ATO Interpretative Decision

ATO ID 2005/77

Income Tax

Assessable Income: government grant received under a contract to provide services
FOI status: may be released

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If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Do the amounts received from the government authority constitute assessable income of the taxpayer, a landowner, under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), where the amount is received under an agreement whereby the taxpayer undertakes to provide certain services?

Decision

Yes. The amounts received from the government authority under an agreement whereby the taxpayer undertakes to provide certain services constitute assessable income of the taxpayer under section 6-5 of the ITAA 1997.

Facts

The taxpayer owns land. The taxpayer does not carry on any business on the land. The land has been identified by the Government as land that contains specific vegetation types that require special protection. The Government invited owners of these lands to submit tenders representing the price for which these owners will do conservation work on these lands. The selection of successful tenders will be through a transparent process based on the conservation value of the site, the expected outcomes of the work and the amount of the tender. The more landholder services that are offered as part of the proposed vegetation management plan, the higher the conservation value of the site will be.

The taxpayer submits a successful tender which included a proposed management plan where the taxpayer will provide a number of services over a period of five or ten years. As a successful tenderer, the taxpayer enters into an agreement with the Government authority based on the proposed management plan previously submitted.

Once the agreement is signed, the first payment is forwarded to the taxpayer. The payments for the entire contract are paid over a period of three years. However, these payments are made subject to the submission of an annual report by the landholder for the entire period and successful delivery of the services as specified in the agreement.

In the event that the land is sold prior to the termination date of the agreement, the agreement will come to an end and, if required in writing by the government authority, the taxpayer will be required to refund an amount equal to the contract sum divided by the term of years of the agreement multiplied by the number of years (or proportion thereof) which remained for the agreement to run at the date that the land is sold.

Reasons for Decision

Subsection 6-5(1) of the ITAA 1997 provides that an amount is included in assessable income if it is income according to ordinary concepts (ordinary income). However, as there is no definition of 'ordinary income' in income tax legislation it is necessary to apply principles developed by the courts to the facts of a particular case.

In determining whether a payment has the character of income or capital, regard must be has to the character of the receipt in the hands of the recipient (Scott v. Federal Commissioner of Taxation ( 1966) 117 CLR 514; (1966) 14 ATD 286; (1966) 10 AITR 367; Hayes v. Federal Commissioner of Taxation (1956) 96 CLR 47; (1956) 11 ATD 82; (1956) 4 AITR 248 (Hayes); Federal Coke Co Pty Ltd v. FC of T 77 ATC 4255; (1977) 7 ATR 519).

In MIM Holdings Ltd v. Commissioner of Taxation 97 ATC 4420; (1997) 36 ATR 108 Justices Northrop, Hill and Cooper, relying on Hayes and Reuter v. FC of T 93 ATC 5030; (1993) 24 ATR 527 said that 'amounts paid in consideration of the performance of services will almost always be income'.

In Hayes, the High Court considered two factors as relevant in determining whether an amount is a product of the taxpayer's services (that is, paid in consideration of the performance of services):

•: whether there is an expectation to receive the amount by the taxpayer, and
•: the motive of the payer in paying the amount.

Thus, if the taxpayer had an expectation to receive the amount in return for providing the services and the motive of the government authority is to give the taxpayer a reward or encouragement for providing the services, then the amount is a product of the taxpayer's services and is ordinary income.

The agreement can be properly characterised as one whereby the taxpayer agrees to provide its services to the government authority over the specified period. Accordingly, the amounts received under this contract are ordinary income and is assessable under section 6-5 of the ITAA 1997.

Note: Although the contract spans for a period of 10 years, the payments will all be made in the first three years. Accordingly, a question arises as to when the payments received under this contract are assessable. Taxation Ruling TR 98/1 provides that where non-business income is derived from the provision of personal services by the taxpayer, the income is assessable on a receipts basis. Under the receipts method, income is derived when it is received, either actually or constructively, under subsection 6-5(4) of the ITAA 1997. The effect of that subsection is that income is taken to have been derived by a person although it is not actually paid over, but is dealt with on his/her behalf or as he/she directs. Accordingly, the amounts received under the agreement will be assessable in the income year that they are received.

The funds received are included in the taxpayer's income regardless of whether the taxpayer performs the services themselves or engages the services of a contractor. The authority for this statement is found in the Full Federal Court case of JB Chandler Investment Co Ltd v. FC of T 93 ATC 5182 (1993) 27 ATR 340. That case emphasised that the entering into of an agreement by which a taxpayer is bound to render specified services is sufficient to stamp the consideration received in exchanged for entering into the agreement as income. It is not essential that the taxpayer in fact actively renders any service. The taxpayer is entitled to claim a tax deduction for any deductible expenses incurred.

Date of decision: 24 February 2005

Year of income: Year ended 30 June 2005 Year ended 30 June 2006 Year ended 30 June 2007 Year ended 30 June 2008

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

Case References:
Scott v. Federal Commissioner of Taxation (
   (1966) 117 CLR 514
   (1966) 14 ATD 286
   (1966) 10 AITR 367

Hayes v. Federal Commissioner of Taxation
   (1956) 96 CLR 47
   (1956) 11 ATD 82
   (1956) 4 AITR 248

Federal Coke Co Pty Ltd v. FC of T
77 ATC 4255
(1977) 7 ATR 519

MIM Holdings Ltd v. FC of T
97 ATC 4420
(1997) 36 ATR 108

Reuter v. FC of T
93 ATC 5030
(1993) 24 ATR 527

ATO Interpretative Decisions overturned by this decision
ATO ID 2001/417

Keywords
Capital receipts
Government grants income
Income

Siebel/TDMS Reference Number: 4304181

Business Line: Small Business/Individual Taxpayers

Date of publication: 11 March 2005

ISSN: 1445-2782

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