• The impact of this case on ATO policy is discussed in Decision Impact Statement: Carberry and Commissioner of Taxation (Published 15 September 2011).

CARBERRY v FC of T

Members:
SE Frost SM

Tribunal:
Administrative Appeals Tribunal, Sydney

MEDIA NEUTRAL CITATION: [2011] AATA 303

Decision date: 10 May 2011

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SE Frost (Senior Member)

Introduction and summary of issues

1. Patrick Carberry is the owner of a property known as "Cardale", located in the lower Namoi Valley in New South Wales.

2. For many years Mr Carberry has held groundwater bore licences authorising the extraction of water from bores on the property and the use of the water for irrigation and related purposes.

3. In about 2000, a review of groundwater usage in the Namoi Valley showed that extraction levels in many of the valley's zones were higher than could be sustained. As a result of that review, the New South Wales Government developed a new "Water Sharing Plan" for the Namoi Valley which would see groundwater extraction levels more actively managed and, in some areas including the lower Namoi zone, reduced.

4. In July 2004, under a program called the Namoi River Groundwater Structural Adjustment Program (GSAP), Mr Carberry received from the New South Wales Government a payment, described in a brochure published by the NSW Department of Land and Water Conservation as "financial assistance to help licence holders adjust to changes in groundwater access over the ten years of the Water Sharing Plan". The GSAP was one of the measures introduced to assist "high level users" of water (including Mr Carberry) to adjust to the new arrangements. As the brochure explained:

"The amount of structural adjustment assistance paid to high level users will be directly linked to the reductions in access."

5. The issue raised by this application is whether the payment received by Mr Carberry is subject to income tax, either as an amount of ordinary income within s 6-5 of the Income Tax Assessment Act 1997 (the Act), an amount of statutory income within s 6-10 (and specifically a "bounty or subsidy" under s 15-10), or is assessable under the capital gains provisions in Part 3-1 of the Act.

The groundwater bore licences

6. Mr Carberry has owned Cardale (some portions of it in his own name, and some as a tenant in common with his brother, William, now deceased) since about 1962. During the relevant income year, ended 30 June 2005, Mr Carberry and his brother were partners, along with interests associated with their sons, in a partnership known as Stan Carberry and Sons (the Partnership) which ran Cardale as an irrigation and farming property. Mr Carberry and his late brother had been effectively retired since about 1995 from the day-to-day running of the Partnership business, which is now conducted by Mr Carberry's son Michael and Michael's cousin Andrew Carberry.

7. Mr Carberry and his brother held two groundwater bore licences issued under the (now repealed) Water Act 1912 (NSW). One was issued to Mr Carberry in September 1968, and permitted the licensee to sink a bore up to a depth of 250 feet (about 76 metres) and to use the extracted water for "irrigation". The second licence was acquired by Mr Carberry and his brother in 1973 when they purchased a parcel of land which now forms part of Cardale. It also permitted the licensee to sink a bore up to a depth of 250 feet, and to use the extracted water for "stock watering and irrigation".

8. At the time of issue of the licences there does not seem to have been any restriction in the volume of water that could be extracted by the licensee. However, that position changed in 1986 when the Water Resources Commission served on Mr Carberry a notice under s 117A(3) of the Water Act 1912 (NSW) which limited the volume of water that could be extracted from the two bores (combined) to 1466 megalitres per year.

9. Mr Carberry accepted, by way of a letter dated 3 May 2010, written on his behalf by his accountant and addressed to the Commissioner, that the licences have not at any time been used for any non-business or non-commercial purposes. In that same letter the business of the Partnership was described in the following way:

"The business operates on land developed for broad scale irrigation, growing crops such as cotton and wheat and broad acres farming land on which it runs a beef cattle breeding enterprise and 'dryland' cereal crops such as wheat, barley and oats."

The Water Management Act 2000

10. On 8 December 2000 the Water Management Act 2000 (NSW) (the WM Act) received Royal assent, with parts of the legislation commencing on 1 January 2001. Section 401 of the WM Act repealed the Water Act 1912 (NSW).

11. The objects of the WM Act are set out in s 3, and include provision for:

"… sustainable and integrated management of the water sources of the state for the benefit of both present and future generations and, in particular:

• (a) to apply the principles of ecologically sustainable development, …
• (b) …,
• (c) …,
• (d) …,
• (e) to provide for the orderly, efficient and equitable sharing of water from water sources,
• (f) …,
• (g) to encourage the sharing of responsibility for the sustainable and efficient use of water between the Government and water users,
• (h) to encourage best practice in the management and use of water."

