Edited version of private ruling

Authorisation Number: 1011637871314

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fac sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Assessability of Commonwealth funds received under the Program

Issue 1 - Funds received by you under the Program and not for the Proponents

Question 1

Will the Commonwealth funds that are received under the Program by you that are to be used for the improvements to your own works be assessable to you as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No. 

Question 2

Will the Commonwealth funds received under the Program by you that are to be used for your own works (that are not payments for the acquisition of rights) be assessable to you as statutory income under section 15-10 of the ITAA 1997?

Answer

Yes. 

Issue 2 - Funds received by you for the acquisition of rights held by you

Question 3

Will the Commonwealth funds received under the Program by you for the acquisition of rights held by you be assessable to you as a capital gain under section 104-10 of the ITAA 1997?

Answer

Yes.

Issue 3 - Funds provided to you under the Program for proponents

Question 4

Will the Commonwealth funds received under the Program by you that are to be provided to the proponents in accordance with that program be assessable to you as ordinary income under section 6-5 of the ITAA 1997?

Answer

No.

Question 5

Will the Commonwealth funds received under the Program by you that are to be provided to the proponents in accordance with that program be assessable to you as statutory income under section 15-10 of the ITAA 1997?

Answer

No.

Question 6

Will the Commonwealth funds received under the Program by you that are to be provided to the proponents in accordance with that program be assessable to you as statutory income under Subdivision 20-A of the ITAA 1997?

Answer

No.

Question 7

Will the Commonwealth funds received under the Program by you that are to be provided to the proponents in accordance with that program be assessable to you as a capital gain under section 102-5 of the ITAA 1997?

Answer

No.

Question 8

How and when will the funds be treated for taxation purposes by the proponents?

Answer

The ATO cannot provide you with a ruling in respect of the taxation matters of other entities. However we suggest the application for a Class Ruling as the best means to provide certainty for the proponents about the taxation treatment of the funds to be received by them.

This ruling applies for the following period

1 July 2010 to 30 June 2011

1 July 2011 to 30 June 2012

1 July 2012 to 30 June 2013

1 July 2013 to 30 June 2014

The scheme commenced on

1 July 2010

Relevant facts

You are considering entering into a Program with the Commonwealth of Australia. Under the Program, you will receive funding from the Commonwealth. The Program has been established to acquire rights that arise as a result of certain works undertaken.

You will enter into a funding agreement with the Commonwealth to give effect to the Program. The agreement provides for the acquisition of rights by the Commonwealth.

There are five main sub-projects that the funding will be provided for. Under the agreement, part of the funding will be retained for two of those sub-projects and used by you in accordance with the terms of the funding agreement and the guidelines.

The remainder of the funds are for the proponent's rights and for infrastructure works to be carried out in accordance with the agreement and the guidelines.

All those who stand to gain funding under the Program will be required to return some of their rights to the Commonwealth, with the amount having been determined on a sub-project by sub-project basis.

You will only receive payment of the funds from the Commonwealth if you comply with the obligations in the funding agreement and the related guidelines.

The funding agreement provides that you must perform the activity under the agreement. The schedule provides that in conducting the activity, you must perform the work and achieve the milestones that are specified. The activity also includes several specified elements that must be completed.

You are required to ensure that the proponents carry out their projects within the period stated, diligently, effectively and to a high professional standard, and in good faith so as to achieve the objectives of the arrangement. The proponent's projects include the project as outlined.

You must spend the funding in accordance with the agreement, and must ensure that each proponent spends the funding in accordance with the agreement. You may only release funding to a Proponent who has complied and is complying with its contract with you. You also only release the funding to proponents who hold the certain rights and have the capacity to enter into a contract with you to assign the rights to you and have entered into a contract with you to undertake works set out in the agreement.

The funding agreement outlines that the funding will be paid in six separate instalments, the first being upon the signing of the agreement. The remaining five payments will be paid upon the completion of the relevant milestones as specified to the satisfaction of the Commonwealth.

The Commonwealth has the discretion to withhold, suspend, or demand repayment of the funds if you does not meet it's obligations under the funding agreement.

