Reckitt & Colman Pty. Limited v. Federal Commissioner of Taxation.
74 ATC 4185
Supreme Court of New South Wales
Judgment date: Judgment handed down 5 July 1974.
Mahoney J.: In the substituted income year of the taxpayer ended on 31st October, 1970, the taxpayer received amounts totalling $25,577 by way of grants under the Industrial Research and Development Grants Act, 1967. The question before me for determination is whether those amounts are amounts which should be included in the taxpayer's assessable income.
The taxpayer is a company which was incorporated in the Australian Capital Territory on 22nd August, 1960. The taxpayer's activities, insofar as evidence of them is before me, comprise the manufacture of a wide range of household, toiletry, pharmaceutical and food products. Apart from the manufacture of these products, the taxpayer maintains a laboratory which conducts programmes of research and development of existing and new products to be produced by the company. A separate section headed by two qualified senior chemists is responsible for the running of the research and development programmes. The equipment used for these research and development programmes is separate from that utilised by that section of the company responsible for its quality control.
On 25th November, 1969, the company applied for a grant under the Act (Ex. D). On 29th June, 1970, $20,000 was received by way of interim grant (Ex. F); and on 26th August, 1970, the remaining amount, $5,577, was received by way of ``a final payment'' for industrial research and development work performed in the grant year ended 30th June, 1969 (Ex. G).
On 21st December, 1971, the company was assessed to tax in respect of these amounts totalling $25,577. Notice of objection was lodged in relation, inter alia, to the assessment of these amounts on 18th February, 1972. An amended assessment issued on 14th March, 1972, did not delete from the assessment these amounts and on 5th May, 1972, the taxpayer requested that its objection be referred to the High Court of Australia.
On 28th March, 1974, the objection was forwarded to this Court by the Commissioner of Taxation and the matter was heard on 24th June, 1974.
Two questions were argued before me -
- (1) Whether the grants were income according to ordinary usages and concepts; and
- (2) whether they fell to be included in the company's assessable income by reason of sec. 26(g) of the Income Assessment Act, 1936, as amended.
Whether sec. 26(g) operates to bring to tax amounts which otherwise would not be assessable income under sec. 25 has not yet been finally determined. In
The Squatting Investment Co. Limited v. F.C. of T. 86 C.L.R. 570, the matter did not arise for determination but in
Brisbane Amateur Turf Club v. F.C. of T. 118 C.L.R. 300, Owen J. (at p. 304) said, in relation to sec. 26(g) -
``The express provision that subsidies received in the carrying on of a business shall be part of the recipient's assessable income is made, I would think, `simply for greater certainty', to use the words of Dixon C.J. and Williams J. in
F.C. of T. v. Dixon (1952) 86 C.L.R. 540 at p. 555.''
This aspect of the matter was not argued in detail before me and, having regard to the findings which I shall make, it is not necessary for me to consider it further.
1. Were the grants income according to ordinary usages and concepts?
In determining whether Government payments of the kind here in question are of the nature of income, the Court must in my opinion examine the nature of the payment itself and the relationship of it to the activities, actual or potential, of the recipient. What is the nature of the payment and of the relationship which must exist between the amount received and the recipient's activities, for the amount to constitute assessable income has not been
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finally delineated. In
Pontypridd & Rhondda Joint Water Board v. Ostime, (1946) A.C. 477, in the context of a statutory water undertaking, Viscount Simon (at p. 484-5) said -
``I agree with his (Lord Thankerton's) conclusion and will limit myself to a brief statement of two contrasting propositions: the real question in the appeal seems to me to be under which of these two propositions the present case falls. The first proposition is that, subject to the exception hereinafter mentioned, payments of the nature of a subsidy from public funds made to an undertaker to assist in carrying on the undertaker's trade or business are trading receipts, i.e. are to be brought into account in arriving at the balance of profits or gains under case 1 of Sch. D. It is sufficient to cite the decision of this House in the Sugar Beet case,
Lincolnshire Sugar Co. Limited v. Smart, (1937) A.C. 697, as an illustration. The second proposition constitutes an exception. If the undertaker is a rating authority and the subsidy is the proceeds of rates imposed by it or comes from a fund belonging to the authority, the identity of the source with the recipient prevents any question of profits arising...''
