ATO ID 2002/824: Assessability of refund of capital contribution towards obtaining electricity
Date of decision: 13 August 2002
Year of income: Year ended 30 June 2002
Business line: Small Business/Individual Taxpayers

Issue
Is a refund of a contribution towards obtaining an electricity supply, included in the taxpayer's assessable income under section 6-5 of the Income Tax Assessment Act 1997 ('ITAA 1997')?

Decision
No. A refund of a contribution towards obtaining an electricity supply is not included in the taxpayer's assessable income under section 6-5 of the ITAA 1997 as it is a receipt of a capital nature.

Facts
The taxpayer paid an amount to an electricity provider. The amount was paid before 20 September 1985. The amount was a contribution towards the cost of obtaining an electricity supply to the taxpayer's property. Under an agreement, the taxpayer was entitled to receive a full refund of their contribution (without interest) after a specified number of years from the date of the agreement. The taxpayer received a full refund of their contribution from the electricity provider.

Reasons for decision
Summary: Section 6-5 of the ITAA 1997 provides that the assessable income of an Australian resident for taxation purposes, includes income according to ordinary concepts (ordinary income) derived directly or indirectly from all sources. Relevant factors in determining whether a payment is ordinary income include: Under the terms of the agreement, the taxpayer was entitled to receive a refund of the total amount of their contribution, without interest, after a specified number of years from the date of their initial payment. Generally, expenditure incurred in the installation or connection of utilities (eg. electricity, gas, and telephone) is considered to be an outgoing of a capital nature. The taxpayer received a full refund of their contribution from the electricity provider. This payment is a refund of a capital contribution made by the taxpayer. The payment is a one-off payment, that was expected but not relied upon, and not related to work performed or an interest in property. It does not have the characteristics of ordinary income but is rather a capital receipt in the taxpayer's hands. The refund amount is not ordinary income and is therefore not included in the taxpayer's assessable under section 6-5 of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 section 6-5
Subject references: Refunds Income Capital receipts Utility expenses