn next to the claim by SPANT. The claim by SPANT is in respect of the period from 19 October 2005 to 31 March 2011. On that day, SPI PowerNet formed part of a tax consolidated group as part of a public float of the combined SP Australia Networks (Transmission) and SP Australia Networks (Finance) Trust Stapled Group. SPI PowerNet ceased to be assessed separately for income tax purposes from that date and, by operation of s 701-1(1) of the 1997 Act, the assets of SPI PowerNet were treated as assets of SPANT for tax purposes.

43    Section 701-10(4) of 1997 Act had the effect of re-setting the tax cost to SPANT of each of the assets of SPI PowerNet on consolidation at its “tax cost setting amount” calculated in accordance with Sub-division 705-A as modified by Sub-division 705-B of the 1997 Act. Under s 701-55 each depreciating asset of SPI PowerNet was taken to have been acquired by SPANT for a payment equal to its tax cost setting amount. Section 705-35 identifies how the tax cost setting amount is to be calculated in respect of each asset. Section 705-35 provides:

(1)     For each asset of the joining entity (a re-set cost base asset) that is not a retained cost base asset or an asset (an excluded asset) covered by subsection (2), the asset’s tax cost setting amount is worked out by:

(a)    first working out the joined group’s allocable cost amount for the joining entity in accordance with s 705-60; and

(b)    then reducing that amount by the total of the tax cost setting amounts in accordance with s 705-25 for each retained cost base asset (but not below zero); and

(c)    finally, allocating the result to each of the joining entity’s re-set cost base assets (other than excluded assets) in proportion to their market values.

The Commissioner accepts SPANT’s contentions in respect of subsections 705-35(1)(a) and (b). In other words, the Commissioner accepts that the allocable cost amount for the purposes of s 705-35(1)(a) was $2,124,334,718. The Commissioner also accepts SPANT’s contention that the total of the tax cost setting amount for the purpose of s 705-35(1)(b) was $57,601,240. The dispute between the parties, therefore, concerns only the application of s 705-35(1)(c). SPANT contended that the total market value was $223,691,137. The Commissioner disputed the allocation of the remaining allocable cost amount to items of copyright in existence at 19 October 2005 on the basis that they had that market value. SPANT relied upon the second PwC report, dated 26 February 2007 and prepared by Mr Studley of PwC, to establish the market value of the items of copyright as at 19 October 2005. The Commissioner contended that the second PwC report was inadmissible and of little probative value.

44    One of the Commissioner’s many challenges (in the written submissions prepared before the hearing) to the second PwC report was that Mr Studley was acting as an adviser rather than as an independent expert expressing an independent opinion to assist the Court. I do not accept the submission. The submission drew its primary foundation upon an introductory sentence in Mr Studley’s letter describing his retainer as being “to provide [SPANT] with advice in connection with the value of the intellectual property (copyright) in certain assets” (my emphasis). There was no suggestion in Mr Studley’s letter that the word “advice” was being used in any sense other than a description of the task he was able to perform, namely to express an independent opinion. Indeed, when setting out in his letter the scope and purpose of the task he was undertaking, Mr Studley expressed his understanding of his task to be to fulfil the requirement which had been sought, namely for PwC “to provide a value assessment” of the assets for taxation purposes. In setting out the limitation of the scope of the work PwC was going to undertake, Mr Studley explained:

We anticipate that our report will include consideration of a potential value range for the Assets, however it will not present a formal opinion of value. (Emphasis added)

The letter otherwise made clear that an independent valuation was understood to be the required task and an independent valuation is what the report provided in unmistakable terms, namely, that the valuation of the subject matter was within a range but was “approximately $239 million at 19 October 2005”. Mr Studley confirmed that opinion in oral testimony at the hearing of the proceeding as having been “the mid-point valuation” within the range. It may be true, as the Commissioner contended, that Mr Studley’s report was not prepared “with a conscious appreciation of the obligations by Practice Note CM7” (by which the Commissioner relied upon the fact that Mr Studley had not been given the Practice Note at the time when he had been asked to prepare the report in 2006), but he was aware that the report was sought for taxation purposes and he may be assumed to have been aware of the duties imposed upon him by law, including those duties imposed by tax laws about making statements that are true, correct and not misleading. Litigation was not pending when he was asked in 2006 to prepare the report, but he was aware of his duties under the Practice Note when he adopted his report for the purposes of giving evidence in the proceeding in an affidavit dated 14 November 2012 and also when he provided a joint report with other experts (including Mr Samuel who had been retained by the Commissioner) and when giving oral testimony both concurrently with the other experts and separately at the conclusion of the concurrent evidence.

