The Full Federal Court has unanimously dismissed the taxpayer’s appeal from the decision in Re PFGG and FCT [2015] AATA 972 and confirmed that fuel disbursement receipts he received were ordinary income that he derived “in the ordinary course of carrying” on his mining business. As a result, the taxpayer failed to meet the “small business entity” $2m turnover test for the purpose of qualifying for the CGT small business concession in Div 152 of the ITAA 1997, and specifically the 50% reduction, in respect of a capital gain of $11.6m he made from the sale of certain mining tenements.
In arriving at its decision, the Court confirmed that the “fuel disbursements receipts” satisfied the requirement in s 328-120(1) that “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”. In particular, the Full Court confirmed that the phrase “in the ordinary course of carrying on a business” bears its ordinary meaning and, therefore, included the receipts in question.
(Doutch v FCT [2016] FCAFC 166, Full Federal Court, Greenwood, McKerracher and Moshinsky JJ, 2 December 2016.)
[LTN 236, 6/12/16]
FJM Note
There are perhaps 2 things to note about this case.
- The first is that it was Mr Doutch himself, who made the $11m capital gain – through selling mining tenements. He claimed the small business CGT exemption, under s152-10(1)(c)(iv) & (1A) of the ITAA97, because his drilling company (which was relevantly ‘connected’ to him) had carried on a drilling business on the tenements and, he alleged, it was a ‘small business entity’. This was on the basis that it’s ‘aggregated turnover’ was under $2m – albeit it only just, as the whole case hinged on whether $55k of ‘fuel disbursement’ receipts were relevantly part of its ordinary concepts income derived ‘in the ordinary course of carrying on [its drilling] business’ (s328-120(1) of the ITAA97).
- The second thing of interest is how the taxpayer framed his case that these ‘fuel disbursement’ receipts were not ordinary concepts income derived in the ordinary course of the drilling company’s business. This was of interest to me, as it is well accepted law, that a receipt, by way of a reimbursed a cost, is not income, but rather, it is just part of the mechanism by which the cost is passed back to the person paying the reimbursement sum. I was surprised, therefore, that an amount invoiced as a ‘disbursement’ could be treated as ‘income’ (as the name implies it is only seeking to be reimbursed this cost incurred on the customer’s behalf). But the case did not mention this at all. Rather, the taxpayer’s argument was, in essence, that it was usual for the land owner to supply the fuel to the drilling contractor and it was unusual for his drilling company to have to supply the fuel itself. On this basis, he said that what is ‘unusual’ was not in the ‘ordinary course’ of carrying on this business. The Court did not agree. It is clear that a drilling rig needs fuel to carry on it’s business, and it does not matter who usually supplies the fuel. This fell within the law established in the lease incentive cases that held that the incentive was income (of the recipient tenant) because it was “a transaction [that] is a normal incident of the [ordinary] business activity”. I think an argument based on a reimbursement receipt not being ‘income’ might have been more successful.