His Lordship, in formulating these propositions, had in mind not merely statutory authorities but also incorporated trading companies: the Lincolnshire Sugar Company Limited was a trading company. However, in my opinion, his Lordship did not intend to indicate that any subsidy received while carrying on a trade or business must, whatever the circumstances, be of an income nature; the emphasis in his Lordship's statement was, in my opinion, upon the words ``in carrying on the undertaker's trade or business''. Where a subsidy payment is seen as given for a purpose, which is not part of the taxpayer's trade, it will not be of an income nature. Thus, in the
Seaham Harbour Dock Co. v. Crook, 48 T.L.R. 91; 16 Tax Cases 333; a series of grants made to assist a company in defraying interest on loans taken so that men could be employed in extending the company's dock premises, was held not of a revenue nature.
Where the amount is received by reason of facts which arise in the context of the business operations of the taxpayer, several factors have been referred to as relevant in determining the nature of the amount received. The fact that the payment was of a periodical character (though subject to being withheld by the statutory authority making the payment); was received in the course of the carrying on of the taxpayer's business; and was made to assist the taxpayer in the carrying on of that business, was held sufficient to categorise the payment, a distribution to a racing club from totalisator operations, as income: Brisbane Amateur Turf Club v. F.C. of T. 118 C.L.R. 300 at p. 303, a case in which the payments made were not calculated by reference to or apportioned to any particular aspect of the taxpayer's business activities.
Where the amount of subsidy is paid by reference to the acquisition or the reinstatement of an asset which qua the particular taxpayer is a capital asset, the amount may be held to be not of an income nature. Thus, in
Watson v. Samson Bros., 38 Tax Cases 346, an amount paid towards the costs of reinstating fields damaged by the incursion of the sea was held not taxable: see also
St John Dry Dock and Shipbuilding Co. v. Minister of National Revenue, (1944) 1 D.L.R. 81 (construction work on a dock).
However, where the subsidy paid is calculated by reference to profits made or not made or is paid to make good the deficiency in the normal profits which the taxpayer would ordinarily have been expecting to make, these circumstances have been seen as supporting the conclusion that the subsidy is of an income nature:
Charles Brown & Co. v. I.R. Commrs. 12 Tax Cases 1256 at pp. 1276-7, 1278. In that case, Lord Hanworth, M.R., referred in the course of his reasoning, to
Glenboig Union Fireclay Co. Limited v. I.R. Commrs. 12 Tax Cases 427;
I.R. Commrs. v. Newcastle Breweries Limited, 12 Tax Cases 947, and
A. Guinness Son & Co. Limited v. I.R. Commrs. (1923) 2 I.R. 186; and the effect of the significance of the item in respect of which the payment was
74 ATC 4188
received in the structure of the taxpayer's business upon the categorisation of it for tax purposes. In the Pontypridd case (supra) it was held that amounts levied in the exercise of statutory powers by a statutory body, a water undertaking, upon local authorities, to meet an estimated deficit in its anticipated revenue from its business of selling water, were of an income nature.
Similarly, an amount paid by reference to the quantity of sugar manufactured was held to be of an income nature where one of the conditions of the payment was that the sugar should have been made from home grown beet of which the price paid to the grower was not less than a specified price: Lincolnshire Sugar Co. Limited v. Smart, (1937) A.C. 697. Lord MacMillan (at p. 704) said -
``But in my view the question ought not to be decided on mere verbal arguments. What to my mind is decisive is that these payments were made to the company in order that the money might be used in their business.''
His Lordship continued -
``But if the company had not happened to have been able to pay for its raw material otherwise it could properly have used the `advances' for this purpose. It was with the very object of enabling them to meet their trading obligations that the `advances' were made; they were intended artificially to supplement their trading receipts so as to enable them to maintain their trading solvency.''
Where the subsidy paid is properly categorised as a grant towards a particular expenditure of a revenue nature, it has been held to be of such a nature. Thus in
Higgs v. Wrightson, (1944) 1 All E.R. 488; 26 Tax Cases 733, Macnaughton J. was of the view that a ploughing grant, calculated by reference to the area ploughed was in substance ``a grant towards the expense of the ploughing and the subsequent acts mentioned in sec. 271'' (at p. 489) and held that the grant was therefore taxable.
I come now to consider the nature of the present payments and the relationship of them to the taxpayer's operations.
