Victoria Power Networks Pty Ltd v Commissioner of Taxation, [2019] FCA 77

The subsidiaries of the taxpayer, who distributed electricity (the “Distributors”) were required to connect customers even if the present value of the incremental cost exceeded the present value of the incremental revenue. However, in those circumstances, the customer was required to make a “Customer Cash Contribution” to the Distributor, based on the shortfall.

In finding that the Customer Cash Contributions were ordinary income to the Distributors, Moshinsky J stated (at para. 165):

As the Distributors’ businesses included connecting new customers to the electricity network, and as the Customer Cash Contributions were gains (in the sense that they were amounts derived) in respect of new connections, it follows that they constituted ordinary income … . The Customer Cash Contributions were derived by the Distributors under transactions that occurred as an ordinary incident of their electricity distribution businesses.

In the above “uneconomic” scenario, the customer could choose to perform the work, in which case, on transferring the constructed assets to the Distributor, the Distributor would pay a rebate that did not represent the full cost of the work, so that again, the customer effectively bore the excess of the present value of the incremental cost over the present value of the incremental revenue (the “Customer Contribution”). In finding that the Customer Contributions were not ordinary income to the Distributors (and before going on to find that they were income under a special deeming provision), Moshinsky J stated (at para. 179):

[T]he Distributor offered to pay the customer an amount (the Rebate) calculated as the estimated cost of construction less the Customer Contribution. The customer accepted that offer. In these circumstances, in my view, the Customer Contribution was not a payment or gain received by the Distributor; it was merely a component used in the calculation of the amount to be paid by the Distributor to the customer.

Australian electricity distributors were entitled to require their customers to pay an amount equal to the estimated net economic burden to the distributors of hooking them up to electricity, i.e., where the the present value of the incremental cost exceeded the present value of the incremental revenue. Moshinsky J found that these “Customer Cash Contribution” amounts were ordinary income to the distributors as they were received “as an ordinary incident of their electricity distribution businesses” (para. 165).

The customer could instead choose to perform the work, in which case, on transferring the constructed assets to a distributor, the distributor would pay a rebate that did not represent the full cost of the work, so that again, the customer effectively bore the excess of the present value of the incremental cost over the present value of the incremental revenue (the “Customer Contribution”). In finding that a Customer Contribution was not ordinary income to the distributor, Moshinsky J stated: (para. 179):

[T]he Customer Contribution was not a payment or gain received by the Distributor; it was merely a component used in the calculation of the [rebate] amount to be paid [the other way] by the Distributor to the customer.