Edited version of private ruling

Authorisation Number: 1011540037144

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Ruling

Subject: Government Grant

Question 1

Will the Government Grant funding that was received be assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Will the Government Grant funding that was received be assessable under section 15-10 of the ITAA 1997?

Answer

No

Relevant facts and circumstances

The company currently carries out the administration and management of a number of private medical practices in Australia. Each location includes medical staff. All operations are conducted from rented premises refurbished to suit.

The company became aware of a possible government opportunity or grant to create or commence and manage a new business.

The company has signed a contract to purchase a property in Australia and that all the funds received from the Government Grant have been placed in a lawyer's trust fund ready for settlement.

The company applied for and was successful in obtaining capital funding under the Program to assist with the purchase of property for the new business venture.

There are a number of conditions attached with the funding which advise that the capital funding cannot be used for:

· ongoing operating costs including rent, utilities, salaries and building maintenance;

· professional services;

· maintenance of equipment; and

· the purchase of consumables for equipment.

The conditions of the funding have been met by the company. The company has used the funds to acquire property in Australia upon which to build and operate the business. The remaining costs of establishing and running the business (i.e. fit out, remaining costs for the property, ongoing reporting requirements, make good) will be funded by the company itself.

Other conditions of the funding include the requirement for an audit of funds received, which have resulted in the following:

· the setup of a separate bank account from the business's existing trading bank account;

· the set up of a separate division in the company accounts that show the grant monies received and expenditure associated with it; and

· maintenance of a separate system of filing for all documentation relating to the grant and the business.

Your arguments and references

The Government has offered the GPI ("Government payments to industry") under the Program to the company for it to consider carrying on another business in the industry which is vastly different to its existing business operations, details of which are provided above. The GPI is preliminary to the business being established, as it is to assist with the commencement of the business, therefore, it is not a receipt in the ordinary course of trade or for which business is being carried on. Therefore, it is not ordinary income under section 6-5 and is not received in relation to carrying on a business under section 15-10. The funds are, therefore, not assessable. (Taxation Ruling TR 2006/3 paragraphs 56-57).

The payment is received by the company for the new business that will be operated under its existing business structure, however, will be a separate operation independent of other business being performed by the company (TR 2006/3 paragraph 61).

The payment was not received as a normal incident of the recipient's other existing business, nor was it paid for a purpose for which the existing business is carried on. The payment is for the creation of a new profit earning opportunity under the business's existing company structure, therefore, taking into account the nature of the item it creates, is a capital receipt. The receipt of the payment is capital in nature and, therefore, is not assessable as ordinary income under section 6-5 (TR 2006/6 para 62).

The bounty was not 'received in relation to carrying on a business' as there is no real connection between the payment and carrying on the business, as the business has not yet commenced. Therefore, the payment was not received in relation to carrying on a business as the payment is for the creation of a new profit earning venture within the existing company structure. Thus, the payment is not assessable under section 15-10 as it is not received in relation to carrying on of the business (TR 2006/3 para 63).

In addition, we note the decision in Plant v. FC of T 2004 ATC 2364 (Plant) does not apply as this grant was for the extension of existing facilities (see paragraphs 18 and 19 in Plant). It is also submitted that there is no necessity to form a new structure. It is sufficient to show that the grant is related to a new business and not connected to an existing business operated by the taxpayer. Throughout the Income Tax Assessment Act 1997 there are many references to a single entity conducting multiple businesses (see non commercial losses for example).

Relevant legislative provisions

Income Tax Assessment Act 1997 section 15-10

Income Tax Assessment Act 1997 section 6-5.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Issue 1

Ordinary income

Subsection 6-5(1) of the ITAA 1997 provides that the assessable income of a taxpayer includes income according to ordinary concepts, however, the legislation does not define 'income according to ordinary concepts'. Instead, a substantial body of case law has evolved to identify various factors that indicate the nature of ordinary income.

Periodicity, recurrence or regularity are some of the main determinants of ordinary income. The funding that the company will receive are once-only, lump-sum payments and lack the regularity that typifies ordinary income.

In addition, the funding is not received in relation to the carrying on of any business activity as the funding will be received before the business commences. Therefore, the funding is not assessable as ordinary income under section 6-5 of the ITAA 1997.

Bounty or subsidy

Section 15-10 of the ITAA 1997 provides that the assessable income includes a bounty or subsidy that you receive in carrying on a business and is not assessable as ordinary income under section 6-5 of the ITAA 1997.

As you have not commenced any business activity the funding is not assessable under section 15-10 of the ITAA 1997.

In TR 2006/3 paragraph 26 specifically states that the Government Payments to GPI made to commence or cease business are not assessable as ordinary income under section 6-5 of the ITAA 1997 or as a bounty or subsidy under section 15-10.

The funding you will receive under the Program is not assessable income under section 6-5 or section 15-10 of the ITAA 1997.

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