FEDERAL COURT OF AUSTRALIA Denmark Community Windfarm Ltd v Commissioner of Taxation [2017] FCA 478 File number: WAD 113 of 2016 Judge: MCKERRACHER J Date of judgment: 10 May 2017 Catchwords: INCOME TAX – whether a commonwealth grant received by a taxpayer was an assessable recoupment for the purposes of s 20-20(2) and 20-20(3) of the Income Tax Assessment Act 1997 (Cth) (1997 Act) – whether the grant was received "by way of indemnity" for the purposes of s 20-20(2) of the 1997 Act – whether a grant paid on capital account is a deductible outgoing in the current year or an earlier income year for the purposes of s 20-20(2) and 20-20(3) of the 1997 Act – whether an allowable depreciation under Div 328 is a deductible amount for the purposes of s 20-20(2) and 20-20(3) Legislation: Income Tax Assessment Act 1997 (Cth) Div 20, Div 40, subdivs 20-A, 328-D, ss 6-5, 8-1(1)(a), 8-1(1)(b), 8-1(2), 8-1(2)(a), 15-10, 20-20(2), 20-20(3), 20-25(1)(a), 20-25(1)(b), 20-40, 20-45, 40-15, 40-180, 40-185, 328-110, 328-175 Taxation Administration Act 1953 (Cth) ss 14ZZ, 14ZZO Cases cited: Batchelor v Federal Commissioner of Taxation (2014) 219 FCR 453 Falk v Federal Commissioner of Taxation (2015) 101 ATR 445 Federal Commissioner of Taxation v Rowe (1997) 187 CLR 266 Federal Commissioner of Taxation v Wade (1951) 84 CLR 105 Date of hearing: 13 December 2016 Registry: Western Australia Division: General Division National Practice Area: Taxation Category: Catchwords Number of paragraphs: 64 Counsel for the Applicant: Mr R Sceales Solicitor for the Applicant: Sceales & Company Counsel for the Respondent: Ms H Tiplady Solicitor for the Respondent: Australian Government Solicitor ORDERS WAD 113 of 2016 BETWEEN: DENMARK COMMUNITY WINDFARM LTD Applicant AND: COMMISSIONER OF TAXATION Respondent JUDGE: MCKERRACHER J DATE OF ORDER: 10 MAY 2017 THE COURT ORDERS THAT: 1. The appeal be dismissed. 2. There be no orders as to costs. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT MCKERRACHER J: THE APPEAL 1 Denmark Community Windfarm Ltd appeals pursuant to s 14ZZ of the Taxation Administration Act 1953 (Cth) (1953 Act) from the Commissioner of Taxation's decision to include in Denmark's assessable income a Commonwealth Grant of $2,487,800 received under the Commonwealth's Renewable Remote Power Generation Program (RRPGP) essentially for the establishment of windfarms. BACKGROUND FACTS 2 By an agreement dated 18 May 2011, the (Western Australian) Coordinator of Energy agreed to provide Denmark with the Grant, having in turn received those funds as part of the RRPGP (RRPGP Agreement). The RRPGP was a Commonwealth government initiative providing rebates for renewable energy projects in remote areas. The RRPGP Grant was provided to Denmark in respect of 50% of the Eligible Project Costs to be incurred by it in the construction of two wind turbines in Denmark, Western Australia. The Grant was payable in instalments on the completion of identified Project milestones. Denmark was duly paid the Grant in the financial years ended 30 June 2013 and 30 June 2014. 3 In July of 2012, accountants RSM Bird Cameron, as it then was, now RSM Australia, applied to the Commissioner on Denmark's behalf for a Private Ruling regarding the tax treatment of the Grant to be received by Denmark. 4 In the Private Ruling application, RSM posed the question of whether the Grant received by Denmark would be assessable income under either s 6-5 or s 15-10 of the Income Tax Assessment Act 1997 (Cth) (1997 Act). In the Australian Taxation Office (ATO) Private Ruling, this question was answered in the negative. Denmark does not dispute this aspect of the Private Ruling. 5 On 4 October 2012, following requests for information from the Commissioner and provision of that information by RSM, the Commissioner issued its Private Ruling by which he determined that the Grant would be an assessable recoupment under s 20-20(2) of the 1997 Act. 6 Denmark lodged its income tax returns for the 2013 and 2014 years of income in accordance with the Private Ruling by including the Grant it had received as assessable income in those returns. Objection to the inclusion of an assessable recoupment 7 On 28 May 2015, Denmark objected to the notices of assessment for the years of income for 30 June 2013 and 30 June 2014, namely, the inclusion in the 2013 return of an assessable recoupment amount of $747,045 and the inclusion in the 2014 return of an assessable recoupment of the amount of $1,271,380. 8 Denmark contended that the Grant it had received in those years of income did not constitute an assessable recoupment within the meaning of s 20-20(2) of the 1997 Act because it was not received by way of an indemnity. Denmark also argues that the Grant was not an assessable recoupment within the meaning of s 20-20(2) or s 20-20(3) of the 1997 Act because those sections require the relevant deduction to have been claimed for a loss or outgoing, which, it says, is not the case for deductions claimed for depreciation or decline in value. 9 Denmark contended, in the alternative, that it was permissible for it to choose to calculate depreciation allowances under subdiv 328-D instead of under Div 40 and it did so. Denmark contended that as a deduction under subdiv 328-D is not listed in the table set out in s 20-30 of the 1997 Act, the amount of the funding is not an assessable recoupment for the purposes of s 20-20(2) or s 20-20(3). 