Jacob Berghofer and Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Administrative Appeals Tribunal (2008/2012)
Judgment date: 19 December 2008
Date published: 19 March 2010

Summary of decision:
Outlines the Tax Office's response to a case which concerned the assessability of a grant paid under State law to improve the sustainability and profitability of farming businesses, affected by laws which restricted broadscale clearing of vegetation • Mr Berghofer operates a farming business in rural Queensland • In 2004, the Queensland Government introduced laws which restricted broadscale clearing of vegetation • The new law affected approximately 25% of Mr Berghofer's property, impacting the viability and sustainability of the farming business. • The Queensland Government made available a grant of up to $100,000 to undertake activities to improve the viability, sustainability and profitability of farming businesses whose properties were affected by the new laws. • In 2005, Mr Berghofer applied for and received access to a grant of $100,000 to construct a dam and to develop an irrigated cultivation for growing feed for his livestock. • Between November 2005 and January 2007, as part of the grant, Mr Berghofer was reimbursed, after submitting receipts, for the expenditure incurred in undertaking the project, including the purchase of a tractor, a scrapper, fuel, seed and irrigation equipment. • Mr Berghofer's accountant prepared his income tax return for the 2006 income year and included this as 'assessable government industry payments'. • Mr Berghofer was assessed on the basis of this return. He subsequently objected to the assessment on the grounds that the payment was compensation for the loss of the right to clear part of his land. | • Mr Berghofer operates a farming business in rural Queensland • In 2004, the Queensland Government introduced laws which restricted broadscale clearing of vegetation • The new law affected approximately 25% of Mr Berghofer's property, impacting the viability and sustainability of the farming business. • The Queensland Government made available a grant of up to $100,000 to undertake activities to improve the viability, sustainability and profitability of farming businesses whose properties were affected by the new laws. • In 2005, Mr Berghofer applied for and received access to a grant of $100,000 to construct a dam and to develop an irrigated cultivation for growing feed for his livestock. • Between November 2005 and January 2007, as part of the grant, Mr Berghofer was reimbursed, after submitting receipts, for the expenditure incurred in undertaking the project, including the purchase of a tractor, a scrapper, fuel, seed and irrigation equipment. • Mr Berghofer's accountant prepared his income tax return for the 2006 income year and included this as 'assessable government industry payments'. • Mr Berghofer was assessed on the basis of this return. He subsequently objected to the assessment on the grounds that the payment was compensation for the loss of the right to clear part of his land. | Issues decided by the court or tribunal | The Tribunal affirmed the Commissioner's decision that the payments received by Mr Berghofer constituted part of his assessable income, however, the Tribunal held that the amounts were assessable as ordinary income and not as a bounty or subsidy. | The Tribunal determined that while the payments appeared to satisfy the definition of bounty or subsidy, they did not fall within that category due to the "precondition of an adverse affect upon the land available to conduct the recipient's business." This precondition made the payment of the same nature as compensation for the loss of the right to clear the land and therefore could not be described as a bounty or subsidy. | However, the Tribunal considered that, as Mr Berghofer had no entitlement to compensation for the loss of the right to clear trees on his property, the payments were gratuitous in nature.. The Tribunal stated that "Mr Berghofer did not become entitled to payment because his land was affected; rather, because his land was affected he was entitled to be considered for a grant provided the other matters required to be shown were shown." The payments "were received as recoupment of expenditure undoubtedly made in the course of Mr Berghofer's business". Accordingly, "it represented a profit or gain made by Mr Berghofer in the course of his business" and was therefore ordinary income.

Overview of facts:

Issues decided:
The Tribunal affirmed the Commissioner's decision that the payments received by Mr Berghofer constituted part of his assessable income, however, the Tribunal held that the amounts were assessable as ordinary income and not as a bounty or subsidy. The Tribunal determined that while the payments appeared to satisfy the definition of bounty or subsidy, they did not fall within that category due to the "precondition of an adverse affect upon the land available to conduct the recipient's business." This precondition made the payment of the same nature as compensation for the loss of the right to clear the land and therefore could not be described as a bounty or subsidy. However, the Tribunal considered that, as Mr Berghofer had no entitlement to compensation for the loss of the right to clear trees on his property, the payments were gratuitous in nature.. The Tribunal stated that "Mr Berghofer did not become entitled to payment because his land was affected; rather, because his land was affected he was entitled to be considered for a grant provided the other matters required to be shown were shown." The payments "were received as recoupment of expenditure undoubtedly made in the course of Mr Berghofer's business". Accordingly, "it represented a profit or gain made by Mr Berghofer in the course of his business" and was therefore ordinary income.

