The Full Federal Court has dismissed the taxpayer’s appeal and held that a Commonwealth grant of almost $2.5 million, for the establishment of wind farms, was an assessable recoupment of deductible expenses, under s20-20 of the ITAA97 – despite the deductions being amortised rather than an ‘outright deduction’.

  1. The case involved the development of a renewable energy project in Denmark, Western Australia, which is 423 km SSE of Perth. Denmark is on the SW coast of WA, where there was plenty of wind (hence the wind turbines).
  2. In May 2011, the WA Government agreed to give the Taxpayer a grant for 50% of the Eligible Project Costs, capped at about $2.5m (and the maximum/capped amount was paid). The Grant was payable in instalments on the completion of identified Project milestones.
  3. The expenditure was on the capital costs of constructing and commissioning the the windfarm (eg cost of equipment and services in the design, construction and commissioning of the wind turbines and the cost of modifying equipment, to incorporate the turbines into the electricity grid).
  4. For tax purposes, the Taxpayer was a ‘small business’, and it claimed depreciation deductions under sub-div 328-D of the ITAA97 (instead of the usual Div 40). The deductions claimed were about $0.75m in the 2013 year and $1.25m in the 2014 year.
  5. The Taxpayer requested a ‘private ruling’ from the Commissioner, that the grant amounts were not assessable income under s6-5 of the ITAA97 (as ‘ordinary income’) or under s15-10 (as a ‘bounty’ or ‘subsidy’). The Commissioner ruled that the grant amounts were not assessable, under those provisions, and that issue was not before the Court.
  6. The Commissioner also ruled, however, that the amounts were assessable as ‘assessable recoupments’ under both s20-20(2) and also ss (3) of the ITAA97. This was the issue before the Court.
  7. Section 20 makes assessable, recoupments of amounts, that are deductible in two categories: first if the recoupment is by way of ‘insurance or indemnity’ (ss(2)) and, second, if the recouped amounts are deductible under one of the provisions set out in s20-30.
  8. It is worth noting that subdiv 328-D depreciation (the option taken by the Taxpayer, here) is not one of the types of deductions, listed as recoupable, in s20-30, whereas Div 40 depreciation was (and still is). A ‘small business entity’ may, however, claim depreciation deductions under Div 40 and, hence, a s20-30(3) assessable recoupment remained possible.
  9. This is because the relevant deductibility test, was phrased (for both) as: “you can deduct”. The Taxpayer could have claimed the depreciation deductions under Div 40 (even though it elected not to, in this case).
  10. For this reason, the Taxpayer accepted it had to defend both a s20-20(2), and a s20-20(3) basis, of being assessed.
  11. It is also worth noting, that the effect of the ‘assessable recoupment’ provisions, was to only off-set the amount of the amortised deductions claimed, in that year. That is the effect of s20-40 (which relates to circumstances where the deductions can be claimed over more than one year). The result would have been much more ‘cruel’ had it assessed the recoupment prior to the deductions being available.

So the Taxpayer put its case in two ways.

  • First, it resisted a s20-20(2) assessment, on the basis that the Grant receipts were not an ‘indemnity’ for the costs incurred.
  • Second, it resisted both s20-(2) and (3) assessments, on the basis that the a depreciation deduction, is not claimed, “for the loss or outgoing” recouped, but for the cost of the asset, spread over a number of years, in line with the ‘decline in the value’ of the asset over its effective life. The Taxpayer said  that a deduction ‘for‘ a particular ‘loss or outgoing’ is narrower than, say: ‘in respect of‘ the ‘loss or outgoing’ which could cover deductions for the ‘cost’ of that asset, spread over the effective life of the asset.

Both of these grounds of objection were to fail, for the reasons set out in the judgement, at first instance, in the Federal Court: Denmark Community Windfarm Ltd v Commissioner of Taxation [2017] FCA 478 (10 May 2017). His Honour, McKerracher’s reasons are also reproduced in the Full Court’s reasons at para 26.

And the Full Federal Court reached the same conclusion, for essentially the same reasons.

  • On the first issue, the Court relied on a recent Full Federal Court decision: Batchelor v Federal Commissioner of Taxation [2014] FCAFC 41, on the meaning of the word ‘indemnity‘ in exactly the same provision (see related Tax Technical article). That Court held that the term ‘indemnity’ must be given its ordinary meaning, which was broad and can be phrased as: “a sum of money paid to compensate a person for liability, loss or expense incurred by the person”. [para 39]
  • On the second issue, the Court held that the Taxpayer was making too much of the distinction between the word/phrase: ‘for’ and ‘in respect of’. They held that the word ‘for’ was wide enough to encompass deductions allowed over time, set by the ‘effective life’ of the assets and the decline in its value. [para 42] Also, they pointed to the fact that these ‘assessable recoupment’ provisions expressly applied to recouping deductions for depreciation, under Div 40. [para 44] And, finally, the Court relied on this interpretation being consistent with the evident purpose of the assessable recoupment provisions.

(Denmark Community Windfarm Ltd v CofT [2018] FCAFC 11, Full Federal Court, Gilmour, Jagot and Moshinsky JJ, 5 February 2018.)

On 25 May 2018, the Commissioner issued a draft ‘Decision Impact Statement‘ (DIS) on this case, agreeing (obviously) with the result of the case, in his favour – saying: the decisions of the Federal Court and Full Federal Court are consistent with the ATO view in relation to the application of subsections 20-20(2) and 20-20(3) of the ITAA 1997. The Commissioner seeks any feedback by 22 June 2018.


[FJM; LTN 24, 6/2/18; LTN 99, 25.5.18; Tax Month February 2018; Tax Month May 2018]


Study questions (answers below*)

  1. Did the Full Federal Court uphold the first instance decision to apply the ‘assessable recoupment’ provisions as a result of the taxpayer receiving a grant, from the WA Government, for half of its capital cost, of erecting and installing wind turbines?
  2. Did the Taxpayer depreciate the wind turbines under Division 40 of the ITAA97?
  3. Did the Taxpayer seek a ruling about the tax effect of the Grant?
  4. Was the Taxpayer assessable on receiving the grant moneys as ordinary income under s6-5 or as a subsidy under s15-10?
  5. Was there an assessable recoupment, under s20-20(2) because the grant was an ‘indemnity’?
  6. Was there assessable recoupment, under s20-20(3), because the actual method of depreciation was mentioned in s20-30?
  7. Was the whole of the $2.5m Grant assessed in the 2013 Year?








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