45    The process undertaken in preparation of the second PwC report was explained by Mr Towns who, with Mr Studley, had been involved in the first PwC report. The second PwC report was based upon the same valuation principles as PwC had applied in the first PwC report. In August 2006 SPI PowerNet had engaged PwC to comment upon the reasonableness of the SKM valuation of the copyright assets. In that process Mr Towns had (a) classified the copyright assets into the three categories of critical, important or useful, (b) estimated the cost per man hour of recreating the copyright, and (c) calculated the number of man days required to recreate the copyright assets. Mr Towns classified the assets: as critical “if the business required them to operate sustainably”; as important “if operating without the relevant drawing or procedure manuals would have significant or consequential impact on the business”; and as useful if the relevant drawing or manual would be beneficial to the business. The valuation range given in the first PwC report was concerned only with the first category of copyright assets, namely, those classified as critical. To these PwC applied the costs and times which Mr Towns had calculated and which he explained in detail in his evidence.

46    The second PwC report adopted the same process and valued the copyright assets as at 19 October 2005 to be between $230 and $332 million but assessed at the mid-point of $239 million. The second PwC report concluded by saying:

We conclude that the assessed market value of Critical IP is approximately $239 million at 19 October 2005. This is after considering an adjustment reflecting the cap on value resulting from the Enterprise Value at 19 October 2005. The assessed market value of Critical IP is approximately 9.0% of the Enterprise Value at 19 October 2005 compared with approximately 8.5% at 6 November 1997.

Mr Studley confirmed in oral testimony his valuation of the copyright as the mid-point in the valuation range using the replacement cost methodology which the three experts had considered in a joint report for the assistance of the Court and about which they had given concurrent evidence.

47    The Commissioner’s many challenges to the valuations relied upon by SPANT are not supported by the evidence. The Commissioner, for example, contended in his written submissions that “the second PwC report is not a valuation”, but, in contrast, the experts in valuation gave evidence which was to the contrary. All of the experts, including Mr Samuel who had been engaged by the Commissioner, agreed that replacement cost was a generally accepted method for valuing intellectual property and the disagreement between Mr Samuel and the other valuers was not about whether what Mr Studley had done was a valuation or an application of the replacement cost methodology. Nor was there any evidence that what was done by Mr Studley was anything other than a reliable and independent assessment of value upon which the Court could base its findings: such dispute between the valuers as there was, was about objective theoretical professional differences.

48    One of the differences between the valuers, as previously mentioned, concerned the appropriateness of a valuation taking into account indirect costs such as the opportunity costs of, for example, a shut-down where necessary to replace relevant drawings. The issue arose because the only method for valuation before the Court was a replacement cost method. There was evidence of the Commissioner having had available, but did not reply upon, a valuation by VAA which had produced a different value whilst concurring with views which had been expressed by the then prior valuers that the replacement cost was the best approach to determine the value of the intellectual property in dispute. Indirect costs like deprival or opportunity costs could be excluded as a matter of statutory analysis in the application of s 124R(5) (where the question was what proportion of an amount actually paid for many assets was to be taken to be the price paid for an asset) but may not be excluded for the purpose of s 705-35(1)(c) (where the question is the market value of an asset).