The minister's News Release

12. On 11 June 2002, the Minister for Land and Water Conservation, the Honourable John Aquilina, issued a "News Release" which provided:

"Minister for Land and Water Conservation, John Aquilina, has announced an assistance package for groundwater users and communities in the Namoi Valley.

'I am pleased to announce that the State Government is offering $20 million in financial assistance,' Mr Aquilina said.

'Approval has now been given by State Treasury to increase the original allocation of $15 million to $20 million'.

'We are seeking an equivalent commitment from the Commonwealth, which would bring the total assistance package to $40 million,' Mr Aquilina said.

'The additional funding will allow the implementation of a new package that will provide substantial assistance to irrigators,' Mr Aquilina said.

'The package will help these irrigators by providing them with both a guaranteed pathway of groundwater access and financial assistance,' he said.

'I have spoken with many irrigators and community representatives on this issue.'

'We all agree there is a need to manage our groundwater resources better to protect them from over-extraction and irreversible damage.'

'The State Government recognises that around 250 groundwater licence holders in the Namoi will have to adjust to reduced groundwater use.'

'In these cases, an assistance package will be made available,' he said.

In recognition of the socio-economic impact of the groundwater access changes, $4 million of the assistance package will be set aside for community development programs in the region.

The proposed package provides high-level users with initial access equal to their recent levels of groundwater use and a guaranteed pathway to reducing groundwater access over 10 years.

'The financial assistance available to water users will be linked to the volume of water withdrawn under the guaranteed pathway and will be available up-front for eligible irrigators,' Mr Aquilina said.

An information brochure is available to explain more about the assistance package. A toll-free telephone hotline has also been established for licence holders to call."

13. The assistance package referred to in the Minister's News Release was the GSAP.

The information brochure

14. According to the Department that now administers the WM Act (the Department of Environment, Climate Change and Water), the "information brochure" referred to in the News Release is the only document outlining the GSAP. The Department has also indicated, in correspondence to the Commissioner, that the GSAP had no statutory basis, although it was established on the approval of the NSW Cabinet.

15. Mr Carberry received a copy of the information brochure when the then Department of Land and Water Conservation wrote to him on 13 December 2002 advising him that the GSAP was being activated.

16. The "Introduction" section of the information brochure said this:

"A healthy, sustainable groundwater system requires that extraction is kept within, or returned to, sustainable yields. Many aquifers are under stress from high levels of water extraction.

In five Upper Namoi zones … and the Lower Namoi, average zone extraction exceeds the sustainable yield …

To address this situation, the Government with the advice of the Namoi Groundwater Management Committee has decided on a new approach for the future management of groundwater in the Namoi.

As outlined in the Water Sharing Plan for the Upper and Lower Namoi Groundwater Sources, water management for the Namoi groundwater source will incorporate the following three components.

Firstly, future groundwater extractions in each zone will be managed within the sustainable yield of the zone.

Secondly, shares in each zone's sustainable yield will be distributed in proportion to existing licence entitlements.

Thirdly, a range of measures will be introduced to assist licence holders whose allowable history of use (HOU) is more than their share of sustainable yield (high level users). These measures include groundwater trading, more flexible water accounting, and a Groundwater Structural Adjustment Program (the Program).

The NSW Government has allocated $20 million to the program. Eighteen million dollars will be provided as assistance to high level users, and $2 million is being provided to community infrastructure projects.

The Program to assist high level users has two major components:

• • Phasing in reductions by introducing a guaranteed pathway of water access over the ten years of the Water Sharing Plan.
• • Financial assistance to help licence holders adjust to changes in groundwater access over the ten years of the Water Sharing Plan.

The starting point of the Program is that high level users receive initial access to water equal to their share of sustainable yield plus an HOU, which reflects their past extraction in excess of their share of sustainable yield. The endpoint of the Program is that high level users will receive access to groundwater equal to their share of sustainable yield.

The Program provides a guaranteed but declining volume of water over the 10 years of the Plan. The amount of structural adjustment assistance paid to high level users will be directly linked to the reductions in access.

This booklet describes how the Program will work. It will allow you to estimate the change in your water access and your eligibility for structural adjustment assistance."

