BERGHOFER v FC of T

Judges:
PE Hack SC DP

Court:
Administrative Appeals Tribunal, Brisbane

MEDIA NEUTRAL CITATION: [2008] AATA 1138

Judgment date: 19 December 2008

PE Hack SC (Deputy President)

INTRODUCTION

1. In 2004 the Queensland Parliament enacted legislation that had the effect of restricting the ability of landholders to engage in broadscale clearing of remnant vegetation. Subsequently, regulations were promulgated to create a scheme -. the Vegetation Management (Enterprise Assistance) Scheme (the Scheme). -. to provide financial assistance from the Queensland Government to those who were adversely affected by the legislation.

2. The applicant, Mr Jacob Berghofer, received assistance totalling $100,000 (approximately) between November 2005 and January 2007. The respondent, the Commissioner of Taxation, says that the sums received form part of Mr Berghofer's assessable income. Initially, the Commissioner contended only that the receipt was "a bounty or subsidy" within the meaning given to that expression in s 15-10 of the Income Tax Assessment Act 1997(Cth) (the 1997 Act). Subsequently, the Commissioner had a change of heart and now says that part of the receipt is income according to ordinary concepts and thus ordinary income. The Commissioner maintains the contention that the balance of the sum received is a bounty or subsidy.

3. Mr Berghofer contends to the contrary by contending, generally, that he ought not be required to pay income tax on the amounts received.

BACKGROUND

4. The facts are not in dispute. Mr Berghofer runs "Springvale", a grazing property of about 17,000 hectares at Eulo in south-western Queensland. He owns 6,245 hectares of the property and the balance is owned by his mother[1] The Commissioner does not suggest that the fact of differing ownership is of any consequence. but all of the land is used by Mr Berghofer to run sheep and some cattle.

5. On 21 May 2004 amendments made to the Vegetation Management Act 1999(Qld) by the Vegetation Management and Other Legislation Amendment Act 2004(Qld)[2] Act No 1 of 2004. commenced. The effect of those amendments was that some of Springvale became what the Rural and Regional Adjustment Regulation 2000(Qld) (the Regulation) describes as an "affected area of land", that is, land containing vegetation that could have been cleared prior to the commencement of the amendments and for which no development approval for a broadscale application for clearing the vegetation had been obtained, or would, in the future, be able to be obtained.

6. In June 2005 Mr Berghofer applied to the Queensland Rural Adjustment Authority, the body charged with the administration of the Scheme, for an Enterprise Assistance Grant[3] An Exit Assistance Grant is available under Part 14 of the Regulations to those with affected areas of land who have decided to “adjust out of primary production or relocate the … farming business”. under the Scheme. He sought a grant to enable him to construct a 500 megalitre earth dam and to develop a 200 hectare cultivation capable of being irrigated by the dam. It was hoped that this irrigation would drought proof the property.

7. For the purposes of the application an official from the Queensland Department of Natural Resources and Mines undertook an assessment of Springvale which determined that 4,326 hectares might be affected by changes to the legislation, regulation and policies.

8. By letter dated 2 August 2005 Mr Berghofer was informed that a grant of $100,000 had been conditionally approved for the purposes of purchasing a stick rake[4] Subsequently the approval was varied to allow for the purchase of a second-hand stick rake and a tractor in lieu of a new stick rake. and fuel to undertake preparation of the cultivation, to undertake the dam earthworks and associated equipment and material, and for seed, fertilizer and planting/harvesting costs. Mr Berghofer was required to accept the terms and conditions of the grant which included a requirement in these terms:

"Payment will be by way of instalments based on the project being undertaken, with the first being made upon approval of assistance (if applicable) and subsequent payments upon evidence of work being completed within agreed milestones".

9. Thereafter, Mr Berghofer claimed, and received payment for, the following items:

Date of payment Amount (before GST) Description
9 November 2005 $15,000.00 Stick rake & tractor
22 November 2005 $ 3,117.27 Diesel fuel
16 December 2005 $ 1,363.64 Diesel fuel
19 December 2005 $35,000.00 Second hand scraper
9 January 2006 $ 8,285.45 Diesel fuel, freight, labour
31 January 2006 $ 467.91 Machinery parts
31 January 2006 $ 877.79 Machinery parts/repairs
10 March 2006 $ 9,456.82 Labour, pipes, parts, diesel fuel, seed
Subtotal $73,568.88
27 July 2006 $12,000.00 Pump & pipes
2 August 2006 $ 3,210.87 Irrigation material, diesel fuel
12 September 2006 $ 4,610.54 Seed, labour, parts
22 November 2006 $ 3,158.19 Diesel fuel, freight
19 January 2007 $ 2,508.64 Diesel fuel, machinery hire
Total $99,057.12

The claims were supported by invoices or other documents that demonstrated that Mr Berghofer had incurred the expense for which reimbursement, in whole or in part, was being claimed.