The two payments were made, as I have said, under the Industrial Research and Development Grants Act, 1967. That Act as originally drawn provided for the making of grants during a period of five successive years. It was by the Industrial Research and Development Grants Act, 1972, amended and extended in its operation for a further period. However, the payments here in question were made under the original Act.
The object of the Act was stated to be ``to encourage increased industrial research and development in Australia'': sec.4.
In order to achieve this object the Act made provision for grants of financial assistance, the grants being of two kinds, general grants and selective grants.
In relation to general grants, sec. 26 provided -
``(1) This section applies in relation to so much of the eligible expenditure of a company in respect of a grant year as does not exceed Fifty thousand dollars.
(2) Where -
- (a) an eligible company has duly applied for a grant in respect of a grant year; and
- (b) there is an amount of eligible expenditure of the company in respect of that grant year, the Board shall, subject to this Act and to any relevant directions of the Minister under sec. 20 of this Act, authorize payment of a grant to the company in respect of so much of that amount as is eligible expenditure in relation to which this section applies.
(3) The amount of a grant authorized under this section shall be one-half of the amount of eligible expenditure in respect of which it is made, or such lesser fraction of that amount as the Minister fixes, by a direction under sec. 20 of this Act, for the purposes of grants under this section in respect of the grant year concerned.''
Where the eligible expenditure of the company in respect of the grant year exceeded $50,000 the Board was empowered, in its discretion, to authorise the payment of
74 ATC 4189
a further grant, as a selective grant, of not more than one-half of the amount of the eligible expenditure in respect of which it was made: sec.27.
In the present case, the original payment of $20,000 was made by way of general grant; part of the subsequent amount of $5,577 was made by way of selective grant, the balance by way of general grant.
In respect of grants authorised by the Board, sec. 24(1) provided that ``grants of financial assistance to eligible companies'' ``shall be made''.
The nature of the expenditure eligible to be taken into account under the Act for the authorising of grants was provided by sec. 25. This section was in the following terms -
``(1) For the purpose of calculating the eligible expenditure of a company in respect of a grant year, the following classes of expenditure of the company in respect of that year and in respect of the base year shall be taken into account in accordance with this section, namely -
- (a) Salary expenditure;
- (b) contract expenditure; and
- (c) plant expenditure.
(2) Subject to this Part, the eligible expenditure of a company for a grant year is the sum of -
- (a) the excess, if any, of the total of any salary expenditure and contract expenditure of the company in respect of that grant year over the total of any salary expenditure and contract expenditure of the company in respect of the base year; and
- (b) the amount of any net plant expenditure of the company in respect of that grant year.''
The terms ``salary expenditure'' and ``contract expenditure'' were, by sec. 51(1) defined to refer to expenditure related to industrial research and development and that term, was defined to mean -
``... systematic experimentation or analysis in the fields of science, engineering and technology carried out by the company concerned, or, procured by it to be carried out, in Australia with the object of -
- (a) acquiring knowledge that may be of use for the purpose of devising or developing new or improved material products or new or improved processes for or in connection with the production or use of material products; or
- (b) applying knowledge for the purpose referred to in the last preceding paragraph;''
The right to receive a grant under the Act was limited to ``eligible companies'', that is, to companies incorporated under the law of a State or of a Territory forming part of the Commonwealth and carrying on in Australia in the relevant grant year the manufacture of goods or mining operations.
In general terms, therefore, the Act, with the object of encouraging industrial research and development in Australia held out to eligible companies the prospect of receiving grants in respect of (or of amounts up to) one-half of the increased expenditure made by them over their expenditure on industrial research and development in the base year (1965).
(I have for present purposes put aside the effect of the provisions in relation to ``plant expenditure'' the terms of which cause some difficulties of interpretation: cf. amendments enacted in the 1972 Act in this regard.)
In my opinion, the payments made under the Act are payments calculated by reference to expenditure on industrial research and development (as defined) and with the object of partly reimbursing the taxpayer for such expenditure.