17. Section three of the brochure explained the "structural adjustment assistance" that was available to high level users, as follows (original emphasis):

"Under the Program, financial assistance is provided to high level users to allow them to undertake structural adjustment.

The level of financial assistance available will be based on the amount of supplementary access withdrawn in each year of the Plan.

High level users will be reimbursed for expenditure on the following on-farm investments:

• • water use efficiency investments (made after 1 July 1998);
• • on-farm business diversification, such as into dry land primary production;
• • farm investment plans (to a maximum of $5000);
• • purchase of water licences (for those who have maximised all cost-effective opportunities for improving efficiency through the measures outlined above and for whom buying licences is the only means left to maintain viability)."

18. The brochure then explained the five-step process by which high level users could receive the financial assistance. In summary, the process comprised:

• (a) Step 1 - the Department would write to each eligible licence holder, outlining their "metered use" and "history of use".
• (b) Step 2 - eligible licence holders were required to return a confirmation form to the Department advising that they accepted the metered use data, or otherwise advising of any discrepancies between the figures provided and the correct amounts. The licence holder was also to advise of any trades that occurred during the period 1991/92 to 2000/01.
• (c) Step 3 - the Department would, following receipt of the confirmation form, or resolution of any discrepancies, then write to the eligible holder, stating, and explaining, the calculations for their:
  • • share of the sustainable yield
  • • guaranteed pathway
  • • supplementary access, and
  • • level of financial assistance.
• (d) Step 4 - the eligible licence holder would then need to complete the application form identifying the "past and proposed eligible on-farm investments for which [they] will seek assistance ". The form was to "form the base from which you later claim reimbursement for expenditure" and was to be forwarded to the NSW rural assistance authority (RAA), which would confirm receipt of the application and advise whether the proposed investments had been approved for assistance. The RAA was foreshadowed as "managing claims for reimbursement".
• (e) Step 5 - the eligible licence holder could complete "reimbursement forms" for any past expenditure for water efficiency measures made since 1 July 1998 or, as they made any future expenditure, for eligible on-farm investments. Up to $5000 (of the available assistance) in reimbursement could also be claimed for a consultant to help prepare a farm investment plan. The total amount of reimbursement available was limited to the amount of financial assistance identified pursuant to steps 3 and 4.

Carrying out the process described in the brochure

19. In Mr Carberry's case, only steps one to three were carried out, as will be explained below. As far as step three is concerned, the Department wrote on 28 March 2003 to Mr Carberry and his brother:

• "(a) noting that Mr Carberry and his brother had confirmed an allowable history of use (HOU) figure of 1082 ML;
• (b) providing advice as to the financial assistance available under the Program, with a table outlining the amount available for each year, and totalling $97,893; and
• (c) providing advice as to how to complete steps four and five of the Program. Relevantly, the letter contemplated that Mr Carberry and his brother would 'notify the Government of the past and proposed on-farm investments for which you will seek assistance'".

20. Although the letter contemplated that, on 1 July 2003, "separate aquifer access and supplementary water access licences" would be put in place under the new Plan, effectively to replace the licences previously issued under the Water Act 1912 (NSW), this did not take place until much later, on 1 November 2006.

The GSAP is halted

21. In May 2003 there was an "unofficial halt" to the GSAP. That was followed by an official halt (the timing of which is not clear, but must have been prior to February 2004) "while the Minister [considered] amending the gazetted groundwater sharing plans".

The Minister approves payment of the outstanding amounts

22. On 6 June 2004 the Minister approved a recommendation "that the remaining $7.5 million offered to 87 licence holders in the Namoi be paid in the form of upfront payments before 30 June 2004". The briefing note to the Minister contained the following (original emphasis):

"BACKGROUND

• • In 2001, Cabinet approved $15 million to groundwater irrigators in the Namoi who (sic) adjusted entitlement would be less than their historical extraction to improve water use efficiency. The funding was subsequently increased to $20 million.
• • To date, of the $20 million approved for the program, $11.5 million has been offered and $4 million paid out to eligible licence holders.
• • In March 2004, Cabinet agreed to alter the current approach of reducing entitlements in over-allocated groundwater systems, and that no further offers of financial assistance under the current Structural Adjustment Program would be made to eligible licence holders in the Namoi until all licences had been adjusted in accordance with the new approach and the Namoi groundwater plan was ready for commencement.
• • Cabinet nonetheless noted that the Government was legally obligated to pay out the remaining $7.5 million already offered to eligible licence holders in the Namoi.
• • The Cabinet Minute indicated that future adjustment assistance would be paid by way of up front payments rather than reimbursements for expenditure on on-farm development, as had been the case. This forgoes the need for irrigators to supply the Government with proof of investment in water efficiency measures and on farm works etc. The intention was that the remaining $7.5 million already offered to eligible licence holders in the Namoi would be paid in this way.

