Edited version of your written advice

Authorisation Number: 1013031389802

Date of advice: 17 June 2016

Ruling

Subject: Funding grant from Australian Government

Question 1

With regard to the Australian Government grant, did the Company merely act as agent for the superannuation fund, the partnership and the property unit trust ('the Property Owners') being the actual beneficial recipient of the funding for taxation purposes?

No. The funding receipt was paid to the Company as the business operator. The Company was not acting as agent and the Property Owners were not the beneficial recipient of the funding for taxation purposes.

This ruling applies for the following periods:

01/07/20ww to 30/06/20zz

The scheme commences on:

20xx

Relevant facts and circumstances

The Company entered into a funding agreement ('the agreement') with the Commonwealth of Australia to expand the production capacity of the Company's business.

The project that provides the grant supports new projects that create sustainable business growth and job opportunities that contribute to the strengthening of the local economy by encouraging applications from projects that generate new, sustainable business growth and jobs.

Funding will be received over the years ending 30 June 20xx, 20yy and 20zz. Each instalment is dependent on the Company providing a progress report to the satisfaction of the Commonwealth.

Each of the facilities is leased to the Company, from which it operates a business.

The Property Owners' own the property where the business is operated from and their only activity in relation to the property is to act as lessor.

The Property Owners derive passive rental income from the properties and do not derive any business income.

The grant monies were deposited into the Company's bank account.

Each respective legal owner of the properties intends to remit the GST on the grant monies and claim the GST on the building costs incurred.

The Property Owners intend to claim any capital allowances and capital works deductions in relation to the building extensions and equipment purchases.

The Program

Section 2 of the Customer Information Guide ('Customer guide') to the grant states, 'The Fund will support new projects that create sustainable business growth and job opportunities that will contribute to the strengthening of the local economy. The Fund will encourage applications from projects that generate new, sustainable business growth and jobs'.

The Ministerial Guidelines ('Ministerial guidelines') to the grant states, 'The Fund will support new projects that create sustainable business growth and job opportunities that will contribute to the strengthening of the local economy'. It further states, 'The Fund will encourage applications from projects that generate new, sustainable business growth and jobs'.

Who can apply

The Customer guide sets out who may apply. It states, 'Applicants must be incorporated in Australia under a law of the Commonwealth or of a State or Territory, and must engage in trading or financial activities that form a substantial or significant portion of their overall current activities'. It further states that, 'All applicants are required to have an Australian Business Number and be registered for the GST'.

The Customer guide also states, '(Applicants) Commit to contributing a minimum of 50 per cent of the overall eligible project cost (exclusive of in-kind contributions) from non-Government funding.

Certain entities are not eligible to apply, according to the Customer guide. These include individuals and partnerships and trusts. However, an incorporated trustee can apply on behalf of a trust provided that the Commonwealth is satisfied that the incorporated trustee will remain sufficiently liable for the performance of any agreement it signs.

Eligible expenditure

Section 5 of the Customer guide sets out what constitutes eligible expenditure. It states:

Eligible expenditure is defined as the direct project costs incurred in undertaking the project and may include:

• acquisition of new equipment or machinery that can be capitalised in the applicant's accounts

• construction or fit-out of a new building or extension to premises; and

• costs incurred undertaking an independent project audit certificate

Treatment of income

The Customer guide, under the section 'What funding is available?' states, 'For grant payments that attract the GST, AusIndustry will increase your grant payments to compensate for the level of that tax. Grant funds should be included in assessable income unless the entity receiving the grant is exempted under the income tax law'.

This is reinforced by the Ministerial guidelines, under the heading 'Conditions of funding'. It states, '…While grants are typically treated as assessable income for taxation purposes, how they are treated will depend on the grantee's particular circumstances. Grantees must seek their own independent professional advice on their taxation obligations'.

Under the Grant agreement, it states the grant must be paid to the grantee. It states, 'The Grantee must ensure that the Grant is held in an account in the Grantee's name and which the Grantee controls, with an authorised deposit-taking institution…'.

Project merit criteria

The project merit criteria are set out in the Customer guide. The criteria to be met when applying for the grant are:

• The level of net economic benefit the proposed project will bring to the local area, including:

• the contribution of the project towards the business's growth; and

• the number of, and sustainability of, new jobs generated through the project

• The demonstrated capacity of the applicant to successfully undertake the project outlining the skills, experience and resources to which they will have access

• The demonstrated capacity of the applicant to provide matching funding for the project

• The value for public money offered by the project as measured by the extent to which the project will be unlikely to proceed without funding support

The agreement and conditions of funding

The Customer guide at the section titled 'What if I am successful?' states, 'Successful applicants will need to enter into a Grant agreement with the Commonwealth. This agreement is a legal contract between the grantee and the Commonwealth. It provides details of the rights and obligations of both the grantee and the Commonwealth, including the agreed proposal, grant funding to be provided, power to recover grant funds in circumstances where grantees do not meet their obligations, the ability to inspect premises and records relating to the project, provisions for variation and termination of the agreement and the grantee's compliance and reporting obligations.'