49    The preponderance of the expert evidence was that the application of the replacement cost methodology generally required taking into account opportunity costs. Even Mr Samuel was of the view that the replacement cost methodology usually required allowing for opportunity costs. During the concurrent evidence the experts said:

MR SAMUEL: May I answer that. Not quite. In fact, the real dispute arises prior to that and on a previous point that we have been discussing. It really arises on whether you should value it entirely in the copyright, entirely in separation from the circumstances or any other asset and it’s that point at which we diverge. If we’re in replacement cost and we are valuing it in isolation, then we’re actually in agreement that opportunity cost would usually be included. It depends – in some circumstances, there won’t be opportunity costs. We’re actually, at that point, I think, in agreement.

MR STUDLEY: Yes.

MR LONERGAN: I think so.

MR SAMUEL: Yes. So the issue actually arises at the first point which we were discussing before as to whether you would, in fact – is it sensible, if you like, in valuation theory to value that copyright separately from the circumstance being, as I say, that you would never actually acquire it other than in conjunction with the transmission system. So that the ..... cost issue follows from that.

MR GLICK: Staying with – thank you. That’s very helpful. Thank you. But, Mr Samuel, staying with that point for a moment, if I may, should his Honour understand this, leaving aside why the difference has emerged, when it comes to the methodology of valuation of the asset copyright, replacement cost is the agreed methodology.

MR SAMUEL: Yes.

The difference between the experts about opportunity costs depended, therefore, upon whether it was possible to value the copyright asset separately from the other assets. On that point, Mr Samuel’s view depended fundamentally upon whether the copyright in this case had separate value:

MS SYMON: Well, Mr Lonergan, have you got anything further to add to this question of the importance of segregating the asset and economic benefits and why that’s important.

MR LONERGAN: I think I would take a slightly different view to the one expressed by Mr Samuels who, as I understood what he said, that if assets operate together, then separating them isn’t sensible. Very often, you know, in more modern times, one separates those assets for financial engineering or economic benefit purposes so that it’s not the case, as it might have been a long time ago, where these things stayed together interlinked and intrinsically inseparable. It’s actually relatively easy to separate many of these things out. It’s a matter of commercial practice. Sale of a lease back being an example, licensing arrangements, etcetera.

MS SYMON: The asset which you were asked to consider, gentlemen, was copyright in drawings and documents for a transmission system and bearing that in mind, and perhaps coming back to page 2, Mr Samuel has expressed the view that there are circumstances in which the intellectual property can’t sensibly be separated from the tangible asset to which it relates. And then Mr Samuel gives some reasons – there were some reasons given for Mr Samuel’s view which are couched in terms of the willing but not anxious buyer. The discussion we have just been having suggests, though, that there might be features which affect the ability to separate an asset and the economic benefits attributable to it and I wonder if you could comment on the ability to segregate in the context, particularly, of the asset which is the copyright in the drawings and documents for a transmission system.

Is there something about the relationships between the copyright of the drawings and documents and the transmission system itself which makes – that is, features of this

particular asset which affect the segregation of the asset and the economic benefits attributable to it? Mr Lonergan first.

MR LONERGAN: There’s a number of issues in what you have just summarised. I wonder which particular question you wish to put to me.

HIS HONOUR: May I take up that and invite you to reformulate your question so that I can follow it.

MS SYMON: Certainly, your Honour.

HIS HONOUR: Are you asking whether, as a matter of valuation theory, there is a difficulty about segregating assets of the kind here in question?

MS SYMON: Yes, your Honour.

HIS HONOUR: Would that be a helpful way of asking the question?

MS SYMON: Yes, your Honour, bearing in mind that the asset is the copyright in drawings and documents for a transmission system.

HIS HONOUR: Yes, I’m happy for you to add that on.

MS SYMON: Yes.

HIS HONOUR: I just thought I might reformulate the phrase, that was all.

MS SYMON: Thank you, your Honour. Happy for your Honour to do that.

HIS HONOUR: Have another go now.

MS SYMON: I’m not sure – I thought – I was going to say it like he said, your Honour.

HIS HONOUR: I see, all right.

Well, I think the question is whether there is any difficulties, as a matter of valuation theory, about valuing assets of the kind that are in question here, bearing in mind their nature as

MS SYMON: Copyright in drawings and documents for a transmission system.

HIS HONOUR: Yes.