The funds paid to you by the Commonwealth for the Proponent's projects must be held in accordance with the agreement by you. You are required to hold the funds received for yourself and the Proponent's projects in separate bank accounts. These bank accounts must be established solely for the purposes of accounting for, and administering the funds, and must be separate from your other operational accounts. You are also required to keep financial accounts and records, and to keep a separate account ledger for each proponent, clearly identifying the funds received for each proponent.

The funding agreement provides that the contracts between you and the Proponents must include certain clauses as outlined.

If a Proponent has breached its contract with you then you may be required to repay an amount of funds that does not include any amount of funds equivalent to the agreed value of the certain rights assigned to the Commonwealth in relation to the proponent's project.

In the event of termination of the contract for default the agreed value of the rights assigned to the Commonwealth is excluded from any funds that may be recovered by the Commonwealth.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Subsection 6-5(1)

Income Tax Assessment Act 1997 Section 15-10

Income Tax Assessment Act 1997 Section 20-20.

Income Tax Assessment Act 1997 Subsection 20-25(1)

Income Tax Assessment Act 1997 Section 102-5

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Subsection 108-5(1)

Income Tax Assessment Act 1997 Section 116-20

Income Tax Assessment Act 1997 Subsection 116-40(1)

Income Tax Assessment Act 1997 Subsection 118-37(2)

Income Tax Assessment Act 1997 Section 118-37

Income Tax Assessment Act 1997 Paragraph 118-37(2)(a)

Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision

Issue 1 - Funds received by you under the Program and not for the Proponents

Question 1 - Section 6-5 - Income according to ordinary concepts

Summary

The funding received under the Program by you that are for rights and for the improvements to your infrastructure will not be assessable to you as ordinary income under section 6-5 ITAA 1997 as it is not income according to ordinary concepts.

Detailed Reasoning

Under subsection 6-5(1) of the ITAA 1997 an amount received by a taxpayer is included in assessable income if it is income according to ordinary concepts. There are a number of principles developed by the courts that assist in determining if an amount is income according to ordinary concepts.

In Scott v. Federal Commissioner of Taxation (1966) 117 CLR 514, Windeyer J stated at CLR 527:

'Whether or not a particular receipt is income depends upon its quality in the hands of the recipient.'

In G.P. International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation (1990) 170 CLR 124; 90 ATC 4413; (1990) 21 ATR 1 (GP International Pipecoaters) the High Court stated at CLR 138; ATC 4420; ATR 7 that:

'To determine whether a receipt is of an income or a capital nature, various factors may be relevant. Sometimes, the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence, sometimes, by the character of a right or thing disposed of in exchange for the receipt, sometimes by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business'

The regularity and periodicity of a receipt may indicate that the receipt is income. However, this is generally not a decisive consideration (see FC of T v. Dixon (1952) 86 CLR 540 at 568). Where a recipient provides consideration for a payment, the nature of that consideration is generally taken to be the nature of that payment (see (Federal Coke Co Pty Ltd v. Federal Commissioner of Taxation (1977) 34 FLR 375). However, it is possible that a receipt is not in exchange for, or in respect of, any right or thing disposed of.

Where the taxpayer is carrying on a business, the scope of the taxpayer's business and the taxpayer's purpose in engaging in a transaction are important means of determining the character of the receipt. Other matters that the Courts, over the years, have considered to be important are:

· whether the amount is the product of any employment, services rendered, or any business (FC of T v. Harris 80 ATC 4238 at 4241; (1980) 10 ATR 869 at 873, Hayes v. FC of T (1956) 96 CLR 47 at 54);

· whether the amount is paid to supplement or replace an amount of income or profits so as to take on the character of the substituted or supplemented amount (FC of T v. Dixon (1952) 86 CLR 540; [1952] HCA 65); and

· in the case of an individual, whether there is an expectation of receiving an amount on a regular basis, so that the recipient is able to depend upon the amount for his or her regular expenditure (FC of T v. Dixon (1952) 86 CLR 540; [1952] HCA 65).