ATO view of decision:
The Commissioner could not appeal the decision of the Tribunal that the payment was not a bounty or subsidy because the decision was favourable. | The decision to classify the payments received by Mr Berghofer as ordinary income was open to the Tribunal on the facts. However, if the payments received were not ordinary income, the Commissioner maintains that the payments received would be included in assessable income under section 15-10 of the ITAA 1997 as bounties or subsidies received in relation to carrying on a business. | The Tribunal states that there is a common underlying notion of compensation for a loss between payments of the nature received by Mr Berghofer and payments for agreeing to give up or sell part of the profit yielding structure of the business, and for this reason the payments are outside what is said to be a bounty or subsidy. The Tribunal cited paragraph 83 of Taxation Ruling TR 2006/3 as support for the contention that these payments were outside what is considered a "bounty or subsidy" | The Commissioner's view is that the "precondition of an adverse affect upon the land available to conduct the recipient's business" does not change the nature of the payments in the hands of Mr Berghofer or take them out of the category of payments properly described as a bounty or subsidy. It is also considered that paragraph 83 does not support the Tribunal's finding. | In determining whether a government payment (grant) is a bounty or subsidy for the purposes of section 15-10 of the ITAA 1997, it is essential to determine what the grant is actually for (see paragraph 97 of Taxation Ruling TR 2006/3). Thus, a government payment received by a taxpayer for each diseased dairy cow destroyed was accepted by the High Court in Federal Commissioner v Wade (1951)84 CLR 105 as payment of compensation in respect of loss sustained by him as a result of the destruction of the dairy cattle. In contrast, in Softex Industries Pty Ltd v FCT [2002] AATA 1232, a payment of financial assistance was provided to recipients to address the adverse impact of a change to exemptions in the sales tax law (to remove a sales tax exemption for their product). The assistance was held to be a bounty or subsidy received in relation to carrying on a business. | In the present case, the fact that the taxpayer's land was affected adversely by the new laws enabled him to meet one of the eligibility criteria to apply for the grant. However, the grant was not compensation for the loss of any rights in respect of the land. Rather, the grant was financial assistance received by the taxpayer to undertake activities to improve the viability, sustainability and profitability of his business and, therefore, is a bounty or subsidy for the purposes of section 15-10 of the ITAA 1997. A reference to 'bounty or subsidy'' includes a grant that encourages business or trade (see paragraph 96 of Taxation Ruling TR 2006/3). | The Commissioner maintains that the words "bounty or subsidy" are words of wide meaning and may include financial assistance provided by government by way of grant, including grants provided to address the detrimental impact of changing economic and environmental circumstances. | The Commissioner has issued an addendum to Taxation Ruling TR 2006/3 which clarifies the grant of the nature received by Mr Berghofer.

Administrative treatment:
Implications on current Public Rulings & Determinations | None

Legislative references: Income Tax Assessment Act 1997 6-5 15-10
Case references: Brisbane Amateur Turf Club v Federal Commissioner of Taxation [1968] HCA 31 118 CLR 300 Federal Commissioner of Taxation v Dixon [1953] ALR 17 [1952] HCA 65 86 CLR 540 First Provincial Building Society Ltd v Commissioner of Taxation (1995) 56 FCR 320 30 ATR 207 95 ATC 4145 GP International Pipecoaters Pty Ltd v Commissioner of Taxation [1990] HCA 25 (1990) 170 CLR 124 21 ATR 1 90 ATC 4413 Reckitt & Colman Pty Ltd v Federal Commissioner of Taxation (1974) 3 ALR 381 74 ATC 4185 4 ATR 501 Scott v Commissioner of Taxation [1967] ALR 561 [1966] HCA 48 117 CLR 514 The Squatting Investment Company Ltd v Federal Commissioner of Taxation [1953] HCA 13 86 CLR 570 26 ALR 658
Subject references: Income Tax Ordinary Income Bounty or Subsidy