MR LONERGAN: The answer is, in valuation theory, no, you can value theoretically anything on a hypothetical transaction basis. The practicalities may be – it would not be common practice because without the two parts, one can’t operate

without the other. But having said that, there are many circumstances where people do separate the ownership of physical assets from the copyright upon which it depends.

MS SYMON: Mr Studley.

MR STUDLEY: I would concur with what Mr Lonergan has just said. I would give an example – for example, a telecommunications company that has customers with mobile phone contracts, those mobile phone contracts with those customers are intangible assets and invariably there’s a relationship between those and the network of the telecommunications company but that does not mean to suggest that you can’t actually separately identify and value those two assets. It’s not – there’s also examples where telecommunications customers have been purchased by other communications providers and fair value has been exchanged for the intangible asset independent of the other assets. And so I don’t see any impediment, no.

MS SYMON: Mr Samuel.

MR SAMUEL: Yes, I differ from Mr Lonergan slightly. I think you can value nearly everything in isolation. That does not necessarily mean that the context is always that you have to separate it and value it in isolation which is – I think a point will come – that will emerge from other things we’re discussing. There is, here, in the context of this copyright in drawings, in the context of the transmission system, I think two areas where this issue arises. One, as to whether you can separate the drawing – the documents from the transmission system to which it relates and the second one is whether you can then separate the information in the document from the copyright itself. So I think there are challenges there because I don’t think valuation theory necessarily gives us a prescriptive approach on what to do in those circumstances. I might just take up the Telco example that Mr Studley has just used because I agree there and I have been involved in similar contracts. You can break up a contract with multiple elements and value the individual components but ultimately there’s one stream of cash flows arising from the contract and so it’s that one stream of economic benefits that you’re seeking to carve up. By separating them, you don’t create a different stream of cash flows. It’s still the same stream of cash flows that you’re seeking to value. The issue only becomes how you allocate it or how you determine the individual components.

The conclusion to be drawn from the evidence is not that opportunity costs should be excluded from the disciplined application of the replacement cost method to determine the value of copyright, but that in determining the market value of any asset within an enterprise there may need to be an adjustment to ensure that its market value fairly reflects its proportion of the market value of the enterprise as a whole. That appears to be the point of the concluding observation made by Mr Samuel in the extract above from his evidence that if there is only one stream of cash flow to be valued it becomes a question of allocation of the value between the elements that give rise to that value. It also appears to be the point of the adjustment which was made to the value of the copyright in proportion to the value of the other assets as was contemplated by the fifth question in the joint report.

50    The experts explained that the market value of individual assets may exceed the total value of the enterprise and that there was no generally accepted methodology for dealing with the excess. Section 705-35(1)(c) contemplates allocating an amount to the reset cost base assets “in proportion to their market values”, and in that allocation it may be assumed that the market values will, at least in some cases, be determined by reference to the market value in the enterprise as a whole. The experts agreed that, when the total market value of separate assets exceeded the enterprise value, it was a pragmatic and reasonable approach for there to be a proportional reduction of the value of the assets.

51    Mr Studley in the second PwC report had been careful to ensure that the valuation of the copyright assets was not overstated as a proportion of the enterprise value of SPANT. An enterprise value of SPI PowerNet had been undertaken for the purpose of ensuring that the assets recorded in the Initial Public Offering (“IPO”) had not been stated in excess of their fair value. The copyright assets valued in the second PwC report had not been identified in the IPO but the assets did exist. The assessed market value of the tangible assets which had been identified at the time of the IPO still exceeded the assessed enterprise value and had been reduced proportionately for accounting purposes on the basis that their aggregate value could not exceed the enterprise value. Mr Studley considered that the value of the copyright assets valued in the second PwC report should be reduced proportionately with the tangible assets because of the close proximity between them. The mid-point value for the copyright assets had been $280 million before the proportionate reduction and $239,102,710 after the proportionate reduction. The ACA allocated on this basis, after other adjustments, was calculated at $162,711,808 and that calculation, which I accept, was not otherwise in dispute.