10. Mr Berghofer's 2006 income tax return was electronically lodged on 25 October 2007 by the tax agent then acting for him. Included in the return was an amount of $91,563.00 at Item P8 "Assessable government industry payments". The case for the Commissioner has proceeded on the assumption that this sum represents, or includes, the payments made to Mr Berghofer under the Scheme in that income year. However it is not at all clear to me whether that assumption is correct. Nor is it clear to me how the figure of $91,563.00 was determined. The Commissioner assessed the return as lodged. That assessment was evidenced by a notice of assessment dated 31 October 2007. In late November 2007 Mr Berghofer lodged a notice of objection to this assessment using the form available on the Commissioner's website. Mr Berghofer's grounds, attached to the document, did not so much object to the assessment as take issue with the requirement to pay the income tax assessed. Mr Berghofer said, in part:

"In the 2006 year I along with many other farmers received a grant of $100,000 as compensation for the loss of my right to clear trees on my property. As a result of this grant I have ended up with a large tax bill".

11. The Commissioner treated the document as a valid notice of objection and, by letter dated 4 March 2008, disallowed the objection in full. The Commissioner's reasons concluded that the payments received were assessable income and did not need to descend into the detail of the amount of payments received. Thereafter, Mr Berghofer sought a review of the objection decision in this Tribunal.

THE QUEENSLAND REGULATIONS

12. The Scheme is the creature of Part 13 of Schedule 1 to the Regulation. The purpose of the Scheme is set out in s 139 of that Schedule in these terms:

"The purpose of assistance under the scheme is to allow an eligible farm entity that owns or has a relevant interest in an affected area of land to adjust its operations if .-

  • (a) the inability to carry out broadscale clearing of vegetation in the affected area of land is directly responsible for imposing a significant impact on the potential viability of the entity's farming business; and
  • (b) with the assistance provided under the scheme, the entity can achieve long-term economic viability and sustainable resource use in operating its farming business" .

13. Mr Berghofer answers the description of "farm entity" because he is an individual "solely or mainly engaged in a farming business"[5] See the definition of “farm entity” in s 136 of the Schedule. . I infer that he has a "relevant interest" in that part of Springvale that he does not own by virtue of a sharefarming agreement with his mother in relation to that part of the land. Section 137 provides, so far as is relevant:

  • "(1) An area of land is an affected area of landif -
    • (a) the area contains vegetation that could have been cleared under the old vegetation management legislation; and
    • (b) development approval has not been obtained and will not be able to be obtained for a broadscale application for clearing the vegetation".

14. The general nature of the assistance that may be given under the Scheme is set out in s 140 in these terms:

"The nature of the assistance under the scheme is the provision of a grant to an eligible farm entity for undertaking a project to improve productivity, sustainability and viability of the farm entity's business ..."

Thereafter are set out a number of examples. It is unnecessary for present purposes to set them out. Section 141 then sets out the eligibility criteria. Importantly, one of the criteria is that the farm entity owns, or has a relevant interest in, an area of land that is an affected area of land. It has been accepted that 4,326 hectares, approximately 25% of Springvale, was an affected area of land. Again, it is unnecessary for present purposes to set out all of s 141, however it may assist in an understanding of the character of the payment to set out s 141(1)(f) to (h). Those paragraphs provide:

  • "(f) having regard to the enterprise management plan, each of the following applies-
    • (i) carrying out broadscale clearing of vegetation in the affected area of land would be necessary to achieve or maintain sustainable long-term viability of the farm entity;
    • (ii) the relevant project will substitute for broadscale clearing in the affected area of land by achieving or maintaining long-term viability of the farm entity;
    • (iii) the action proposed under the plan is consistent with managing vegetation in a way that achieves the purposes of the Vegetation Management Act;
    • (iv) the farm entity has the capacity to become financially independent of the assistance under the scheme within a reasonable period; and
  • (g) the farm entity can achieve long-term viability with the assistance provided under the scheme, taking into account the viability factors; and
  • (h) the assistance given under the scheme is likely to contribute to, or facilitate, improvements in the viability of the farm entity by-
    • (i) reducing the average costs of operating the farm entity's farming business; or
    • (ii) providing a sustainable increase in the value of the production of the farming business ..."

