ATO Interpretative Decision

ATO ID 2003/565 (Withdrawn)

Income Tax

• This ATO ID is withdrawn as the income tax consequences of receiving a government grant are now discussed in TR 2006/3 'Income tax: government payments to industry to assist entities (including individuals) to continue, commence or cease business'.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is a State Government grant paid to a school bus operator to assist with the purchase of a new bus, assessable income under section 15-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. The State Government grant paid to a school bus operator to assist with the purchase of a new bus is assessable income under section 15-10 of the ITAA 1997.

Facts

The taxpayer carried on a business as a school bus operator.

A State Government department is providing funding to school bus operators to upgrade their school buses. The funding has been made available due to community concern about the age and safety of some school buses.

Bus operators are required to use the funding to purchase more modern buses for school bus routes.

If a school bus is sold or withdrawn from operation on school bus routes within five years of the payment, then the operator must refund the State Government part or all of the lump sum.

The taxpayer entered into an agreement with the State Government to accept financial assistance towards the purchase price of a new coach.

Reasons for Decision

Section 15-10 of the ITAA 1997 includes in assessable income bounties and subsidies that are received in relation to carrying on a business and that are otherwise not assessable as ordinary income.

The basic tests contained in section 15-10 of the ITAA 1997 are that an amount is assessable income if it is:

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a bounty or subsidy

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received in relation to carrying on a business; and

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not assessable as ordinary income under section 6-5 of the ITAA 1997.

The terms 'bounty' and 'subsidy' are not defined in income tax legislation.

The word 'subsidy', as noted by Windeyer J in Placer Development Ltd v. Commonwealth of Australia (1969) 121 CLR 353 derives from the Latin 'subsidium' meaning 'an aid or help'. The Macquarie Dictionary, Third edition, defines subsidy as including a grant or contribution or money.

Following the decisions in Squatting Investments Co Ltd v. Federal Commissioner of Taxation (1953) 86 CLR 570; 10 ATD 126; (1953) 5 AITR 496; Reckitt and Colman Pty Ltd v. FC of T 74 ATC 4185; (1974) 4 ATR 501 and First Provincial Building Society Ltd v. Federal Commissioner of Taxation (1995) 56 FCR 320; 95 ATC 4145; (1995) 30 ATR 207 (First Provincial), it is now well accepted that a 'subsidy' includes a financial grant made by a government.

Furthermore, the decision in First Provincial confirmed that section 15-10 of the ITAA 1997 (which replaced its antecedent, paragraph 26(g) of the Income Tax Assessment Act 1936 (ITAA 1936)) may apply to payments of a capital nature.

The taxpayer is being provided funding under an agreement with the State Government. The agreement refers to the funding as 'financial assistance'.

It is considered that the financial assistance provided under the agreement constitutes a 'subsidy' for the purposes of section 15-10 of the ITAA 1997.

The issue is then whether the subsidy has been received in relation to carrying on a business. Hill J in the First Provincial case considered the meaning of the words 'received in relation to carrying on a business'. He stated that the receipt of the subsidy must relate to the activities of the business which are directed to the gaining or producing of assessable income.

As His Honour was discussing the antecedent of section 15-10 of the ITAA 1997, that is, paragraph 26(g) of the ITAA 1936, it is important to note that the former provision contained the words '... received in or in relation to carrying on of a business ... (emphasis added)'. When the provision was incorporated into the ITAA 1997, it was rewritten as a bounty or subsidy 'you receive in relation to carrying on a business.'

In the First Provincial case judgement, Hill J specifically discussed the relationship between the terms 'received in' and 'or in relation to'. This has direct relevance to the interpretation of section 15-10 of the ITAA 1997 as the rewrite of the provision only contained the latter phrase. Hill J stated:

. . . the word "in" means "in the course of" and requires a direct relationship to exist between the bounty, on the one hand, and the carrying on of the taxpayer's business, on the other. The second limb comprehends a bounty or subsidy received "in relation to" the carrying on of the taxpayer's business. These words no doubt are sufficiently wide to cover the first limb, but were obviously intended to extend it. Thus the relationship between the receipt of the bounty on the one hand, and the carrying on of the business, on the other, may be less direct where the second limb is sought to be applied than where the first limb is applied.

It is clear from the First Provincial case, that the scope of the section 15-10 of the ITAA 1997 phrase 'in relation to carrying on a business' is wide. In this instance, the taxpayer is carrying on a business of transporting school children and it is considered that the subsidy is sufficiently linked to the activities of the taxpayer's business to have been made in relation to carrying on of the business.

A bounty or subsidy will not fall within the scope of section 15-10 of the ITAA 1997 if it constitutes 'ordinary income'. Under subsection 6-5(1) of the ITAA 1997 'ordinary income' will be assessable income if it is 'income according to ordinary concepts'.

There is no definition of 'ordinary income' in income tax legislation. In determining whether an amount is ordinary income, the courts have established the following principles:

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what receipts ought to be treated as income must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as statute dictates otherwise

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whether the payment received is income depends upon a close examination of all relevant circumstances; and

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it is an objective test.

Business trading receipts are considered 'ordinary income'. The receipt of the subsidy cannot be said to have resulted from a particular trading activity. A typical trading activity undertaken by the taxpayer would be the receipt of a fare in return for a bus trip. In terms of State financial assistance, ongoing payments made to subsidise student fares (based on a per head or per kilometre basis) would also be considered to have resulted from trading activities.

The primary issue in this instance is the relationship between the payment and the business activities as a bus operator. Examination of this relationship will determine whether the payment is correctly characterised as a gain made in the course of business or trading activities.

It is considered that the payment lacks the necessary connection with the taxpayer's business activities to constitute ordinary income. It is a one-off grant that is not payment by the State government for a particular trading activity undertaken. The payment was made to assist in meeting the costs of capital acquisitions. The subsidy is considered a capital receipt, not ordinary income and therefore, not assessable income under section 6-5 of the ITAA 1997.

The ambit of Section 15-10 of the ITAA 1997 includes payments of a capital nature, in addition to payments of a revenue nature. This is confirmed in the Explanatory Memorandum (EM) to Tax Law Improvement Bill 1997, which states (in reference to section 15-10) '...any bounties or subsidies of a capital nature related to carrying on of business will be assessable under this provision'.

Accordingly, as the payment is a subsidy received by the taxpayer in relation to the carrying on of a business and is not ordinary income it is assessable under section 15-10 of the ITAA 1997.

Year of income:  Year ended 30 June 2003 Year ended 30 June 2004 Year ended 30 June 2005 Year ended 30 June 2006 Year ended 30 June 2007

Legislative References:
Income Tax Assessment Act 1997
   section 6-5
   subsection 6-5(1)
   section 15-10

Case References:
First Provincial Building Society Ltd v. Federal Commissioner of Taxation
   (1995) 56 FCR 320
   95 ATC 4145

Other References:
The Macquarie Dictionary, 3rd Edition

Keywords
Bounties & subsidies
Business income
Capital receipts
Carrying on a business
Government grants income
Grants of financial assistance & funding
Income
Ordinary course of business
Producing assessable income

Business Line:  Business and Personal Taxes Centre of Expertise

Date of publication:  11 July 2003

ISSN: 1445-2782