10 On 18 January 2016, the Commissioner issued a notice of objection decision disallowing Denmark's objection in full. The Commissioner determined that the Grant was assessable as an assessable recoupment under: (a) section 20-20(2) of the 1997 Act, as the amounts were received by Denmark by way of indemnity (but not by way of insurance); or (b) section 20-20(3) of the 1997 Act, as the amounts were received in respect of a loss or outgoing incurred and the amounts related to depreciating assets, which were deductible under Div 40 of the 1997 Act. 11 Denmark appealed. Expenditure 12 In the years of income ended 30 June 2013 and 30 June 2014, Denmark incurred Eligible Project Costs, being capital costs in the construction of the windfarm. These are recorded in Note 6 to its Financial Statements for the year ended 30 June 2014 under the heading 'Property, Plant and Equipment' and accounted for as follows: Infrastructure 2014 2013 $ $ At cost 5,498,467 5,632,979 Capital Grant (2,487,800) (2,401,168) Accumulated depreciation (194,819) (54,168) 2,815,848 3,177,643 Movements in carrying amounts: Balance at the beginning of the year 3,177,643 2,024,310 Less capital grant received (86,631) (1,798,211) Additions 9,356 2,925,897 Capitalising borrowing costs - 81,022 Disposals (143,869) (1,207) Depreciation (140,651) (54,168) Balance at the end of the year 2,815,848 3,177,643 13 'Eligible Project Costs' are defined in the RRPGP Agreement as: The capital costs of the equipment and services, exclusive of GST, that are essential for implementation of the Project. Eligible Project Costs shall be based on the following as described in clause 4 of the Denmark Community Windfarm Sub-agreement: (a) the costs of all equipment and services that are clearly essential for, and apply solely to, the design, construction and commissioning of the wind turbines; (b) the costs of upgrading or modifying equipment required to incorporate the wind turbines into the electricity grid or to reasonably maximise their output; and (c) the costs of additional services required for network integration, where services need to be extended to incorporate the wind turbines or to reasonably maximise their output. 14 In its accounts, Denmark has treated the expenditure on Eligible Project Costs as an outgoing entirely on capital account. 15 Mr Paul Llewellyn is a co-founder and director of Denmark and an environment planner and economist. He has lived in Denmark for more than 20 years and has a scientific background, particularly in natural resource management. He has been actively involved in politics, focusing on advancing concepts of renewable energy. To the extent it is admissible, his affidavit in support of the appeal explains that the Denmark Community Windfarm project was initiated in 2003 and supplies clean energy to the Denmark Shire's approximately 2000 residences by turbines generating 55% of Denmark's annual domestic electricity demand. The two turbines are substantial. (Each blade is about 24 metres long.) The economic working life of a turbine is between 20 and 30 years depending on long term site conditions. Windfarms are highly capital intensive, requiring a high percentage of capital investment at the outset. While an income stream is expected through a long term power-purchase contract with an electricity retailer, windfarms are technically challenging. STATUTORY FRAMEWORK 16 Div 20 of the 1997 Act deals with 'amounts included to reverse the effect of past deductions' and in that regard, pursuant to s 20-25(1)(a) and (b), the recoupment of a loss or outgoing includes: (1) any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery however described; and (2) a grant in respect of the loss or outgoing. An amount will not be an assessable recoupment to the extent that it is ordinary income or a statutory income because of a provision outside subdiv 20A: s 20-20(1). (emphasis added) 17 Those provisions should be seen in context. Relevantly, Div 20 provides: What is an assessable recoupment? 20-20 Assessable recoupments Exclusion (1) An amount is not an assessable recoupment to the extent that it is *ordinary income, or it is *statutory income because of a provision outside this Subdivision. Insurance or indemnity (2) An amount you have received as *recoupment of a loss or outgoing is an assessable recoupment if: (a) you received the amount by way of insurance or indemnity; and (b) you can deduct an amount for the loss or outgoing for the *current year, or you have deducted or can deduct an amount for it for an earlier income year, under any provision of this Act. Other recoupment (3) An amount you have received as *recoupment of a loss or outgoing (except by way of insurance or indemnity) is an assessable recoupment if: (a) you can deduct an amount for the loss or outgoing for the *current year; or (b) you have deducted or can deduct an amount for the loss or outgoing for an earlier income year; under a provision listed in section 20-30. 20-25 What is recoupment? General (1) Recoupment of a loss or outgoing includes: (a) any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery, however described; and (b) a grant in respect of the loss or outgoing. Amount paid for you (2) If some other entity pays an amount for you in respect of a loss or outgoing that you incur, you are taken to receive the amount as recoupment of the loss or outgoing. … 20-30 Tables of deductions for which recoupments are assessable (1) This table shows the deductions under the Income Tax Assessment Act 1997 for which recoupments are assessable. Note: References are to section numbers except where otherwise indicated. Provisions of the Income Tax Assessment Act 1997 Item Provision Description of expense 1.1 8-1 (so far as it allows you to deduct a bad debt, or part of a debt that is bad) bad debts 1.2 8-1 (so far as it allows you to deduct rates or taxes) rates or taxes 1.3 25-5 tax-related expenses 1.4 25-35 bad debts 1.5 25-45 embezzlement or larceny by an employee 1.5A 25-47 misappropriation by an employee or agent 1.6 25-60 election expenses, Commonwealth and State elections 1.6A 25-65 election expenses, local governing body 1.7 25-75 rates and land taxes on premises used to produce mutual receipts 1.8 The former 25-80 upgrading assets to meet GST obligations etc. 1.8A 25-95 work