Factors 2 and 3 are not applicable in the present case. Factor 1 can be seen to involve similar matter to those considered in GP International Pipecoaters.

Thus, a profit or gain made in the ordinary course of the recipient's business is included in ordinary income: see and Westfield Ltd v. FC of T (1991) 28 FCR 333; [1991] FCA 86; 91 ATC 4234; (1991) 21 ATR 1398. An amount that is a receipt arising as a product or incident of carrying on the recipient's business is included in ordinary income as expressed in Taxation TR 2006/3 at paragraph 15.

Not all receipts by a taxpayer carrying on a business will be income. In First Provincial Building Society Ltd v. Commissioner of Taxation (1995) 56 FCR 320; [1995] FCA 1101; 95 ATC 4145; (1995) 30 ATR 207 (First Provincial), Hill J, said that 'it is now well established that not all receipts by a taxpayer carrying on a business will be income'. Hill J said further (FCR 325; FCA 1101 at paragraph 18; ATC 4148-4149; ATR 211), that the words 'in the ordinary course of business' must be understood in their context, and, referring to his comments in Commissioner of Taxation v. Hyteco Hiring Pty Ltd (1992) 39 FCR 502; [1992] FCA 189; 92 ATC 4216; (1992) 23 ATR 270, that:

'it does not follow from these words, as used by the High Court in Myer, that every gain made by a taxpayer carrying on a business and which has some relationship to that business will be taxable. To so hold would be to destroy completely the distinction between capital and income.'

In G.P. International Pipecoaters (Pipecoaters), the Full High Court accepted the proposition that a gift or subsidy to replenish or augment the recipient's capital is capital in nature (and not income under ordinary concepts) because in such a case, the receipt is not a product or incident of the recipient's income producing activity (at 170 CLR 142; 90 ATC 4422; (1990) 21 ATR 10).

In First Provincial, Hill J said that the issue which has to be addressed is the relationship between the receipt and the business activities of the recipient. It will thus be relevant to consider not only the scope and nature of the recipient's business (which involves a wide survey and exact scrutiny of the recipient's activities) but also what the grant is actually for.

In Warner Music Australia Pty Ltd v. FC of T (1996) 70 FCR 197; 96 ATC 5046; (1996) 34 ATR 171, Hill J commented at FCR 210; ATC 5056; ATR 182, that

'in seeking to determine whether an amount is received in the ordinary course of carrying on a business, it will be necessary to examine in detail both the scope and nature of a taxpayer's business.'

Hill J then referred to Gibbs J's analysis in London Australia Investment Company Limited v. FC of T (1977) 138 CLR 106 at 116, citing Western Gold Mines NL v. Commissioner of Taxation (WA) (1938) 59 CLR 729 at 740 and said 'this involves 'a wide survey and an exact scrutiny of the taxpayer's activities.'

Thus, in First Provincial, an ex gratia payment, which assisted the recipient to continue to carry on its building society activities but was not consideration (even in a practical sense) for some trading activities of that recipient, was found not to be income according to ordinary concepts as it lacked the necessary connection with the business/trading activities of the taxpayer to be characterised as a profit or gain made in the course of the company's business as a building society.

Paragraphs 11 to 15 of Taxation Ruling TR 2006/3 set out the ATO view of when section 6-5 of the ITAA 1997 will apply to government grants in specific circumstances not presently relevant.

Application to your circumstances

The program has been established to provide funds for the acquisition of rights and for the upgrade of the infrastructure for certain purposes. The funds to be received by you are consideration under the agreement for and are to be apportioned to these purposes.

a) Funds that are not for the acquisition of rights

You are a private co-operative responsible for providing commodity delivery and associated services to its customers through the day to day operation of the scheme and particularly your infrastructure. The funds received under the Program will materially assist it in the conduct of these activities.

