PLANT v FC of TMembers:
D Muller DP
Administrative Appeals Tribunal
MEDIA NEUTRAL CITATION:
 AATA 1296
D Muller (Deputy President)
During the tax year ending 30 June 2002, Katherine Mary Plant, the Applicant taxpayer, was a partner with her husband, Lennard Allan Plant, in a
ATC 2365firm trading as Goomeri Service Centre (GSC). In that tax year, GSC received a payment in the sum of $181,500 gross ($165,000 plus GST of $16,500) from the Commonwealth Government, pursuant to the Dairy Regional Assistance Program (DRAP).
2. The apparent aim of the DRAP was to provide funds to businesses in Australian country towns to facilitate the employment of former dairy workers who had lost their jobs, and to lessen the negative impact on the economy of country towns, due to the de- regulation of the dairy industry.
3. The Commissioner contends that the grant is assessable as a bounty or subsidy pursuant to section 15-10 of the Income Tax Assessment Act 1997 (ITAA97), which provides:
``SECTION 15-10 BOUNTIES AND SUBSIDIES
15-10 Your assessable income includes a bounty or subsidy that:
- (a) you receive in relation to carrying on a business; and
- (b) is not assessable as ordinary income under section 6-5.''
4. Mrs. Plant contends that the grant to GSC under the DRAP was not in relation to carrying on the business of GSC, but it was to create the infrastructure, the building and fitting out of a new workshop for the purpose of providing work for unemployed former dairy workers.
5. Mrs. Plant seeks a review of the Commissioner's decision that the grant is assessable as a bounty or subsidy.
6. Mrs. Plant was represented by her accountant, Ross Goodhew. The Commissioner was represented by Ms. Hopton.
7. The following material was placed before the Tribunal:
- (a) The section 37 statement;
- (b) Monthly reports of GSC to the Department of Employment, Workplace Relations and Small Business to report on the expenditure of the money allocated by DRAP, the progress of the building of the fabrication workshop and employment outcomes;
- (c) A statement by Mrs. Plant.
- (d) Oral evidence from Lennard Plant.
8. The material placed before the Tribunal by Katherine and Lennard Plant, relating to the factual background, was not contradicted by any other evidence, nor was it challenged, nor was it inherently improbable. The Tribunal accepts that material and finds as follows:
- (a) Katherine and Lennard Plant started GSC in May 1975.
- (b) They initially operated on a small scale. They repaired farm machinery and fabricated feed bins.
- (c) Over the years the business expanded. They relocated to a property out from Goomeri, consisting of nine acres with a house. There they set up a small workshop.
- (d) Their three sons did their apprenticeships at the small workshop.
- (e) By 2001 the business was doing larger projects such as installing feeding systems and fabricating and erecting rural buildings such as dairies and piggeries.
- (f) Katherine and Lennard Plant, together with one of their sons, decided to build a new and bigger workshop on the property. They levelled a site, drew up plans and estimated the total cost to be about $200,000.
- (g) At about that time the Kilkivan Shire Council was setting up an Industrial Estate in Goomeri. The Plants approached the Council to enquire about the possibility of setting up their new workshop on the Industrial Estate, with a view to separating their business activities from their private residence.
- (h) The Council CEO and Engineer were very receptive to the suggestion of having the Plants set up their workshop on the Industrial Estate. The CEO also informed the Plants that the Burnett Inland Development Organisation (BIDO) was assisting small businesses in the area to apply for grants from the DRAP to improve light industrial infrastructure to provide employment opportunities for redundant dairy farmers. Employment in the district had been badly affected by de- regulation of the dairy industry.
- (i) With considerable assistance from the Council CEO and an officer of the BIDO, the Plants made a submission for funding to DRAP. The submission painted a picture of a very successful business which would be even more successful if it had a bigger and more efficient workshop. Thus, impliedly, it
ATC 2366would be in a position to use the grant to satisfy the aim of DRAP to provide extra employment in the area. The submission also incorporated the hope within the district that the former dairy industry would be replaced by new ventures such as piggeries, olive processing, vineyards, feed mills, feed lots, poultry, grain and goats. The submission contained the following:
- ``Goomeri Service Centre (GSC) aims to expand their fabrication and construction business.
- The expansion will increase the number of employed in their business from 4 to 10: an increase of 6 new positions.
- Goomeri Service Centre plans to expand their business via:
- 1. a bigger, more efficient workshop. The extra space will allow the business to employ more workers. This, in turn, will enable the Plants to accept contracts they must currently reject due to lack of capacity,
- 2. a display room and storage site that will allow them to expand a successful sideline in imported fabrication equipment, and
- 3. development of an innovative transportable modular piggery unit that is not currently produced elsewhere.