in progress amount 1.8B item 7 of the table in section 30-15 contributions relating to fund-raising events 1.8C item 8 of the table in section 30-15 contributions relating to fund-raising auctions 1.9 Division 40 capital allowances 1.10 The former Division 42 (as it applied to *software because of the former Subdivision 46-B) expenditure on software 1.11 The former Subdivision 46-C expenditure on software 1.12 The former Subdivision 46-D expenditure on software, pooled 1.13 The former Division 42 (as it applied to *IRUs because of Division 44) expenditure on IRUs 1.14 The former 330-15 exploration or prospecting expenditure 1.15 The former 330-80 allowable capital expenditure relating to mining or quarrying 1.16 The former 330-350 petroleum resource rent tax 1.17 The former 330-370 transport capital expenditure relating to mining or quarrying 1.18 The former 330-435 rehabilitation expenditure relating to mining or quarrying 1.19 The former 330-485 balancing adjustment deduction for expenditure relating to mining or quarrying 1.19A Division 355 R&D 1.20 The former Subdivisions 380-A and 380-C capital expenditure incurred in obtaining a spectrum licence 1.21 The former Subdivision 387-A landcare operations expenditure 1.22 The former Subdivision 387-B expenditure on facilities to conserve or convey water 1.23 The former Subdivision 387-D grapevine establishment expenditure 1.24 The former Subdivision 387-C horticultural plant establishment expenditure 1.25 The former Subdivision 387-E mains electricity connection expenditure 1.26 The former Subdivision 400-A expenditure on environmental impact assessment 1.27 The former Subdivision 400-B expenditure on environmental protection activities 1.27A 420-15 registered emissions unit 1.28 775-30 forex realisation loss … 18 It is apparent that these provisions operate to include, in a taxpayer's assessable income, amounts received as recoupment for certain deductible losses or outgoings where the recoupment is not otherwise assessable: (a) by s 20-20(2) of the 1997 Act, an amount received by a taxpayer as recoupment of a loss or outgoing is an assessable recoupment if: (i) it is received by the taxpayer by way of an insurance or indemnity; and (ii) the taxpayer can deduct an amount for the loss or outgoing for the current year, or the taxpayer has deducted or can deduct an amount for it for an earlier income year, under any provision of the 1997 Act; (b) section 20-20(3) of the 1997 Act provides that an amount received by a taxpayer as recoupment of the loss or outgoing (except by way of insurance or indemnity) is an assessable recoupment if: (i) the taxpayer can deduct an amount for the loss or outgoing for the current year; or (ii) the taxpayer has deducted or can deduct an amount for the loss or outgoing for an earlier income year; under a provision elected in s 20-30. 19 As discussed at [16], in s 20-25(1) 'recoupment of the loss or outgoing' is defined as including: (a) any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery, however described; and (b) a grant in respect of the loss or outgoing. 20 The table of deductions in s 20-30 of the 1997 Act includes Div 40 of the 1997 Act, namely, capital allowances. Under Div 40, a taxpayer can deduct an amount equal to the decline in value of the depreciating asset held by it over the effective life of the asset. 21 Subdivision 328-D of the 1997 Act also provides capital allowances for small business entities. 22 Section 328-175 provides: (1) You can choose to calculate your deductions and some amounts of assessable income under this Subdivision instead of under Division 40 for an income year for all the *depreciating assets that you *hold if: (a) you are a *small business entity for the income year; and (b) you started to use the assets or have them *installed ready for use, for a *taxable purpose during or before that income year. This subsection has effect subject to subsections (2) to (10). Note: If you choose to use this Subdivision for an income year, you continue to use this Subdivision for your general small business pool for a later income year even if you are not a small business entity, or do not choose to use this Subdivision, for the later year: see section 328-220. 23 The Commissioner does not dispute that Denmark is a small business entity within the meaning of s 328-110. As such, Denmark is entitled under s 328-175 to elect to calculate its deductions under subdiv 328-D instead of under Div 40. Denmark has so elected and as a result it has deducted its depreciating assets, being the wind turbines, on a diminishing value basis. 24 When subdiv 328-D was introduced in the 1997 Act, there was no corresponding amendment made to include it in the table in s 20-30. The explanatory memorandum for subdiv 328-D makes no reference to the potential impact of subdiv 328-D on s 20-20 or s 20-30 despite addressing the interrelationship with numerous other sections of the 1997 Act. The Commissioner submits that there could be no policy basis for treating an amount as an assessable recoupment if the deductions for decline in value have been claimed under Div 40, but not as an assessable recoupment if the deductions for decline in value have been claimed under subdiv 328-D. The Commissioner suggests that the most likely explanation is that it was by drafting oversight that subdiv 328-D was not included in the table in s 20-30 with Div 40. 