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Edited version of your written advice
Authorisation Number: 1012793103221
Ruling
Subject: Assessability of certain Government Grants
Question 1
Do the Grants paid by the relevant Government constitute assessable income pursuant to section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
No.
Question 2
Do the Grants constitute assessable income pursuant to section 15-10 of the ITAA 1997?
Answer
No.
This ruling applies for the following periods:
1 June 2013 to 31 May 2014
The scheme commences on:
1 June 2013
Relevant facts and circumstances
The entity is a non-profit entity and has been successful in obtaining X government grants.
The entity has requested a ruling on whether these grants are assessable for income tax purposes.
The X grants are paid by the relevant Government for community purposes and expressly cannot be used for the income producing purposes of an existing business.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 6-5 and
Income Tax Assessment Act 1997 section 15-10.
Reasons for decision
Question 1
Summary
The X government grants received from the relevant Government are both paid for capital refurbishment of community sport and recreational capital facilities under the terms and conditions of both grants and will therefore be capital and not ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997).
Detailed reasoning
Section 6-5 of the ITAA 1997 defines ordinary income as income according to ordinary concepts.
The government grants are not assessable as ordinary income under section 6-5 of the ITAA 1997, as they are capital in nature. In G.P. International Pipecoaters Pty. Ltd. v. Federal Commissioner of Taxation (1990) 170 CLR 124; 90 ATC 4413; (1990) 21 ATR 1 the High Court commented on the characterisation of a subsidy that is intended to assist the recipient with capital costs, saying that such receipts would be capital in nature. The court stated at CLR 124; ATC 4422; ATR 10 that:
...it is necessary to consider the taxpayer's submission that the cases show that a receipt of moneys intended by payer and payee to recoup a recipient's capital expenditure is a receipt of a capital nature. That proposition can be accepted when the amount is received by way of gift or subsidy to replenish or augment the payee's capital, for in such a case the receipt cannot fairly be said to be a product or incident of the payee's income-producing activity.
The X government grants received from the relevant Government are both paid for capital refurbishment of community sport and recreational capital facilities under the terms and conditions of both grants and will therefore be capital and not ordinary income under section 6-5 of
the ITAA 1997. They qualify as bounties or subsidies
Question 2
Summary
As there is no connection between the granting of the X grants and the carrying on of entity's business, it considered the grant monies are not received in relation to the carrying on of their business and therefore the grants are not considered to constitute assessable income pursuant to section 15-10 of the ITAA 1997.
Detailed reasoning
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
Taxation Ruling TR 2006/3 defines bounty or subsidy to include grants. It states at
paragraphs 93 - 96:
Bounty or subsidy
93. Payments of financial assistance by government are commonly referred to as 'bounties', 'subsidies' or 'grants'. As 'bounty', 'subsidy' and 'grant' are not defined terms, the ordinary meaning of these terms applies.
94. 'Subsidy' is defined as '1. a direct pecuniary aid furnished by a government to a private industrial undertaking, a cultural organisation, or the like; 2. a sum paid, often in accordance with a treaty, by one government to another, to secure some service in return; 3. a grant or contribution of money'. The ordinary meaning adopted by case law is an 'aid provided by the Crown [government] to foster or further some undertaking or industry'.
95. 'Bounty' is defined to include 'a premium or reward, especially one offered by a government'. When 'bounty' and 'subsidy' are positioned together the compound term is interpreted as describing financial assistance given to assist business.
96. 'Grant' is defined to include 'that which is granted, as a privilege or right, a sum of money, as for a student's maintenance, or a tract of land'. A reference to 'bounty or subsidy' includes a grant that encourages business or trade and also a grant to address a detrimental effect on a business or trade.
As we have determined that the X government grants are not assessable as ordinary income pursuant to section 6-5 of the ITAA 1997, we must now consider if the X grants have been received in relation to carrying on a business.
Paragraphs 99-101 of TR 2006/3 outline what meant by 'in relation to carrying on a business'. It states:
In relation to carrying on a business
99. 'Business' is defined in section 995-1 as 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'. Taxation Ruling TR 97/11 provides further guidance on whether an activity carried on by a taxpayer amounts to a business.
100. A bounty or subsidy will be 'in relation to' carrying on a business when there is a real connection between the payment and the business. The term 'in relation to' includes within its scope payments that have a direct or indirect connection to the business. As stated by Hill J in the First Provincial case:
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.....the degree of connection will be 'a matter of judgment on the facts of each case'... 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.
101. A bounty or subsidy must be related to 'carrying on' the business not merely for commencing or ceasing a business. As stated by Hill J in the First Provincial case:
the relationship must be to the 'carrying on' of the business. These words may perhaps be understood in opposition to a relationship with the actual business itself. They would make it clear, for example that a bounty received, merely in relation to the commencement of a business or the cessation of the business, would not be caught. The expression 'carrying on of a business' looks, in my opinion, to the activities of that business which are directed towards the gaining or producing of assessable income, rather than merely to the business itself.
The entity operates a particular business. It derives its income from the operation of the particular business. It also provides non-business facilities for its members and community participation which include X non-business activities which are the subject of the X grants.
The grants have been paid to upgrade the premises in which the non-business activities are conducted. The conditions for the X grants do not permit the grant monies to be used to support the operational costs of particular business or be directed at any income producing activity of the entity. Any benefit of the grants to the income producing ability of the entity is considered to be minimal and not considered to be the purpose of the grants.
Accordingly, as there is no connection between the granting of the X grants and the carrying on of entity's business, it considered the grant monies are not received in relation to the carrying on of their business and therefore the grants are not considered to constitute assessable income pursuant to section 15-10 of the ITAA 1997.
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