Section 20-20(2)
34 Section 20-20(2) of the 1997 Act provides, in summary, that an amount received by a taxpayer will constitute an "assessable recoupment" (and so be included in the taxpayer's assessable income) if: the amount was received as "recoupment" of a loss or outgoing; the amount was received "by way of insurance or indemnity"; and the taxpayer can deduct, or has deducted, an amount for the loss or outgoing under a provision of the Act.
35 In the present case, there does not appear to be any issue that the amounts Denmark received under the Grant were "recoupments" as defined in s 20-25(1). The word "recoupment" is defined, in relation to a loss or outgoing, as meaning "any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery, however described" and "a grant in respect of the loss or outgoing". The amounts paid to Denmark under the Grant were recoupments or reimbursements of a portion of the outgoings Denmark incurred in the construction of the two wind turbines. The amounts constituted "recoupments" as defined in s 20-25(1).
36 The next element of s 20-20(2) is that the amounts were received "by way of insurance or indemnity". There is no suggestion that the relevant amounts were received by way of insurance. The question, then, is whether they were received by way of indemnity. Section 20-20(2) of the 1997 Act was considered by the Full Court of this Court in Batchelor v Federal Commissioner of Taxation (2014) 219 FCR 453 (Batchelor). In that case, Edmonds and Pagone JJ noted at [9] that ss 20-20 and 20-25 were inserted into the 1997 Act as part of the re-writing and consolidation of the comparable provisions previously found in s 26(j) of the Income Tax Assessment Act 1936 (Cth) (the 1936 Act). Section 26(j) of the 1936 Act had provided:
The assessable income of a taxpayer shall include:
…
(j) any amount received by way of insurance or indemnity for or in respect of any loss:
(i) of trading stock which would have been taken into account in computing taxable income; or
(ii) of profit or income which would have been assessable income;
if the loss had not occurred, and any amount so received for or in respect of any loss or outgoing which is an allowable deduction; …
37 As Edmonds and Pagone JJ noted at [10], the authorities on s 26(j) of the 1936 Act expressed the view that the words "by way of insurance or indemnity" were intended by the legislature to apply broadly: see Federal Commissioner of Taxation v Wade (1951) 84 CLR 105 at 112 per Dixon and Fullagar JJ, at 116 per Kitto J; Robert v Collier's Bulk Liquid Transport Pty Ltd [1959] VR 280; Williamson v Commissioner for Railways [1960] SR (NSW) 252. Further, as Edmonds and Pagone JJ discussed at [11], a difference of view concerning s 26(j) emerged in the decisions in Goldsbrough Mort & Co Ltd v Federal Commissioner of Taxation (1976) 14 SASR 591 and Commercial Banking Company of Sydney Ltd v Federal Commissioner of Taxation (1983) 70 FLR 433. This concerned whether it was necessary for there to be an antecedent obligation to indemnify. In Batchelor, Edmonds and Pagone JJ expressed the view (at [13]) that, generally speaking, a payment will not be regarded as an indemnity unless the entitlement to its receipt precedes the event in respect of which it is paid (cf Batchelor at [77] per Wigney J). Edmonds and Pagone JJ explained the design and operation of s 20-20 in the following terms at [12]-[13]:
12 Neither s 26(j) of the 1936 Act nor s 20-20 of the 1997 Act is designed to bring to tax every payment received by a taxpayer of an amount for which the taxpayer previously obtained a deduction. In Federal Commissioner of Taxation v Rowe (1997) 187 CLR 266 (Rowe) the High Court by majority rejected the existence of any general principle in taxation law bringing to tax an amount received by a taxpayer which compensates the taxpayer for an item that had previously been allowed as a deduction. The majority pointed at 277 to the existence of s 26(j) as telling against the existence of a general principle of the kind which had been advanced in Rowe. It should not be thought, however, that s 26(j) is as wide as the principle otherwise rejected in Rowe. It may be accepted, therefore, that a payment which has the practical effect of compensating a taxpayer for an amount previously claimed as a deduction will not necessarily make the amount assessable as income.
13 The "recoupment" of a loss or outgoing is one of the conditions for the operation of s 20-20(2). Recoupment is defined broadly (as may be seen by the definition in s 20-25(1)) but, however broad "recoupment" may be, a receipt will only be an "assessable recoupment" if it satisfies the additional conditions in s 20-20(2)(a) and (b). One of those conditions is that the recoupment be capable of bearing the description of being received "by way of insurance or indemnity". An amount will not satisfy that requirement merely by satisfying the definition of recoupment. It may be accepted that the words "by way of insurance or indemnity" are, and are intended to be, wide, but they must be applied as intended. Generally speaking a payment will not be regarded as an indemnity (whether the word is taken alone or in combination in the composite phrase "by way of insurance or indemnity") unless the entitlement to its receipt precedes the event in respect of which it is paid. An ex gratia payment, for example, is not apt to be regarded as indemnification of a loss or outgoing notwithstanding that its receipt may be said, from the point of view of economic equivalence, to compensate the recipient for a loss which had been suffered or an outgoing which had been incurred. Similarly, a refund would not ordinarily be regarded as an indemnification notwithstanding that its receipt may be said to have rendered a taxpayer harmless, from an economic point of view, for an antecedent loss or outgoing.
38 The issue in Batchelor was whether an amount received by the taxpayer as a partial refund of her contribution to a deposit paid by a partnership of which she was a member was an amount received "by way of … indemnity" within the meaning of s 20-20(2) of the 1997 Act. All members of the Full Court held that the amount could not be so regarded. Edmonds and Pagone JJ said (at [15]): "It was not an amount paid to compensate a loss but received by [the taxpayer] as a return of what she had contributed to the venture." See also [83]-[84], [102] per Wigney J.