25 The Commissioner has approved this case for test funding because it raises issues about the correct interpretation of the phrases 'for the loss or outgoing' and 'can deduct' where they appear in s 20-20(2) and s 20-20(3), as well as the interaction discussed above. The Commissioner relies on s 14ZZO of the 1953 Act and has put Denmark to proof on all relevant facts upon which it seeks to rely to establish that the assessments the subject of this proceeding are excessive or otherwise incorrect, and what the assessments should have been. DENMARK'S CONTENTIONS 26 A taxpayer can deduct from assessable income any loss or outgoing to the extent that it is incurred in gaining or producing assessable income or is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income: s 8-1(1) of the 1997 Act. However, certain deductions are precluded under s 8-1(2) of the 1997 Act which provides as follows: 8-1 General deductions … (2) However, you cannot deduct a loss or outgoing under this section to the extent that: (a) it is a loss or outgoing of capital, or of a capital nature; or (b) it is a loss or outgoing of a private or domestic nature; or (c) it is incurred in relation to gaining or producing your *exempt income or your *non assessable non-exempt income; or (d) a provision of this Act prevents you from deducting it. For a summary list of provisions about deductions, see section 12-5. (emphasis added) 27 Denmark's position is that none of the amounts incurred in respect of Eligible Project Costs of constructing the windfarm are amounts which it can deduct either as a loss or as an outgoing as they were expenditure incurred on capital account for Plant, Property and Equipment. The deductibility of the entire amount is therefore precluded by the provisions of s 8-1(2)(a) of the 1997 Act. 28 As noted, it is common ground that the Grant was not assessable income under either s 6-5 or s 15-10 of the 1997 Act. Rather, the question is whether the Grant constitutes a 'recoupment' as defined. Again, it appears to be common ground that the Grant, being a portion of the Eligible Project Costs, falls within the meaning of 'recoupment' and 'reimbursement' of an outgoing as envisaged in s 20-25(1)(a) of the 1997, albeit that it is an outgoing on capital account. There is also no doubt that the Grant was not paid by way of insurance. However, Denmark's position is that the Grant is not a 'refund, insurance, indemnity or recovery, however described'. 29 As to the second limb of the definition in s 20-25(1), it is also common ground that the Grant is in respect of a loss or outgoing within the meaning of s 20-25(1)(b) of the 1997 Act, being 'a grant in respect of the loss or outgoing'. 30 Consequently, two alternative questions arise: (a) was the payment of the Grant an 'indemnity' and therefore assessable under s 20-20(2)?; and (b) could the depreciation have been claimed under Div 40 of the 1997 Act? 31 Denmark argues that it did not receive the Grant as recoupment of a deductible outgoing by way of indemnity within the meaning of s 20-20(2) for the following reasons: (a) the Grant was funding Denmark received (via the State) from the Commonwealth, paid to it by the Coordinator. The Grant was paid in respect of a portion of Eligible Project Costs as defined, in respect of the capital costs of land, equipment and services to implement, design, construct and install the Denmark Community Windfarm and to provide for ancillary services to enable the windfarm to supply power to the electricity grid; (b) the Grant was not paid or received 'by way of indemnity', within the meaning of indemnity in ordinary parlance, the amount not having the quality of a payment 'by way of indemnity'. Nor is it a payment to indemnify a deductible loss or outgoing for the current year or an earlier income year within the meaning of the section of the Note to s 8-1. The amount paid was merely a refund of the expenses of construction which in turn was non-deductible; (c) the expression 'by way of indemnity' imposes a characterisation test which requires consideration of the character of the amount received. In this instance the amount was paid on account of, and to recoup, non-deductible capital expenditure; (d) as such, the Grant was not a payment to indemnify or otherwise compensate Denmark in respect of a deductible loss or outgoing for the current year or an earlier income year, the Eligible Project Costs not being deductible to Denmark having been incurred on capital account and accounted for as such. The Grant was not paid to offset a prior or current year deduction. (e) none of the provisions of the RRPGP Agreement contemplate that the Grant approved by the Commonwealth would be or is paid by way of indemnity. Rather, it is funding provided by the Commonwealth to Denmark to implement the construction of Denmark Community Windfarm in respect of capital costs of equipment and services; (f) when properly characterised by reference to the RRPGP Agreement under which the Grant was paid, the amounts paid were paid on capital account on account of Eligible Project Costs, and were not paid or received by way of indemnity in respect of a deductible outgoing, this being consistent with the basis on which the Commissioner determined that the Grant was not assessable as ordinary income under s 6-5 or as statutory income under s 15-10; (g) under s 20-20(2)(b) it is necessary that the taxpayer can deduct 'an amount for the loss or outgoing' under any provision of the 1997 Act. The use of the definite article in the term 'the loss or outgoing' is a reference to the amount of the capital expenditure, which is the outgoing. It does not envisage, as the Commissioner contends, that the term includes depreciable expenses, even though the deduction claimed in any one year may not be for the original loss or outgoing expended to purchase a capital asset, but rather a component of that expense reflecting the declining value of that asset in a given year; (h) the introductory words to s 20-20(2) and (3) refer to 'an amount you have received as recoupment of a loss or outgoing' which is a reference to the capital expenditure and is not a reference to a deduction; and (i) in any event, the deduction of an amount representing a decline in value is not a 'loss or outgoing', but rather, is an allowance. 