PFGG and Commissioner of Taxation (Taxation)
[2015] AATA 972
•16 December 2015
PFGG and Commissioner of Taxation (Taxation) [2015] AATA 972 (16 December 2015)
Division
TAXATION & COMMERCIAL DIVISION
File Number(s)
2014/4476
Re
PFGG
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal The Honourable Justice AN Siopis, Deputy President &
Senior Member CR WalshDate 16 December 2015 Place Perth The Tribunal affirms the decision under review.
.........[Sgd]...............................................................
The Honourable Justice AN Siopis, Deputy President
CATCHWORDS
INCOME TAX – small business entities – tax concessions – 50% capital gains tax “active assets” reduction – aggregated turnover - annual turnover – company “connected with” the applicant – fuel disbursements – “ordinary income” - meaning of “in the ordinary course of carrying on a business” – meaning of “sales of retail fuel” - objection decision affirmed
LEGISLATION
Bankruptcy Act 1924-1960 – s 95(1)
Fuel Tax Act 2006 – s 110.5
Income Tax Assessment Act 1936 – s 51(1)
Income Tax Assessment Act 1997 – s 8-1 - Subdivision 152-A - Subdivision – 152-C – s 152-10(1) – s 152-10(1A) – s 152-10(1B) – s 152-35(1) - Division 328 – s 328-110(1) – s 328-115 – s 328-115(1) - s 328-115(2) – s 328-115(3) - s 328-120 – s 328-120(1) – s 328-120(3) - s 328-125 – s 995-1
Sale of Goods Act 1895 (WA) – s 1(3)Tax Laws Amendment (Small Business) Act 2007
CASES
Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue [2009] HCA 41; (2009) 239 CLR 27
Collector of Customs v Chemark Services Pty Ltd [1993] FCA 394; 114 ALR 531; 17 AAR 429
Commissioner of Taxation v Consolidated Media Holdings Ltd (2012) 250 CLR 503
Downs Distribution Company Pty Ltd v Associated Blue Star Stores Pty Ltd (in Liq) (1948) 76 CLR 463
Federal Commissioner of Taxation v The Myer Emporium (1987) 163 CLR 199Taylor v White (1964) 110 CLR 129
SECONDARY MATERIALS
Explanatory Memorandum to the Tax Laws Amendment (Small Business) Bill 2007 – 2.15 – 2.16
REASONS FOR DECISION
The Honourable Justice AN Siopis, Deputy President &
Senior Member CR Walsh16 December 2015
This application concerns the operation of Division 328 of the Income Tax Assessment Act 1997 (ITAA 1997), titled “Small Business Entities”, which, commencing from the 2007/2008 income year, provides that an entity that is a “small business entity” (SBE), can choose to access various tax concessions in Division 152 of the ITAA 1997, subject to satisfying any additional conditions that apply to the particular concession.
In this application, the taxpayer (PFGG), seeks a review of the Commissioner’s objection decision, dated 30 June 2014, to deny PFGG such a concession, namely the capital gains tax (CGT) small business 50% reduction provided for in Subdivision 152-C of the ITAA 1997 (50% CGT Reduction) on a capital gain arising on the disposal of certain Western Australian mining tenements in the year ended 30 June 2009.
The objection arises in the following circumstances.
On 6 November 1997, PFGG’s sister transferred WA Gold Mining Leases, comprising various mining tenements, to him for no consideration.
In December 2001, the WA Gold Mining Leases expired and were reissued to PFGG. We will refer to them as the tenements (Tenements).
On 17 July 2008, PFGG entered into a Sale and Purchase Agreement with Mining Co Pty Ltd (Mining Co) to sell the tenements for a consideration of $5,000,000, in cash, plus 5,000,000 ordinary shares in Mining Co, valued at their closing price on the Australian Stock Exchange (ASX) on that day. This disposal resulted in a capital gain.
During the period 1 July 2007 to 30 June 2009, PFGG was one of two directors of a company we will call Drilling Co (Drilling Co) which, throughout that period, carried on the business of providing drilling services to mining companies in Western Australia. Drilling Co’s issued capital consists of, and at the material time consisted of, two Ordinary shares, one B Class share and one C Class share. At all material times, PFGG has beneficially owned one Ordinary share and one B Class share in the Company.
On 6 September 2010, PFGG lodged his income tax return for the year ended 30 June 2009 (2009 Tax Return).