- While the proposed expansion will directly contribute to 6 new positions, it is anticipated that the modular innovation will become the core of additional business expansion within three years. This will necessitate a further 4-5 employees in years 3 and 4.
- Goomeri, and the surrounding communities, rely on local entrepreneurs such as the Plants for employment and income generation.
- Adjustments in the dairy, beef and forestry industries, that were the basis of the local economy in this region, have increased the importance of such entrepreneurs.
- GSC has the capacity to service diverse agricultural industry sectors, including dairy, piggeries, olives, vineyards, feed mills, feed lots, poultry, grain and goats.
- The company, therefore, continues to be viable regardless of peaks and troughs in any particular sector.
- All of the sectors mentioned above are growth industries in the Burnett Inland. They are future-focused industries with a growing market base both domestically and internationally.
- 1. business expansion for greater profit.
- 2. greater efficiency in delivering services to the current client base,
- 3. diversification of business output to accommodate growth industry sectors,
- 4. to proceed with a fabrication innovation - a Transportable Modular Piggery Unit,
- 5. to enhance the future viability of the business,
- 6. to provide employment and training opportunities to the local workforce and support the local communities to offset the effects of adjustment in the region's dairy industry.
- Larger facilities will enable the business to build exponentially on its current marketshare due to increased:
- • Diversity of services the business can supply to clients,
- • Diversity of clients the business can service, agricultural and non- agricultural, nationally and overseas,
- • Numbers of employees and apprentices (from 4 to 10 initially; an additional 4-5 in years three and four),
- • Gross turnover and actual profit,
- • Opportunities for implementing innovations in agricultural fabric-ation.
- As mentioned above, the expansion will also have a positive flow-on effect to the local economy and associated businesses.
- Background on Goomeri Service Centre:
- Goomeri Service Centre supplies a complete fabrication service for agricultural buildings and equipment for
ATC 2367the dairy, piggery, feedlot, feed- mill, olive, wine and goat industries.
- GSC specialises in on-site, complete piggery construction, and is considered to be one of the premier service providers in Queensland in this sector. The Centre is also developing an innovative Modular Piggery Unit. This unit is discussed in detail in 1.11 - Future Developments.
- Goomeri Service Centre has a retail distribution outlet, suppling fabrication equipment throughout Australia and has clients in New Guinea and New Caledonia.
- Through their close association with local growth industries , such as piggeries, wine and olives and feedmilling, Goomeri Service Centre can provide employment options for displaced dairy industry workers. GSC can also provide the technical capability to assist dairy producers to diversify into, and/or transit from the dairy sector to, piggeries, wine, olive and other growth sectors.
- Expected outcomes:
- Employment outcomes:
- 6 new positions in addition to the existing 4 workshop workers.
- 4-5 new positions in years 3-4 (following expansion) as the modular piggery innovation is developed.
- 7 new positions over five years in associated businesses, such as suppliers and contractors.
- Indirect employment growth in local businesses (eg: retail) and service providers (schools) as a result of Goomeri Service Centre:
- The proposed expansion is an extension of a successful enterprise and will enable the growth and expansion of that enterprise. The business success of the expansion will ensure the on-going viability of the project beyond the end of the funding period.
- 1.13 What would be the result if Commonwealth funding were not provided for the project?
- Goomeri Service Centre would build a smaller shed with less workshop and storage capacity.
- This would stifle employment opportunities for tradespeople and apprentices. There would only be capacity for 2 new employees as opposed to 6, and the 4-5 new employees for modular construction would not be required as there would be insufficient space to develop this innovation.
- Specifically, there would be insufficient space for:
- • The full-time packager-distributor,
- • The office administrator,
- • 2 of the 4 workshop employees,
- • The 4-5 employees required for modular construction.
- Goomeri Service Centre would not be able to expand to meet the existing and future potential of national and overseas markets.''
- (j) The Plants were required to agree to a number of conditions in relation to the receipt of the grant. They agreed to those conditions and in particular they agreed to:
- (i) Spend the grant on a new workshop, including machinery;
- (ii) Spend at least an equivalent amount (dollar for dollar) of their own money on the project, as that received by way of grant;
- (iii) Spend the grant on items which could not be removed from the new premises, nor be sold for profit;
- (iv) Adhere to certain performance conditions, relating to boosting the local economy, which if not fulfilled would give the Commonwealth a right to claim a proportion of ownership of any assets purchased by Plants partly with the grant.