32 As to 'indemnity', Denmark argues that an indemnity can be used in one of two senses. One connotes that there is a contractual relationship by which the indemnifier agrees to insure another party against a contingent loss. In that sense, there would be little difference between a contract of indemnity and a contract of insurance. In the second sense, the term refers to the undertaking to make good a contingent loss, whether or not there is a contractual relationship between the parties to the undertaking. 33 In Batchelor v Federal Commissioner of Taxation (2014) 219 FCR 453, Edmonds, Pagone and Wigney JJ made clear that the words 'insurance or indemnity' are to be given a wide meaning. While in a narrow sense 'indemnity' is a payment in respect of loss or damage, there is a broader meaning identified in Yallop C (ed), Macquarie Dictionary (4th ed, Macquarie, 2005) (at 722) which includes: protection or security, as by insurance, against damage or loss; compensation for damage or loss sustained; something paid by way of such compensation; legal protection as by insurance from liabilities or penalties incurred by one's actions; and legal exemption from penalties attached to unconstitutional or illegal actions granted to public officers and other persons. 34 Denmark contends that the general principle is that an amount received by way of insurance or indemnity is treated as income on the basis that it is intended to 'fill a hole' created by a loss of income or profits. This is reflected by the fact that the predecessor to subdiv 20-A, s 26(j), largely replicated this principle. In Federal Commissioner of Taxation v Wade (1951) 84 CLR 105 (at 115), Kitto J noted that 'indemnity' includes a receipt in the nature of compensation by way of a statutory right as well as a receipt under a contract of indemnity. There, the taxpayer received statutory compensation in respect of an actual loss caused by destruction of cattle. Denmark contends that its expenditure was not a loss, but a capital investment. 35 In Batchelor, the Full Court considered the status of an amount described as a return of a deposit, the question being whether the amount of the refunded deposit was an assessable recoupment under s 20-20 or a taxable capital gain. In that case, the taxpayer had acquired an interest in the business and assets of the Cresthaven Village Partnership Agreement for the purchase and development of a property as a retirement village. The taxpayer's share of the deposit was $55,500, being part of an amount she claimed as a deduction for her share in a partnership loss distribution. She had been allowed a deduction for that amount as her share of the deposit paid through the partnership. The venture did not proceed, ultimately resulting in a settlement deed from which the taxpayer received an amount of $47,927. Edmonds and Pagone JJ (with whom Wigney J agreed) observed (at [12]-[15]): 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. 14 The issue in dispute was raised sharply in this case because the deduction was allowed, probably incorrectly, by the Commissioner at the time that the taxpayer entered the partnership. Section 20-20(2)(b) would not have been satisfied (on any view) if the wrongful deduction had not been allowed, but the question of construing the condition in s 20-20(2)(a) is not to be determined by reference to the mistake (if it was a mistake) of an amount having been allowed. Section 20-20(2) does not provide that an amount received as a recoupment will be an assessable recoupment if it is received and the taxpayer could or did deduct an amount that was recouped. Section 20-20(2)(a) cannot be read as if the words "the amount by way of insurance or indemnity" simply said "an amount". There must be something about the quality of the received amount which may be regarded as being "by way of insurance or indemnity". A mere refund or reimbursement will not ordinarily fit those words because its receipt will not have a quality of the receipt being by way of insurance or indemnity. 15 It is, therefore, to the character of the receipt that one must turn to determine whether what the taxpayer received may relevantly bear the description as being "by way of insurance or indemnity". In Goldsbrough Walters J held that a contract between the purchaser and vendor had obliged one party "to be kept secured against, or compensated for, the expense of rates and taxes". His Honour said at 598: In the present case, each contract for sale and purchase resulted in the assumption by the purchaser of certain obligations which, but for the transaction, would have rested upon the taxpayer. In terms of the contract, the taxpayer was to be kept secured against, or compensated for, the expense of rates and taxes on the subject property, in so far as the taxpayer might become liable in future to discharge that expense, or in so far as it had already been discharged it: the taxpayer was to be held indemnis. In my view, the language of s 26(j) may be treated as contemplating an indemnification in respect of loss already incurred. In the present case the payment to the taxpayer was not of an amount from a person who was obliged to make good a loss occasioned by another. What the taxpayer received was a return of the deposit from the person to whom it had been paid by her through the partnership. Clause 10.4 of the contract provided: If the Purchaser rescinds the Contract as a result of a default by the Vendor, the Purchaser shall be immediately entitled to be paid by the Vendor an amount equal to so much of the Deposit as has then been paid. What the taxpayer received, in light of the way the case was conducted before the Tribunal, was the return of her deposit pursuant to an entitlement arising under cl 10.4 (whether as a claim for damages or a claim in restitution) plus interest. The latter is plainly