The Ministerial guidelines also state, 'Successful Applicants are required to enter into a Grant agreement with AusIndustry, representing the Department, acting on behalf of the Commonwealth, on acceptable terms to the Commonwealth…'. Further, it states, 'Grant funds will not be provided to an Applicant until and unless that Applicant is selected as a successful grant applicant and has executed a legally binding Grant Agreement'.

In relation to recovery of grant monies, the Ministerial guidelines refer to this specifically. It states, 'Among other things, a Grant Agreement with a successful Applicant must:

(a) ensure that AusIndustry is empowered to recover Grant Funds in circumstances where the Applicant has acted in a manner to reduce the benefits that were expected to be generated by the Project;

(b) specify the amount of grant funding for the Project to which the application relates and the timing and method of delivery of the grant;

(c) require that the Project be conducted with the aim at all times of achieving the planned Project outcomes described in the application

(d) ensure the complete and accurate records relating to the conduct and management of the Project are maintained;

(e) provide AusIndustry with the ability to inspect the premises where the Project is undertaken and records relating to the conduct and management of the Project;

(f) ensure that AusIndustry is provided with all relevant information concerning the conduct and management of the Project;

(g) provide for variation and termination of the agreement;

(h) ensure the Project complies with all applicable Commonwealth, State and Territory laws and these Guidelines; and

(i) may include any other terms that the Programme Delegate considers to be necessary to protect the Commonwealth's interests in securing the achievement of the Project, relevant Commonwealth policies, the programme policy objectives set out in these Guidelines and making appropriate use of public monies'

Commonwealth Grant Agreement between the Commonwealth and the Company

A Commonwealth Grant Agreement ('Grant agreement') between the Commonwealth the company was signed in March 20xx.

Repayment of grant

The Grant agreement states, 'If any of the Grant has been spent other than in accordance with this Agreement or any amount of the Grant is additional to the requirements of the Activity, the Grantee agrees to repay that amount to the Commonwealth unless agreed otherwise'.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Reasons for decision

Question 1

With regard to the Australian Government grant, did the Company merely act as agent for the superannuation fund, the partnership and the property unit trust ('the Property Owners') being the actual beneficial recipient of the funding for taxation purposes?

No. The funding receipt was paid to the Company as the business operator. The Company was not acting as agent and the Property Owners were not the beneficial recipient of the funding for taxation purposes.

Detailed reasoning

Agency

The Property Owners contend that they have authorised the Company to act as their agent when it entered into the agreement with the Commonwealth.

In the Privy Council case Siu Yin Kwan (Administratrix of the Estate of Chan Yin Lunk, deceased) and Anor v Eastern Insurance Co Ltd [1994] 2 A.C. 199, which was cited in the Australian case Sedco Forex International Inc v Nexus Energy WA Proprietary Limited [2012] FCA 351, summarised the law relating to undisclosed principals into five points. These were:

(1) An undisclosed principal may sue and be sued on a contract made by an agent on his behalf, acting within the scope of his actual authority

(2) In entering into the contract, the agent must intend to act on the principal's behalf

(3) The agent of an undisclosed principal may also sue and be sued on the contract

(4) Any defence which the third party may have against the agent is available against his principal

(5) The terms of the contract may, expressly or by implication, exclude the principal's right to sue, and his ability to be sued

In the current case, it is unlikely that Property Owners, as principal, would be able to sue or be sued on the contract (point 1 above), as the agreement does not contemplate the Property Owners as a party to the agreement (point 5).

In Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd and Others (1985) 155 CLR 541, it was held that one party was not acting as agent for an undisclosed principal for the purposes of a contract. Among the reasons given for not finding an agency relationship was the fact that the contract contained provisions which would be inappropriate if the undisclosed principal had been disclosed.

Applying this reasoning to the current case, the Company could not have been operating as an agent for the undisclosed principals, being the Property Owners. The Property Owners, if known to the Commonwealth, could not have signed the agreement or received the grant. The Property Owners, as passive investors, could not meet the criteria for the application or fulfil the requirements of the agreement, such as creating new employment.

The UK case, The Commissioners for Her Majesty's Revenue and Customs v Secret Hotels2 Limited [2014] UKSC 16, highlighted the importance of documentation in demonstrating that an agency relationship exists.