THE INCOME TAX ASSESSMENT ACT

15. A taxpayer's taxable income determines the amount of income tax payable. Taxable income is determined by subtracting deductions from assessable income. It will suffice for the present to notice that assessable income consists of ordinary income and statutory income[6] 1997 Act, s 6-1(1). By virtue of s 6-5(1) of the 1997 Act assessable income "includes income according to ordinary concepts, which is called ordinary income". Statutory income comprises amounts that are not ordinary income but which are included in assessable income by statutory provisions about assessable income.

16. One such provision is s 15-10 of the 1997 Act which provides:

"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".

THE ISSUES

17. The Commissioner contended at the hearing that the entire receipt constituted a "bounty or subsidy" however in supplementary submissions he advised of a reconsideration of his position and now submits that:

"the portion of the grant that is a reimbursement of revenue outgoings is assessable as ordinary income under section 6-5 of the ITAA 1997 and the portion of the grant that is a reimbursement of capital outgoings is assessable as a bounty or subsidy under section 15-10"[7] Respondent's supplementary submissions, 30 October 2008, paragraph 11. .

The Commissioner's submissions go on to identify receipts totalling $37,057.12 as reimbursement of outgoings and argue that the balance, comprising the stick rake purchased for $3,000, the tractor purchased for $12,000, the scrapper purchased for $35,000 and the irrigation pump and pipes purchased for $12,000, was assessable under s 15-10 of the 1997 Act.

18. In light of this the issues that fall to be determined are:

  • (a) did the payments answer the description of a bounty or subsidy?
  • (b) were the payments received in relation to carrying on a business?
  • (c) were the payments otherwise ordinary income?

DID THE PAYMENTS ANSWER THE DESCRIPTION OF A BOUNTY OR SUBSIDY?

19. The expression "bounty or subsidy" is not defined in the 1997 Act however the expression appeared in relevantly identical terms in the Income Tax Assessment Act 1936(Cth) (the 1936 Act). The expression, as used in the 1936 Act, has been the subject of some judicial consideration although there is a contextual difference between the two provisions. It has been said of s 26(g) of the 1936 Act that it was inserted "simply for greater certainty"[8] Federal Commissioner of Taxation v Dixon (1952) 86 CLR 540 at 555 (Dixon CJ & Williams J); Brisbane Amateur Turf Club v Federal Commissioner of Taxation (1968) 118 CLR 300 at 304 (Owen J). with the result that a receipt might be income according to ordinary concepts and yet come within s 26(g). Section 15-10(b) of the 1997 Act now creates a dichotomy such that a receipt may be one or the other but not both.

20. Some consideration was given to s 26(g) of the 1936 Act in
The Squatting Investment Company Ltd v Federal Commissioner of Taxation[9] (1953) 86 CLR 570 at 611. An appeal to the Privy Council by the Commissioner succeeded (see (1954) 88 CLR 413) however their Lordships did not deal with s 26(g) of the 1936 Act. where McTiernan and Williams JJ spoke of the payments to which the paragraph referred as being:

"payments made for the purpose of assisting persons to carry on a business at the time the payments are made or, perhaps, to commence a business in the future".

To similar effect, Webb J described s 26(g) as:

"a compound expression designed to deal with payments received to assist in carrying on a business". [10] (1953) 86 CLR 570 at 613.

21. Mahoney J made reference to these remarks in
Reckitt & Colman Pty Ltd v Federal Commissioner of Taxation[11] (1974) 3 ALR 381. The applicant in that case manufactured a wide variety of household, toiletry, pharmaceutical and food products and received grants from the Commonwealth under the Industrial Research and Development Grants Act 1967(Cth) to partly reimburse the applicant for expenditure on industrial research and development. Having referred to the observations of Webb J about a "compound expression" his Honour said[12] (1974) 3 ALR 381 at 389.