assessable as income but the former is not apt to be described as received "by way of insurance or indemnity". It was not an amount paid to compensate a loss but received by her as a return of what she had contributed to the venture. It is a payment unlike that considered in Goldsbrough because it lacked the quality of payment to compensate for some other event rather than because the obligation to be repaid the deposit was in existence before a loss had been suffered or had occurred. (emphasis added) 36 In relation to the payment of capital argument, the contention for Denmark is that the Grant was not one of indemnity, either within the ambit of the term as set out in s 20-20(2) of the 1997 Act or within the context of the decisions referred to in the Commissioner's Private Ruling or in Batchelor. Denmark submits that the true character of the Grant was that of a payment to reimburse a portion of capital expenditure and that is not within the ordinary meaning of the word 'indemnity'. Therefore, Denmark submits, the Grant was not an 'assessable recoupment' within the meaning of s 20-20(2). 37 Importantly, however, Denmark goes onto argue that even if this is wrong and the Grant should be regarded as being an indemnity in a wide sense, it is still necessary under s 20-20(2)(b) of the 1997 Act that a taxpayer can deduct an amount for the loss or outgoing which has been recouped for the current year, or an earlier income year, under any provision of the 1997 Act. An allowance for depreciation could only ever relate to the year in which the asset is held ready for use or for a later year. This fact underscores Denmark's contention that the assessable recoupment provisions are designed to reverse the effect of past deductions and do not apply to cases such as the present where, Denmark submits, no 'deduction' was allowed for the outgoing. 38 The Commissioner asserts that a fundamental requirement for an amount to be an assessable recoupment is that the taxpayer has deducted or can deduct an amount 'for the outgoing'. That is, there is a connection between the deduction and the outgoing. That connection, the Commissioner submits, is that the outgoing that the taxpayer has subjected itself to is the asset's cost, and the amount that is being deducted is calculated by reference to the decline in value of the asset. The deduction envisaged in s 20-20(2)(b) is for the outgoing under any provision of the 1997 Act. Denmark asserts that this misconstrues the tests in s 20-20(2) and s 20-20(3), the proper test being, 'was the amount received as reimbursement of a deductible loss or outgoing?' Denmark says, in this case, the character of the receipt determines that it was not an assessable recoupment. 39 Denmark also argues that the Commissioner is mistaken in stating that the outgoing was deductible under Div 40, so satisfying one of the requirements of s 20-20(3), as the outgoing was never deductible. The capital allowance in respect of the depreciating asset is a provision or allowance and is not an 'outgoing'. It is simply a deductible allowance designed to reflect an assumed reduction in the value of the depreciating asset through age, use or altered technology. 40 The other question to consider is that of 'other recoupment'. An amount received as recoupment of a loss or outgoing (except by way of indemnity or insurance) is assessable under s 20-20(3) of the 1997 Act if the taxpayer can deduct an amount for the loss or outgoing for the current year, or it has deducted or can deduct an amount for the loss or outgoing for an earlier income year under a provision listed in the tables to s 20-30. If, as the Commissioner contends, 'indemnity' is to be interpreted widely to include the Grant which was paid on capital account, Denmark contends that it would not be necessary to include s 20-20(3) of the 1997 Act because 'indemnity' would include every form of payment. Rather, Denmark argues, the amount of the Grant is not an 'assessable recoupment' of a loss or an outgoing because it cannot deduct an amount for the outgoing for the current year under a provision listed in s 20-30, nor had it deducted nor could it deduct an amount for the outgoing for an earlier income year under a provision listed in s 20-30 or under another provision of the 1997 Act. Denmark argues that the deductibility of the outgoing, being the Eligible Project Costs, is actually precluded under s 8-1(2)(a) of the 1997 Act. Accordingly, Denmark submits, the Grant is not an assessable recoupment within the meaning of s 20-20(3) as the amount of capital expenditure in respect of an Eligible Project Cost is not a deductible loss or outgoing, but rather, an expenditure on capital account. Section 20-20(2)(b) and s 20-20(3)(a) or (b) are both predicated on the deductibility of the loss or outgoing in the current year or an earlier income year. The outgoing is the expenditure on Eligible Project Costs, which is not deductible, and therefore neither subsection has room to operate, according to Denmark. 41 Section 20-20(3) of the 1997 Act applies on its terms to the deduction of 'an amount for the loss or outgoing' in respect of which the recoupment is received for the current or an earlier year. Denmark argues that the outgoing posited by use of the definite article in the expression 'the loss or outgoing' is a reference to the amount paid on an account of Eligible Project Costs. This is not the amount which may be an allowable deduction under Div 40, which relates to a decline in value of a depreciating asset held by a taxpayer. Division 40 does not relate to a deduction for the amount of the 'outgoing'. 'The decline in value' is not 'the outgoing' predicated in s 20-20(3) and, in any event, the 'decline in value' is not an outgoing but is an allowance or provision. 