ATO Interpretative Decision

ATO ID 2004/900 (Withdrawn)

Excise

• This ATO ID is withdrawn from 1 July 2012, the date the Energy Grants (Credits) Scheme Act 2003 was repealed.
  Despite its withdrawal, this ATO ID continues to be a precedential ATO view in respect of the period the Act was in force, 1 July 2003 up to and including 30 June 2012.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is the drilling and maintenance of a bore an agricultural soil/water activity as defined in section 24 of the Energy Grants (Credits) Scheme Act 2003 (EGCSA) if the water obtained from the bore is for use in the rearing of livestock and for the farmer's domestic use?

Decision

Yes. The drilling and maintenance of a bore is an agricultural soil/water activity as defined in section 24 of the EGCSA if the water obtained from the bore is for use in the rearing of livestock and for the farmer's domestic use.

Facts

An entity (the farmer) carries on the core agricultural activity of rearing livestock for sale on an agricultural property.

The farmer constructs and maintains a bore on the agricultural property where the farmer's core agricultural activity is carried on.

The ground water obtained from the bore is for use in the rearing of livestock. However some portion of the water will also be used by the farmer for domestic purposes.

Reasons for Decision

Under subsection 53(1) of the EGCSA an entity is entitled, subject to certain conditions, to an off-road credit if they purchase diesel fuel for use by them in a range of specified activities, including 'agriculture'.

'Agriculture' is defined in section 22 of the EGCSA as including 'an agricultural soil/water activity'. The phrase 'agricultural soil/water activity' is in turn defined in section 24 and includes a number of activities, the most relevant of which is contained in paragraph 24(b) which states:

searching for ground water solely for use in an agricultural activity, or the construction or maintenance of facilities for the extraction of such water, solely for that use, if the searching, construction or maintenance:

(i)

is carried out on an agricultural property where a core agricultural activity is carried on, or at a place adjacent to that property; and

(ii)

is carried out by the person who carries on the first-mentioned agricultural activity or by a person contracted by that person to carry out the searching, construction or maintenance.

Therefore, the farmer's activities will be an agricultural soil/water activity if:

•

the facilities being constructed or maintained are for the extraction of water

•

the water being extracted is solely for use in an agricultural activity

•

the construction and maintenance activities are carried out on a agricultural property where a core agricultural activity is carried on, or at a place adjacent to that property, and

•

the construction or maintenance is carried out by the person who carries on the agricultural activity the water is for use in, or a contractor to that person.

As the facilities being constructed and maintained are for the extraction of water and are being constructed and maintained on an agricultural property where the core agricultural activity of rearing livestock is carried on, the first and third requirements are satisfied. The fourth requirement is also clearly satisfied.

Therefore, the activities will be an agricultural soil/water activity if the water being extracted is solely for use in an agricultural activity.

'Agricultural activity' is defined in subsection 28(1) as meaning:

... an activity referred to in any of the paragraphs of the definition of agriculture in subsection 22(1) (other than an activity referred to in paragraph (i) or (j) of the definition of sundry agricultural activity in section 27) if that activity is carried out for the purposes of, or for purposes that will directly benefit, a business undertaken to obtain produce for sale.

The definition of agriculture in subsection 22(1) of the EGCSA includes the 'rearing of livestock'. In this instance the rearing of livestock is being carried out for the purposes of a business undertaken to obtain produce for sale. Consequently, the water being extracted for use in rearing livestock is being extracted for use in an agricultural activity.

However, the definition of 'agricultural activity' in subsection 28(1), of EGCSA whilst including most sundry agricultural activities (as defined in section 27 of the EGCSA), specifically excludes the activities contained in paragraphs 27(i) and 27(j). Paragraph 27(j) includes within the definition of a sundry agricultural activity:

the use of off-road diesel fuel at residential premises in:

(i)

providing food and drink for; or

(ii)

providing lighting, heating, air-conditioning, hot water or similar amenities for; or

(iii)

meeting other domestic requirements of; residents of the premises if: ...

Accordingly, as some of the water is to be used for domestic purposes, it is not being used in an agricultural activity. Therefore, it must be determined whether this prevents the construction and maintenance of the bore from passing the 'solely' test.

The word 'solely' is not defined in the EGCSA and therefore takes on its ordinary meaning. 'Solely' is defined in the Macquarie Dictionary, 2001, rev. 3rd edn, The Macquarie Library Pty Ltd, NSW as:

... '2. exclusively or only...'

