Edited version of your private ruling

Authorisation Number: 1012433734013

Ruling

Subject: Assessable income - Grants

Question

Will government funding paid into your account in relation to an agreement between a company related to you (as landowner) and a Government authority be assessable to you under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following period

Year ended 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts and circumstances

You have an Australian business number (ABN). You are not registered for GST.

You carry on a farming enterprise with your spouse. For many years you have had an unwritten lease to carry on the farming enterprise on land owned by a company ('the company') of which your relative is the main director. You are also a director of the company.

You are the lessee of part of the property.

The relevant program is funded by the state and federal governments.

You expressed an interest in the program and officers inspected the property to determine your eligibility. An application was approved in writing and the approval letter enclosed a copy of the final agreement entered into between the company and the government authority in respect of this approval.

This letter also provided that a single funding payment would be made upon receipt of a tax invoice and that if the applicant was not registered for GST this funding amount would need to be recalculated to exclude the GST component.

During the relevant financial year, you supplied the government authority with a tax invoice which included your individual name and individual ABN as the supplier and the tax invoice was for the GST inclusive payment amount.

During the relevant financial year, you received the funding payment. The government authority had insisted that this funding be paid into your individual bank account.

The written agreement in respect of the payment named the company in the heading and included its ABN. You and your relative were listed as landholders and signed the agreement. The General Manager of the government authority also signed the agreement.

The agreement states:

The Landholder agrees to carry out the management actions set out in Schedule Two. The Landholder agrees to comply with the payment schedule in Schedule Three and requirements of Schedule Four.

The word 'landholder' is defined in Schedule four to the agreement.

Schedule three to the agreement provides that a single GST inclusive payment of funding will be made to the landholder by the government authority.

The funding has been provided to carry out the relevant activities over a defined period. The specific authorised activities and management actions that must be undertaken are listed in Schedule two to the agreement.

The contract between the landholder and the government authority specifies the rights and obligations of both landowner and the payer under the agreement. It includes a schedule of management actions the landholder needs to complete to receive payment.

Under the agreement the landholder agrees to provide management services to land it owns over the specified period in return for consideration.

Under the agreement, the landholder must also agree to a covenant on the title of the property for a specified period to ensure that the management actions in the agreement are met. The agreement shows that it was your relative who gave the consent to register a covenant on the title of the property.

You have advised that the activities required under the agreement will be carried out by you through your farming enterprise.

You state that the only reason the company's name was on the agreement was because the government authority wanted a lien over the property to ensure that the work was done.

You have also advised that you do not have the right to bind the company in relation to any legal agreement.

The GST component received in the funding has been placed in a separate bank account pending a determination of who is liable for the GST on the funding received.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Reasons for decision

Summary

You will not be assessable under section 6-5 of ITAA 1997 on the funding that you received on behalf of the company. From the facts provided we have determined that you merely acted as agent for the company and it was the company who was the funding recipient, being contractually obliged to perform services in return for the funding.

Detailed reasoning

An amount is included in assessable income if it is income according to ordinary concepts, which is called ordinary income (section 6-5 of the ITAA 1997). 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.

ATO policy concerning government payments to industry (GPI) is set out in Taxation Ruling TR 2006/3 Income Tax: government payments to industry to assist entities (including individuals) to continue, commence or cease business. At paragraph 84, it provides that ordinary income generally falls within three categories:

· income from providing services;

· income from property; or

· income from carrying on a business.

Whether or not a particular receipt is income according to ordinary concepts depends on its character in the hands of the recipient (GP International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation (1990) 170 CLR 124; [1990] HCA 25; (1990) 21 ATR 1; 90 ATC 4413).

In your case, it is necessary to determine if you received the funding in your own right or as an agent for the company.

Whether an agency relationship exists is a question of fact determined by, among other things, any relevant documentation about the arrangement, the description used by the parties and the conduct of the parties.

In this case, you entered into discussions with the government authority to undertake a land management plan, on land situated on a family property owned by the company.

It is our understanding that only land owners and lessees that have the authority under the lease to enter into a contract with the government authority are eligible to participate in the project. This is because one of the requirements in undertaking the project is to register the plan as a covenant on the title of the property. This covenant is to ensure that the land management actions under the plan are binding on all current and future landholders. The government authority uses the term 'landholder' to refer to both land owners and lessees.

You have advised that while you have an unwritten lease to carry on a farming enterprise on part of the family property you do not have the right to bind the company in relation to any legal agreement.

Therefore, on your own, you would not have been able to enter into an agreement with the government authority in respect of the land management plan. This is confirmed by the fact that even though you were the contact person for the application and undertook the practical steps to obtain the funding, when it came to complying with the requirements of the approval (entering into an agreement and placing a caveat over the property) you had to seek the assistance of your relative.

That is, while you are a director of the company it is your relative, as the main director, who has the controlling interests in the company and also over the family property.

Therefore, while the approval letter was addressed to you, the agreement enclosed with that letter was between the company (as 'landholder') and the government authority. As well, this agreement was signed by both you and your relative as landholders and it was your relative that gave consent to register the land management plan as a covenant on the title of the family property.

It is the company who agrees to be responsible for carrying out the land management actions and has a legal obligation to comply with the payment schedule.

After looking at all the facts it is considered that you are were not acting independently when you entered into the agreement with the government authority. Instead, you and your relative entered into the agreement in your capacity as directors of the company. As company directors you and your relative were acting as agents for the company.

When an agent uses his or her authority to act for a principal, then any act done on behalf of that principal is an act of the principal (GSTR 2000/37).

This means that where an entity acts in the capacity of an agent, the income tax consequences are determined at the level of the principal.

It is not uncommon for government entities to insist that grant funds be paid into a separate bank account to ensure that it is kept separate from working capital.

Therefore, based on the information provided, we consider that you were not acting in your own right when you received the funding from the government authority into your individual bank account. Instead, you received the funding as an agent for the company, who is the actual recipient of the grant funding.

Therefore, you will not be assessable under section 6-5 of ITAA 1997 on the funding that you received from the government authority on behalf of the company.

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