"Whatever the terms signify, they include, in my opinion, a financial grant made by the State for the purpose of encouraging a particular activity in the field of trade and commerce".

22. The meaning of "bounty or subsidy" was considered by the Full Court of the Federal Court in
First Provincial Building Society Ltd v Commissioner of Taxation[13] (1995) 56 FCR 320 (Black CJ, Hill & Carr JJ). The applicant in that case was a permanent building society. For a number of years all building societies, including the applicant, had been obliged by legislation to make contributions to a contingency fund established to protect depositors to building societies in the event of failure of a society. As part of changes to the regulation of non-bank financial institutions, the contingency fund was wound up and paid into Consolidated Revenue with a similar amount appropriated and paid out to the building societies then in existence in terms that required the amount paid to go to the societies' statutory reserves. The Commissioner treated the amount paid to the applicant as taxable on the footing that was a bounty or subsidy. The applicant conceded that and the contest concerned whether the amount was income according to ordinary concepts and whether it had been received in relation to the carrying on of the applicant's business.

23. There is, notwithstanding the concession, a helpful discussion by Hill J, of the meaning and origins of the word "subsidy" where his Honour said[14] (1995) 56 FCR at 327-8. Black CJ and Carr J agreed with the reasons of Hill J.

"Whether the amount in question is a bounty or subsidy within s 26(g)

Section 26(g) of the Act includes 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;'

It was conceded, on behalf of the applicant, that the present payment could correctly be described as a 'subsidy' within the meaning of that word in s 26(g), albeit not a subsidy made assessable income within the words of the paragraph. In my view, that concession was correctly made.

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 Dictionarynotes that in Tudor times the word was applied to a tax of four shillings in the pound on lands and two shillings eight pence in the pound on movables.

However in modern usage, as Jowitt's Dictionary of English Law(2nd ed, 1977) 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 Ltd v Commonwealth (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 Crown 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 Ltd v Anti-Dumping Authority (unreported Federal Court, Moore J, 12 October 1994) at pp 21-22.

Ordinarily, a subsidy or bounty received by a taxpayer in relation to its business activities would constitute income in ordinary concepts. No doubt that explains the comment made by Owen J in
Brisbane Amateur Turf Club v Commissioner of Taxation (Cth) (1968) 118 CLR 300 at 304 that:

'The express provision that subsidies received in the carrying on of a business shall be part of the recipient's assessable income is made, I would think, 'simply for greater certainty' to use the words of Dixon CJ and Williams J in
Commissioner of Taxation (Cth) v Dixon (1952) 86 CLR 540 at 555'.

It was, however, unnecessary for his Honour to decide that point and indeed it is clear from the words that follow the passage cited that his Honour expressly did not do so. Indeed his Honour was of the view that the periodicity of the payments stamped them with the character of income in accordance with 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 I 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 GP International Pipecoaters,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'.".

24. In the present case the Commissioner points to the definition of the words "bounty" and "subsidy" in dictionaries. "Bounty" is defined, relevantly:

  • (a) in the Oxford English Dictionary, Online Edition as:
    • "5
      • a. A gift bestowed by the sovereign personally, or by the state.

        ...

      • b. A gratuity given to recruits on joining the army or navy; also as a reward to soldiers.

        ...

      • c. A sum of money paid to merchants or manufacturers for the encouragement of some particular branch of industry".
  • (b) in the Macquarie Dictionary, 4th ed, as:

    "3. a premium or reward, especially one offered by a government ... 4. a sum paid for the killing of an animal declared a pest ... 5. an amount paid by a government to a person or company in the private sector to encourage them to produce particular goods that they would not otherwise produce ..."

  • (c)in Black's Law Dictionary, 8th ed, as:

    "1. A premium or benefit offered or given, especially by a government, to induce someone to take action or perform a service ..."

"Subsidy" is defined, relevantly:

  • (a) in the Oxford English Dictionary, Online Edition as:
    • "3. ...
      • c. Financial aid furnished by a state or a public corporation in furtherance of an undertaking or the upkeep of a thing."
  • (b) in the Macquarie Dictionary, 4th ed, as:
    • "1. a direct pecuniary aid furnished by a government to a private industrial undertaking, a cultural organisation, or the like".
  • (c) in Black's Law Dictionary, 8th ed, as:
    • "1. A grant, usually made by the government, to any enterprise whose promotion is considered to be in the public interest."