ISSUE

• • The Cabinet Minute indicates that the remaining $7.5 million already offered to eligible licence holders in the Namoi is to be paid in 2003/04. Treasury has confirmed that this funding will not be carried over to 2004/05 if part of it is unspent before 30 June 2004.

COMMENT

• • The payment of the remaining $7.5 million offered to 87 licence holders in the Namoi must be paid before 30 June 2004. This will need to be done by way of upfront payments. Time does not permit the payments to be made in the form of reimbursements, as relevant on-farm expenditure may not have occurred.
• • The payment of adjustment assistance in the form of up front payments does not increase the total funding required from the Government."

23. Shortly thereafter the Department of Infrastructure, Planning and Natural Resources paid the amount of $97,893 by cheque made out to the Partnership. The cheque was deposited into the Partnership's cheque account on 5 July 2004.

24. The reason the cheque was made out to the Partnership was that, in connection with the implementation of Step 2 of the GSAP (see [18] of these reasons), Mr Carberry had ticked a box in a "Direction for payment form", sent to the Department, so as to indicate that:

"Assistance should be provided to the landowner/s as the water entitlement was acquired by the landowner or his/her predecessor in title (please go to section A …)"

25. The corresponding Section A of the form stated (original emphasis):

"In order to progress the structural adjustment payment process, please provide the name/s [person/s or entity] and address of the recipient to which payments of financial assistance is (sic) to be made on behalf of all landowners . The signed approval of all partners/parties who hold land ownership title (who obtained water entitlement) is required."

26. At the foot of the form are shown the name and signature of Mr Carberry and the name (but not the signature) of his brother. The form instructs the Department to make any payment to "S. Carberry and Sons".

A new program is announced

27. It seems that the Department's payment of that remaining $7.5 million brought the GSAP, in practical terms, to an end. Although there was no formal announcement of the cancellation of the Program, or of any modification to it, the Program was replaced by the Achieving Sustainable Groundwater Entitlements (ASGE) program in about November 2005. The ASGE program was jointly funded by the Commonwealth and the State of New South Wales and it finally brought about, from November 2006 onwards, what the NSW Government had originally sought to achieve some four years earlier with the GSAP.

28. Under the ASGE program, water "entitlements" that were in place immediately prior to 1 November 2006 were "replaced" by access licences under the WM Act, but that Act provides at item 3(3) of Sch 10 that a replacement licence "may provide for a specified reduction over a period of the quantity of water that the holder of the licence is entitled to take …".

29. On 15 January 2008, the NSW Department of Water & Energy wrote to Mr Carberry attaching an offer of $101,380 under the ASGE program and attached a Deed of Indemnity and Release. The letter included the following:

"The Water Sharing Plan for the Upper and Lower Namoi Groundwater Sources commenced on the 1 November 2006. On that date your Water Act 1912 licences expired and were replaced with an aquifer access licence under the Water Management Act 2000 with a share of the sustainable yield in the Groundwater Source less than the volume of your former licences and a supplementary water access license which will be reduced and then cancelled in accordance with the Plan.

The New South Wales and Australian governments in partnership with irrigators have developed the ASGE program. While there is no legislative requirement to do so the NSW and Australian governments have jointly invested $135 million in the program to provide ex gratia payments to affected groundwater users and regional communities in the six aquifer systems."

30. The Deed of Indemnity and Release was executed for Mr Carberry and his brother by Mr Carberry's son, Michael, on or about 22 January 2008. Payment under the ASGE program was to be made to the Partnership. The amount which was offered under the ASGE program was $101,380 (for both Mr Carberry and his brother), reflecting an entitlement of $199,270 less a "Previous Namoi GSAP Payment" of $97,890.

The amount in dispute

31. Mr Carberry included in his tax return for the year ended 30 June 2005 the amount of $48,947 (being approximately one-half of the GSAP payment of $97,893 made to the Partnership) as an "assessable government industry payment". It is this amount that is in dispute between the parties.

Is the amount assessable as "ordinary income"?