The 2009 Tax Return disclosed a taxable income of $5,612,632, calculated as follows:
TABLE A
Salary and Wages $152,300 Interest $33,575 Add: Capital Gain $11,680,000 Less: CGT cost base (sale costs) $170,544 Gross capital gain $11,509,456 Less: Capital losses $621,656 $10,887,800 Less: 50% discount $5,443,900 $5,443,900 $5,629,775 Less: Cost of managing tax affairs $17,143 PFGG’s Taxable Income $5,612,632
On 14 September 2010, PFGG was issued with his income tax assessment for the year ended 30 June 2009 (2009 Assessment), by which PFGG’s taxable income was assessed in accordance with the 2009 Tax Return.
However, some years later, on 19 December 2013, PFGG objected to the 2009 Assessment on the basis that the 50% CGT Reduction in Subdivision 152-C of the ITAA 1997 should apply to the capital gain amount of $5,443,900 (as disclosed in the 2009 Tax Return), reducing that capital gain amount by an amount of $2,877, 364 (Objection).
The following statutory provisions are relevant to the contention advanced by PFGG in the Objection.
Subdivision 152-A of the ITAA 1997 provides for the prospect of the 50% CGT Reduction. In short, for the taxpayer to qualify for CGT small business relief under that subdivision, the following conditions set out in s 152 - 10 (1) must be satisfied:
· A CGT event happens in relation to an asset that the taxpayer owns: s 152-10(1)(a) of the ITAA 1997;
· The event would otherwise result in a capital gain: s 152-10(1)(b) of the ITAA 1997;
· One or more of the following (in s 152-10(1)(c) of the ITAA 1997) applies:
(i)The taxpayer is a SBE, within the meaning of s 328-10(1) of the ITAA 1997, for the income year (s 152-10(1)(c)(i) of the ITAA 1997);
(ii)The taxpayer satisfies the “maximum asset value” test in s 152-15 of the ITAA 1997 (s 152-10(1)(c)(ii) of the ITAA 1997);
(iii)The asset is an interest in a partnership which is a small business entity for the income year, and the taxpayer is a partner in that partnership (s 152-10(1)(c)(iii) of the ITAA 1997); or
(iv)The special conditions for passively held assets in s 152-10(1A) of (1B) are satisfied in relation to the CGT asset in the income year (s 152-10(1)(c)(iv) of the ITAA 1997); and
· The asset satisfies the “active asset” test in s 152-35(1) of the ITAA 1997: s 152-10(1)(d) of the ITAA 1997.
Section 995-1 of the ITAA 1997 states that the expression SBE has the meaning given by s 328-110 of the ITAA 1997. Section 328-110(1) of the ITAA 1997 provides:
328-110(1)You are a small business entity for an income year (the current year) if:
(a)you carry on a *business in the current year; and
(b)one or both of the following applies:
(i)you carried on a business in the income year (the previous year) before the current year and your *aggregated turnover for the previous year was less than $2 million;
(ii)your aggregated turnover for the current year is likely to be less than $2 million. [Emphasis added]
Section 328-115(1) of the ITAA 1997 provides that an entity’s “aggregated turnover” for an income year is the sum of the “relevant annual turnovers” listed in s 328-115(2) of the ITAA 1997, excluding any amounts specifically mentioned in s 328-115(3) of the ITAA 1997.
The “relevant annual turnovers” listed in s 328-115(2) of the ITAA 1997 are:
· the entity’s “annual turnover” for the income year;
· the “annual turnover” for the income year of any entity “connected with” the entity at any time during the income year; and
· the “annual turnover” for the income year of any entity that is an “affiliate” of the entity at any time during the income year.
Section 328-125 of the ITAA 1997 provides that entities are “connected with” each other if either entity “controls the other in a way described in this section”. It is not in dispute that Drilling Co is and has, at all relevant times been, “connected with” PFGG for the purposes of s 328-115 of the ITAA 1997.
The expression “annual turnover” is defined in s 328-120(1), is important in this case, and provides as follows:
328-120(1)An entity’s annual turnover for an income year is the total *ordinary income that the entity *derives in the income year in the ordinary course of carrying on a business. [Emphasis added]
Section 328-120(3) of the ITAA 1997 excludes amounts derived from “sales of retail fuel” from an entity’s “annual turnover”. Section 328-120(3) of the ITAA 1997, is also important in this case, and provides:
328-120(3)In working out an entity’s *annual turnover for an income year, do not include any amounts of *ordinary income the entity *derives from sales of *retail fuel.
