The case in FCT v Citylink Melbourne Ltd  is build on the law regarding general business income deductions under the Australian taxation law which is based on the Income Tax Assessment Act. The law involved a case between the Federal Commissioner of Taxation and Citylink Melbourne Limited over matters related to annual concession fees (in respect to the Concession Deed which entered between the State and the Company which granted certain rights to the company for the contract period) which were payable by the Citylink to the State government.
The case was heard in 20thh July 2006 at the High Court of Australia. Basically, the law falls under section 8(1) of the Income Tax Assessment Act regarding the general provision for income deductions. In similar to other cases like Arthur Murray and J Rowe & Son, the case raises the question on when income is supposed to be recognized for taxation and how deduction are to be allocated to their respective years of income (timing of Citylink’s deductions) .
The above case stipulates that a practical approach followed in determination of the question raised regarding whether an outgoing or a loss has been incurred instead of following strict juridical procedures. Likewise, the case validates that the preferable principles are applicable in other situations outside financial transactions. Generally, the high court held that the annual concessions were supposed to be paid (deductable) by the Citylink limited to the Australian state as they accrue. The following points can be inferred in support of the Commissioner’s arguments regarding the above case.
(i) A critical analysis of the above case reveals that the concession fees were incurred during the relevant company’s years of income and therefore Citylink limited had a contractual liability to pay such concession fees failure to which the Commissioner was to sue the company for breach of the term and conditions contract under the Concession Deed. (ii) In contrary to the Commissioner’s argument that the concession fees were not properly referable to the relevant years of income, the High Court of Australia made ruling that such expenses (concession fees) were preferable to their respective income years.
It was relevant for the commissioner to reframe the statement the (decided issue) which involved deciding whether the amounts disputed were incurred in its preferred year of income or not. Moreover, the Commissioner did not adequately support his statement which is early mentioned above, that the concession fees not preferable to their years of income, using the matching principle. The matching principle states that revenues should be matched with the expenses incurred in generation of such revenues.
The principle if properly argued would have clarified the disputed issue by determining the company’s accounting period in which its expenses and revenues were recognized. According to the matching principle, the concession fees were supposed to be recognized only and only when obligations requiring their payments are incurred for instance after the services have been rendered, and when they are used to offset against revenues generated out of such expenses regardless when cash is to be received.
(iii) In taxation law, the conditions that affect timing of discharge do not bring about a contingent liability. It was significant for that commissioner to drop his allegations of creating a contingency liability on the side of Citylink Melbourne Ltd. Ideally, a contingency liability cannot legally result to a loss or outgoing despite of such a contingent will be satisfied. (iv) The decision made by court that the concession fees (being like any other periodical fees) were payable for its period and that the outgoings had no sheltered future rights in acceptable.
Section 8(1) of the Income Tax Assessment Act outline clearly that any outgoing or loss incurred may be deducted even before it’s paid. Nevertheless, it’s necessary to observe the terms and conditions of the Concession Deed. The deed outlined clearly when and how such payments were to be made to the state. Thus the (v) It’s important to note that the concession fees, unlike periodical installments resulting from purchase of assets that are capital in nature, are characterized by periodic license fees which must be surrendered to the State upon the end of the income period until the end expiration period of the contract.
Furthermore, the Income Tax Assessment Act provides that a company cannot deduct a loss or outgoing under the section to the extend to which such deduction is a business loss or an outgoing of capital or such as loss is of capital in nature or such a loss is of private of domestic in nature and that if the loss was incurred in respect to generation of income. (vi) In clear terms, the Commissioner would have raised an issue disagreeing with the assumption (statement) made that the losses were the same as outgoings.
In this case, the concession fees were to be regarded as outgoings and not as losses. It was therefore fundamental to deduct the gross amount each payment as opposed to deducting the net amount. Bibliography Greenwoods &FreeHills 2006 High Court confirms deductibility of concession fees - FCT v Citylink Melbourne Limited (Transurban), [Online], Australia, Greenwoods & FreeHills. Availablefrom:http://www. gf. com. au/477_High%20Court%20confirms%20deductibility%20of%20concession%20fees. htm [Accessed on 26th May 2011]