Capital Allowances: irrigation water provider - primary and principal activity

Is the taxpayer an irrigation water provider within the meaning of that term in subsection 40-515(6) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes, because revenues and costs to the taxpayer of engaging each of its business activities is a valid basis of comparison of the relative precedence of the business activities to the taxpayer in this case, and based on that comparison, the taxpayer is an irrigation water provider within the meaning of that term in subsection 40-515(6) of the ITAA 1997.

The taxpayer's business supplies bulk water for a number of uses, including use by entities in primary production businesses on land in Australia. The business also provides water supply industry-specific consultancy and management services.

The business accounts of the taxpayer provide separate figures for revenue derived and costs incurred (including asset impairment) in engaging in each business activity - including each type of bulk water use.

The taxpayer's revenue derived from and costs incurred in engaging in the supply of water to entities for use in primary production businesses are greater than 50 per cent of the revenue and costs of the taxpayer's total business activity.

(All legislative references are to the ITAA 1997)

Subsection 40-515(6) defines an 'irrigation water provider' as follows: An irrigation water provider is an entity whose *business is primarily and principally the supply (otherwise than by using a *motor vehicle) of water to entities for use in *primary production businesses on land in Australia.

In order to determine whether the taxpayer satisfies subsection 40-515(6), it is necessary to understand the meaning to be attributed to 'primarily and principally' in this context, the scope and nature of the taxpayer's business and to apply that meaning to the business of the taxpayer.

The Tax Laws Amendment (2004 Measures No. 6) Act 2005 introduced the concept of an 'irrigation water provider' in subsection 40-515(6) to the income tax law. The extrinsic materials, including the explanatory memorandum to the Bill for this Act do not provide any guidance as to the meaning that Parliament intended the expression 'primarily and principally' to take in this context.

The meaning of the expression 'primarily and principally' has not been judicially considered in this context, however, the meaning of the expression 'primarily and principally' has been considered by Australian courts in relation to other legislation.

In Parker Pen (Aust) Pty Ltd v. Export Development Grants Board (1983) FCA 77; (1983) 46 ALR 612, Lockhart J said, in considering whether advertising expenditure was incurred primarily and principally for the purpose of creating or seeking opportunities, or creating or increasing demand, for export sales by the entity incurring the expense (at ALR 619-20): Sub-s. 4(1) uses the adverbs 'primarily' and 'principally'. It is a curious use of language. The words have different derivations and sometimes different connotations. For example, one meaning of 'primarily' is at first or originally. 'Principally' does not bear this meaning. I have looked at various dictionaries. They all define the adjectives 'primary' and 'principal' and some define the adverbs 'primarily' and 'principally'. The modern meanings given in the dictionaries to these words is much the same. For example, Collins Dictionary of the English Language, Australian edition edited by G.A. Wilkes, defines 'primarily' so far as relevant, as 'principally; chiefly; mainly'. The Macquarie Dictionary defines the adverb 'principally' as 'chiefly; mainly'. It is in this sense that the words are to be understood in sub-s.4(1). Notwithstanding the tractability of the English language I do not think that the two adverbs have separate work to perform in the sub-section. In my view the draftsman used both words to emphasise that it is only where the Board is satisfied that expenditure has been incurred mainly or chiefly (to use neutral adverbs) for the required purpose that the expenditure answers the description of 'eligible expenditure'.

The scope of the term 'primarily and principally' was considered in St George Leagues Club v. Commissioner of Land Tax (NSW) (1983) 14 ATR 826; 83 ATC 4736 ( St George ), where Lee J said, in considering whether a block of land was used primarily and principally for water skiing (at ATR 833; ATC 4743-4): The expression "primarily and principally" is not the same as "solely" and does not deny exemption in a case where there is some other user of the whole or part which, however, does not prevent a conclusion that the land is used "primarily and principally" for the purposes of the sport under consideration. This may give rise to questions of fact and degree in some cases, but on the evidence in the present case there can be no doubt that the whole of the land is used "primarily and principally" for the purposes of water-skiing and, accordingly, it is within the exemption provided under para.(h).

These cases indicate that the question of what the taxpayer's business primarily and principally is can be determined as the chief or main, but not necessarily the sole, business of the taxpayer.

The St George case above indicates that land may have a primary and principal use notwithstanding that it is used for more than one purpose. This principle can equally be applied to determining what the business of a taxpayer primarily and principally is.

In Hope v. The Council of the City of Bathurst (1980) 144 CLR 1; 80 ATC 4386; (1981) 12 ATR 231 ( Hope ), Mason J. considered the meaning of the phrase 'carrying on business' when he said (at CLR 8-9; ATC 4390; ATR 236): ... activities undertaken as a commercial enterprise in the nature of a going concern, that is, activities engaged in for the purpose of profit on a continuous and repetitive basis.

Based on the Hope case, a business can best be determined by identifying the activities engaged in on an ongoing basis for the purpose of profit. It follows that determining what a taxpayer's business primarily and principally is, can be determined by identifying the chief or main activity the taxpayer engages in on an ongoing basis for the purpose of profit.

In regard to a taxpayer who carries on more than one business activity, it is necessary to decide appropriate criteria upon which the relative precedence of the business activities to the taxpayer can be measured. What criteria are appropriate will depend upon the facts and circumstances of the conduct of the particular business activities and the information available. Further, the measurable attributes of the activities engaged in that are most useful in this regard will also depend on the facts in each case.

In the taxpayer's factual circumstances, revenue and costs are the measurable attributes common to all the taxpayer's business activities that provide an indication of the scope and nature of the business activities undertaken. The fact that both the taxpayer's revenue derived from and costs incurred in engaging in the supply of water to entities for use in primary production businesses are greater than those in relation to any of the other activities supports the conclusion that the taxpayer in this instance is an irrigation water provider.

In this case, the revenue and costs related to the relevant business activity are actually greater than 50 per cent of the revenue and costs of the taxpayer's total business activity however, it does not appear to be necessary in this statutory context for the chief or main activity to constitute 50 per cent or more, that is - the absolute majority, of the taxpayer's business activities - rather that the relevant activity merely be foremost amongst the business activities.