42 For those reasons, Denmark argues that an assessment under s 20-20(3) is incorrect. There is conceptual confusion in treating 'the amount of the outgoing' with the 'amount of the decline in value' as meaning the same thing when they do not. 43 Both for the purpose of s 20-20(2) and s 20-20(3) of the 1997 Act, Denmark contends it is necessary that it 'received' the amount of the Grant 'as recoupment of the loss or outgoing' on one or another of the conditions posited in those sections. Denmark submits that these provisions import a characterisation test as to the nature and quality of the amount received. The correct characterisation of the amount Denmark received, it says, is that it was paid on account of non-deductible capital expenditure, defined as Eligible Project Costs, for which Denmark is not entitled to a deduction for an earlier year or for a current year under Div 8 or Div 40 or under any other provision of the 1997 Act. 44 On that basis, Denmark again asserts that the amount of the Grant is not an assessable recoupment of a loss or an outgoing because it cannot deduct an amount for the outgoing for the current year under a provision listed in s 20-30, nor did it deduct nor could it deduct an amount for the outgoing for an earlier income year under a provision listed in s 20-30 or any other provision of the 1997 Act. While depreciation is deductible by way of a capital allowance under either Div 40 or subdiv 328-D, Denmark submits that the Grant was not paid to refund a capital allowance or depreciation, nor could it be so characterised. Rather, the Grant was an amount paid to fund one half of the capital costs of construction by way of reimbursement of the cost of the Eligible Project Costs. Again, Denmark asserts the amounts expended on construction were not deductible costs, but capital costs. 45 As an alternative construction pertaining to subdiv 328-D, Denmark contends that because subdiv 328-D is not listed in the table set out in s 20-30, the amount of the Grant is not an assessable recoupment for the purpose of s 20-20(2) or s 20-20(3). As a further alternative, it is contended by Denmark that if the allowable depreciation under Div 328 is a deductible amount for the purpose of s 20-20(2)(b), it is submitted that the assessable recoupment is limited to the amount of the deductible depreciation in the current year (2014) or in prior years. It would not extend to the full amount of the Grant. CONSIDERATION 46 For the Grant to be an assessable recoupment under s 20-20(2) of the 1997 Act, three requirements must be established: (1) Denmark received the Grant as a recoupment of loss or outgoing; (2) Denmark received the Grant by way of insurance or indemnity; and (3) Denmark can deduct an amount for the loss or outgoing for the current year or Denmark has deducted or can deduct an amount for an earlier income year under any provision of the 1997 Act. 47 As to those three matters, it is clear, that the first requirement is satisfied, namely, that the Grant has been received as recoupment of an outgoing, even if the payment was treated as being on capital account. 48 As to the second requirement, the Grant was not received by way of insurance, but the Commissioner contends it was by way of indemnity. While 'indemnity' is not defined in the 1997 Act, it bears its ordinary meaning and is to be given a wide construction: Batchelor (at [74]) and Falk v Federal Commissioner of Taxation (2015) 101 ATR 445 (at [49]) where Kerr P and Frost DP said '[t]he word "indemnity" is not defined in the [1997 Act] and so it must take its ordinary meaning'. 49 In my view, an indemnity, as widely understood, may include a sum of money paid to a person in respect of an outgoing incurred by the person. The Grant was made by way of compensation for half of the Eligible Project Costs incurred in the construction of the wind turbines, albeit that those costs were on capital account. 50 The Commissioner argues, and I agree, that the ordinary meaning of the word 'indemnity' gleaned from dictionary definition includes 'a sum of money paid to compensate a person for liability, loss or expense incurred by the person' (Butt PJ (ed), Butterworths Concise Australian Legal Dictionary (3rd ed, LexisNexis, 2005) (at 217)) or 'compensation for damage or loss sustained' (Yallop C (ed), Macquarie Dictionary (4th ed, Macquarie, 2005) (at 722)) and Batchelor (at [51]) and 'something paid by way of such compensation' (Yallop C (ed), Macquarie Dictionary (4th ed, Macquarie, 2005) (at 722)). 51 To the extent that Wade may provide helpful observations about the nature of an indemnity, it has been displaced in a more specific sense by the Full Court decision in Batchelor, expressly referable to the statutory provisions under consideration. 52 Denmark was required to satisfy certain specific requirements before the payments under the Grant would be made. This does not take it outside of the realm of what could be characterised as an indemnity. In this instance, the Grant was payable in various instalments on completion of certain identified milestones. But there is nothing in payment by way of instalments or by milestones which changes the nature of the proper characterisation of the receipt or, more specifically, the underlying reason for the receipt. 53 In this instance the Grant was received by Denmark as compensation for an 'expense' incurred by it. As such, it falls within the meaning of the word 'indemnity'. 54 The fact that the expense Denmark was being compensated for was on capital account does not prevent the Grant from being characterised as a payment by way of indemnity. Nor does the fact that the Grant was paid to Denmark pursuant to the RRPGP Agreement as opposed to a contract of indemnity. 