ATO Interpretative Decision

ATO ID 2002/1090

Income Tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is a grant received by the taxpayer to conduct a feasibility study assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. A grant received by the taxpayer to conduct a feasibility study is included in assessable income under section 6-5 of the ITAA 1997.

Facts

The taxpayer was established for the specific purpose of obtaining grants from the government so that it could undertake a feasibility study.

The taxpayer was successful in obtaining the grants and used the funds to engage experts and conduct trials as part of the feasibility study.

Reasons for Decision

Subsection 6-5(1) of the ITAA 1997 provides that the assessable income of a taxpayer includes income according to ordinary concepts, which is called ordinary income.

Ordinary income has generally been held to include three categories:

•

income from providing personal services

•

income from property; and

•

income from carrying on a business.

The nature of a receipt in the hands of a taxpayer is determined by the circumstances in which it is received by the taxpayer. In GP International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation [1990] HCA 25; (1990) 170 CLR 124; 90 ATC 4413; (1990) 21 ATR 1 (GP International Pipecoaters) the taxpayer, a company established for the sole purpose of undertaking a contract to coat gas pipes, received 'establishment costs' to pay for the construction of a plant to carry out the pipe-coating process. The High Court held that the 'establishment costs' were income in the taxpayer's hands, even though they were received for the purpose of construction of the plant.

The relevant factor in characterising the receipt in GP International Pipecoaters was the scope of the taxpayer's business and its purpose for engaging in it. The High Court took the view that, since the taxpayer's business was the construction of a plant for the purpose of coating the pipes, any payments received in relation to the construction of that plant were in the ordinary course of the taxpayer's business.

If an entity is brought into existence for the sole purpose of performing a contract, then all payments received under that contract are likely to be income rather than capital. This is because the business of such an entity is the performance of the contract, and any receipts related to the performance of that contract are in the ordinary course of that business.

In this case, the taxpayer was established in order to conduct a feasibility study. The taxpayer is in the business of conducting a feasibility study; therefore, any amounts received in relation to the feasibility study are income from the carrying on of the business. The receipt, in these circumstances, is income according to ordinary concepts. Therefore the grant is ordinary income and assessable under section 6-5 of the ITAA 1997.

Amendment History

Year of income:  Year ended 30 June 2001 Year ended 30 June 2002

Legislative References:
Income Tax Assessment Act 1997
   section 6-5

Case References:
GP International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation
   [1990] HCA 25
   (1990) 170 CLR 124
   90 ATC 4413
   (1990) 21 ATR 1

Keywords
Government grants income

Business Line:  Small Business/Individual Taxpayers

Date of publication:  30 November 2002

ISSN: 1445-2782