Edited version of private ruling

Authorisation Number: 1011634664884

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Ruling

Subject: Assessability of a government grant

Is a Government grant considered assessable income?

Yes.

This ruling applies for the following period

Year ending 30 June 2011

Year ending 30 June 2012

The scheme commenced on

1 July 2010

Relevant facts

A private company as trustee for a unit trust applied for, and was successful in receiving, a Government grant.

The object of applying for funding of the project was to provide necessary facilities and equipment to enhance and develop the current business.

The grant will be given in three instalments.

Relevant legislative provisions

Section 6-5 of the Income Tax Assessment Act 1997

Section 6-10 of the Income Tax Assessment Act 1997

Section 15-10 of the Income Tax Assessment Act 1997

Reasons for decision

Ordinary income

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) states:

6-5(1) Your assessable income includes income according to ordinary concepts, which is called ordinary income.

6-5(2) If you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

6-5(3) If you are a foreign resident, your assessable income includes:

(a) the ordinary income you derived directly or indirectly from all Australian sources during the income year; and

(b) other ordinary income that a provision includes in your assessable income for the income year on some basis other than having an Australian source.

6-5(4) In working out whether you have derived an amount of ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct

Clearly the intent of section 6 of the ITAA 1997 is to include in assessable income those receipts which can be categorised as income according to ordinary concepts.

Income according to ordinary concepts is not defined in the ITAA 1997. However, there is a substantial body of case law from which a number of factors have been drawn which indicate whether an amount has the character of income according to ordinary concepts (ordinary income).

A frequent characteristic of income receipts is an element of periodicity, recurrence or regularity, even if the receipts are not directly attributable to services rendered.

The grant received is not considered to be income according to ordinary concepts as it lacks these characteristics and therefore it is not ordinary income and is not assessable under section 6-5 of the ITAA 1997. 

Statutory income

Section 6-10 of the ITAA 1997 states:

6-10(1) Your assessable income also includes some amounts that are not ordinary income.

6-10(2) Amounts that are not ordinary income, but are included in your assessable income by provisions about assessable income, are called statutory income.

6-10(3) If an amount would be statutory income apart from the fact that you have not received it, it becomes statutory income as soon as it is applied or dealt with in any way on your behalf or as you direct.

6-10(4) If you are an Australian resident, your assessable income includes your statutory income from all sources, whether in or out of Australia.

6-10(5) If you are a foreign resident, your assessable income includes:

(a) your statutory income from all Australian sources; and

(b) other statutory income that a provision includes in your assessable income on some other basis other than having an Australian source.

Bounties and subsidies

Bounties and Subsidies are considered statutory income.

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.

The Macquarie Dictionary (2^nd edition) defines 'bounty' as:

A premium or reward, especially one offered by a government.

A subsidy is defined as:

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

The meaning of the word 'subsidy' was considered by the Full Federal Court in First Provincial Building Society Ltd v. Federal Commissioner of Taxation (1995) 56 FCR 320; 95 ATC 4145; (1995) 30 ATR 207 (First Provincial). Hill J (with whom Black CJ and Carr J agreed) stated that, in this context, the word means financial assistance given by the Crown and quoted with approval the following statement by Windeyer J in place Placer Development Ltd v. Commonwealth of Australia (1969) 43 ALJR 265; [1969] ALR 801; (1969) 121 CLR 353 at CLR 373:

The word is no longer used in its early sense of a grant to the Crown. It ordinarily means today not aid given to the Crown but aid provided by the Crown to foster or further some undertaking or industry. A subsidy was defined in America fifty years ago as a "legislative grant of money in aid of a private enterprise deemed to promote the public welfare". Shumaker and Longsdorf, Cyclopedic Law Dictionary. This I take to be, broadly speaking the sense in which the word is currently used in Australia

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

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.

You received funding under an agreement with a government department for a building expansion project (and minor equipment purchases). The funding was to provide necessary facilities and equipment to enhance and develop the current business.

The grant received is considered a subsidy as you received a financial grant from a Government.

Received in relation to carrying on a business

The issue is then whether the bounty/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 of a business.'

In the First Provincial case judgment, Hill J. specifically discussed the relationship between the terms 'received in' and '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 phrase 'in relation to carrying on a business' in section 15-10 of the ITAA 1997 is to be interpreted widely.

In your application for funding, it is stated that the business intended to use the grant to:

· extend the existing building

· refurbish existing rooms

· build a new tea room, and

· relocate the files and joinery and install a new telephone system.

It is therefore considered that the funding received is sufficiently connected to your current business activities to have been made in relation to the provision of services.

It does not necessarily mean that the business has to increase the production of assessable income, it only means that the receipt of the subsidy is related to the gaining or producing of assessable income within the business which is the case here.

The grant is considered statutory income and is assessable as a subsidy under section 15-10 of the ITAA 1997.

Assessable recoupment

Subsection 20-20(1) of the ITAA 1997 states an amount is not an assessable recoupment to the extent that it is ordinary income, or it is statutory income because of a provision outside this Subdivision (20A) of the ITAA 1997.

As the grant is considered assessable income under section 15-10 of the ITAA 1997 (statutory income) it is not considered an assessable recoupment.

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