The receipt of funds under this program is an unusual and once off receipt by way of subsidy from the Government to improve your capital infrastructure. In Pipecoaters the High Court discussed the proposition that an amount received by way of a gift or subsidy to replenish or augment the payee's capital is a receipt of a capital nature. In such a case, the receipt cannot fairly be said to be the product or incident of the payee's income producing activity. However this is not the case when the circumstances show that the payment is received in consideration of the performance of a contract, the performance of which is the business of the recipient or which is performed in the ordinary course of the recipient's business.

In this case, as in the circumstances in First Provincial, the funds are neither consideration for some trading or business activities of yours or a product of such activities. It is not for the performance of a contract which is the business of yours or performed in the ordinary course of that business. The receipt of the funds lacks the necessary connection with your business and trading activities required for them to be characterised as a profit or gain made in the course of those activities.

The funds are therefore capital in nature and not derived as ordinary income.

(b) Funds under the Program for acquisition of rights

Where a recipient provides consideration for a payment, the nature of the consideration is generally taken to be the nature of the payment (Federal Coke Co Pty Ltd v. Federal Commissioner of Taxation (1977) 34 FLR 375).

The consideration provided by you is the permanent transfer of a right. Therefore, the nature of the right transferred is relevant in determining the nature of the receipt under the agreement.

The certain rights you are transferring are defined by relevant legislation. That act confers that the rights contain valuable benefits to its holder.

The rights that you hold in your own right are valuable assets that forms part of your business structure and are capital in nature. The receipt is for the transfer of a capital asset being the rights. It is capital in nature and not assessable as ordinary income under section 6-5 of the ITAA 1997.

Question 2 - Section 15-10 - bounty or subsidy

Summary

The funds received under the Program by you that are to be used for your infrastructure works and not for the acquisition of rights are assessable to you as statutory income under section 15-10 of the ITAA 1997 because they are a bounty or subsidiary received in relation to carrying on your business.

Detailed Reasoning

Section 15-10 of the ITAA 1997 provides that 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.

Bounty or subsidy

The terms 'bounty' and 'subsidy' are not defined in income tax legislation. The word 'subsidy', as noted by Windeyer J in Placer Development Ltd v. Commonwealth of Australia (1939) 121 CLR 353, derives from the Latin 'subsidium' meaning 'an aid or help'. The Macquarie Dictionary 2001, rev. 3rd edn, defines subsidy as including 'a grant or contribution of money'. The ordinary meaning adopted by case law is aid provided by the Crown (government) to foster or further some undertaking or industry.

Following the decisions in The Squatting Investment Co Ltd v. Federal Commissioner of Taxation (1953) 86 CLR 570, Reckitt and Colman Pty Ltd v. Federal Commissioner of Taxation (1974) 4 ATR 501; 74 ATC 4185 and First Provincial Building Society Ltd v. Commissioner of Taxation (1995) 56 FCR 320; 95 ATC 4145; (1995) 30 ATR 207 (First Provincial ), it is accepted that a 'subsidy' or 'bounty' includes payments of financial assistance by government. It would not however include amounts provided for the acquisition of a capital asset.

Regulation 3A(1) of Financial Management and Accountability Act 1997 (FMA Act) defines a 'grant' for the purposes of the Commonwealth Grant Guidelines (CGGs) as an arrangement for the provision of financial assistance by the Commonwealth:

· under which public money is to be paid to a recipient other than the Commonwealth; and

· which is intended to assist the recipient achieve its goals; and

· which is intended to promote 1 or more of the Australian Government's policy objectives; and

· under which the recipient is required to act in accordance with any terms or conditions specified in the arrangement.

The AGS Legal Briefing No 83 (17 August 2010): Grants and funding Programs: Legal Issues page 7 discussion on grants programs suggests that:

'……if the prime focus is the enabling of an activity which also promotes government policy objectives, it can generally be treated as grant funding."

