Edited version of your written advice

Authorisation Number: 1013034424537

Date of advice: 20 June 2016

Ruling

Subject: Assessability of a government grant

Question 1

Will the grant received under the programme be assessable income under section 6-5 or section 15-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

No.

Question 2

Where you are entitled to claim amounts for deductions in relation to expenditure that the grant was used for, will corresponding amounts be required to be included in its assessable income as assessable recoupments under Subdivision 20-A of the ITAA 1997?

Answer:

Yes.

Question 3

Will section 59-30 of the ITAA 1997 apply if you repay some of or the entire programme grant?

Answer:

Yes.

This ruling applies for the following periods:

Year ended 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

Year ending 30 June 2018

The scheme commenced on:

1 July 2014

Relevant facts

You sought funding under a government programme.

You were successful and received a grant in order to prepare and make a site suitable for a business to be carried on in the future on the site.

This project will take several years.

The project will involve the refurbishment and repair of existing buildings and plant, and the installation of new plant.

You do not carry on a business and will not be carrying on a business during the project.

During the project you will receive some lease income.

You may be required to repay some, or all, of the grant if certain conditions are not met.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 15-10

Income Tax Assessment Act 1997 Section 20-20

Income Tax Assessment Act 1997 Subsection 20-20(1)

Income Tax Assessment Act 1997 Subsection 20-30(2)

Income Tax Assessment Act 1997 Subsection 20-30(3)

Income Tax Assessment Act 1997 Section 20-35

Income Tax Assessment Act 1997 Section 20-40

Income Tax Assessment Act 1997 Section 59-30

Income Tax Assessment Act 1997 Subsection 59-30(1)

Reasons for decision

Summary

The funding paid under the programme is not ordinary income under section 6-5 of the ITAA 1997 and, as you are not carrying on a business, the funding is not assessable income under section 15-10 of the ITAA 1997. However, where you are entitled to claim amounts for deductions in relation to expenditure that the grant was used for (such as depreciation or capital works deductions), corresponding amounts will be required to be included in your assessable income as assessable recoupments under Subdivision 20-A of the ITAA 1997.

If you are required to repay or refund some or the entire programme grant, section 59-30 of the ITAA 1997 will apply such that if any amount repaid was previously assessable income, it will no longer be treated as assessable income.

Detailed reasoning

Question 1

Taxation Ruling TR 2006/3 discusses government payments to industry to assist entities to continue, commence or cease business.

Paragraph 26 states government payments to industry to commence or cease a business are not assessable as ordinary income of the recipient under section 6-5 of the ITAA 1997 or as a bounty or subsidy in relation to carrying on a business under section 15-10 of the ITAA 1997.

In this case, you applied for a grant under the programme to prepare and make a site suitable for a business to be carried on in the future on the site.

You do not carry on a business and will not be carrying on a business during the project.

Accordingly, the government grant is not assessable under either section 6-5 of the ITAA 1997 (as ordinary income) or under section 15-10 of the ITAA 1997 (bounty or subsidy) as the payments are considered payments to commence business.

Question 2

Recoupment

Subdivision 20-A of the ITAA 1997 includes in your assessable income certain amounts, termed as assessable recoupments.

Under subsection 20-20(2) of the ITAA 1997, an amount received as recoupment of a loss or outgoing is an assessable recoupment if:

(a) you received the amount by way of insurance or indemnity; and

(b) you can deduct an amount for the loss or outgoing for the current year, or you have deducted or can deduct an amount for the loss or outgoing for an earlier income year under any provision of this Act.

For the recoupment of the loss or outgoing to be an assessable recoupment under subsection 20-20(2) of the ITAA 1997, the amount the taxpayer receives must be by way of insurance or indemnity. It is clear in this case that the recoupment will not be received by way of insurance.

Indemnity is not a defined term and therefore must be given its ordinary meaning. The Macquarie Dictionary, [Multimedia], version 5.0.0, 1/10/01, definition of indemnity includes compensation for damage or loss sustained.

The issue of whether an amount is received by way of indemnity for the purposes of the predecessor provision to subsection 20-20(2) of the ITAA 1997 (paragraph 26(j) of the Income Tax Assessment Act 1936) has been considered in a number of cases including: Federal Commissioner of Taxation v. Wade (1951) 84 CLR 105; (1951) 9 ATD 337; 5 AITR 214, Robert v. Collier's Bulk Liquid Transport Pty Ltd (1959) VR 280, Goldsbrough Mort & Co Ltd v FC of T (1976) 76 ATC 4343, 6 ATR 580 (Goldsbrough); and Commercial Banking Company of Sydney Limited v. FC of T 83 ATC 4208 (1983); 14 ATR 142 (Commercial Banking).

These cases make it clear that an amount received by way of indemnity is not restricted to amounts received under a contract of indemnity. This was made clear by Hunt J. in Commercial Banking who, referring to the decision in Goldsbrough, stated:

... his Honour was correct in ruling that the expression "by way of... indemnity" should not be construed narrowly in the sense of "pursuant to a contract of indemnity".

The cases also make it clear that an amount received 'by way of indemnity' would include a receipt pursuant to an antecedent obligation (whether by virtue of a contract, statute or a breach of some common law duty of care) to make good or compensate for a loss which arises after the obligation comes into existence.

Therefore, the phrase 'by way of indemnity' broadens the range of receipts to be considered an assessable recoupment under subsection 20-20(2) of the ITAA 1997 to include receipts other than amounts received under a contract of indemnity.

In your case, the programme grant compensates you for outgoings that arise as a result of obligations under the grant agreement including the refurbishment and repair of existing buildings and plant, and the installation of new plant. In other words, the programme grant is designed to indemnify you for the outgoings you are obliged to incur as a result of the agreement.

Where you can deduct amounts in relation to the outgoings (such as depreciation or capital works deductions), corresponding amounts of the grant received will be required to be included in assessable income as assessable recoupments under subsection 20-20(2) of the ITAA 1997.

Where an expense is deductible over two or more income years, section 20-40 of the ITAA 1997 applies so that the total of assessable recoupments to be included in assessable income at a particular time is limited to the total amount of the loss or outgoing that can be or has been deducted at that time. Any part of an assessable recoupment that is not included in assessable income in the year of receipt because of this limit is assessable in later income years to the extent that further amounts are deductible in the later income years.

Question 3

Repayment of the programme grant

Section 59-30 of the ITAA 1997 provides that:

59-30(1) An amount you receive is not assessable income and is not *exempt income for an income year if:

(a) you must repay it; and

(b) you repay it in a later income year; and

(c) you cannot deduct the repayment for any income year.

If you are required to repay or refund some or the entire programme grant, section 59-30 of the ITAA 1997 will apply such that if any amount repaid was previously assessable income, it will no longer be treated as assessable income. Therefore, if you have previously included a repaid amount of the grant as assessable income, you can request an amendment to remove the repaid amount from the relevant tax return.

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