Carberry and Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Administrative Appeals Tribunal (2009/1456)
Judgment date: 10 May 2011
Date published: 15 September 2011

Summary of decision:
Outlines the ATO view of this case which concerned whether a payment made under a state government program was assessable income as ordinary income, as statutory income as a bounty or subsidy, or as a capital gain from a CGT event.

Overview of facts:
The applicant, Mr Carberry, and his brother held bore water licences under the Water Act 1912 (NSW) as pre-CGT assets. The licences were used on an irrigation and farming property known as Cardale, located in the lower Namoi Valley in New South Wales. | The property was run by the Stan Carberry & Sons partnership. The applicant, his brother and each of their sons, were partners in that partnership; but the applicant and his brother had been effectively retired since around 1995. The day-to-day running of the partnership business is now conducted by their sons. | On 8 December 2000 the Water Management Act 2000 (NSW) received Royal Assent, with parts of the legislation commencing on 1 January 2001. That Act was to provide a new water licensing and management regime. This effectively included replacement of existing bore water licences with aquifer access and supplementary water access licences, with a gradual reduction in water extraction rights under the latter type of licence. | A program known as the Groundwater Structural Adjustment Program (" GSAP ") was announced by the New South Wales government in December 2002. It provided a five-step process by which water licence holders that were high level users could receive payments to help them adjust to changes in groundwater access. | Put briefly, the five steps involved: • the relevant New South Wales government department (" the department ") writing to a licence holder outlining their history of water use (Step 1), • the licence holder confirming or correcting this data and proving other information (Step 2), and • the department, on receipt of this confirmation, writing to the licence holder advising of the level of financial assistance potentially available to them, as calculated via a formula (Step 3). | • the relevant New South Wales government department (" the department ") writing to a licence holder outlining their history of water use (Step 1), • the licence holder confirming or correcting this data and proving other information (Step 2), and • the department, on receipt of this confirmation, writing to the licence holder advising of the level of financial assistance potentially available to them, as calculated via a formula (Step 3). | On completion of those steps, the licence holder was then to complete an application form identifying the types of on-farm investments for which they sought assistance (Step 4), and forward it to the Rural Assistance Authority. Then, following approval of their application, they were to complete reimbursement forms for such eligible expenditure (Step 5). | Mr Carberry had only completed Steps 1, 2 and 3 at the time of receiving a payment from the department. .The payment followed a decision by the New South Wales government to make upfront payments to 87 identified licence holders in the Namoi Valley. | The Carberrys received a payment for $97,893. The dispute before the Tribunal pertained to approximately half of that payment, being $48,947 (the remainder of the payment being for Mr Carberry's brother). | The applicant's licences (under the Water Act 1912 ) were replaced with licences under the Water Management Act 2000 on 1 November 2006. | Issues decided by the tribunal | 1. Whether the amount received by the applicant under the GSAP was assessable as ordinary income within section 6-5 of the Income Tax Assessment Act 1997 . | No. The Tribunal concluded that the payment was not ordinary income. | 2. Whether the amount received by the applicant was assessable as a bounty or subsidy under section 15-10 of the Income Tax Assessment Act 1997 . | No. The Tribunal found that in this case there was no relevant connection or relationship between the receipt of the payment and the carrying on of any business activities and as a result the payment was not a bounty or subsidy within 15-10 of the Act. | 3. Whether there was a CGT Event C2. | Yes, but not until the year ended 30 June 2007 when the applicant's licences were replaced. | 4. Whether there was a CGT event H2. | As CGT event C2 was taken to have occurred, the Tribunal considered it unnecessary to examine whether a CGT event H2 occurred.

Issues decided:
1. Whether the amount received by the applicant under the GSAP was assessable as ordinary income within section 6-5 of the Income Tax Assessment Act 1997 . No. The Tribunal concluded that the payment was not ordinary income. 2. Whether the amount received by the applicant was assessable as a bounty or subsidy under section 15-10 of the Income Tax Assessment Act 1997 . No. The Tribunal found that in this case there was no relevant connection or relationship between the receipt of the payment and the carrying on of any business activities and as a result the payment was not a bounty or subsidy within 15-10 of the Act. 3. Whether there was a CGT Event C2. Yes, but not until the year ended 30 June 2007 when the applicant's licences were replaced. 4. Whether there was a CGT event H2. As CGT event C2 was taken to have occurred, the Tribunal considered it unnecessary to examine whether a CGT event H2 occurred.

