Power & Utilities sector
Tax agenda 2013
The unbilled income saga
Recent developments in the income tax treatment of ‘unbilled income’ tell a cautionary tale in which the ATO applies a view different from settled case law.
The story begins with the AGL case in 1983. AGL supplied gas through its distribution network in Sydney. Customers were billed quarterly in arrears but only after their meter had been read. The Full Federal Court found that the ‘exceptional circumstances’ of AGL, its customers and the regulatory framework in which it operated meant AGL did not derive any income from the sale of gas until a customer’s meter was read and a bill was issued. The High Court refused special leave to appeal and the ATO issued Income Tax Ruling IT 2095, accepting the decision but limiting its application to utility companies. The matter seemed settled.
However, the ATO has recently reopened the issue to the dismay of an industry feeling the heat from rising energy prices and lower demand.
The cautionary tale relates to how the ATO has managed this issue. For years in risk reviews the ATO has raised a flag on unbilled income. It cited Hawkes Bay (a New Zealand court case), changed regulations and accounting practices, deregulated energy markets, smart meters, the ability to estimate bills and more. However, it only raised a flag and did not issue a fully considered and tested view necessary to distinguish the original finding of the Federal Court.
In 2012, the ATO issued ATO ID 2012/15, where it concluded that the ‘exceptional circumstances’ referred to in the AGL case no longer exist. The issue of the ATO ID caused considerable concern in the industry. In particular, the ATO ID did not fully explain the reason for its conclusions, nor did it explain which of the ‘exceptional circumstances’ had changed or indeed when the change occurred.
In response, a consultation process was initiated. Some seven months later the ATO issued its final ‘post consultation’ position, informing taxpayers ‘for those companies that have been deferring, where we do not hear from you by 31 August 2013, we will commence or further progress current compliance action in relation to the treatment of unbilled income’. It thus appears that the consultation process did not change anything. This seems odd since, at the same time, the ATO concedes that ‘a legal opinion is also being sought from external senior counsel on the ATO view in relation to a specific private ruling objection’.
The ATO’s plan to embark on or continue with action within eight weeks of issuing its post consultation position and in circumstances where its views are subject to senior counsel’s review, smacks of a heavy handed approach on a complex matter. Affected taxpayers will now need to consider their position and the impact of any change to that position on their cash flow, franking account, penalty exposure, tax effect accounting and ATO relationship.
Whatever the merits of the ATO’s position on unbilled income, taxpayers will now need to be more cautious as they apply what seems to be settled law to their circumstances.