Received in relation to carrying on a business

A bounty or subsidy will be received in relation to carrying on a business when there is a real connection between the receipt and the carrying on of the business and this connection may be direct or indirect. Taxation Ruling TR 2006/3, at paragraphs 100-101 suggests that this principle was established in First Provincial. In First Provincial, the taxpayer was carrying on a business as a building society and was required by legislation to contribute to a contingency fund to provide protection to persons who deposited moneys with permanent building societies. The contingency fund was wound up when a new national scheme for the supervision and regulation of building societies was established. The relevant legislation was amended to provide for the payment of the gross assets of the contingency fund into consolidated revenue and to pay certain amounts out of consolidated revenue to each continuing building society named in the Schedule to the amending Act. An amount of $1.92m was distributed to the taxpayer. Hill J found that although the payment lacked the necessary connection with the business activities of the applicant to constitute income in ordinary concepts, it was received in relation to carrying on a business and formed part of the taxpayer's assessable income under paragraph 26(g) of the Income Tax Assessment Act 1936 (ITAA 1936).

In applying the elements of paragraph 26(g) to the facts of that case, Hill J (at 95 ATC 4145 at 4155; (1995) 30 ATR 207 at 218) said:

'In a real sense…the payment assists the applicant to continue to carry on its building society activities and can thus be said to have been made in relation to the carrying on of its business…

In my opinion, the present is a case where there is a real relationship between the amount paid by the Queensland Government, on the one hand, and the carrying on by the applicant of its business as a building society on the other, so that the amount forms part of the applicant's assessable income under s26(g) [of the ITAA 1936].'

Paragraph 26(g) of the ITAA 1936 was rewritten as section 15-10 of the ITAA 1997. Section 15-10 of the ITAA 1997 and paragraph 26(g) of the ITAA 1936 differ in 3 aspects:

· Section 15-10 does not include the redundant exemption for petroleum research subsidies;

· Section 15-10 does not deem the bounty or subsidy to be part of the proceeds of the business. Those words were inserted to ensure that bounties and subsidies were treated as income from personal exertion for the purposes of the ITAA 1936. The distinction between income from personal exertion and income from property is not relevant in the ITAA 1997; and

· Section 15-10 only applies to bounties and subsidies that are not ordinary income.

These changes do not affect the substantive application of the provision and accordingly, it is considered that the guidance provided by the Courts regarding paragraph 26(g) of the ITAA 1936 is equally relevant for section 15-10 of the ITAA 1997. This view is confirmed in Re Plant v. FCT [2004] AATA 1296; 2004 ATC 2364; (2004) 58 ATR 1070.

'In relation to'

The expression 'in relation to' was considered by Hill J in First Provincial. His Honour said that the expression 'in relation to', in the context of a subsidy received by a taxpayer carrying on a business, was sufficiently wide to cover a direct relationship between the receipt on the one hand and the carrying on of the taxpayer's business on the other as well as a less direct relationship. His Honour said that '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'. He referred to McHugh J in O'Grady v. Northern Queensland Company Limited (1990) 169 CLR 356 (O'Grady) who said at CLR 376 that 'the prepositional phrase "in relation to" is indefinite. But, subject to any contrary indication derived from its context or drafting history, it requires no more than a relationship, whether direct or indirect, between two subject matters' … 'the words 'in relation to' require a connection or association' … 'what connection or association will be sufficient…must be a matter of judgement on the facts of each case...as long as the connection is not so remote as to be insignificant'. Hill J echoed the comments made in O'Grady in stating that 'If the relationship were merely a remote one…[the provision] would have no operation. 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'.

Therefore what is required for a bounty or subsidy to be received in relation to carrying on a business is that there is 'a relationship' to the carrying on of a business that is not so remote as to be insignificant. As well the use of the expression 'any relationship' by Hill J and the conclusion that the relationship may be indirect suggest that there is no requirement that the relationship be the dominant or main relationship. The degree of the connection will be a matter of judgement on the facts of each case (see O'Grady (1989-90) 169 CLR 356 at 376). However this would not extend to a receipt that had only a relationship to the business rather than carrying on a business. In First Provincial Hill J said that the words 'carrying on' of a business makes it clear that a bounty or subsidy received merely in relation to the commencement of a business (or the cessation of the business) would not be caught.

