Fuel Tax Credits: assessability of fuel tax credits

Are fuel tax credits received by an entity carrying on a business assessable under subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. Fuel tax credits received by an entity in carrying on a business are assessable under subsection 6-5(1) of the ITAA 1997.

An entity uses fuel in carrying on a business. The price of fuel includes an amount of fuel tax.

The entity claims the cost of the fuel as a deductible business expense when it lodges its income tax return for the relevant year.

The entity is entitled to claim a fuel tax credit under the Fuel Tax Act 2006 for all or part of the fuel tax embedded in the price of the fuel.

The entity claims the fuel tax credit when it lodges its business activity statement for the relevant period.

Assessable income includes amounts that are income according to ordinary concepts (subsection 6-5(1) of the ITAA 1997), and amounts that are not ordinary income but are specifically included by the legislation (section 6-10 of the ITAA 1997).

Under section 41-5 of the Fuel Tax Act 2006 an entity that acquires, manufactures, or imports fuel for use in carrying on an enterprise is entitled to claim a credit for all or part of the fuel tax embedded in the price of the fuel. The meaning of 'enterprise' is drawn from section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 and the most common example of an enterprise is an activity in the form of a business.

There is no general principle of law that an amount received as a reimbursement or recoupment of an amount that has been claimed or will be claimed as a deduction, is assessable as ordinary income ( Federal Commissioner of Taxation v. Rowe (1997) 187 CLR 266; 97 ATC 4317; (1997) 35 ATR 432; H R Sinclair and Son Pty Ltd v. Federal Commissioner of Taxation (1966) 114 CLR 537; 14 ATD 194; 10 AITR 3 ( H R Sinclair )). Whether the amount is assessable as ordinary income will depend on its character in the hands of the recipient.

Where an entity that is carrying on a business receives an amount that is a direct recoupment of an outgoing on revenue account that was an ordinary incident of its income producing activities, it is likely that the amount received will be so closely connected to the entity's income producing activities that it must be treated as being an incident of the business, and as such, 'stamped' with the character of ordinary income ( HR Sinclair , Warner Music Australia Pty Ltd v. Federal Commissioner of Taxation (1996) 70 FCR 197; 96 ATC 5046; (1996) 34 ATR 171).

This reasoning has been applied in Taxation Determination TD 97/25. TD 97/25 states that a diesel fuel rebate is assessable as ordinary income in the hands of the recipient, under section 6-5 of the ITAA 1997, if it is paid as a consequence of the recipient's income producing activities.

Similarly, Taxation Ruling 2006/3 notes in an example that the Wine Equalisation Tax producer rebate received by a wine producer in the ordinary course of the entity's wine distribution activities, is assessable as ordinary income under section 6-5 of the ITAA 1997. The ruling explains that the rebate is calculated with reference to business income and is received to offset the liability that arises because of business operations.

In the present case, the fuel tax credit received by the entity under section 41-5 of the Fuel Tax Act 2006 is inextricably linked to the business activities of the entity. As such, the fuel tax credit received by the entity forms part of the proceeds of the business carried on by the entity, and is assessable as ordinary income under subsection 6-5(1) of the ITAA 1997.