52    A separate issue arises in relation to SPI PowerNet in the 2001 year of income. In that year the Commissioner imposed a 25% penalty on SPI PowerNet in respect of the 2001 income year pursuant to s 284-75(2) of schedule 1 of the Administration Act on the basis that SPI PowerNet had failed to adopt a reasonably arguable position. The conclusions in favour of SPI PowerNet on the substantive issue concerning liability make it unnecessary to deal with the penalty issue but it may be desirable to express some views about the identification of the position about which the issue arose.

53    Section 284-15 deals with when a matter is “reasonably arguable”, and provides:

(1) A matter is reasonably arguable if it would be concluded in the circumstances, having regard to relevant authorities, that what is argued for is about as likely to be correct as incorrect, or is more likely to be correct than incorrect.

Note: For the effect of transfer pricing documentation on when a matter is reasonably arguable, see Subdivision 284-E.

(2) To the extent that a matter involves an assumption about the way in which the Commissioner will exercise a discretion, the matter is only reasonably arguable if, had the Commissioner exercised the discretion in the way assumed, a court would be about as likely as not to decide that the exercise of the discretion was in accordance with law.

(3) Without limiting subsection (1), these authorities are relevant:

(a)     a *taxation law;

(b)     material for the purposes of subsection 15AB(1) of the Acts Interpretation Act 1901;

(c)     a decision of a court (whether or not an Australian court), the*AAT or a Board of Review;

(d)     a *public ruling.

The operation of this provision requires the identification of “what is argued for” and a judgment about whether that “is about as likely to be correct as incorrect, or is more likely to be correct than incorrect”.

54    The identification of “what [was] argued for” for the purposes of the application of the provision is, no doubt, not to be undertaken narrowly. However, it would not be sufficient, for example, to identify the subject matter of enquiry as something as broad as an assertion by a taxpayer of an entitlement to a tax deduction. In this case the parties had different formulations of what was said to have been “argued for”. SPI PowerNet identified its claim to a reasonably arguable position as being, essentially, “a valuation issue” that “the copyright has a significant value”. The Commissioner identified SPI PowerNet’s position generally as being that “the relevant income tax laws [were treated by SPI PowerNet] as applying in such a way that the Commissioner determined under s 124R(5) that the total cost of the items of copyright was $171.8 million”. The Commissioner’s formulation of what had been argued for was said to depend upon a number of assumptions including:

(a)    that the only relevant consideration when making a determination under s 124R(5) is the market values of the assets purchased;

(b)    that, in determining the replacement cost for the items of copyright for valuation purposes:

(i)    the cost of recreating the information contained in the documents in which the copyright subsisted should be included;

(ii)    deprival costs to the business should be included, calculated under a hypothetical scenario when SPI PowerNet purchased the business without the items of copyright;

(c)    that the items of copyright were not properly to be included or accounted for in the costs of other assets acquired by SPI PowerNet;

(d)    that the cost of the items of copyright had not already been depreciated as part of the cost of the transmission system assets.

It is not clear from this formulation of what was said to have been “argued for” whether the assumptions are to be treated as independent arguments or as individual steps of one argument concerning the operation of s 124R(5). Neither formulation, however, takes into account the reversal of the position of both parties concerning whether s 124R(5) depended upon the exercise of a discretion or operated objectively like the provisions considered in WR Carpenter.

55    It may be that the penalties issue in the 2001 year could not usefully be determined without further refinement of the position which the taxpayer argued for in that year. The conclusion that SPI PowerNet was correct in its contentions, however, makes unnecessary any further consideration of whether its position was sufficiently identified for a consideration of whether it was reasonably arguable. However, the description by SPI PowerNet in these proceedings of the position it argued for (assuming, but without deciding, that the description was sufficient) was reasonably arguable. It was based upon sound valuation principles and depended upon an arguable construction of the operation of s 124R(5).

56    In these proceedings there will be orders setting aside the Commissioner’s decision and a remittal of the matter to the Commissioner to re-determine the assessment in accordance with these reasons. The parties will be heard on the form of orders and on any question concerning costs.

I certify that the preceding fifty-six (56) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Pagone.

Associate:

Dated:     25 March 2014