It is not in dispute that in the year ended 30 June 2009:
(i)PFGG satisfied the basic conditions for CGT relief in s 152-10(1)(a) and (b), as set out above, in relation to the sale of the Tenements to Mining Co on 17 July 2008;
(ii)PFGG did not satisfy any of the tests in s 152-10(1)(c)(ii) to (iv) of the ITAA 1997, as set out above; and
(iii)the Tenements satisfied the “active assets” test in s 152-35(1) of the ITAA 1997 for the purposes of s 152-10(1)(d) of the ITAA 1997, as set out above.
Further, as mentioned, it was accepted that the Drilling Co is and, at all relevant times, was a company “connected with” PFGG for the purposes of s 328-125 of the ITAA 1997. It was also accepted that in assessing the sum of the “relevant annual turnovers” for the purpose of determining and the “aggregated turnover” for the year 2008 regard was to be had only to the “annual turnover” of the Drilling Co.
It followed, therefore, that the question of whether PFGG was a SBE depended on whether the “annual turnover” of Drilling Co for the previous year, namely, the year ended June 2008, was less than $2 million.
Drilling Co’s income tax return for the year ended 30 June 2008 disclosed total gross income of $2,545,010, comprising:
TABLE B
Drilling Receipts $2,466,753 Lease/Hire of Motor Vehicle Income $72,978 Miscellaneous Income $3,963 Interest $1,316 Drilling Co’s Gross Income $2,545,010
However, PFGG contended that the “annual turnover” (as defined in s 328-120 of the ITAA 1997) of Drilling Co for the year ended 30 June 2009 was $1,974,323, calculated as follows:
TABLE C
Taxable income returned $2,545,010 Less: Lease/Hire of Motor Vehicle $72,978 Miscellaneous Income $3,963 Interest $1,316 $78,257 Drilling Receipts $2,466,753 Less: Advance Payments $205,000 Loan from N Metals $50,000 $255,000 $2,211,753 Less: Amounts invoiced for reimbursement of “irregular disbursements” incurred in providing access to the Tenements for purposes of inspection $135,714 Fuel disbursements charged- see paragraphs 18 to 20 below $55,106 Mining Co- drilling charges accrued in 2007 financial year- see paragraph 21 below $46,610 $237,430 Adjusted Annual Turnover $1,974,323
On 30 June 2014, the Commissioner disallowed the Objection in full as he was not satisfied that Drilling Co’s “annual turnover” for the year ended 30 June 2008, for the purposes of s 328-120 of the ITAA 97, was less than $2 million (Objection Decision).
On 29 August 2014, PFGG applied to the Tribunal for a review of the Objection Decision. PFGG’s stated “Reasons for Application” are:
[PFGG] is of the view that [Drilling Co] qualifies as a [SBE] for the 2009 year and as such [PFGG] meets the conditions to access the CGT Small Business Concessions under Division 152 of the ITAA 1997.
There were concessions made prior to the hearing so that PFGG’s present position is that Drilling Co’s “annual turnover” for the 2008 year for the purposes of s 328-120 of the ITAA 1997 is $1,977,723, calculated as set out in Table D below.
TABLE D
Adjusted Annual Turnover per Table C $1,974,323 Add: Amount conceded by applicant re loan from [N] Metals $50,000 $2,024,323 Less: Irregular disbursements paid to Mr BM on behalf of Mining Co $46,600 Further Adjusted Annual Turnover $1,977,723
The consequence was that at the hearing there only issue was whether in assessing its “annual turnover” (as defined in s 328-120 of the ITAA 1997) for the year ended 30 June 2008, Drilling Co was entitled to deduct the total sum of $55,106 in respect of the monies expended on fuel for which it had charged its customers, and which it referred to as the “fuel disbursements” in Table C above.
An amount comprising a fuel disbursement was included in each of five separate invoices that Drilling Co issued to two of its clients, Nickel Limited and Resources NL, in the 2008 year. Each invoice shows that Drilling Co invoiced Nickel Limited and Resources NL “at cost” for diesel fuel (totalling $55,106) purchased by it in the 2008 year and consumed by the drilling rig whilst performing its contracted drilling services for Nickel Limited and Resources NL (Fuel Disbursements). As well as including the charges for fuel, the invoices also included charges for other various expenses incurred by Drilling Co necessary to perform its contracted drilling services for, Nickel Limited and Resources NL, including hammers, hammer oil, drill foam, drill bits, truck tyres and so on. The five invoices together charged a total of $476,129 (Invoices).
The details of the Invoices, which included the Fuel Disbursements, are set out in Table E below.