32. "Ordinary income" is income according to ordinary concepts: s 6-5(1) of the Act. This reference to "income according to ordinary concepts" is a reference to Sir Frederick Jordan's statement in Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215 at 219:

"The word 'income' is not a term of art, and what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income, must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income, or that special rules are to be applied for arriving at the taxable amount of such receipts."

33. Mr Carberry submits that the receipt was a lump sum payment calculated by reference to the present value of ten annual reductions in Mr Carberry's water extraction entitlements. It was therefore received on capital account, and so was not income according to ordinary concepts, because it represented compensation for a capital asset appropriated and cancelled by the Crown in right of the State of New South Wales.

34. The Commissioner, on the other hand, submits that the payment constitutes an amount of ordinary income in Mr Carberry's hands. The Commissioner says, as detailed in his Outline of Submissions at [84], that the facts of particular importance to the question of whether the payment was ordinary income are as follows:

• • "Mr Carberry and his late brother acquired the original licences for the purpose of irrigating Cardale;
• • the licences they obtained permitted them to use the water only for 'stock watering and irrigation' and 'irrigation';
• • the water extracted pursuant to the licences was in fact used for the purposes of carrying on the business of the Partnership and not for any non-commercial or non-business purpose;
• • the licences were thus always used by the registered owners for their income producing activities, the activities of the Partnership;
• • the amount paid to the Partnership was paid as 'financial assistance'. It was a voluntary payment, having no statutory basis. Eligibility for the financial assistance arose because the Partnership was a 'high level user' of water and the NSW Government had determined to provide such financial assistance to assist in structural adjustments to the business operations of such high level users;
• • it was contemplated, in 2003 and 2004, that the original licences would, at some point, be replaced with licences under a new regime which would allow less water to be extracted;
• • nevertheless, when the payment was made, the licences continued to be held by Mr Carberry and his brother and used in the Partnership, the Water Sharing Plan had not commenced but continued to be deferred, and there had not in fact been any reduction in the entitlement to extract water because the original licences had not been replaced."

35. The Commissioner dismisses as irrelevant the fact that some of the "high level users" (including Mr Carberry) ultimately did not need to prove what expenditure the amounts would be applied to.

36. The Commissioner also submits that the payment was received in the ordinary course of business, the significance of this factor originating from the comment of the High Court in
Commissioner of Taxation v The Myer Emporium Ltd 87 ATC 4363; (1987) 163 CLR 199 (Myer) at p 209:

"Although it is well settled that a profit or gain made in the ordinary course of carrying on a business constitutes income, it does not follow that a profit or gain made in a transaction entered into otherwise than in the ordinary course of carrying on the taxpayer's business is not income. Because a business is carried on with a view to profit, a gain made in the ordinary course of carrying on the business is invested with the profit-making purpose, thereby stamping the profit with the character of income."

37. It should be noted, however, that that excerpt continues at p 209 and 210 as follows:

"But a gain made otherwise than in the ordinary course of carrying on the business which nevertheless arises from a transaction entered into by the taxpayer with the intention or purpose of making a profit or gain may well constitute income. Whether it does depends very much on the circumstances of the case. Generally speaking, however, it may be said that if the circumstances are such as to give rise to the inference that the taxpayer's intention or purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary judged by reference to the ordinary course of the taxpayer's business."

38. In Mr Carberry's case there is no "transaction" giving rise to the payment, unless one were to take the view that the payment arose from the prior transactions undertaken by the Partnership (which had an indirect bearing on the classification of Mr Carberry as a "high level user"), or from its future transactions, or from a combination of all of them. But to take that view would be to move a significant way from the statements of principle in Myer. In my view, Myer provides no support for the Commissioner's arguments in relation to Mr Carberry's circumstances.

39. Nor, in my view, are the Commissioner's arguments assisted by the decision of the Tribunal in
Re Berghofer and Commissioner of Taxation (2008) 73 ATR 964 (Berghofer). That case concerned a payment the taxpayer received from the Queensland Government under the Vegetation Management (Enterprise Assistance) Scheme to assist in the construction of a dam and irrigation infrastructure. The payment was made to enable him to adjust his business or relocate. On the question of whether the receipt should be characterised as ordinary income, Deputy President Hack said at p 976 [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."

40. Although originally designed as a scheme providing for "recoupment" (or in some cases prepayment) of approved expenditure, the GSAP became, for Mr Carberry, a scheme lacking any nexus between the incurring of expenditure (whether of a business nature or not) and the entitlement to the payment.