25. The common features in these definitions are twofold - that the payment is one made by the government and that the payment has the purpose of encouraging an activity considered desirable by government. The payment in the present case has each of these features but it has, as well, a feature that in my view takes it out of the category of payments that fall to be described as a bounty or subsidy. That feature is the precondition of an adverse affect upon the land available to conduct the recipient's business.

26. Mr Berghofer did not qualify for the payment merely because he presented to the State Government an enterprise management plan that demonstrated that, with assistance from the Scheme, the viability of his farm entity could be improved. He had to do that but he also had to show that the change in legislation prevented him from clearing land that could earlier have been cleared in order to achieve or maintain sustainable long-term viability of his farm entity and that the project proposed would be an alternative way of achieving or maintaining that viability.

27. Thus the Scheme sought to overcome the detriment that persons in Mr Berghofer's position suffered as a consequence of legislative change. It did that by making available funds to otherwise promote viability. It is apparent from the criteria for payment that the purpose of the payment, at least in part, was to compensate operators of rural properties adversely affected by the decision of government to prohibit broadscale land clearing.

28. It is this feature of the Scheme, the element of compensation, which takes it out of the scope of what I apprehend to be a bounty or subsidy. Had the government made the payment to Mr Berghofer to enable him, for example, to increase his carrying capacity or to drought proof Springvale, I have no doubt the payment would be considered as a bounty or subsidy. But the fact that the payment is dependent upon the existence of the "affected area of land" takes it out of that category.

29. That notion is recognised by the Commissioner's own policy document which provides[15] Taxation Ruling 2006/3, paragraph [83].

"Government payments to continue business

  • 83. A GPI received by an entity to assist it to continue its existing business will be:
    • • ordinary income of the recipient assessable under section 6-5; or
    • • a bounty or subsidy received in relation to carrying on a business and assessable under section 15-10,

except where the payment is for agreeing to give up or sell part of the profit yielding structure . If the GPI is not assessable under any of these provisions, the recipient will need to consider whether there are any CGT consequences". [emphasis added ]

30. There is no question here of an agreement to give up the right to clear land; that right was taken from Mr Berghofer by the statute. But that difference aside, the common underlying notion is that of compensation for a loss. It follows that in my view none of the amounts received by Mr Berghofer under the Scheme answer the description of "bounty or subsidy" and accordingly do not satisfy the first limb of s 15-10 of the 1997 Act.

WERE THE PAYMENTS RECEIVED IN RELATION TO CARRYING ON A BUSINESS?

31. Given my earlier conclusion it is not strictly necessary to determine this question. However I propose to do so, albeit briefly, against the possibility that my earlier conclusion is in error.

32. The nature of the required connection between the receipt and the carrying on of a business in the context of s 26(g) of the 1936 Act has been authoritatively considered by the Full Court in First Provincial Building Society Ltd. The phrase in that sub-section was "in or in relation to the carrying on of a business". The words "in relation to" were there said to be:

"words of wide import ... capable of referring to any relationship between two subject matters ..."[16] (1995) 56 FCR at 333.

Earlier[17] (1995) 56 FCR at 331-2. Hill J had said:

"There are two limbs to the first part of par (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 '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."

33. I am satisfied that the necessary relationship between the receipt and the carrying on of Mr Berghofer's farm enterprise business is made out here. The payments reimbursed him for expenditure directed to the income earning activities of the business. Whilst the work undertaken with the funds was a new and different venture it was merely a new aspect of the then existing business rather than a new business in itself.

WERE THE PAYMENTS OTHERWISE ORDINARY INCOME?

34. It will be recalled that the case for the Commissioner is now put on the footing that the part of the payments that reimbursed revenue outgoings was assessable as ordinary income but that the balance, which reimbursed capital outgoings, was assessable as a bounty or subsidy. In my view that distinction is not appropriate. Fundamentally, the distinction between capital and income is determined by reference to the character of the receipt in the hands of the recipient[18] Scott v Commissioner of Taxation (Cth) (1966) 117 CLR 514 at 526. not the nature of the asset acquired with the payment[19] GP International Pipecoaters Pty Ltd v Commissioner of Taxation (Cth) (1990) 170 CLR 124 at 136-7. Here the distinction which the Commissioner draws focuses upon the latter rather than the former. The use to which the payments are put may have relevance in determining the character of the expenditure - whether it is deductible or depreciable in the year of expenditure - but not necessarily the character of the receipt.