TABLE E
I II III IV V Date of Invoice Client Period work done Total amount of Invoice- GST Exclusive Fuel Disbursements (included in IV) Exhibit 1 page no. 29/01/08 Resources NL 10 to 22 Jan 08 $104,978 $8,919 698 19/12/07 Resources NL 10 to 17 Dec 07 $75,358 $10,858 710 10/12/07 Resources NL 3 to 9 Dec 07 $77,377 $8,001 712 3/12/07 Nickel Limited 17 Nov to 1 Dec 07 $103,962 $11,550 714 20/11/07 Nickel Limited 8 to 19 Nov 07 $114,456 $15,779 716 $476,129 $55,106
As mentioned, PFGG deducted the total Fuel Disbursements of $55,106, shown in Table E above, in arriving at the Adjusted Annual Turnover, shown in Table C above.
There were two bases upon which PFGG contended that he was entitled to deduct the sum of $55, 106 which it charged in respect of the fuel it had purchased.
First, PFGG contended that the monies received from the two customers in respect of the invoicing of the amounts it expended on the fuel, was not ordinary income derived by Drilling Co in the 2008 year “in the ordinary course of carrying on its drilling business” for the purposes of s 328-120(1) of the ITAA 1997.
Second, it contended that the amount derived from the payment of the amounts invoiced in respect of the Fuel Disbursements must be excluded from Drilling Co’s “annual turnover” for the 2008 year because the monies were derived from “sales of retail fuel” for the purpose of s 328-120(3) of the ITAA 97
We consider each of these contentions below.
Was the revenue Drilling Co received from the payment of the Fuel Disbursements “ordinary income” which it derived “in the ordinary course of carrying on a business”?
The Tribunal received evidence, in the form of a witness statement and oral evidence, from each of the following three witnesses:
(i)PFGG;
(ii) The Office Manager, being the office manager of Drilling Co since May 2004; and
(iii)The Exploration Director, being the executive director and then exploration manager of Mining Co.
The Tribunal makes the findings of fact set out in paragraphs 38 to 61 below.
Drilling Co is an oil and gas drilling business based in Western Australia and carrying on business in that State.
Drilling Co owns a drilling rig which it uses in the conduct of its business. The drilling rig usually operates continually, namely 7 days a week, weather dependent.
The drilling rig moves from drilling site to drilling site on a float (a low loader truck). This is because when the drilling rods are on board the rig, the drilling rig exceeds permissible weights for use on public roads.
Once on site the drilling rig will be tasked with drilling holes at the direction of the mining or exploration site owner. This will involve a geologist employed by the mining or exploration site owner directing the drilling rig where to place itself prior to commencing drilling. Generally a “pad” will have been pre-prepared. A “pad” is a flat area that has been prepared of around 15 to 20 metres by 15 to 20 metres where the drill rig will operate. The depth of the holes drilled and the angle drilled are at the direction of the mining or exploration owner’s geologist.
The drilling rig operates mainly on mining sites and each job can last for up to six months
During the course of carrying out the drilling operations, the drilling rig uses diesel fuel. It also uses other products which are consumed in the course of drilling operations. These include drill bits and hammers.
The drilling rig takes 1000 litres of fuel (2 x 500 litre tanks). The drilling rig used approximately 1,000 of litres of fuel a day. On the basis that in the year ended 30 June 2008, the drilling rig was operating to capacity, it could be inferred that the drilling rig used in excess of 300,000 litres of fuel in the year ended 30 June 2008.
Before undertaking a drilling operation for a client, Drilling Co enters into a contract with the company which has engaged Drilling Co to carry out the drilling operations. The contract usually contains terms which deal with the charging of consumables and fuel.
During the four years ended 30 June 2006 to 30 June 2009, Drilling Co performed the majority of its drilling services for (and derived the vast majority of its income from) Mining Co, and less frequently performed drilling services for (and derived its income from) Magellan, on mine sites in or near West Wiluna. Magellan’s mine site was approximately 20km away from Mining Co’s West Wiluna site. The provision of drilling services to Mining Co accounted for 65% of Drilling Co’s revenue during the year ended 30 June 2008 and 79% during the years ended 30 June 2006 to 30 June 2009
Annexure A to the “Wiluna West Project Drilling Contract” between Mining Co and Drilling Co, dated 5 June 2009 (Mining Co Contract), titled, “Tender for RC Drilling”, provides (at clause 1.3 (C)) that the “Contractor” (i.e. Drilling Co) would provide “all fuel required” and if fuel is supplied by Mining Co it would be “noted as part of the overall drilling cost”.
