KL Beddoe SM

Administrative Appeals Tribunal


Judgment date: 29 November 2002

KL Beddoe (Senior Member)

On 17 June 1994 the applicant's agent applied for a private ruling that assistance grants received or to be received from the Commonwealth Government could be offset against the cost of plant installed or to be installed by the applicant in its business as a recycler of waste paper. The matter has its genesis in the removal of the sales tax exemption in respect of recycled paper products in 1992, and a subsequent decision to provide assistance to manufacturers of recycled paper who had made investment decisions on the basis of the previous exemption of certain recycled paper goods from sales tax.

2. After obtaining further information the respondent gave the applicant a private ruling dated 21 December 1994. The ruling was to the effect that the assistance payments were assessable income, or, in the alternative, the payments were assessable as a capital gain. In making that ruling the respondent relied on the information contained in the following documents:

  • (a) application for private ruling dated 17 June 1994 (T3);
  • (b) Commonwealth Treasurer's letter dated 14 December 1993 addressed to Senator Kernot (T4A);
  • (c) Price Waterhouse letter dated 12 July 1994 addressed to the respondent (T4B);
  • (d) Report of a telephone conversation of 30 November 1994 (although it seems the respondent relied on the unrecorded conversation rather that the report) (T4C);
  • (e) Senate Hansard of 8 September 1992 (page not shown) (T4E); and
  • (f) Senate Hansard of 14 October 1992 at pages 1763 to 1776 (T4D).

By notice dated 1 February 1995 the applicant, by its agent, objected against the ruling.

3. In a notice dated 5 August 1999 the respondent disallowed the objection. The essence of that decision was that the assistance provided by the Commonwealth Government was assessable income within the terms of paragraph 26(g) of the Income Tax Assessment Act 1936 (``the Act'') being a subsidy as explained in case law and not compensation for investment in plant as explained in the Hansard Reports of Parliamentary proceedings.

4. The applicant subsequently lodged an application for review of the decision.

5. At the hearing Mr Gotterson QC appeared for the applicant and Mr Logan SC appeared for the respondent. The documents lodged in the

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Tribunal pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 were marked as Exhibit 1 and a copy of a letter by the Treasurer dated 23 July 1993 was marked as Exhibit A. No oral evidence was given. Following the hearing the applicant made further written submissions but the respondent has not made any further submissions in response.

6. The applicant carried on business in Australia as a manufacturer of toilet and facial tissue. Sales tax at 20% had been charged on such goods except where the goods were manufactured from recycled materials. Apparently seeking to take advantage of this concession the applicant made a substantial investment in paper recycling plant, such investment to be over three years from January 1992.

7. In June 1992 the Commonwealth Government announced that the exemption for tissue and other paper products made from recycled materials would cease from 26 June 1992. Eventually Parliament legislated to give effect to the announcement. The Government's proposal to remove the exemption was controversial and, it seems, enactment of the legislation was facilitated by a further decision to provide a temporary assistance scheme for manufacturers who had invested in plant with the expectation that the sales tax exemption for tissue made from recycled materials would remain in place.

8. The applicant was a beneficiary of the temporary assistance scheme and received the following payments from the Commonwealth Government via the State Government:

   Year ended 30 June 1994   3,691,336
   Year ended 30 June 1995   2,676,904
   Year ended 30 June 1996     423,676

9. I understand those payments to be in the nature of ``ex-gratia'' payments there being no statutory basis for the amounts of the payments. I also understand that the payments were based on sales tax liability as distinct from capital investment in plant.

10. However it is not for this Tribunal to make findings of fact in the normal way but to confine itself to the facts put before and identified by the respondent when the private ruling was made (
FC of T v McMahon & Anor 97 ATC 4986). It is the facts identified by the respondent for the purpose of making the private ruling that are to be considered by this Tribunal in a review of the ruling. Disputes as to what are the real facts are to be resolved in review of an objection decision relating to an assessment of income tax.

11. I have set out in paragraph 2 above the material which the respondent contends is the only material which the Tribunal can have regard to in accordance with the decision in McMahon.