35. The decision in First Provincial Building Society Ltdcontains a detailed analysis of the task of characterisation between income and capital. It is useful to set out a lengthy extract from the judgment of Hill J where his Honour said[20] (1995) 56 FCR 320 at 324-6.

"The starting point of the Commissioner's submissions was that the question of characterisation involved in resolving the issue of whether the payment made to the applicant was assessable income or a payment of a capital nature depended upon a close examination of all relevant circumstances:
Hayes v Commissioner of Taxation (Cth) (1956) 96 CLR 47 at 54. No one individual circumstance was determinative. It was necessary to consider the payment against the entire matrix of facts. So much may readily be accepted.

The general principles to be applied in determining whether a particular receipt has the character of income or capital have been authoritatively set out in the judgment of the Full High Court in
GP International Pipecoaters Pty Ltd v Commissioner of Taxation (Cth) (1990) 170 CLR 124 particularly at 136-142. That was a case where the taxpayer, under an agreement to coat pipes to be used in a pipeline for transport of natural gas, was entitled under the contract to the payment of a sum of money on account of establishment costs equal to the estimated costs of constructing a plant which was a necessary prerequisite to the carrying out of the work under the contract. It was held that the payment received under the agreement on account of establishment costs was income in ordinary concepts. The following propositions emerge clearly from the judgment:

  • 1. Whether a particular receipt is income is to be determined by reference to the character of that receipt in the hands of the taxpayer:
    Scott v Commissioner of Taxation (Cth) (1966) 117 CLR 514.
  • 2. The question is not decided by determining whether the expenditure by the payer is of an income or capital nature.
  • 3. The fact that the amount in question must be applied for a capital purpose will not determine its character as capital.
  • 4. In many cases it will be necessary to determine the scope of a taxpayer's business by reason of which the amount in question is received:
    Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199 at 209-210.
  • 5. The ascertainment of the character of a receipt involves the application of 'a business conception to the facts of the case'
    Commissioner of Taxation (Cth) v Becker (1952) 87 CLR 456 at 467.

It is now well established that not all receipts by a taxpayer carrying on a business will be income. The point has been made clearly in three decisions of Full Courts of this Court:
Commissioner of Taxation (Cth) v Spedley Securities Ltd (1988) 88 ATC 4,126 at 4,130;
Westfield Ltd v Commissioner of Taxation (Cth) (1991) 28 FCR 333 at 342 and
Commissioner of Taxation v Hyteco Hiring Pty Ltd (1992) 39 FCR 502. In each of these cases it was pointed out that the comments of the High Court in the well-known passage from Myer, the citation to which is given above, was not to be taken as speaking in a 'temporal sense'. As I explained in Westfieldand repeated in Hyteco, the words 'in the ordinary course of business' must be understood in their context. In HytecoI said (at 508):

'In particular, it does not follow from these words, as used by the High Court in Myer, that every gain made by a taxpayer carrying on a business and which has some relationship to that business will be taxable. To so hold would be to destroy completely the distinction between capital and income, blurred though such a distinction may sometimes be'.

A mere gift made to a taxpayer would be received by the taxpayer on capital account and it will not matter whether the taxpayer was carrying on a business;
Scott; Hayes; Commissioner of Taxation (Cth) v Harris (1980) 43 FLR 36; and
Federal Coke Co Pty Ltd v Commissioner of Taxation (Cth) (1977) 34 FLR 375.

In Hayesa gift of shares to a former accountant at the time he had ceased to be a full-time employee was held not to be assessable because the gift did not relate to an income producing activity on the part of the accountant. Fullagar J in so holding placed emphasis on the fact that the shares given were (at 57):

'... in no true sense a product or an incident of any employment in which Hayes had engaged or any business which he had carried on.'

Conversely, the fact that a payment is made without consideration and is, in that sense, a gift will not be determinative that the payment is on capital account. So in
Commissioner of Taxation (Cth) v Squatting Investment Co Ltd (1954) 88 CLR 413, a voluntary payment made by the Commonwealth, pursuant to s 7 of the Wool Realization (Distribution of Profits) Act 1948 (Cth)was held to be income as being a receipt resulting from the operations by the taxpayer of growing wool."