However, that term did not represent what actually occurred in relation to the fuel charges in respect of the drilling services provided by Drilling Co to Mining Co and Magellan. In each of those cases during the period 2006 to 2009, Mining Co and Magellan each provided the fuel used by Drilling Co on site and Drilling Co did not invoice each of those companies for the cost of the fuel used by the drilling rig in carrying out the drilling functions.
The unchallenged evidence of PFGG and the Exploration Director was that the Mining Co Contract (which provided that Drilling Co was to provide the fuel and would charge the client for the fuel consumed by the drilling rig) most likely arose as a result of a temporary CEO seeking to change practices, almost a year after the year ended 30 June 2008, but that the changes were never implemented.
In about October 2007, the drill was located near Wiluna. PFGG was asked by Mr DC with whom he had a good relationship to provide drilling services at an exploration site of Nickel Co near Ravensthorpe. PFGG agreed and the rig was relocated from Wiluna to near Ravensthorpe.
Drilling Co sent Nickel Limited, a letter dated 30 October 2007, attaching a document titled “Price Schedule at 30th October 2007” (the copy before the Tribunal was unexecuted) which stated, under the heading “Client Responsibility”:
…….The client [i.e. Nickel Limited] will be responsible for provision of fuel for all drilling associated equipment and vehicles.
Nickel Limited did not provide fuel for the operation of the rig during the time that it was at its exploration site. The fuel needed to operate the rig was purchased by employees of Drilling Co from a commercial outlet in Ravensthorpe and taken to the site where it was then used by the drilling rig in its operations. The fuel charges were then included in the Invoices which were furnished by Drilling Co to Nickel Limited and which is the subject of this proceeding.
Whilst the drilling rig was operating at the Nickel Limited’s site, PFGG was asked by the Resources NL if Drilling Co could also carry out drilling services at its site. PFGG agreed.
Drilling Co sent a letter to Resources NL, dated 14 November 2007, which attached a document titled “Price Schedule at 14th November 2007” ( the copy before the Tribunal was executed) which stated, under the heading “Client Responsibility”:
The client [i.e. Resources NL] will be responsible for full cost of all drilling associated equipment and vehicles.
However, as in the case of Nickel Limited, the fuel that was used by the drilling rig in performing the contract for Resources NL was also purchased by Drilling Co from a commercial outlet in Ravensthorpe and the fuel charges incurred by Drilling Co were then included in the total amount invoiced to Resources NL.
Despite the fact that the terms of the Price Schedule provided otherwise, PFGG knew in advance of the supply of the drilling services under its contracts with Nickel Limited and Resources NL that neither would be supplying the fuel for the provision of the drilling services.
Three of the five Invoices in issue in this case were issued to Resources NL and other two were issued to Nickel Limited. As mentioned, these totalled $476,129.76 of which $55,106 related to the fuel charges. As already mentioned, in addition to charges for the fuel purchased and consumed, the Invoices also included amounts for the drill bits, drill foam, hammers, hammer oil, truck tyres and various other consumables which Drilling Co had purchased and used in the supply of the drilling services.
The Office Manager who was responsible for issuing the invoices remembered the Invoices issued to Nickel Limited and Resources NL because it was unusual for Drilling Co to charge for fuel. The Office Manager, however, that she took no action as a consequence of this and issued the Invoices which included the fuel charges in the usual way.
In the experience of the Exploration Director it was usual for the clients of Drilling Co to supply the fuel consumed by the drilling rig in the providing drilling services under a contract. However, he accepted there were occasions when the client did not provide the fuel and when the fuel was provided by Drilling Co and the client was invoiced for the fuel.
In the experience of the Exploration Director it was “industry practice” for mining companies to supply fuel for contractors (including drillers), especially for large drilling contractors. He accepted, however, that there would be cases where the mining company did not supply fuel.
The provision of drilling services to Nickel Limited and Resources NL was a not an insignificant part of Drilling Co’s overall business in the year ending 30 June 2008. At a total of $476,129, the Invoices account for approximately 23% of the amount of PFGG’s claimed “annual turnover” for that year of $2,032,829 (including the Fuel Disbursements). The time period covered by the Invoices, being 54 working days, also constitutes a not insignificant portion of the relevant year.
PFGG’s contentions
PFGG contended that Drilling Co’s business in the 2008 year was that of a drilling contractor where, in the ordinary course, it provided the drilling rig, the drilling consumables and the personnel necessary to operate its drilling rig.