In his judgment, Lord Neuberger, at 31 stated, 'Where parties have entered into a written agreement which appears on its face to be intended to govern the relationship between them, then, in order to determine the legal and commercial nature of that relationship, it is necessary to interpret the agreement in order to identify the parties' respective rights and obligations, unless it is established that it constitutes a sham.'

As there is no documentation relating to the purported agency agreement, this lends weight to the argument that the agency agreement in relation to the grant application does not exist.

Taxpayer contentions that an agency agreement exists

The taxpayers raised a number of contentions to support their argument. The taxpayers' arguments are:

• The Property Owners would have applied for the grant on their own behalf, if not for the administrative requirements of the Grant

• The Property Owners undertook all the financial obligations in respect of the recipient's contributions and intends to claim for any capital allowances and capital allowances and capital work deductions in relation to the improvements that were made

• The Property Owners were the applicants for the planning and building approvals and the grant would increase the value of the assets held by the Property Owners

As there is no documentation which sets out the agency relationship in relation to the Grant agreement, the surrounding information will be examined, which includes the Customer guide, the Ministerial guide and the actual Grant agreement.

The taxpayer's first argument was that the Property Owners would have applied for the grant on their own behalf, if not for the administrative requirements of the Grant. However, this submission is not accepted.

An agreement was executed between the Company and the Commonwealth of Australia. The agreement is a legal contract between the grantee and the Commonwealth. The rights and obligations are the Company's and the Commonwealth's and are enforceable only between those parties.

The Company is expected to repay the grant if it has not been spent in accordance with the agreement.

The grant was paid into the company's bank account and there was a requirement that it be held in an account with the company's name.

The Property Owners were not mentioned in the Grant agreement, either directly or as a principal in an agency relationship. There are no indications that the Commonwealth intended to be bound by agreement with the Property Owners, nor were aware of their existence. There was opportunity for the Property Owners to apply jointly but they did not do so.

Only the Company could meet the requirements for application and to satisfy the project criteria, such as the creation of new jobs. To apply for the grant, the applicant must be incorporated in Australia. Of all the entities which include the Property Owners, only the Company is a company that could apply. The applicant must also be engaged in trading or financial activities that form a substantial of significant proportion of its overall activities. These are activities that could only be performed by the Company, the business operator.

An eligible application must create economic growth and new sustainable jobs. This could only be done by the Company in its capacity as the operator of the business. The Property Owners, as passive investors in the property, could not meet this requirement, as an applicant or as a principal in an undisclosed agency agreement. Applications that were deemed ineligible were not to be assessed.

The Customer guide and Ministerial guidelines state that the grant funds should be included in assessable income unless the entity receiving the grant is exempted under the income tax law. Although this statement is not determinative in respect of the classification of income, it does indicate that the Commonwealth believe that the grant represents income in the hands of the grantee.

Secondly, the taxpayer argues that the Property Owners undertook all the financial obligations in respect of the recipient's contributions and intends to claim for any capital allowances and capital allowances and capital works deductions in relation to the improvements that were made. It is our view that this submission does not prove an agency relationship existed.

Although the Property Owners contributing the matching contribution on behalf of the Company is an indicator that there is a financing agreement is in place, it is not determinative of an agency relationship.

It is noted that while there may be some factors which suggest an arrangement may be in place so that the Company may finance the contributions, the agreement does not express concern over where the contributions are sourced from. The responsibility remains with the Company to supply the matching contribution.

There are also items of machinery and equipment that are to be acquired under the Grant agreement, that would not be considered to be improvements to the Property Owners' property. These include a forklift and other machinery that would not constitute fixtures and would not be improvements to the property.

The Customer guide describes what constitutes eligible expenditure for the project. It includes 'acquisition of new equipment of machinery that can be capitalised in the applicant's accounts'. This suggests that the Commonwealth intended that the applicant (the Company) is the entity that acquires the equipment and it is to be capitalised in the Company's accounts.

While some of the grant applies to improvements to the property owned by the Property Owners, not all of the grant payment does. Taking into account the wider context of the Grant agreement being a contract between the Commonwealth and the Company, the actual terms of the agreement and the associated supporting material is evidence that an agency agreement does not exist for the purposes of the grant.

The taxpayer's third argument is that the Property Owners were the applicants for the planning and building approvals and the grant would increase the value of the assets held by the Property Owners. This submission is intended to add weight to the contention that an agency relationship exists.

However, it is our view that the third argument does not evidence that an agency relationship exists between the Company and the Property Owners, especially when it is considered in relation to the actual agreement between the Commonwealth and the Company.

Overall, our view is that there is no agency agreement between the Company and the Property Owners for the purposes of applying for the grant. The grant is paid to the Company as it is the business operator. The grant could only be applied for by the Company and it is the only entity that could meet the project criteria. The Company was also responsible for fulfilling the requirements of the agreement.

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