Application to your circumstances

The Commonwealth funds received under the Program is a grant provided by the government to provide financial assistance to you to implement projects for specific purposes. However the receipt of funds for the acquisition of the rights is a receipt for the consideration provided by you under the contract and is not financial assistance in the required sense.

Therefore the funds received by you that are not for the acquisition of rights are a bounty or subsidy for the purposes of section 15-10 of the ITAA 1997.

As noted above you are carrying on business operating an infrastructure scheme and in particular its infrastructure for the delivery of goods and associated services for its customers. Its business includes acquisition, construction and improvement of the infrastructure, the ownership and management of certain rights and licences. The infrastructure is an essential and central element in carrying on its business.

The receipt of the grant funds and their application for upgrading the infrastructure will provide material assistance to you in carrying on your business. They will therefore be received in relation to carrying on a business as required by section 15-10 of the ITAA 1997.

Conclusion

Accordingly the funds received under the Program by you that are to be used for your infrastructure works and not for rights are assessable to you as statutory income under section 15-10 of the ITAA 1997 because they are a bounty or subsidiary received in relation to carrying on of your business.

The amount that will be derived and included in your assessable income for an income year under section 15-10 of the ITAA 1997, will be so much of the grant that you have expended, or legally committed for expenditure, in that income year in accordance with the funding agreement.

Issue 2 - Funds received by you for the acquisition of rights held by you

Question 3 - Capital gains tax

Summary

The funds received under the Program by you that are for the acquisition of rights held by you will assessable as a capital gain under section 104-10 of the ITAA 1997.

Detailed Reasoning

Section 104-10 of the ITAA 1997 states that CGT event A1 happens if you dispose a CGT asset.

A CGT asset is defined in subsection 108-5(1) of the ITAA 1997 as:

· any kind of property; or

· a legal or equitable right that is not property.

The rights are statutory rights, therefore they are CGT assets within the definition of a CGT asset under subsection 108-5(1) of the ITAA 1997.

Furthermore, each right is a separate legal right and is a separate CGT asset for the purposes of subsection 108-5(1) of the ITAA 1997.

CGT event A1 under section 104-10 of the ITAA 1997 will happen when the contract between you and the Commonwealth Government for the transfer of the rights held by you is entered into.

A capital gain is made if the capital proceeds from the disposal of a CGT asset exceed the asset's cost base. A capital loss is made if the capital proceeds from the disposal of a CGT asset are less than the asset's reduced cost base (subsection 104-10(4) of the ITAA 1997).

The capital proceeds from CGT event A1 happening to the rights is the part of the payment you receive from the Commonwealth Government for the permanent transfer of the rights.

If you receive a payment in connection with a transaction that relates to more than one CGT event, the capital proceeds from each event are so much of the payment as is reasonably attributable to that event (subsection 116-40(1) of the ITAA 1997).

Issue 3 - Funds provided to you under the Program for proponents

Question 4 - Section 6-5 - Income according to ordinary concepts

Summary

The funds received under the Program by you that are to be applied the proponents in accordance with that program are not assessable to you as ordinary income under section 6-5 of the ITAA 1997 as you do not have a beneficial entitlement to those funds.

Detailed Reasoning

As discussed at question 1, under subsection 6-5(1) of the ITAA 1997 an amount received by a taxpayer is included in assessable income if it is income according to ordinary concepts.

For an amount to be included in assessable income under section 6-5 of the ITAA 1997 as income under ordinary concepts, the taxpayer must have a beneficial entitlement to it: see Taxation Determination TD 2008/9 Income tax: are amounts mistakenly paid as salary or wages to employees (or as income support payments or worker's compensation amounts to persons), to which they are not beneficially entitled, but are obliged to repay, 'ordinary income' under section 6-5 of the Income Tax Assessment Act 1997?.

In Taxation Case T44 - 20 June 1986 86 ATC 366, the Board of Review considered the position of an entity which collected amounts for services provided by the taxpayer, as agent for the taxpayer. Included in the taxpayer's arguments as to why the amounts should be assessable to the (agent) entity, was that the entity had a contractual entitlement to receive the money, and was entitled to deal with the amounts it received in the course of its agency in a particular way. However, the Board found in favour of the Commissioner and held that moneys generated on account of the taxpayer, and paid to, his agent and applied in accordance with an agreement between the taxpayer and his agent constituted assessable income in the hands of the taxpayer.

