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Edited version of private advice
Authorisation Number: 1012635652812
Ruling
Subject: Non-profit entity - assessable income - government grant
Question 1
Is the government grant received by the Association considered to be assessable income?
Answer
Yes.
This ruling applies for the following period:
1 July 2013 to 30 June 2014.
The scheme commences on:
The scheme has commenced.
Relevant facts and circumstances
The Association is a not-for-profit organisation.
In 20XX, a government grant was made to undertake a project.
During 2013, the Association took over the project and the remaining funds of the grant.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 6-1;
Income Tax Assessment Act 1997 section 6-5;
Income Tax Assessment Act 1997 section 15-10.
Reasons for decision
Question 1
Is the government grant received by the Association considered to be assessable income?
Summary
The grant payment is considered to form part of your assessable income.
Detailed reasoning
Section 6-1 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an entity for an income year consists of 'ordinary income' and 'statutory income' derived by the entity for the year.
Taxation Ruling TR 2006/3 Income tax: government payments to industry to assist entities (including individuals) to continue, commence or cease business discusses bounties, subsidies, grants and rebates paid or funded by the Commonwealth or a State, Territory or local government, or government agency.
Paragraph 4 states that 'Government payments to continue business' includes payments to undertake research and development activities, and Paragraph 10 provides that a government payment to continue business is included as assessable income as ordinary income (section 6-5 of the ITAA 1997) or statutory income (section 6-10 of the ITAA 1997).
Ordinary Income
Sub-section 6-5(1) of the ITAA 1997 states that 'your assessable income includes income according to ordinary concepts, which is called ordinary income'.
'Income according to ordinary concepts' is not defined in the taxation legislation. The characteristics of ordinary income have been developed by case law and generally fall into three categories:
• income from providing personal services
• income from property, or
• income from carrying on a business.
Case law has established a number of principles to assist in determining the nature of a receipt, including the following:
• The nature of the payment is determined by examining the character of the payment in the hands of the recipient.
• Regard must be given to all the facts.
• The test is objective.
• A payment that is provided for a purpose which is not part of the recipient's business will not be income in nature.
• A payment paid in consideration for the performance of services is generally income.
• Periodicity, recurrence or regularity may show a payment to be income.
• A payment from an isolated transaction entered into with an intention to profit may still be income.
The Association agreed to take over the Project which was funded by a grant from a government department.
The Association agreed to take on the grant as it was consistent with their goals. In these circumstances, it is considered that the grant is ordinary income.
Despite the above, we also consider that the grant would be statutory income under section 6-10 of the ITAA 1997.
Statutory Income - A Bounty or Subsidy
Section 6-10 provides that your assessable income may include some amounts that are not 'ordinary income'. These amounts are considered 'statutory income'. Subsection 6-10(1) refers to a summary list of these provisions that is contained within section 10-5.
One of the statutory income provisions listed in section 10-5 of the ITAA 1997 is bounties or subsidies and refers to section 15-10.
Section 15-10 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.
'Bounty' and 'subsidy' are not defined in the taxation legislation. 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 Placer Development Ltd v. Commonwealth of Australia (1969) 43 ALJR 265; 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.
It is now well accepted that a 'subsidy' includes a financial grant made by a government.
The Association agreed to take over the Project which is funded by a grant from a government department. The funding enables the Association to achieve the aims and objectives of the Project.
The issue is whether the grant has been received in relation to carrying on a business. In First Provincial Hill J considered the antecedent of section 15-10 of the ITAA 1997, paragraph 26(g) of the ITAA 1936, which contained the term 'received in or in relation to carrying on a business. Hill J stated the following on the meaning of the term 'in relation to carrying on a business' (at 4154):
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 hand, may be less direct where the second limb is sought to be applied than where the first limb is applied.
The issue for consideration is the relationship between the grant and the business activities of the Association. Examination of this relationship will determine whether the amount is correctly characterised as a gain made in the course of carrying on a business.
It is considered that the funding is sufficiently connected to the current goals of the Association to have been made in relation to the carrying on of its business.
As such, it is considered that the grant payment would also be assessable under section 15-10 of the ITAA 1997.
Conclusion
The grant payment is considered to form part of your assessable income.
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