ATO Interpretative Decision

ATO ID 2002/1084

Income Tax

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Issue

Is a taxpayer assessable under section 15-10 of the Income Tax Assessment Act 1997 (ITAA 1997) on a Commonwealth Government grant?

Decision

No. A taxpayer is not assessable under section 15-10 of the ITAA 1997on a Commonwealth Government grant, as it was not received in relation to carrying on a business.

Facts

The taxpayer received a Commonwealth Government grant.

The funds were provided as a contribution towards the capital costs of a heritage project and were to be used for that purpose only.

The funds were used in relation to certain capital costs and infrastructure.

The taxpayer was not in business at the time the payment was received.

A business was to be commenced in the future and would use the infrastructure established as a result of the heritage project.

Reasons for Decision

Section 15-10 of the ITAA 1997 states:

'Your assessable income includes a bounty or subsidy that:

(a)

you receive in relation to carrying on a business; and

(b)

is not assessable as ordinary income under section 6-5.'

Given the decisions in Squatting Investments Co Ltd v. FC of T (1953) 86 CLR 570; (1953) 10 ATD 126; (1953) 5 AITR 496 Reckitt and Colman Pty Ltd v. FC of T (1974) 74 ATC 4185; (1974) 4 ATR 501 and in 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 the government.

Following the decision in First Provincial it is accepted that section 15-10 of the ITAA 1997 ( which replaced paragraph 26(g) of the Income Tax Assessment Act 1936) may apply to payments of a capital nature.

Even though the taxpayer was not carrying on a business at the time the payment was received section 15-10 of the ITAA 1997 can still apply if the payment was received '...in relation to the carrying on of a business' either in the past or in the future.

In looking at the meaning of the phrase ' in relation to the carrying on of a business' Hill J stated that

'...the relationship must be to the "carrying on" of the business. These words may perhaps be understood in opposition to a relationship with the actual business itself. They would make it clear, for example, that a bounty received, merely in relation to the commencement of a business or the cessation of the business, would not be caught. The expression "carrying on of the business" looks, in my opinion, to the activities of that business which are directed towards the gaining or producing of assessable income, rather than merely to the business itself.'

It is not sufficient that the payment be received in relation to the business it must be in relation to the 'carrying on' of that business.

The grant was received to assist the taxpayer with certain capital costs prior to the commencement of any business. It was not paid conditional upon any business being commenced. There was no direct link between the grant and the carrying on of a business.

Even though a business was to be commenced in the future the payment was not made to assist with carrying on the activities of that business by which the taxpayer would gain assessable income. As such, the grant was not received in relation to the carrying on of a business.

Accordingly the grant received by the taxpayer will not be included in their assessable income under section 15-10 of the ITAA 1997.

Year of income:  Year ended 30 June 2002

Legislative References:
Income Tax Assessment Act 1997
   section 15-10

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

Keywords
Income
Government grants income

Business Line:  Small Business/Individual Taxpayers

Date of publication:  30 November 2002

ISSN: 1445-2782