A similar conclusion was reached by the Federal Court in Zobory v. FC of T (1995) 64 FCR 86; 95 ATC 4251; (1995) 30 ATR 412 in relation to amounts in which the taxpayer had no beneficial interest. At FCR 89; ATR 414; ATC 4253, Burchett J stated that:

The fundamental principle which must be the starting point for a consideration of this case is the rule that the general provisions of the Income Tax Assessment Act 1936 (Cth) are directed to income to which a taxpayer is beneficially entitled MacFarlane v. FC of T (1986) 13 FCR 456; 67 ALR 624; Countess of Bective v. FC of T (1932) 47 CLR 417; Richardson v. FC of T (1932) 48 CLR 192; Liedig v. FC of T (1994) 121 ALR 561; 94 ATC 4269 at 4276; Vegners v. FC of T 91 ATC 4213.

Application to your circumstances

A number of clauses set out the terms and conditions for the payment of funds for the proponents to you and include the use, payment and recovery of those funds.

You will only receive payment of the funds from the Commonwealth if you comply with the obligations in the funding agreement and the related guidelines.

The funding agreement provides that you must perform the activity under the agreement. The schedule provides that in conducting the activity, you must perform the work and achieve the milestones that are specified. The activity also includes several specified elements that must be completed.

You are required to ensure that the proponents carry out their projects within the period stated, diligently, effectively and to a high professional standard, and in good faith so as to achieve the objectives of the arrangement. The proponent's projects include the project as outlined.

You must spend the funding in accordance with the agreement, and must ensure that each proponent spends the funding in accordance with the agreement. You may only release funding to a Proponent who has complied and is complying with its contract with you. You also only release the funding to proponents who hold the certain rights and have the capacity to enter into a contract with you to assign the rights to you and have entered into a contract with you to undertake works set out in the agreement.

The funding agreement outlines that the funding will be paid in six separate instalments, the first being upon the signing of the agreement. The remaining five payments will be paid upon the completion of the relevant milestones as specified to the satisfaction of the Commonwealth.

The Commonwealth has the discretion to withhold, suspend, or demand repayment of the funds if you does not meet it's obligations under the funding agreement.

The funds paid to you by the Commonwealth for the Proponent's projects must be held in accordance with the agreement by you. You are required to hold the funds received for yourself and the Proponent's projects in separate bank accounts. These bank accounts must be established solely for the purposes of accounting for, and administering the funds, and must be separate from your other operational accounts. You are also required to keep financial accounts and records, and to keep a separate account ledger for each proponent, clearly identifying the funds received for each proponent.

The funding agreement provides that the contracts between you and the Proponents must include certain clauses as outlined.

If a Proponent has breached its contract with you then you may be required to repay an amount of funds that does not include any amount of funds equivalent to the agreed value of the certain rights assigned to the Commonwealth in relation to the proponent's project.

In the event of termination of the contract for default the agreed value of the rights assigned to the Commonwealth is excluded from any funds that may be recovered by the Commonwealth.

You are not entitled to retain any funds that are provided for the proponents and may only make payments from those funds as required under the agreement. It must strictly account for the application of the funds under the agreement and return any unused funds to the Commonwealth.

It is considered that you have no beneficial interest in the funding received from the Commonwealth under the Program for payment to the Proponents and therefore will not be assessable income of yours under section 6-5 of the ITAA 1997.

Question 5 - Section 15-10 - bounty or subsidy

Summary

The funds received under the Program by you that are to be applied by the proponents in accordance with that program will not be assessable to you as statutory income under section 15-10 of the ITAA 1997 as you do not have a beneficial entitlement to the funds and therefore the receipt of the funds is not a bounty or subsidy received in relation to carrying on a business.

Detailed Reasoning

As discussed at length in question 2, section 15-10 of the ITAA 1997 provides that 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.