- (k) In complying with the conditions the Plants had to obtain a bank loan larger than they otherwise would have. They had to use their own assets as collateral. They had to supply their existing machinery to equip the new workshop.
- (l) The grant was approved. The Plants received $165,000 ($181,500 less GST of $16,500).
- (m) The total cost of the project was $480,000. That is, the Plants put in $315,000
ATC 2368and the balance of $165,000 came from the grant from DRAP.
- (n) The Plants were never warned that the grant could be taxable.
- (o) All of the grant was spent on the building of the workshop and non- removable items.
- (p) After the new workshop began operating, business was good for about 12 months. Employee numbers rose from 5 to 14. It was not a condition of the grant that new employees had to be from the dairy industry, but in fact six of the additional nine employees were ex dairy workers.
- (q) Business has not been so good in recent years. The piggeries have gone - allegedly as a result of the import of Canadian pork products. The olive industry did not get going. There has been a limited amount of work associated with the wine industry, but the import of second hand stainless steel tanks from the south has reduced the potential work available for the local industry.
- (r) Recent applications by farmers/graziers for feed lot approvals have been mostly unsuccessful.
- (s) Grain growth has been badly affected by drought.
- (t) If the Plants now have to pay 48.5% of $181,500 as tax, the continuation of their business will be put at risk.
9. It is common ground between the parties that the grant was a capital receipt and was not ordinary income assessable under section 6-5 of the ITAA 97.
10. The Plants applied to the Commissioner for a Private Ruling on 4 August 2003.
11. A ``Notice of Private Ruling'' dated 24 September 2003, was sent to the Plants on that date. The ruling was that the grant received under the DRAP was assessable income under section 15-10 of the ITAA 1997.
12. On 30 September 2003, the Plants filed a notice of objection to the above Private Ruling.
13. On 19 November 2003, a decision was made to disallow the Plant's objection.
14. The question for determination is whether notwithstanding the DRAP grant to the Plants was not ordinary income assessable under section 6-5 of the ITAA 97, it was assessable income as a ``bounty or subsidy'' in relation to carrying on their business. This raises two questions:
- (a) Was the grant a bounty or subsidy?, and
- (b) If so, was it received in relation to carrying on their business?
15. The Tribunal was referred to a number of cases in which the terms ``bounty or subsidy'' and ``in relation to carrying on a business'' were analysed. An extensive distillation of the cases is contained in the judgment of Hill J in
First Provinicial Building Society Limited v FC of T 95 ATC 4145. The Full Federal Court was concerned with the interpretation of s. 26(g) of the ITAA 1936, which included in assessable income:
``any bounty or subsidy received in or in relation to the carrying on of a business (other than subsidy received under an agreement entered into under an Act relating to the search for petroleum), and such bounty or subsidy shall be deemed to be part of the proceeds of that business''
16. The judgment of Hill J contains the following passages (among others) [ATC at 4150-4155]:
``The word `subsidy' appears originally to have applied to taxes or tributes granted by Parliament to the King for the urgent need of the kingdom. The Oxford English Dictionary notes that in Tudor times the word was applied to a tax of 4 shillings in the pound on lands and 2 shillings 8 pence in the pound on movables.
However in modern usage, as Jowitt's Dictionary of English Law (Street & Maxwell 1977 2nd ed) observes the word `generally means financial assistance granted by the Crown'. This is the meaning which the word truly has in the present context.
The word, in the context of an agreement which provided that the Commonwealth would pay a `subsidy' to a company was said, by Windeyer J in
Placer Development Limited v Commonwealth of Australia (1969) 121 CLR 353, to derive from the Latin subsidium meaning `an aid or help'. His Honour said (at 373):
`The word is no longer used in its early legal sense of a grant to the Crown. It ordinarily means today not aid given to the Crown but aid provided by the
ATC 2369Crown to foster or further some undertaking or industry. A subsidy was defined in America fifty years ago as ``a legislative grant of money in aid of a private enterprise deemed to promote the public welfare''. Shumaker and Longsdorf, Cyclopedic Law Dictionary. This I take to be, broadly speaking, the sense in which the word is currently used in Australia, as for example in the Nitrogenous Fertilizers Subsidy Act 1966 (Cth).'
See too Rocklea Spinning Mills Pty Limited v Anti-Dumping Authority (Moore J, 12 October 1994, unreported) at 21-22.
Ordinarily, a subsidy or bounty received by a taxpayer in relation to its business activities would constitute income in ordinary concepts....
