Edited version of private ruling

Authorisation Number: 1011591771248

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Ruling

Subject: Grant

1. Are you assessable under section 15-10 of the Income Tax Assessment Act 1997 (ITAA 1997) on the Government grant?

Yes.

2. Can you claim travel expenses under section 8-1 of the ITAA 1997?

Yes, to the extent to which they are incurred in gaining or producing assessable income.

This ruling applies for the following period

Year ending 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You work as a sole trader. You were awarded a grant for a residency overseas.

The grant provides a sum of money as an advance against expenses to be incurred during the residency. The funding is provided through some government departments. The purpose of the residency is to foster relationships in the creative field. It is not project specific and there maybe a tangible or non tangible outcome. You are required to submit a report at the end of the residency.

You were required to invoice for the advance under your ABN. You were advised that your grant does not cover salaries or fees, so for tax purposes it could be seen as a (forward) reimbursement of expenses. Any monies not spent on expenses have to be returned to the program.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 15-10

Income Tax Assessment Act 1997 Section 8-1

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA of the ITAA 1936, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

The legislative references referred to herein are from the ITAA 1997, unless otherwise stated.

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

Relevant factors in determining whether a payment is ordinary income include whether the payment is for services rendered, such as from personal services, and the character of the payment in the hands of the recipient.

Taxation Ruling IT 2639 defines income from personal services as income that a taxpayer earns predominantly as a direct reward for his or her personal efforts by, for example, the provision of services, exercise of skills or the application of labour.

Other characteristics of income that have evolved from case law include receipts that:

· are earned

· are expected

· are relied upon, and

· have an element of periodicity, recurrence or regularity.

The payment of a 'residency grant'' that you received is not income from personal services. The payment is not earned, as it is not project specific, and it was not expected or relied upon as you had to apply for it and you may not have been successful. The payment also has no element of periodicity, recurrence or regularity, in the respect that it is a one off payment.

Therefore, the character of the payment is not ordinary income under subsection 6-5(1).

Taxation Ruling TR 2006/3 explains the tax implications of government payments to industry (GPIs) to assist entities (including individuals) to continue, commence or cease business. The payments considered in the ruling are bounties, subsidies, grants and rebates paid or funded by the Commonwealth or a state, territory or local government, or government agency.

A grant is assessable under section 15-10 in the income year in which it is received if it is:

· a bounty or subsidy

· received in relation to carrying on a business, and

· not assessable as ordinary income under section 6-5.

Bounty or subsidy

Payments of financial assistance by government are commonly referred to as 'bounties', 'subsidies' or 'grants'. As 'bounty', 'subsidy' and 'grant' are not defined terms, the ordinary meaning of these terms applies.

'Subsidy' is defined as:

1. a direct pecuniary aid furnished by a government to a private industrial undertaking, a cultural organisation, or the like;

2. a sum paid, often in accordance with a treaty, by one government to another, to secure some service in return;

3. a grant or contribution of money'. The ordinary meaning adopted by case law is an 'aid provided by the Crown [government] to foster or further some undertaking or industry'.

'Bounty' is defined to include 'a premium or reward, especially one offered by a government'. When 'bounty' and 'subsidy' are positioned together the compound term is interpreted as describing financial assistance given to assist business.

'Grant' is defined to include 'that which is granted, as a privilege or right, a sum of money, as for a student's maintenance, or a tract of land'. A reference to 'bounty or subsidy' includes a grant that encourages business or trade and also a grant to address a detrimental effect on a business or trade.

Not all government grants are bounties or subsidies for the purposes of section 15-10. It is essential to determine what the grant is actually for. The question as to the nature and quality of any payment must be determined by reference to the agreement or the terms which created in the recipient the right to the government grant. Any factors used to calculate the amount of payment are of marginal, if any, assistance in determining what the payment is for.

In relation to carrying on a business

'Business' is defined in section 995-1 as 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'.

A bounty or subsidy will be 'in relation to' carrying on a business when there is a real connection between the payment and the business. The term 'in relation to' includes within its scope payments that have a direct or indirect connection to the business. As stated by Hill J in First Provincial Building Society Ltd v. Federal Commissioner of Taxation (1995) 56 FCR 320; 95 ATC 4145; (1995) 30 ATR 207 (First Provincial):

The words 'in relation to' are words of wide import. They are capable of referring to any relationship between two subject matters in the present case the receipt of the bounty or subsidy, on the one hand, and the carrying on of the business, on the other.....the degree of connection will be 'a matter of judgment on the facts of each case'... What is necessary, at the least, in the present context is that there be a real connection...the relationship need not be direct, it may also be indirect.

A bounty or subsidy must be related to 'carrying on' the business not merely for commencing or ceasing a business. As stated by Hill J in the First Provincial case:

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 a 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.

In your case, you received a grant as a contribution towards the residency, including airfares, accommodation and general living expenses directly related to the residency. The grant is to facilitate professional development and an individual's program of cultural exchange and does not cover academic study or research. You are to provide the program with a detailed report on the value and effectiveness of the project, including a statement of income and expenditure showing how the grant was spent and also to return any unused part of the residency grant.

The residency grant allowed you a few months overseas working in the creative field. There is a connection between the receipt of the grant and the carrying on of your business.

Therefore, in accordance with section 15-10, your grant is included in assessable income in relation to the carrying on of your business and is not assessable as ordinary income under section 6-5 to the extent that it is not repaid.

Travel expenses

Section 8-1 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

The courts have considered the meaning of 'incurred in gaining or producing the assessable income'. In Ronpibon Tin N.L.Tongkah Compound N.L. v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 4 AITR 236 the High Court stated:

For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to that end. The words incurred in gaining or producing assessable income mean in the course of gaining or producing such income.

A deduction is normally allowable under this section for travel expenses, including accommodation, incurred by a person in connection with him/her earning his/her assessable income. An example of this, given by TR 95/22 is:

A deduction is allowable for the costs incurred by a building worker in undertaking work-related travel. An example is where the building worker attends a seminar interstate. Travel expenses include the costs of accommodation, fares, meals and incidentals.

In general, a payment is considered to be a reimbursement for tax purposes when the recipient is an employee who is compensated exactly for an expense already incurred.

If a payment received from an employer is for an estimated expense, the amount received by the employee is considered to be an allowance (not a reimbursement) and this allowance is to be treated as fully assessable income by the employee.

In your case, however, you are a sole trader, therefore you are required to treat reimbursements paid to you as a grant and this amount is required to be included in your assessable income.

Accordingly, you will be entitled to claim a deduction under section 8-1 for the travel expenses that you have incurred where there is a connection between the travel expenses you incurred and the production of your assessable income.

Substantiation

The deductibility of the expenses is also subject to substantiation requirements. To claim a deduction for the expenses, you will need to keep written evidence to substantiate the expenses (for example receipts).

Subdivision 900-E details what constitutes written evidence. The document or receipt must set out:

· the name or business name of the supplier

· the amount of the expense, expressed in the currency in which it was incurred

· the nature of the goods or services

· the day the expense was incurred.

However, written evidence or receipts do not need to be kept if:

· the Commissioner considers it to be unreasonable for written evidence to be kept, or

· each expense is less than $10; and the total of all expenses is less than $300 for an income year.

In such instances, you can record the expense incurred in a separate document (for example, a diary) and it must set out the same information as the written evidence or receipt.  

Travel records

Section 900-20 requires that a travel record (that is, a travel diary or similar document) must be kept if the expense is for travel away from your home for six nights or more in a row. The travel record must provide the following information:

· the nature of the activity

· the day and approximate time when it began

· how long it lasted, and 

· where it was engaged in.

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