Application to your circumstances

As concluded at question 2, funding received under the Program falls within the meaning of the terms 'bounty' or 'subsidy'.

However, as concluded in question 4, you are not the beneficial owner of the funding that it receives under the Program for distribution to the Proponents.

Due to this, it cannot be said that you receive the funding under the Program in relation to carrying on its business in the required sense, and therefore it will not be included in assessable income as a bounty or subsidy under section 15-10 of the ITAA 1997.

Question 6 - Assessable recoupment under Subdivision 20-A

Summary

The funds received under the Program by you that are to be applied by the proponents in accordance with that program will not be assessable to you as statutory income under Subdivision 20-A of the ITAA 1997 as there is no beneficial entitlement to the funds and there is no relevant deduction as required under the Subdivision.

Detailed Reasoning

Subdivision 20-A of the ITAA 1997 provides that certain amounts received in an income year may be considered to be an assessable recoupment and included in taxable income.

Subsection 20-25(1) of the ITAA 1997 provides that a recoupment of a loss or outgoing includes:

· Any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery, however described; and

· A grant in respect of the loss or outgoing.

In broad terms, to be an assessable recoupment section 20-20 of the ITAA 1997 requires that an amount be received as a recoupment for a loss or outgoing for which a deduction is available. It also provides that an amount is not an assessable recoupment to the extent that it is ordinary income or statutory income under a provision outside the Subdivision.

Application to your circumstances

The funding received by you under the Program received is a government grant and as such is a recoupment of a loss or outgoing as defined in subsection 20-25(1) of the ITAA 1997.

In this present application, although you will receive the funding under the Program, the amounts will not be included as assessable income under sections 6-5 or 15-10 of the ITAA 1997 for the reasons discussed above.

The funding under the Program would be treated as an assessable recoupment in an income year to the extent that it is received as a recoupment for a loss or outgoing for which a deduction is available and it otherwise satisfied the requirements of section 20-20 of the ITAA 1997.

However, as concluded at question 4, you do not have beneficial entitlement to the funds it receives under the Program for payment to the Proponents. Due to this, you will not be entitled to a deduction for any of the payments made of those funds. Consequently, no amount of the funds received under the Program by you for payment to the proponents will be an assessable recoupment under Subdivision 20-A of the ITAA 1997.

Question 7 - assessable as a capital gain

Summary

The Commonwealth funds received under the Program by you that are to be applied by the proponents in accordance with that program will not be assessable to you as a capital gain under section 102-5 of the ITAA 1997

Detailed Reasoning

You will acquire a legal right, being the right to receive the funds under the Program. This right is a CGT asset (subsection 108-5(1) of the ITAA 1997).

CGT event C2 happens when that right is satisfied by you receiving your share of the funds (subsection 104-25(1) of the ITAA 1997.

A capital gain or capital loss may arise when CGT event C2 happens if the capital proceeds are more than the assets cost base or the capital proceeds are less than the assets reduced cost base (subsection 104-25(3) of the ITAA 1997). The amount of funds you receive under the Program will be the capital proceeds pertaining to the legal right that has been satisfied (paragraph 116-20(1)(a) of the ITAA 1997). 

An exemption is available if a capital gain or capital loss arises from receiving a payment as reimbursement or payment of expenses under a scheme established by an Australian government agency under an enactment or an instrument of a legislative character (paragraph 118-37(2)(a) of the ITAA 1997). 

You will receive the grant funds under the Program. The funds will be received as either a reimbursement or payment of your expenses incurred in undertaking the Program.  

The grant funds will be paid under a scheme established by an Australian government agency. Specifically, the Program is established by the Commonwealth Government, and administered by a Government Department.  

The Program is established under an enactment or an instrument of a legislative character.

As all of the conditions for the exemption have been met, any capital gain or capital loss arising from CGT event C2 is disregarded under paragraph 118-37(2)(a) of the ITAA 1997.  

Therefore, no capital gain from the receipt of the funding under the Program will be included in your assessable income under section 102-5 of the ITAA 1997. 

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).