12. The applicant contends that I should also have regard to Exhibit A. That is a copy of a letter, by the then Treasurer, dated 23 July 1993 and addressed to Coopers and Lybrand. It was said to be merely confirmation of the material identified by the Commissioner.

13. After consideration of the submissions I am satisfied that the Tribunal is confined to the material identified in the respondent's ruling that is the assumed facts stated in the ruling (Sundberg and Merkel JJ in
United Energy Limited v FC of T 97 ATC 4796 at 4806). It has already been noted an officer of the respondent had discussions with, I assume, a representative of the applicant. Those discussions are not recorded as to their content so that the Tribunal is precluded from taking the content of those discussions into its consideration.

14. The Treasurer's letter of 14 December 1993, addressed to Senator Kernot, distinguished the position of manufacturers of recycled paper from the position of the paper converters who manufacture paper products from recycled paper. The former were to receive the temporary assistance but the paper converters, as the manufacturer of the paper products, were not. It is clear enough that the Treasurer was of the view that manufacturers of recycled paper, such as the applicant, were to be the recipients of the assistance. The Treasurer seemed to envisage that the assistance paid would be factored into prices so as to lower the price of recycled paper to manufacturers of paper products (paper converters). That is a supposition by the Treasurer which, at best, gives some guidance as to the purpose of the assistance payment but, in my view, not as to the character of the payments in the hands of the recipients.

15. In a letter to Senator Coulter dated 9 September 1992, and recorded in Senate Hansard of 14 October 1992, at page 1765, the Treasurer said:

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``the first payment, to be made as soon as practicable, would be calculated on the basis of the estimated wholesale sales tax that would have been paid on the product of the producers in the year ending 30 June 1992 if that product had not been exempt from wholesale sales tax.''

16. This paragraph seems to take into account that it was likely the producers would very often supply downstream manufacturers such as paper converters and that the actual liability to pay sales tax rested on the paper converters or their customers. However it seems to be clear that the assistance was thought to be related to sales tax liability rather than capital investment. That is made clear by the Treasurer's response to questions recorded in Senate Hansard of 8 September 1992. The Treasurer stated, in part:

``The transitional assistance enables specialist recycled paper manufacturers who invested in equipment used to make waste paper into 100% recycled paper to adjust to the removal of the sales tax exemption''

(underlining added)

17. It seems to me reasonable to infer that the increase in the ultimate price of paper products no longer exempt from sales tax would result in price reduction caused by competition from papers made from non recycled materials, with the ultimate reduction being borne by the recycled paper manufacturers rather than paper converters and wholesalers. It seems likely therefore that the adjustment referred to by the Treasurer was for a price adjustment rather than some other adjustment and should be characterised as compensation for an adverse price adjustment.

18. The respondent asserts that the Tribunal is not limited in the way explained in McMahon when considering relevant legislation. In particular Mr Logan SC submitted that the Tribunal should take into account the relevant appropriations made by the Parliament as exampled in Appropriation Act (No 6) for 1992/1993 being Act No 20 of 1993. Division 977, Department of the Treasury provided for the following appropriation:

   ``14. Queensland -- Transitional
         Assistance for domestic
         producers of 100% recycled
         paper products                    $3,860,000''

I am satisfied that submission is correct in so far as it requires the Tribunal to take relevant legislation into account to determine the character of the payments.


19. Paragraph 26(g) of the Act relevantly includes in assessable income any bounty or subsidy received in or in relation to the carrying on of a business, and such bounty or subsidy shall be deemed to be part of the proceeds of that business.

20. In
First Provincial Building Society Limited v FC of T 95 ATC 4145 at 4150; (1995) 56 FCR 320 at 327 Hill J said that the word ``subsidy'' in paragraph 26(g) means financial assistance granted by the Crown. His Honour adopted the definition in Jowitt's Dictionary of English Law (2nd ed, 1977).

21. After discussing various authorities relevant to the character of receipts within the terms of section 26 His Honour set out the law relating to paragraph 26(g) as follows (at ATC 4153; FCR 331):

``In my view, the true position is that the Court must consider, when an issue is raised under para (g), not whether the bounty or subsidy received is income in ordinary concepts, but whether the words of the paragraph are satisfied so that the receipt is made assessable income by virtue of the paragraph. It matters not that the bounty or subsidy in question may not be income in ordinary concepts.