36. Applying a "business conception" to the present case I am of the view that the whole of the sum received was income rather than capital.

37. The starting point is my rejection of the Commissioner's distinction based upon the use to which the payment was made. As was said in the judgment of the Court in
GP International Pipecoaters Pty Ltd v Commissioner of Taxation (Cth)[21] (1990) 170 CLR 124 at 136-7.

"The relevant question is whether the receipt of the establishment costs was income in the taxpayer's hands. It is necessary to keep that question steadily in mind and not to confuse the character of the receipt with the nature of the asset acquired by application of the moneys received".

38. Next, it is relevant to have regard to the fact that the payments were, in one sense, gratuitous; that is, the payment was not compensation in the strict sense. They were not, as Mr Berghofer said in his objection, "compensation for the loss of [the] right to clear trees" because he had no entitlement to compensation in those terms. Mr Berghofer did not become entitled to payment because his land was affected land; rather, because his land was affected he became entitled to be considered for a grant provided the other matters required to be shown were shown. The payment here is, for that reason, to be distinguished from a payment made for the compulsory acquisition of an asset where what is acquired will generally be the whole of the interest in the asset acquired. In those cases the receipt will ordinarily be on the capital account and will fall to be dealt with for taxation purposes, if at all, under the capital gains tax regime.

39. The payments were received as recoupment of expenditure undoubtedly made in the course of Mr Berghofer's business. It represented a profit or gain made by Mr Berghofer in the course of his business. The occasion for the payments was unusual, but that does not mean that it was not received in the ordinary course. The construction of a dam and the creation of an area of cultivation are ordinary incidents of that business even though they may be undertaken infrequently. And to my mind it matters not that Mr Berghofer was required to expend the money prior to being reimbursed. In terms of Mr Berghofer's bank balances the result may appear to be neutral. However, the profit or gain arises from the value or worth of what was acquired.

40. Finally, it is of some relevance that as far as I am able to tell from the accountant's working papers, obtained by the Commissioner from Mr Berghofer's accountants at my request, the expenses of a revenue nature appear to have been deducted, and those of a capital nature appear to have been depreciated, in Mr Berghofer's income tax returns.

41. Thus, in my view, the payments received all had the character of ordinary income. I would affirm the decision under review.


Footnotes

[1] The Commissioner does not suggest that the fact of differing ownership is of any consequence.
[2] Act No 1 of 2004.
[3] An Exit Assistance Grant is available under Part 14 of the Regulations to those with affected areas of land who have decided to “adjust out of primary production or relocate the … farming business”.
[4] Subsequently the approval was varied to allow for the purchase of a second-hand stick rake and a tractor in lieu of a new stick rake.
[5] See the definition of “farm entity” in s 136 of the Schedule.
[6] 1997 Act, s 6-1(1).
[7] Respondent's supplementary submissions, 30 October 2008, paragraph 11.
[8] Federal Commissioner of Taxation v Dixon (1952) 86 CLR 540 at 555 (Dixon CJ & Williams J); Brisbane Amateur Turf Club v Federal Commissioner of Taxation (1968) 118 CLR 300 at 304 (Owen J).
[9] (1953) 86 CLR 570 at 611. An appeal to the Privy Council by the Commissioner succeeded (see (1954) 88 CLR 413) however their Lordships did not deal with s 26(g) of the 1936 Act.
[10] (1953) 86 CLR 570 at 613.
[11] (1974) 3 ALR 381.
[12] (1974) 3 ALR 381 at 389.
[13] (1995) 56 FCR 320 (Black CJ, Hill & Carr JJ).
[14] (1995) 56 FCR at 327-8. Black CJ and Carr J agreed with the reasons of Hill J.
[15] Taxation Ruling 2006/3, paragraph [83].
[16] (1995) 56 FCR at 333.
[17] (1995) 56 FCR at 331-2.
[18] Scott v Commissioner of Taxation (Cth) (1966) 117 CLR 514 at 526.
[19] GP International Pipecoaters Pty Ltd v Commissioner of Taxation (Cth) (1990) 170 CLR 124 at 136-7.
[20] (1995) 56 FCR 320 at 324-6.
[21] (1990) 170 CLR 124 at 136-7.

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