Not all subsidies need have the character of income. A subsidy to assist a taxpayer to start up a business may well have the character of capital. In
Seaham Harbour Dock Co v Crook (HM Inspector of Taxes) (1931) 16 TC 333, the House of Lords held that a grant made to a dock company by way of financial assistance in the extension of its dock did not constitute the 'annual profits or gains' of the taxpayer liable to tax under Case 1 of Schedule D of the Income Tax Act 1918 (UK). The payment to the taxpayer there considered was made under legislation permitting assistance to be given in carrying out approved schemes of useful work to relieve unemployment. Their Lordships were unanimous that no tax was exigible for the payment in question had nothing to do with the trade of the taxpayer. The case is cited by the High Court in its judgment in G.P. International Pipecoaters (supra), among other cases, as authority for the proposition that a gift or subsidy to `replenish or augment the payee's capital' was not income in ordinary concepts because it could not fairly be said to be `a product or incident of the payee's income- producing activity'.
Two questions arise for consideration in the present case. The first is whether s. 26(g) is limited to receipts of an income nature so that it adds nothing to s. 25(1). The second is whether the language of the paragraph is applicable on the facts of the present case.
The relationship between s.25(1) of the Act and each of the paragraphs of s. 26 has never been the subject of direct decision. Specifically it has never been decided whether the amounts referred to in each of the specific paragraphs of that section need be income in ordinary concepts or whether the various paragraphs or some of them extend the concepts of income in ordinary concepts referred to in s. 25.
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.
There are two limbs to the first part of para. (g). The first includes in assessable income a bounty or subsidy received by the taxpayer in the carrying on of a business. In that context the word `in' means `in the course of' and requires a direct relationship to exist between the bounty, on the one hand, and the carrying on of the taxpayer's business, on the other. The second limb comprehends a bounty or subsidy received `in relation to' the carrying on of the taxpayer's business. These words no doubt are sufficiently wide to cover the first limb, but were obviously intended to extend it. Thus the relationship between the receipt of the bounty, on the one hand, and the carrying on of the business, on the other, may be less direct where the second limb is sought to be applied than where the first limb is applied.
Under either limb, the relationship must be to the `carrying on' of the business. These words may perhaps be understood in opposition to a relationship with the actual business itself. They would make it clear, for example, that a bounty received, merely in relation to the commencement of a business or the cessation of the business, would not be caught. The expression
ATC 2370`carrying on of the business' looks, in my opinion, to the activities of that business which are directed towards the gaining or producing of assessable income, rather than merely to the business itself.
The words `in relation to' are words of wide import. They are capable of referring to any relationship between two subject matters, in the present case the receipt of the bounty or subsidy, on the one hand, and the carrying on of the business, on the other of
O'Grady v The Northern Queensland Company Limited (1989-1990) 169 CLR 356 at 364-365 per Brennan J and at 376 per McHugh J. As McHugh J (at 376) points out, the degree of connection will be `a matter of judgment on the facts of each case'. If the relationship were a merely remote one, para. (g) would have no operation. What is necessary, at the least, in the present context is that there be a real connection. But the existence of the alternative first limb of the paragraph makes it clear that the relationship need not be direct, it may also be indirect.''
17. The DRAP grant to the Plants clearly constituted financial assistance which was an aid or a help to them in the construction of their new workshop. It was a subsidy.
18. The new workshop formed part of the ongoing business of GSC. The Plants did not start up a new business entity when they built the new workshop. They continued their original business in the new premises.
19. The Plants did not create a separate business entity with the DRAP grant. They did not specifically apply the DRAP grant to a business entity devoted solely to employing redundant dairy farmers.
20. The DRAP grant was included in the total expenditure by GSC in the creation of the new workshop. The grant assisted in the creation of a bigger and more efficient workshop which it was hoped would improve the profitability of GSC and consequently improve the capacity of GSC to employ more workers, which in turn would boost the local economy.
21. The aims of the DRAP, the subsidy to GSC and the promotion of an expanded business and hopefully expanded profitability of the business of GSC were all inextricably linked.
22. In my view the subsidy provided by the DRAP to GSC was directly related to the carrying on of the Plant's business.
23. Alternatively, the grant was directly related to improving the local economy and indirectly related to the carrying on of the Plant's business.
24. In either case the provisions of section 15-10 have been satisfied because the grant was received by the Plants in relation to their carrying on the business of GSC.
25. Consequently, I find that the DRAP grant was correctly included in the assessable income of Katherine Mary Plant.
26. The objection decision is affirmed.