41. Returning for a moment to the parties' submissions (see [33] to [35] of these reasons), there are elements in each of them that can be readily accepted. For example, it is not entirely inaccurate to refer to the receipt as "compensation" (Macquarie Dictionary - something given or received as an equivalent for services, debt, loss, suffering etc), but compensation for what? The Minister's News Release noted that the payment "will be linked to the volume of water withdrawn" but that could be viewed, at least in the context of the Program as originally announced, as a method of calculation of the amount to be paid rather than consideration for the volume of water to be withdrawn or for the reduction in entitlement once the bore licences came to an end. And while the Commissioner's summary of the facts at [34] above could hardly be faulted, it is the inferences to be drawn from those facts that will be critical to the determination of this issue.

42. What cannot be doubted is that, even in the very beginning, the payments were not intended to be made to business operators as such. They were only ever intended to be made to "high level users" of water - and, while it might be assumed that only a person carrying on a business could answer that description, it was the volume of water used, and not the extent of the person's business operations or trading activities (if any), that determined whether a person would or would not be eligible for payment. There is evidence, in the form of affidavits sworn by Phillip Smith and David Phelps, that there were "high level users" of water who were paid amounts under the GSAP although the recipients of the payments had never carried on trading or business activities. That fact certainly throws some light on the question whether the NSW Government characterised the payment as an amount paid to business operators in connection with their business or trading activities.

43. Of course, the characterisation of the payment from the perspective of the payer is not necessarily the same as the characterisation of the receipt in the hands of the payee. And it is the latter, not the former, that will determine whether the receipt is income in the payee's hands:
Scott v Commissioner of Taxation(1966) 117 CLR 514;
GP International Pipecoaters Pty Ltd v Commissioner of Taxation 90 ATC 4413; (1990) 170 CLR 124.

44. In
First Provincial Building Society Limited v Commissioner of Taxation 95 ATC 4145; (1995) 56 FCR 320 (First Provincial) it was recognised that not all receipts by a taxpayer carrying on a business will be income; the determinant as to whether a payment constitutes income in ordinary concepts is "the relationship between the payment and the business activities of the applicant" (page 326E-F).

45. In addition to what I have noted in [42] above is the lack of any requirement (occasioned by the removal of steps four and five of the scheme) to undertake (or plan to undertake) any business expenditure as a precondition of the payment. In this respect I disagree with the Commissioner's submission that the character of the payment should be assessed by reference to the scheme as originally formulated, and that the changes that took place in June 2004 do not affect that character. In my opinion, the substance of the final arrangements should prevail over the form of the original version of the Program. If the Government had insisted on the carrying out of the last two steps as originally proposed, then Mr Carberry's circumstances may have more closely resembled those of the taxpayer in Berghofer. But the removal of those steps rendered the payment, for practical purposes, unconditional.

46. That fact makes it impossible, in my opinion, to characterise the payment as "financial assistance" in the sense contended for by the Commissioner - that is, as financial assistance to encourage identified high level users to adopt efficiency measures in their water usage activities. That may have been an accurate description if the last two steps of the scheme had had to be complied with, but any accuracy in that description fell away once the scheme was changed to remove those steps.

47. The receipt has the character of capital. It is accurately described, in accordance with Mr Carberry's submission, as "a lump sum payment calculated by reference to the present value of ten annual reductions in Mr Carberry's water extraction entitlements" (see [33] of these reasons). But more than that, the receipt is for that reduction. The payment was made in recognition of the fact that, at some stage in the future, Mr Carberry (or the Partnership) would be entitled to extract less water than had previously been permitted. The payment was made as consideration for that reduction.

48. The receipt is not "ordinary income" of Mr Carberry or of the Partnership.

Is the amount assessable as a "bounty or subsidy" within s 15-10 of the Act?

49. Since I have found that the payment is not "ordinary income" of Mr Carberry, it is necessary to consider whether it is statutory income under s 15-10 of the Act. Whether the payment is within s 15-10 turns on two questions:

• (i) whether the payment is a "bounty or subsidy";and
• (ii) whether it was received "in relation to carrying on a business".

50. The predecessor to s 15-10 of the Act was s 26(g) of the Income Tax Assessment Act 1936, although s 26(g) was expressed as covering "any bounty or subsidy received in or in relation to the carrying on of a business …". That provision was considered in First Provincial, where Hill J, with whom the other members of the Full Court (Black CJ and Carr J) agreed, said (at pages 327C-D to 333C-D):

"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 (Sweet and 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] HCA 29; (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).