Paragraph (g) is in two parts. The first part operates to include a bounty or subsidy, otherwise falling within the wording of the paragraph, as assessable income. The second part, encompassed by the words `and such bounty or subsidy shall be deemed to be part of the proceeds of that business', operates to ensure that the amount included in assessable income will be treated as `income from personal exertion', with in the definition of that expression in s 6(1) of the Act.''

22. Hill J went on to explain that paragraph 26(g) requires that the bounty or subsidy be received in the course of carrying on business. ``In relation to'' includes in the course of carrying on the business but extends beyond it. In either limb the paragraph will only apply if the relationship is to carrying on of the subject business.

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23. Hill J described the phrase ``in relation to'' as words of wide import. That is apparent from the decision of the Court. The Court held that the payment received by the building society as a distribution upon winding up of the Permanent Building Societies Contingent Fund was not income according to ordinary concepts. The Court found that the payment had the character of an ex gratia payment arising from the winding up of the Contingency Fund with the necessary connection with carrying on the business.

24. In his judgment Carr J highlighted the fact that the building society received the payment because it was continuing to carry on business as a building society so strengthening the required connection between payment of the subsidy and carrying on business.

25. As set out above, the Appropriation Act provided for payment by the Government of transitional assistance for domestic producers of 100% recycled paper products. It is clear enough from the words of the Act that the assistance was to be prospective and was not an ex-gratia payment for past events. The past had seen exemption from sales tax for such goods and then a change in the law to remove that exemption so that the payment was to offset in effect the change in the law on current and future manufacturing of recycled paper products, it being recognised that investment decisions had been made on the basis that such recycled paper products manufactured to be exempt sales tax.

26. If there be any doubt about the meaning of the words in the Appropriation Act those doubts are explained by the Treasurer's letter of 9 September 1992 addressed to Senator Coulter and tabled in the Senate on 14 October 1992 at page 1765 of the Hansard (T4/65).

27. The applicant contends that the payments are correctly characterised as compensation for expenditure incurred in investing in plant to manufacture recycled paper from paper and were received in relation to the business capital assets and not in relation to carrying on the business.

28. In effect the applicant submits that there was a subsidy for investment in plant for manufacture of recycled paper products. In my view that is inconsistent with the Parliament's use of the words ``Transitional assistance for domestic producers of recycled paper products''. The emphasis is on production not on investment in plant. It is also inconsistent with the letter of explanation by the Treasurer to Senator Coulter and recorded in Hansard (T4/65). The Treasurer makes it clear that the payments relate to an assumed sales tax liability based on year ended 30 June 1992. The assumed sales tax liability was adopted, it might be inferred on the basis of sales by manufacturers in that year. Even if the recycled paper products had not been exempt from tax it is likely that the manufacturers' sales would be made in non-taxable circumstances to paper converters and wholesalers. The subsidy was not therefore a reimbursement of tax payments but a subsidy related to sales of products for the years for which the subsidy was paid - not for the investment in capital assets.

29. I am satisfied that the payments received by the applicant from the Queensland Government, on the basis of Appropriations Act of the Commonwealth set out above, have the character of a subsidy received in relation to the carrying on of a business of manufacturing recycled paper products. It follows that the amounts received are to be included in the applicant's assessable income by operation of paragraph 26(g) of the Act.

30. Because the respondent's ruling asserts that the amounts received are also assessable under section 25(1) and paragraph 26(j) of the Act, albeit that it seemed to back away from this position in the reasons for disallowing the objection, I will vary the ruling so that the relevant part reads as follows:

``The payments made or to be made by the Government to the applicant company are to be included in the assessable income of the applicant pursuant to paragraph 26(g) of the Income Tax Assessment Act 1936.''

31. Having come to that conclusion I am not satisfied that it is necessary for me to consider the supplementary submissions about sub- section 25(1) and Part IIIA of the Act. I have varied the ruling to exclude those provisions because I am not so satisfied.

32. While I have varied the decision under review I am not satisfied that these proceedings have terminated in a manner favourable to the applicant. Accordingly there will be no certificate in accordance with Regulation 19(7).

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