PFGG went on to contend that to produce the drilling results, Drilling Co was dependent upon client “inputs”, which in the ordinary course, involved the client supplying the fuel required to operate its drilling rig and associated vehicles. Accordingly, said PFGG, the amounts invoiced for Fuel Disbursements totalling $55,106 should not only be considered in the context of the other revenue in the year ended 30 June 2008, but also in the context of the four-year period from 1 July 2005 to 30 June 2009. Considered in that context, said PFGG, the amounts which were invoiced in the Invoices for the supply and use of fuel were “unusual” and did not “naturally pass without examination” and, as such, did not constitute ordinary income “in the ordinary course of carrying on a business” for the purposes of s 328-120(1) of the ITAA 1997.
PFGG contended that “the fact that something may be ordinary income but not derived in the ordinary course of business” had been acknowledged in Federal Commissioner of Taxation v The Myer Emporium (1987) 163 CLR 199 (Myer Emporium). PFGG went on to say that the revenue received in respect of the fuel charges in the invoices was not ordinary income derived by Drilling Co “in the ordinary course of carrying on” its drilling business but, rather as was recognised in Myer Emporium, was “extraordinary” judged by reference to the ordinary course of Drilling Co’s business.
In support of this contention, PFGG referred to the following observations of the High Court in Myer Emporium at 209-210:
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. 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. Nor does the fact that a profit or gain is made as the result of an isolated venture or a “one-off” transaction preclude it from being properly characterised as income: [Footnote omitted]. [Emphasis added]
Further PFGG referred to bankruptcy cases where the phrase “ordinary course of business” has also been considered by the High Court. PFGG referred first to the case Downs Distribution Co Pty Ltd v Associated Blue Star Stores Pty Ltd (In Liq)(1948) 76 CLR 463 (Downs Distribution) at 477 and said that Rich J had observed the words “ordinary course of business” meant that the transaction must not call for remark or arise out of a special or particular situation and had gone to observe further:
It means that the transaction must fall into place as part of the undistinguished common flow of business done, that it should form part of the ordinary course a business as carried on, calling for no remark and arising out of no special or particular situation
Next PFGG referred to the case of Taylor v White (1964) 110 CLR 129 (Taylor) at 136 and noted that Dixon CJ had observed at [136] as follows:
The time-honoured phrase “in the ordinary course of business" is meant to refer to transactions regularly taking place in a sustained course of activity or some usual process naturally passing without examination.
Consideration
It is convenient to set out again the terms of s 328-120(1) of the ITAA 1997:
328-120(1)An entity’s annual turnover for an income year is the total *ordinary income that the entity *derives in the income year in the ordinary course of carrying on a business. [Emphasis added]
The expression “ordinary income”, as it appears in s 328-120(1) of the ITAA 1997, is defined in s 995-1 and s 6-5 of the ITAA as “income according to ordinary concepts”. A substantial body of case law has evolved to identify various factors that indicate whether an amount is “income according to ordinary concepts”. As has already been mentioned, in Myer Emporium the High Court observed that the term “ordinary income” can include income derived from a transaction which was “extraordinary when judged by reference to the ordinary course of the taxpayers business”.
The phrase “in the ordinary course of carrying on a business”, as it appears in s 328-120(1) of the ITAA 1997, is not defined in the ITAA 1997 and it is necessary to construe those words. In engaging in the exercise of statutory construction, the Court is to consider the text of the statute in context. The High Court in Commissioner of Taxation v Consolidated Media Holdings Ltd (2012) 250 CLR 503 observed as follows at [39]:
“This Court has stated on many occasions that the task of statutory construction must begin with a consideration of the [statutory] text” [Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue [2009] HCA 41; (2009) 239 CLR 27 at 46 [47]]. So must the task of statutory construction end. The statutory text must be considered in its context. That context includes legislative history and extrinsic materials. Understanding context has utility if, and in so far as, it assists in fixing the meaning of the statutory text. Legislative history and extrinsic materials cannot displace the meaning of the statutory text. Nor is their examination an end in itself.
The extrinsic materials to which the High Court referred includes an explanatory memorandum.
The definition of “annual turnover” in s 328-120(1) of the ITAA 1997 was inserted into the ITAA 1997 by Tax Laws Amendment (Small Business) Act 2007 (TLASBA 2007). The “Explanatory Memorandum” to the Tax Laws Amendment (Small Business) Bill 2007 (EM), which Bill was ultimately enacted as the TSLABA 2007, commencing from the 2008 income year, states:
What does ‘in the ordinary course of carrying on a business’ mean?