The evidence does not establish whether expenditure of this nature was in relation to the taxpayer's activities expenditure of a revenue or of a capital nature. Substantially, the amounts in respect of which grants were sought were amounts paid by way of salaries. No amount was sought by reference to ``contract expenditure'' and only a small sum in relation to ``plant expenditure''. No doubt in some circumstances expenditure upon systematic experimentation or analysis in the relevant fields with the object of acquiring
74 ATC 4190
knowledge for the purpose of developing new or improved products or processes may properly be classified as capital expenditure. I was informed by counsel that in the present case the expenditure here in question had been claimed and had been allowed as an allowable deduction in respect of the company's assessable income during the relevant tax year and I shall assume for present purposes that these expenditures were properly of such a nature.
Upon this assumption, the grants made to the taxpayer were in substance and not as a matter of form directed to the reimbursement of expenditures of a revenue nature. It is in my opinion consistent with the course of decision to which I have referred that I should hold that the grants are of an income nature and that the assessment is for this reason to be upheld.
Mr. Lockhart in his able argument advanced a number of reasons in support of his submission that the grants received were not of the nature of income. He argued that the nature of the grant is to be determined by reference to the Act alone. If by this argument is meant that the relationship of a grant to the taxpayer's business activities is not relevant, I do not think that it is correct.
In the case in which consideration has been given to analogous payments, the relation of the payment to the taxpayer's business activities has been taken into account. It may be that in a particular case the terms of the Act and the circumstances by reason of which the grant is made may be such as to make clear the nature of the grant for tax purposes. But where the taxpayer is carrying on a trade or business and the grant is made by reference to facts having reference to that trade or business, the relationship of a grant to that trade or business must be taken into account.
A grant to rehabilitate land might be of an income or of a capital nature depending upon whether the taxpayer was, for example, a land jobber or a farmer in relation to that land. Mr. Lockhart argued that having regard to the precise terms of the Act the grants may have no necessary relation to any business which the taxpayer has at any time been carrying on or which the taxpayer is at the time of the payment of the grants carrying on. He argues that provided the taxpayer carries on some business of selling goods or of mining and is, therefore, an eligible company, it can be an eligible company for the purposes of the legislation and the industrial research and development in respect of which the grant is made may be related to something quite different from and unrelated to any business which that eligible company then carries on or, indeed, has ever carried on.
If by this submission is meant that a grant is not of an income nature if made by reference to facts having no relationship to a business or trade, or if made at such a stage after the business or trade of the taxpayer has ceased that it has no relevant connection with that business or trade and has become a gift and no more: cf. the arguments advanced in The Squatting Investment Company case, 86 C.L.R. 570; then this argument may be accepted. However, if it means that because under the Act it would be possible to have a grant made to a company which did not carry on any relevant trade or business or in respect of a matter not touching its trade or business, therefore a grant to a company which does carry on a trade or business, and made in respect of the carrying on of that trade or business, is not of an income nature, I do not think that the argument should be accepted.
It does not follow that assuming that a grant might in the present case be made for industrial research and development which had no relationship to the taxpayer's trade or business a grant made to a company which in fact carried on industrial research and development as an incident of its existing business would not be of an income nature. The possibility of such a case as Mr. Lockhart postulated does not mean that in the instant case the amount of the grant received would not be of an income nature.
Mr. Lockhart also argued that an eligible company was not because it made any relevant expenditure entitled as of right to a grant and that any grant made was merely made after the end of the year in which the expenditure was in any event incurred. He,
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therefore, submitted that the amounts of any grant received were not of an income nature.
Whether or not the taxpayer has an enforceable right to the grant which is made does not determine the nature of that grant. A grant received ex gratia may be of the necessary income character:
Severn v. Dadswell, 35 Tax Cases 649.
Whether there is such an enforceable right and whether the grant is made after the relevant activities of the taxpayer which give rise to it may be relevant in deciding whether the grant is made in relation to the taxpayer's business activities or otherwise but I do not think that these things condition irrevocably the nature of the grant when received.
Mr. Lockhart further submitted that the grants were not grants by way of refunds of expenses incurred by the taxpayer. In the strict sense, this is true.
If a grant were in the strict sense reimbursement of the increased expenditure for industrial research and development over such expenditure in the base year, it would in the case of such a taxpayer as the present be of an income nature: Higgs v. Wrightson, (1944) 1 All E.R. 488; 26 Tax Cases 73.
However, what the Act does is, in my view, to hold out to an eligible company the prospect that (whether as a matter of legal entitlement or not need not be determined) it may receive a grant calculated by reference to such increased expenditure.
