Edited version of your private ruling

Authorisation Number: 1012567728903

Ruling

Subject: Government grant

Question 1

Did the company merely act as an agent for the Unit Trust in relation to the receipt of the government grant, with the Unit Trust being the beneficial recipient of the grant for taxation purposes?

Answer

Yes.

Question 2

Will funding paid under the government grant be assessable to the Unit Trust under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 3

Will funding paid under the government grant be assessable to the Unit Trust under section 15-10 of the ITAA 1997?

Answer

No.

Question 4

Will funding paid under the government grant be assessable to the Unit Trust under the capital gains tax provisions?

Answer

No.

This ruling applies for the following periods

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commences on:

1 July 2011

Relevant facts and circumstances

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· the application for private,

· the lease agreement,

· the government grant application form, and

· the Funding Agreement.

The Unit Trust owns a property.

The Unit Trust leases the property to a company which independently operates a medical practice from the property.

In 2011, the company applied for funding under a program.

The funding was to be used for the expansion and upgrade of the property.

The company applied for the grant on behalf of the Unit Trust.

Upon notification the successful application, the company transferred the funds to the Unit Trust.

The capital works in the program guidelines were undertaken by the Unit Trust.

The capital works were completed in 20XX.

The funding was received in full in 20XX.

The total cost of the project was in excess of the grant funding. The Unit Trust used part of its own capital to fund the project.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 subsection 6-5(2)

Income Tax Assessment Act 1997 section 10-5

Income Tax Assessment Act 1997 section 15-10

Income Tax Assessment Act 1997 Subdivision 20-A

Income Tax Assessment Act 1997 subsection 20-20(3)

Income Tax Assessment Act 1997 section 20-40

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 104-35

Income Tax Assessment Act 1997 section 104-155

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

Income Tax Assessment Act 1997 subsection 110-45(3)

Reasons for decision

Question 1

Before we can consider whether the Unit Trust has derived assessable income, we must consider whether the company was acting as an agent for the Unit Trust.

Under an 'agent agreement' an entity (the agent) may receive a payment from a third party on behalf of another entity (the principal). The relationship of the principal and the agent may arise from agreement or deed (express or implied), by operation of law or retrospectively by the principal's ratification of the acts done by the agent.

The question of whether receipts or gains constitute assessable income in the hands of an agent need only be addressed if those receipts or gains are derived beneficially by that agent. Therefore, an agent who receives an amount which is required to be applied or dealt with on behalf of a principal entity, or as the principal directs, will not need to consider whether they derived any assessable income. This question will fall to the principal.

In this case we consider that the company was acting as an agent for the Unit Trust. Therefore, we need to consider whether the Unit Trust has derived assessable income.

Question 2

Ordinary income

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

Ordinary income is income according to ordinary concepts. Although the expression 'income according to ordinary concepts' is not defined in the ITAA 1997, there is a substantial body of case law from which a number of factors have been drawn to determine whether an amount has the character of income according to ordinary concepts.

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. This view is supported by ATO Interpretative Decision ATO ID 2003/902 which cited the same reasoning in finding that a government grant paid in two instalments to a medical practitioner was not assessable under section 6-5 of the ITAA 1997.

ATO policy concerning government payments to industry is set out in Taxation Ruling TR 2006/3. At paragraph 84 of TR 2006/3, it provides that ordinary income generally falls within three categories:

· income from providing personal services

· income from property, or

· income from carrying on a business.

Application to your circumstances

The grant does not constitute ordinary income. Whilst it will be paid in separate instalments it does not possess the necessary elements of periodicity, recurrence or regularity that are common to receipts of ordinary income.

Further, in terms of TR 2006/3 it does not constitute income from the provision of personal services, is not sourced from property, and has not been derived directly from any usual business activities in relation to either the existing business or from the actual operation of the extended facility.

Accordingly, the grant is not assessable under section 6-5 of the ITAA 1997.

Question 3

Statutory Income - a Bounty or Subsidy

Under section 6-10 of the ITAA 1997 some amounts that are not 'ordinary income' are included in your assessable income due to another provision of the tax law. These amounts are referred to as 'statutory income'. Subsection 6-10(1) of the ITAA 1997 refers to provisions about assessable income - a summary list of these provisions is contained within section 10-5 of the ITAA 1997.

Section 15-10 provides that 'assessable income includes a bounty or subsidy that:

(a) is received in relation to carrying on a business; and

(b) is not assessable as ordinary income under section 6-5.'

To be assessable under section 15-10 of the ITAA 1997 the subsidy must relate to the 'carrying on' of the business, not merely to the commencement or cessation of it. The expression 'carrying on of the business' is limited to the activities of the business which are directed towards the gaining or producing of assessable income rather than merely to the business itself (Paragraph 101 of TR 2006/3).

Application to your circumstances

The funding under the grant does not constitute an assessable bounty or subsidy.

To be considered assessable under section 15-10 of the ITAA 1997 the receipt must be in relation to the carrying on of a business.

The Unit Trust owns the property and has been allocated government funding to make improvements to the building. The Unit Trust will not be operating the relevant business; this will be conducted by the company.

The Unit Trust's only activity will be to act in the capacity of lessor in relation to the property and to derive periodical rental payments from the entity that will be operating the business. The extent of the Unit Trust's activities as a lessor will be aligned more readily with the type of activities generally undertaken by a passive investor; it is clear that the Unit Trust will not be carrying on a business in this regard.

As the Unit Trust will not be carrying on the business or a business of leasing properties, any receipts in relation to the funding will not be assessed under section 15-10 of the ITAA 1997 as a bounty or subsidy.

Question 4

Section 104-25 of the ITAA 1997 deals with cancellation, surrender and similar endings to CGT assets - a CGT event C2. A C2 event occurs when the ownership of an intangible CGT asset ends by the asset being released, discharged or satisfied. This would occur when a taxpayer's rights under an agreement come to an end - generally at the time the taxpayer's obligations have been discharged and the taxpayer receives payment.

A capital gain occurs if the capital proceeds from the ending of the rights are more than the asset's cost base.

CGT exemption under paragraph 118-37(2)(a)
Paragraph 118-37(2)(a) of the ITAA 1997 provides, in part, that a capital gain may be disregarded if you make it as a result of receiving a payment as reimbursement or payment of your expenses under a scheme established by an Australian government agency or local governing body.

In relation to this paragraph, the Revised Explanatory Memorandum (EM) in relation to the Tax Laws Amendment (2006 Measures No. 3) Act 2006 provides that the requirement that 'the scheme be established under an enactment or an instrument of a legislative character would be satisfied where the scheme is established that way either expressly or by necessary implication. An enactment would include an Appropriation Act (or equivalent) having regard to associated documentation such as budget papers. An instrument of a legislative character would include regulations (and similar instruments) and local government by-laws.'

Application to your circumstances

Under the agreement, the DHA creates rights in the Unit Trust to receive payments upon the completion of several milestones and the provision of progress reports as stated in the agreement. These rights will be satisfied under CGT event C2 when DHA makes the payments to the Unit Trust.

However, we find that the payments meets the requirements of paragraph 118-37(2)(a) of the ITAA 1997 as outlined in the revised EM and the grant complies because it is a payment received as reimbursement or payment of expenses incurred in relation to the project approved in line with the grant.

Therefore, any capital gain made by the Unit Trust from the C2 CGT event will be disregarded under paragraph 118-37(2)(a) of the ITAA 1997.

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