……..
2.15In general, income is derived in the ordinary course of carrying on a business if the income is of a kind that is regularly or customarily derived by the entity in the course of carrying on its business, arising out of no special circumstance or event. Similarly, the income is derived in the ordinary course of carrying on a business if the income although not regularly derived, is a direct result of the normal activities of the business.
2.16Ordinary income may be derived in the ordinary course of carrying on a business even if it is not the main type of ordinary income derived by the entity. Similarly, the income does not need to account for a significant part of the entity’s overall receipts. It is sufficient that the ordinary income is of a kind derived regularly or customarily in the carrying on of a business. [Emphasis added]
In the Tribunal’s view, the EM provides assistance in the construction of s 328-120(1) because it does not displace, but rather confirms the ordinary meaning of the words “income….derived….in the ordinary course of carrying on a business” as to refer to income which is an incident of, or directly related to, the carrying on of the normal day to day activities of the business in question, even if that income is not regularly derived in that way.
In this case, the business of Drilling Co was the carrying out of drilling services by means of a drilling rig. The use of fuel and hammers were, and are, essential to the operation of the drilling rig and, therefore, to the carrying out of the normal day to day activities of the business. The income in this case was derived by Drilling Co charging the two companies for the supply of fuel to the drilling rig and so the income was as incident of, or directly related to, the carrying on of the normal day to day activities of its drilling business, and, therefore, income derived in the ordinary course of carrying on a business for the purposes of s 328-120(1).
The fact Drilling Co did not derive income in that way in respect of every contract for drilling services that it entered, does not alter that characterisation of the income in those circumstances when it did derive income from that source, namely, by charging for the supply of fuel to the rig. The income derived from the payment of the Fuel Disbursements is no less income in the ordinary course of Drilling Co’s business than the income derived from any of the other charges levied in the Invoices, such as the charge for hammers.
In the Tribunal’s view, PFGG’s reference to Myer Emporium does not assist his case. In Myer Emporium, the High Court was concerned with the scope of the expression “ordinary income” (or “income according to ordinary concepts”) and not of the phrase “in the ordinary course of carrying on a business” . Further, the High Court was concerned with a transaction, namely, the consideration received from an assignment to a finance company of the taxpayer’s right to receive interest under a $80 million loan to a subsidiary, which was a transaction which the Commissioner conceded was outside of the ordinary business of the taxpayer as a retailer and property developer. By contrast, in this case the transactions in question, namely, the charging for the supply of fuel used by the drilling rig, were charges which were incidental to, and directly related to, the carrying out of the day to day trading activities of Drilling Co, namely, the operation of a drilling rig.
Further, no assistance to the construction of s 328-120(1) from a consideration of the cases of Downs Distribution and Taylor. Both of those cases concerned with s 95(1) of the Bankruptcy Act 1924-1960 (Bankruptcy Act) which gave rise to the question of whether a payment to a creditor was made “in the ordinary course of business” for the purpose of determining whether the payment constituted a preference. The phrase under consideration in those cases was “ordinary course of business” rather than in “the ordinary course of carrying on a business”. Further, the bankruptcy statutory context in which the words “ordinary course of business” occur is very different to the statutory context in which words “the ordinary course of carrying on a business” occur in s 328-120(1) of the ITAA 1997. Under the Bankruptcy Act what is considered is whether the relevant payments were payments commonly occurring within the course of the business generally, as opposed to a business which might be suffering from financial pressure. This is very different to the context with in which the words “the ordinary course of carrying on a business” in s 328-120(1) fall for construction.
It follows that the Tribunal finds that the income derived by Drilling Co was ordinary income derived in the ordinary course of carrying on a business and that, therefore, the annual turnover of Drilling Co for the year ended 30 June 2008 exceeded $2 million.
Were the Fuel Disbursements “ordinary income” derived by Drilling Co in the 2008 year from “sales of retail fuel”?
As stated above, s 328-120(3) of the ITAA 1997 excludes “ordinary income” derived by an entity from “sales of *retail fuel” from the calculation of its “annual turnover” (for the purposes of s 328-120(1) of the ITAA 1997) for an income year.
“Retail fuel” is defined in s 995-1 of the ITAA 1997 as follows:
"retail fuel'' means taxable fuel, within the meaning of the Fuel Tax Act 2006, that is sold by retail.