This, in my opinion, is a sufficient connection in accordance with the general tenor of the decisions to which I have referred to warrant the grants being held to be of an income nature.
2. Are the grants bounties or subsidies within sec. 26(g)?
Section 26(g) provides -
``The assessable income of a taxpayer shall include -
- (g) any bounty or subsidy received in or in relation to the carrying on of a business (other than subsidy received under an agreement entered into under an Act relating to the search for petroleum), and such bounty or subsidy shall be deemed to be part of the proceeds of that business.''
Mr. Lockhart submitted that the present grants were not either bounties or subsidies within this provision. The terms ``bounty'' and ``subsidy'' have been used many times in the course of legislation passed by the Australian Parliament. Those instructing Mr. Needham, Counsel for the Commissioner, have referred me to more than seventy enactments dating from the early years of the Commonwealth in which these terms have been used in the formal title. Whether in the present provision the term ``bounty'' has a meaning different from the term ``subsidy'' or whether they constitute merely a compound phrase or expression, as suggested by Webb J. in The Squatting Investment Company case, 86 C.L.R. 570 at p. 613, need not in my opinion be considered in the present case. Whatever the terms signify, they include in my opinion a financial grant made by the State for the purpose of encouraging a particular activity in the field of trade and commerce. Mr. Lockhart, in general, did not dissent from such a view. He accepted, in the course of his argument, the dictionary definitions of these terms, but he submitted that the present payments did not fall within them because, as used in sec. 26(g), the terms were limited to payments made ``for the purpose of assisting persons to carry on a business at the time the payments are made or, perhaps, to commence a business in the future''. Mr. Lockhart took the words which I have cited from the judgment of McTiernan J. and Williams J. in The Squatting Investment Company case, 86 C.L.R. 570 at p 611. He submitted that in the present case the payments were made during the year ended 31st October, 1970, but in respect of expenditure made during the year of grant ended 30th June, 1969. He submitted, in effect, that under the Act grants were able to be made in respect of a business which at the time when they were received was not being carried on and had in the past ceased to be carried on and he submitted, therefore, that such payments could not consistently with the observations of their Honours cited by him fall within sec.26(g).
I am, of course, bound by the observations
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of McTiernan and Williams JJ. in The Squatting Investment Company case upon this aspect; the construction of sec.26(g) was not considered by the Privy Council on appeal, (1954) A.C. 182; and therefore any considered view as to the construction of the provision by their Honours is one which I should follow.
However, I do not read their Honours' observation as being intended to be an exclusive definition of the circumstances in which payments may constitute a bounty or subsidy for the purposes of sec. 26(g). Their Honours were, in the case before them, dealing with business activities which resulted in the production of wool some years before the date at which the legislation then before them had been passed. The Act under which the payment in question had been made, namely, the Wool Realisation (Distribution of Profits) Act, 1948, provided for a payment by reference to persons who had in the past carried on business and who, as far as the relevant legislation was concerned, might then have ceased to carry on such business. I do not understand their Honours' observation to exclude from the ambit of the term ``bounty or subsidy'' a payment which, in substance, is made subsequently following its being held out to a person as one which will or may be made to him in the future if he now carries on a particular activity.
Mr. Lockhart also submitted that sec. 26(g) did not apply because the payments in question when received were not received ``in or in relation to the carrying on of a business'' within the sub-section. His argument in this regard was that under the Act the grant might be paid at a time when the person entitled to it was not or was not any longer carrying on a particular business and therefore any grant made under the Act could not fall within the sub-section.
In my opinion, the words ``in relation to the carrying on of a business'' are wide words; no doubt there are some relations whoch would not fall within the scope of them but even if it be accepted that the payments in question were made in relation to a business which had ceased to be carried on at the time of that payment but by reason of something which had been done when the business was being carried on, the payments would in my opinion properly be held to be ``in relation to the carrying on of the business''.
However, in the present case, the taxpayer was in fact still carrying on the relevant business at the time when the payments were received. I do not think that the possibility that the taxpayer might have discontinued the business before the payments were received renders sec. 26(g) inapplicable.
In my opinion, therefore, the taxpayer's argument fails by reference both to the first and to the second ground advanced by it and the appeal should be dismissed with costs.
The exhibits may be returned unless an appeal against this order or application for leave to so appeal is instituted within twenty-eight days of this date.