Therefore, for the ground water to be solely for a particular purpose, it must be only and exclusively for that purpose and for no other purpose. The history of the provision is helpful in determining if this is so.

The Diesel Fuel Rebate Scheme, which was administered under the Customs Act 1901 and the Excise Act 1901 was the immediate precursor to the Energy Grants (Credits) Scheme and contained a provision in its definition of 'agriculture' identical to paragraph 24(b) of the EGCSA. This provision was inserted into the definition of 'agriculture' as part of a significant change to that definition for the purposes of the Diesel Fuel Rebate Scheme. Prior to this change, a 'sweeper' clause had allowed a rebate to be paid for activities 'in connection' with agriculture. The changes contained in the Customs and Excise Legislation Amendment Act 1995 removed the sweeper clause, and replaced it with a defined list of eligible activities. As made clear in the Supplementary Explanatory Memorandum to the Customs and Excise Legislation Amendment Bill 1995, the intent of the changes was to maintain entitlement to benefits for those engaged in mainstream agriculture while excluding from eligibility, activities which were only remotely connected with agriculture.

Also, the case law has made it clear that this legislation needs to be read in a practical, commonsense manner (see Re Central Norseman Gold Corporation Limited and Collector of Customs, Western Australia AAT No W84/118 (Central Norseman); (1985) 8 ALN N288; Abbott Point Bulk Coal Pty Ltd & Anor v. Collector of Customs (1992) 35 FCR 371; (1992) 15 AAR 365; Australian National Railways Commission v. Collector of Customs (1985) 8 FCR 264; (1985) 69 ALR 367).

In particular, in Central Norseman, the Administrative Appeals Tribunal observed that:

The applicant is not entitled to a rebate unless it demonstrates that it purchased diesel fuel for use in a mining operation as defined. If it is established that it has done so, the applicant will not lose its entitlement to rebate simply because some of the electricity produced is in fact used for a purpose which, looked at on its own, does not form part of a mining operation as defined.

Consequently, where the water for which the bore is being drilled is for use both in an agricultural activity, and for domestic use by the farmer, the 'solely' requirement should not be interpreted so strictly as to prevent the provision being read in a practical and commonsense manner that accords with the legislative intent of the scheme.

In particular, based on Central Norseman, if it is clear that the entity has purchased the fuel for the purpose of constructing or maintaining equipment or facilities for use in an agricultural activity, the entity will not lose its entitlement to an off-road credit simply because, once the equipment or facilities are constructed or maintained, there may be some small use of the equipment for purposes other than agriculture.

In this instance, it is clear that the purpose of constructing and maintaining the bore is to provide water for use by the farmer in the rearing of livestock. Once the bore has been constructed, some of the water may be used by the farmer for domestic purposes. However, this potential use of the water is merely incidental to the purpose of constructing the bore and is not sufficient to alter the characterisation of the purpose of the construction and maintenance as being to extract water for use in the agricultural activity of rearing livestock.

Consequently, the farmer has purchased the fuel for constructing or maintaining equipment for use in an agricultural activity and the minor use of this equipment after its construction for purposes other than 'agriculture' is not sufficient for the farmer to lose its entitlement to an off-road credit for the construction and maintenance.

Therefore, the drilling and maintenance of a bore is an agricultural soil/water activity as defined in section 24 of the EGCSA if the water obtained from the bore is for use in the rearing of livestock and for the farmer's domestic purposes, as it can be said that the water to be extracted from the bore is nonetheless 'solely' for use in an agricultural activity for the purposes of paragraph 24(b) of the EGCSA.

Legislative References:
Customs Act 1901
   the Act

Case References:
Re Central Norseman Gold Corporation Limited and Collector of Customs, Western Australia
    AAT No W84/118

Related ATO Interpretative Decisions
ATO ID 2004/64

Other References:
The Macquarie Dictionary, 2001, rev. 3rd edn, The Macquarie Library Pty Ltd, NSW
Supplementary Explanatory Memorandum to the Customs and Excise Legislation Amendment Bill 1995

Keywords
EGCS agricultural soil/water activity
EGCS agriculture
EGCS off-road
EGCS primary production
EGCS searching for ground water as an agricultural soil/water activity
Energy grants (credits) scheme

Business Line:  Indirect Tax

Date of publication:  19 November 2004

ISSN: 1445-2782