39 In the present case, the amounts received by Denmark under the Grant were received pursuant to the Agreement dated 18 May 2011. The Agreement provided that the Grant was to meet 50% of the Eligible Project Costs to be incurred by Denmark in the construction of two wind turbines, up to a maximum of $2,487,800. The Grant was payable in instalments on the completion of identified project milestones. In these circumstances, the amounts received by Denmark fell within the ordinary meaning of the word "indemnity", which includes, as noted by the primary judge at [50], "a sum of money paid to compensate a person for liability, loss or expense incurred by the person". The fact that the amounts were a government subsidy or rebate does not affect the position. The amounts nevertheless bear the character of compensation for a liability, loss or expense incurred.
40 In the course of submissions, counsel for Denmark emphasised that the word "indemnity" is to be construed as part of the composite phrase "insurance or indemnity". It may be accepted that the context in which the word "indemnity" is to be construed includes the reference to both "insurance" and "indemnity" in s 20-20(2)(a). However, we do not consider that this relevantly affects the meaning to be given to the word "indemnity". As indicated above, the word "indemnity" is to be given its ordinary meaning and this relevantly includes a sum of money paid to compensate a person for liability, loss or expense incurred by that person.
41 The third element of s 20-20(2) is that the taxpayer can deduct, or has deducted, an amount for the loss or outgoing under a provision of the Act. In relation to this element, Denmark emphasises the words "for the loss or outgoing" and submits that this phrase is narrower than, for example, "in respect of the loss or outgoing". Denmark contrasts the wording of the current provision with the wording of s 26(j) of the 1936 Act, which used the words "for or in respect of". Denmark submits that both s 20-20(2) and s 20-20(3) require that the taxpayer can deduct an amount "for the loss or outgoing" and that the definite article in this phrase relates to the loss or outgoing, not some other amount, such as depreciation under Div 40 or Subdiv 328-D. Denmark submits that the amount that may be an allowable deduction under Div 40 or Subdiv 328-D relates to the decline in value of a depreciating asset held by a taxpayer, and that this is to be distinguished from the outgoing upon which ss 20-20(2) and 20-20(3) are predicated.
42 In our view, Denmark's submissions in relation to this element are to be rejected. We consider that Denmark's submissions place too much weight on the distinction between the word "for" and the phrase "in respect of". In the context of ss 20-20(2) and 20-20(3), we consider the phrase "for the loss or outgoing" to be sufficiently broad to pick up a depreciation deduction under Div 40 or Subdiv 328-D where the relevant outgoing is the cost of the depreciating asset. In such circumstances, the depreciation deduction may properly be regarded as a deduction "for the loss or outgoing". We reach this conclusion for three main reasons.
43 First, the words used ("for the loss or outgoing") are sufficiently broad to support this construction. Depreciation deductions under Div 40 are (as s 40-15 makes clear) deductions for "the cost of a depreciating asset", which are spread over the effective life of the asset. This object is achieved by s 40-25(1) making the "decline in value for an income year" of a depreciating asset deductible in that year. Two methods are provided for calculating the "decline in value" of a depreciating asset: the "diminishing value method" in s 40-70 and s 40-72 and the "prime cost method" in s 40-75. However, both methods commence in the first year with the asset's "cost" (see the definition of "base value" in s 40-70(1) and the inclusion of "[a]sset's cost" in the formula in s 40-75(1)). The "cost" of a depreciating asset is dealt with in Subdiv 40-C and, broadly speaking, involves two elements: the amount the taxpayer is taken to have paid to acquire the asset (s 40-180); and amounts paid after acquisition to bring the asset to its present condition (s 40-190). Thus, where the relevant loss or outgoing for the purposes of s 20-20(2)(b) is the cost of a depreciating asset, a deduction under either Div 40 or Subdiv 328-D may be said to be a deduction of an amount "for" that loss or outgoing. This is because it is a deduction for the cost of the depreciating asset spread over the effective life of the asset. As the primary judge observed at [55], this is confirmed by the example in s 20-40(2), which specifically refers to deductions for depreciating assets in demonstrating the operation of the method statement in s 20-40(2).
44 Secondly, the inclusion of Div 40 in the table in s 20-30 points strongly against Denmark's construction. Section 20-20(3) provides, in summary, that an amount the taxpayer has received as recoupment of a loss or outgoing (except by way of insurance or indemnity) is an "assessable recoupment" if the taxpayer can deduct, or has deducted, an amount "for the loss or outgoing" under a provision listed in s 20-30. As noted above, the table in s 20-30 includes Div 40. If Denmark's submissions were correct, there would be no reason for Div 40 to be included in that table. (That is, if, as Denmark submits, depreciation deductions cannot be deductions for a loss or outgoing, there would be no utility in including Div 40 in the table.) As Denmark's submission in relation to the phrase "for the loss or outgoing" is essentially the same in relation to ss 20-20(2) and 20-20(3), this counts against Denmark's submissions in relation to both provisions. It is not to the point that the table in s 20-30 does not include Subdiv 328-D. While this would seem to be anomalous, the important point for present purposes is that, if Denmark's argument were correct, there would be no need to refer to Div 40 in the table in s 20-30.
45 Thirdly, the construction that we favour is consistent with the purpose of the provisions. Subdivision 20-A is designed to include in a taxpayer's assessable income recoupments of losses and outgoings where the taxpayer is able to claim a deduction for the loss or outgoing. It is consistent with this purpose for the provisions to operate where the deduction is for depreciation under Div 40 or Subdiv 328-D.
46 For these reasons, the amounts received under the Grant were assessable recoupments under s 20-20(2) and the primary judge was correct to so hold.