…

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 '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: cf
O'Grady v Northern Queensland Company Limited [1990] HCA 16; (1989-90) 169 CLR 356 at 364-5 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."

51. Even if the receipt answers the description of a "subsidy" as outlined in First Provincial at [34] (I did not understand the Commissioner to submit that it is properly characterised as a "bounty"), where is the relevant relationship, or connection (whether direct or indirect), between the receipt and the carrying on of a business? I have already noted, at [42], the fact that the carrying on of trading or business activities was not a precondition of the payment of an amount under the GSAP. In those circumstances I fail to see how the payment could have been received "in relation to" the carrying on of a business.

52. In the absence of a relevant connection, or relationship, between the receipt of the payment and the carrying on of any business activities, the receipt cannot be assessable within s 15-10 of the Act.

The capital gains tax provisions

53. The contest here is between capital gains tax (CGT) events C2 and H2. (During the hearing Mr Carberry's counsel indicated that he was not pressing his claim in relation to CGT event A1).

54. The hierarchy of the CGT provisions in Part 3-1 of the Act is specified, as relevant to this matter, in s 102-25:

102-25 Order of application of CGT events

• "(1) Work out if a *CGT event (except *CGT events D1 and H2) happens to your situation. If more than one event can happen, the one you use is the one that is the most specific to your situation.
• …
• (3) If no *CGT event (except *CGT events D1 and H2) happens:
  • (a) work out if CGT event D1 happens and use that event if it does; and
  • (b) if it does not, work out if CGT event H2 happens and use that event if it does."

55. So, the first question is whether there has been a CGT event C2. If there has been, then the outcome in relation to that event will determine the question. However, if there has not been a CGT event C2, it will be necessary to determine whether there has been a CGT event H2.

Is there a CGT event C2?

56. Section 104-25 of the Act provides (Notes omitted):

" 104-25 Cancellation, surrender and similar endings: CGT event C2

• (1) CGT event C2 happens if your ownership of an intangible *CGT asset ends by the asset:
  • (a) being redeemed or cancelled; or
  • (b) being released, discharged or satisfied; or
  • (c) expiring; or
  • (d) being abandoned, surrendered or forfeited; or
  • (e) if the asset is an option-being exercised; or
  • (f) if the asset is a *convertible interest-being converted.
• (2) The time of the event is:
  • (a) when you enter into the contract that results in the asset ending; or
  • (b) if there is no contract-when the asset ends.
• (3) You make a capital gain if the *capital proceeds from the ending are more than the asset's *cost base. You make a capital loss if those *capital proceeds are less than the asset's *reduced cost base.

  …

  Exceptions

• (5) A *capital gain or *capital loss you make is disregarded if:
  • (a) you *acquired the asset before 20 September 1985; or
  • (b) for a lease that you granted:
    • (i) it was granted before that day; or
    • (ii) if it has been renewed or extended-the start of the last renewal or extension occurred before that day."

57. Mr Carberry submits that this provision applies. He says that the groundwater bore licences were replaced by operation of the WM Act, the relevant part of which - Schedule 10 - commenced on 1 November 2006. Indeed, item 3(1) in Sch 10 provides that an entitlement that, immediately before 1 November 2006, was in force under the Water Act 1912(NSW) is taken to have been "replaced" by a water access licence under the WM Act. See also regulations 29K to 29O and Schedule 4C to the Water Management (General) Regulation 2004(NSW).

58. Mr Carberry submits that the licences (which the parties agree are "CGT assets" within s 108-5(1) of the Act) either expired or were cancelled, so that a CGT event C2 occurred. I agree with that submission.

59. That makes it unnecessary to examine whether a CGT event H2 occurred.

60. By s 104-25(2) of the Act, the time of the CGT event is "when the asset ends" (or perhaps better expressed, taking into account the language of s 104-25(1), when Mr Carberry's ownership of the asset ends). This must be on 1 November 2006 - in other words, in the 2007 income year. There is no CGT event C2 during the relevant income year, which ended on 30 June 2005. It follows that the happening of the CGT event C2 has no impact on Mr Carberry's tax position for the relevant year.

Conclusion

61. I set aside the Commissioner's objection decision, and decide instead that the taxpayer's objection is allowed in full.