55 While it is clear the Eligible Project Costs constituted expenditure on capital account, and were therefore not deductible under s 8-1(2)(a) of the 1997 Act, it is not the case that such expenditure was not deductible at all. Expenditure on capital assets can be properly claimed as a deduction over time reflecting the decline in value of the assets. This can be done under either Div 40 or under subdiv 328-D in the case of small business entities such as Denmark. The table in s 20-30 of the 1997 Act includes the whole of Div 40, with the relevant expense described as 'Capital allowances'. Section 20-40 and s 20-45 of the 1997 Act confirms this. Section 20-40 provides the method statement for including an amount in assessable income where a taxpayer has received an assessable recoupment of a loss or outgoing for which the taxpayer can deduct amounts over two or more income years. The example included in both s 20-40 and s 20-45 shows a practical example of a taxpayer who has an assessable recoupment and who has claimed corresponding deductions for depreciation. The sections therefore envisage deductions for decline in value. It follows, therefore, that the Grant is an assessable recoupment under s 20-20(2) of the 1997 Act. As to the further alternative argument that the assessable recoupment is limited to the amount of the deductible depreciation in the current year (2014), rather than the full amount of the Grant, the position, in my view, is that the amount of the recoupment required to be included in Denmark's assessable income for each of the years ended 30 June 2013 and 30 June 2014 is an amount equal to the deduction claimed by Denmark in that year (namely, $747,045 for the year ended 30 June 2013 and $1,271,380 for the year ended 30 June 2014). 56 In my view, the Grant is also an assessable recoupment under s 20-20(3) of the 1997 Act. The requirements for that provision are that: (1) the Grant must have been received by Denmark as a recoupment of a loss or outgoing; and (2) Denmark can deduct an amount for the loss or outgoing for the current year or has deducted or can deduct an amount for it for an earlier income year under a provision listed in s 20-30 of the 1997 Act. 57 As noted, the cost of the wind turbines can be deducted by reference to a decline in value under Div 40, which is a provision listed in s 20-30 of the 1997 Act. The necessary connection between the outgoing and the deduction is apparent from the objects clause in Div 40 (s 40-15) which explains that connection in providing for a deduction for the cost of a depreciating asset, spread over a period that reflects the time for which the asset can be used to obtain benefits. The cost of the asset includes costs incurred at the time when the taxpayer began to hold the asset, such as the amount paid for the asset (s 40-180 and s 40-185 of the 1997 Act). Thus, there is a deduction 'for the outgoing'. 58 As the outgoing was deductible under Div 40 of the 1997 Act, the second requirement is satisfied. Denmark, as an alternative, argues that the second requirement is not satisfied as it did not in fact deduct an amount under Div 40, but rather, elected to calculate the deduction under subdiv 328-D, being a provision that is not listed in s 20-30 of the 1997 Act. However, the words of s 20-20(3) do not require Denmark to have in fact deducted an amount for the outgoing under Div 40, rather, it requires that Denmark 'can deduct' an amount for the outgoing under Div 40. 59 Shortly put, the fact that Denmark claimed deductions under subdiv 328-D using the method of calculation there prescribed when it could have claimed deductions for the same expense under Div 40, will not preclude the assessability of the recoupment. The 1997 Act was amended to include subdiv 328-D after it was amended to include Div 20. Nothing in the relevant explanatory memoranda suggests that the legislature turned its mind to Div 20 and made a deliberate decision to actually exclude subdiv 328-D from its ambit. 60 From the purposive perspective, Denmark's arguments would enable it to receive deductions totalling the full amount of the cost of the wind turbines when it did not actually bear the full financial cost of those expenses as they were subsidised by the Grant. 61 That said, it is important to recognise that the question is not as simple as suggesting that because a deduction has been claimed there must be corresponding income declared. That is not so, as a general proposition. In Federal Commissioner of Taxation v Rowe (1997) 187 CLR 266 (at 277), 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 amount that had expressly been allowed as a deduction. As the Full Court has noted in Batchelor, it may be accepted 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. 62 There must be a connection between the deduction and the outgoing. The outgoing is the asset's cost. The amount that has been deducted is calculated by reference to the decline in value of the asset. In this instance, Denmark has deducted the amounts for the cost of the wind turbines by calculating depreciation on them pursuant to subdiv 328-D of the 1997 Act. 63 Denmark seeks to draw a distinction between the difference in the wording of a deduction 'for the outgoing' as distinct from 'in respect of the outgoing'. Clearly, there is a difference. But this, with respect, while creative as an argument, creates an unduly technical and narrow distinction in the present situation. Were Denmark's contention to be correct, there would be no circumstance for the inclusion of Div 40 in the table in s 20-30 of the 1997 Act. It is expressly imported under s 20-30(3). The test, of course, under s 20-30(2) being the capacity for a deduction as distinct from the actual deduction under a specified provision. CONCLUSION 64 For these reasons, the appeal must be dismissed. There will be no order as to costs for reasons explained. I certify that the preceding sixty-four (64) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice McKerracher. Associate: Dated: 10 May 2017