“Taxable fuel” is defined at s 110.5 of the Fuel Tax Act 2006 (FTA 2006) as follows:
“taxable fuel” means fuel in respect of which duty is payable under:
(a) the Excise Act 1901 and the Excise Tariff Act 1921; or
(b) the Customs Act 1901 and the Customs Tariff Act 1995:
but does not include fuel covered by:
(c) item 15, 20 or 21 of the Schedule to the Excise Tariff Act 1921; or
(d) any imported goods that would be classified to item 15 of the Schedule to the Excise Tariff Act 1921, if the goods had been manufactured in Australia.
The term “sales” or “sale” is not defined in the ITAA 1997 and accordingly takes its usual meaning, namely, that a sale occurs where under a contract for the goods the property in the goods is transferred from the seller to the buyer: see s 1(3) of the Sale of Goods Act 1895 (WA).
Further, a “‘retail sale” requires a sale to an ultimate consumer: Collector of Customs v Chemark Services Pty Ltd [1993] FCA 394; 114 ALR 531; 17 AAR 429 at [24] per Spender, Einfeld and Lee JJ.
PFGG’s position is that the $55,106 comprising the Fuel Disbursements should be excluded from PFGG’s “annual turnover” for the 2008 year pursuant to section 328-120(3). PFGG’s Closing Submissions state the following in relation to this issue:
37.………s. 328-120(3) does not in and of itself require a “retail sale”: ….the words of the legislation are fundamental. “Sales of” does not require anything more than a “sale”, which as an undefined term must take its ordinary meaning. The Fuel Disbursements related to fuel acquired, perhaps on the client’s behalf, to use in [Drilling Co’s] equipment whilst being utilised at the direction of [Nickel Limited] and [Resources NL]. The words of s. 328- 120(3) operate to exclude the Fuel Disbursements if they amount to “sales of * retail fuel”. As has been set out above, words which are not in the legislation cannot be read in to give another meaning. Accordingly, any contrary contention of the Respondent must involve reading into s. 328-120(3) the external definition of “retail fuel” in s. 995-1 which provides that “‘retail fuel’ means taxable fuel... that is sold by retail”. As the evidence of [PFGG] was that the fuel was sold to [Drilling Co] as retail fuel, it is submitted that the definition of “retail fuel” was satisfied when [Drilling Co] purchased the fuel, and as such, the subsequent on-sale or on-charge by [Drilling Co] satisfy the words “sales of” without any further restriction. The [Commissioner’s] contention that the Fuel Disbursements do not represent a “sale” for s. 320-120(3) purposes is therefore akin to arguing that rental car companies cannot sell customers retail fuel as the fuel as purchased by the rental car company is consumed in the rental car company’s vehicles; a submission that would be misdirected. It is submitted that the Fuel Disbursements are accordingly, excluded by the operation of s. 328-120(3).
The Tribunal does not accept this contention.
First, there was no foundation on the evidence for the making of the submission that the fuel was acquired “perhaps on the client’s behalf”. To the contrary, the evidence was that the fuel was purchased by and paid for by Drilling Co, and that it then used the fuel it had purchased to run its own drilling rig in the course of it providing the relevant contracted drilling services to the two companies and that it subsequently recovered that cost from the client. There was no evidence of any intention to transfer property in the fuel to Nickel Limited and Resources NL.
Second, PFGG’s analogy with the supply of fuel in a hire car is misplaced. This is because hire car customers use the fuel themselves whilst driving the car that has been hired, and are the ultimate consumer. Drilling Co used the fuel in the operation of its own equipment, not the clients. In this case, Drilling Co was the only and ultimate consumer, not Nickel Limited or Resources NL.
The Tribunal finds that the income received by Drilling Co from Nickel Limited and Resources NL for the payment of the Fuel Disbursements was not income derived by Drilling Co from “sales of retail fuel” for the purposes of s 328-120(3) of the ITAA 1997.
DECISION
For the above reasons, the Tribunal affirms the Objection Decision.
I certify that the preceding 89 (eighty nine) paragraphs are a true copy of the reasons for the decision herein of The Honourable Justice AN Siopis, Deputy President & Senior Member CR Walsh
.......[Sgd].................................................................
Administrative Assistant
Dated 16 December 2015
Dates of hearing
20-21 October 2015
Date final submissions received 3 November 2015 Counsel for the Applicant
Mr JW Fickling
Solicitors for the Applicant
MKT Taxation Advisors
Counsel for the Respondent
Ms F Vernon
Solicitors for the Respondent
Australian Government Solicitor
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