ATO view of decision:
The decision provided that, in the applicant's circumstances, a payment under the GSAP was on capital account and, accordingly a CGT Event C2 happened, although in a later year. | The Commissioner contended that the payment under the GSAP was financial assistance, and was therefore ordinary income. This was rejected by the Tribunal on the basis that the removal of steps 4 and 5 of the program made it impossible to characterise the payment in this instance as "financial assistance to encourage identified high level users to adopt efficiency measures in their water usage activities". | The Commissioner observes, however, that the Tribunal, in coming to this conclusion, suggested that it may have been accurate to describe the payment as financial assistance of the type contended by the Commissioner, if the applicant had been required to comply with the last two steps of the program (see paragraph 46 of the Tribunal's decision). In this regard, the Commissioner notes that this statement highlights the importance of considering the individual circumstances of recipients of GSAP payments on a case by case basis.

Administrative treatment:
The outcome of this case, as set out above, turned on its specific facts. | A key finding in this case was that the payment under the GSAP was received by the applicant despite only steps 1 to 3 of that program having been completed. Whilst all cases must be considered on their facts, the Commissioner will, consistent with the findings of the Tribunal, treat taxpayers who received payments under the GSAP in the same circumstances of this case as being on capital account. This means that these payments are likely to be capital proceeds for a CGT Event C2 (section 104-25 of the Income Tax Assessment Act 1997 ). However, for each affected taxpayer regard will need to be had to all the facts, including the following matters: a. the relevant CGT asset (the original licence); b. the date of acquisition of that licence (and whether it was a pre-CGT asset); c. the timing of the CGT event; and, d. whether any capital gains tax concessions apply. | a. the relevant CGT asset (the original licence); b. the date of acquisition of that licence (and whether it was a pre-CGT asset); c. the timing of the CGT event; and, d. whether any capital gains tax concessions apply. | As above, all cases must be considered on their facts. Where a taxpayer was not in the same circumstances as Mr Carberry, there may be a range of factors that could be relevant. Some of these may potentially include: a. whether the GSAP applicant (the taxpayer) had also completed step 4, or steps 4 and 5 of the GSAP; b. whether that taxpayer was carrying on a business; and/or, c. whether the licence was used (that is, whether water was extracted) by another entity, such as in relation to a business carried on by that entity. | a. whether the GSAP applicant (the taxpayer) had also completed step 4, or steps 4 and 5 of the GSAP; b. whether that taxpayer was carrying on a business; and/or, c. whether the licence was used (that is, whether water was extracted) by another entity, such as in relation to a business carried on by that entity. | Depending on the particular facts and circumstances, the GSAP payment may be ordinary income, statutory income or the proceeds of a CGT event. | Implications for ATO precedential documents (Public Rulings & Determinations etc) | None. | Implications for Law Administration Practice Statements | None

Legislative references: Income Tax Assessment Act 1997 6-5 6-10 15-10 Part 3-1 Water Act 1912 (NSW) (repealed) 117A(3) Water Management Act 2000 (NSW) 401 Water Management (General) Regulation 2004 (NSW) regs 29K 29L, 29M, 29N, 29O and Sch 4C
Case references: Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215 52 WN (NSW) 44 3 ATD 142 Commissioner of Taxation v The Myer Emporium Ltd [1987] HCA 18 (1987) 163 CLR 199 18 ATR 693 87 ATC 4363 Re Berghofer and Commissioner of Taxation [2008] AATA 1138 (2008) 73 ATR 964 2008 ATC 10-066 Scott v Commissioner of Taxation [1966] HCA 48 (1966) 117 CLR 514 14 ATD 286 GP International Pipecoaters Pty Ltd v Commissioner of Taxation [1990] HCA 25 (1990) 170 CLR 124 90 ATC 4413 21 ATR 1 First Provincial Building Society Limited v Commissioner of Taxation (1995) 56 FCR 320 30 ATR 207 95 ATC 4145
Subject references: Income Tax Government payment Ordinary income, statutory income or capital gain Bounty or Subsidy Capital Gains Tax CGT Events C2 and H2 Ground Water Structural Adjustment Program Achieving Sustainable Groundwater Entitlements Program