Edited version of your written advice

Authorisation Number: 1013096895727

Date of advice: 26 September 2016

Ruling

Subject: Government grant

Question 1

Is the government grant received by The Club considered ordinary income and therefore assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Is the government grant received by The Club assessable under section 15-10 of the Income Tax Assessment Act 1997?

Answer

No

Question 3

Are the costs associated with maintaining the generator, including depreciation, tax deductible?

Answer

No

Question 4

Is the government grant amount subject to the mutuality principle?

Answer

Not Applicable

This ruling applies for the following periods:

1 July 2014 to 30 June 2015

1 July 2015 to 30 June 2016

The scheme commences on:

1 July 2014

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

• The Club has received a government grant (Grant).

• The Club is not a tax exempt entity.

• The Club is a registered licenced club, with dining, bars, poker machines, entertainment and sports facilities.

• The Club also donates money to local community organisations.

• The objects clause in The Club's Memorandum and Article of Association of the entity states:

2. The objects for which the Company is established are:-

(a) To promote, support and protect the objects of the Club;

(b) To take over the funds and assets and the liabilities of the present unincorporated club known as The Club and of the trustees thereof and to assume and carry on the functions of the Club;

(c) To provide and maintain a Club and the grounds buildings improvements and amenities thereof for the provision of amenities necessities and facilities for the recreation, social intercourse, literary and other lawful purposes of the members of the Company and their lawful guests;

(d) To erect, prepare, alter, furnish and maintain any buildings or other improvements or works convenient for the purposes of the Company;

(e) To affiliate with and pay fees and monies to any organisation having objects similar to those of the Company;

(f) To buy, take on lease, hire or otherwise acquire any property real or personal convenient for any of the purposes of the Company;

(g) To give, sell, mortgage, exchange, hire, lease or otherwise dispose of the property of the Club or any part or parts thereof, subject to the requirements of the Liquor Act and the Registered Clubs Act.

(h) To borrow, raise or give security for any money on such terms and by such means including the issue of debentures charged on all or any of the Company's property present and future as the Company shall think fit and to purchase, redeem or pay off any such securities;

(i) To raise and collect funds by private subscriptions, public appeals, art unions, gifts or otherwise and to accept any legacy, devise or gift whether subject to special trust or not for any of the objects of the Company;

(j) To invest and deal with the funds and monies of the Company in such investments and securities in such manner as may from time to time be determined and from time to time to vary and realise such investments and securities;

(k) To give any guarantee or enter into any bond in connection with the affairs of the Company and to indemnify any person or persons who may incur or have incurred personal liability for the benefit of the Company;

(l) To hold a club licence for the sale of liquor and to carry on the business of restaurant keeper, wine and spirit merchant and licensed victualler and also seller of tobacco, cigarettes and cigars and to hold a license to keep and use poker machines;

(m) In pursuance of the objects of the Company, to hold, promote, assist or encourage sales of work, bazaars, carnivals, matches, entertainments, competitions, displays, public and other meetings and to take or hire any buildings or grounds therefore and to procure or authorise the delivery of lectures and addresses for the benefit of the Company or its work and to prepare, print and distribute gratuitously or otherwise literature calculated to assist any of its objects;

(n) To appoint trustees and to undertake, establish and execute any trusts or agencies which may seem conducive to the objects of the Company;

(o) To engage or appoint with or without remuneration such managers, secretaries, professional advisers, agents and employees of all kind as may be found advisable for the working and administration of the Company and to suspend or discharge any of them;

(p) To give or guarantee money or labour to any patriotic, charitable or useful object;

(q) To do all such other things as are incidental or conducive to the attainment of the objects and the exercise of the powers of the Company;

(r) To make a suitable provision for alleviation of distress among members and or their dependants and or any ex-servicemen or women as the Directors may determine from time to time;

(s) To erect or join in with any other person or organisation in the erection of a fitting Memorial to the valour and sacrifice of those who suffered the supreme sacrifice and who served the Nation in the Great War 1914-1918 and the War of 1939-1945 and for such purposes to make donations of money or otherwise to help in the erection or maintenance of such Memorial;

• The Grant's project scope outlined in the Grant Deed is for the:

Supply, installation and integration of a diesel generator to allow 24 hour power supply to the club building during the time of flooding or bush fires in emergency situations.

• The Grant was paid in instalments upon reaching specific milestones as detailed in the funding agreement. Those milestones were:

• architectural drawing from DA;

• lodgement of development application with council;

• council approval of development application;

• complete tender drawing for generator tender;

• tender generator;

• award successful generator tenderer;

• pay generator tender deposit;

• issue of construction certificate;

• commencement on site;

• excavate petrol tank and build tank enclosure and generator pad;

• commence install of new switchboard and associated wiring;

• deliver and install new generator;

• make good to trenches and disturbed work;

• commission generator, petrol tank and electrical boards; and

• completion and issue of occupation certificate.

• The termination clause of the Grant Deed states:

This Deed will end on the earlier of:

(a) the Department providing the Grant and the Grantee completing the activities under Project Plan at Attachment 1;

(b) by either party by giving notice to the other party where the other party has breached any material provision of this Deed and that other party has not rectified the Breach within thirty (30) days of receiving notice requiring it to do so;

(c) termination by the Department, without incurring any liability, by notice to the Grantee with immediate effect if the Grantee become insolvent, makes an assignment for the benefit of creditors, is the subject of winding up proceedings whether voluntary or compulsory otherwise for the purpose of reconstruction and amalgamation or a receiver is appointed to the Grantee by a court.

• Due to the noise created by the generator it will be only be used during natural disasters.

Relevant legislative provisions

Income Tax Assessment Act section 6-5,

Income Tax Assessment Act section 15-10 and

Income Tax Assessment Act section 8-1.

Reasons for decision

Question 1

Summary

The government grant received by the Club is not considered to be ordinary income and therefore not assessable income under section 6-5 of the ITAA 1997.

Detailed reasoning

Ordinary Income

Section 6-5 of the ITAA 1997 provides that assessable income includes income according to ordinary concepts, which is called ordinary income.

The term 'ordinary income' is not defined in the ITAA 1997. Its meaning has evolved from case law, which has laid down certain established tests to determine whether receipts can be deemed as ordinary income.

In Scott v. Federal Commissioner of Taxation (1966) 117 CLR 514 Windeyer J stated:

Whether or not a particular receipt is income depends upon its quality in the hands of the recipient.

In GP International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation (1990) 170 CLR 124; 90 ATC 4413; (1990) 21 ATR 1 the High Court stated at CLR 138, ATR 7; ATC 4420:

To determine whether a recipient is of an income or a capital nature, various factors may be relevant. Sometimes, the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence, sometimes, by the character of a right or thing disposed of in exchange for the receipt, sometimes by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business.

The High Court accepted the proposition that a gift or subsidy to replenish or augment the recipient's capital is capital in nature (and not income under ordinary concepts) because in such a case, the receipt is not a product or incident of the recipient's income producing activity (at 170 CLR 142; 90 ATC 4422; (1990) 21 ATR 10).

Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business.

Characteristics of 'income' that have evolved from case law include receipts that:

• are earned

• are expected

• are relied upon, and

• have an element of periodicity, recurrence or regularity.

The Grant will be paid to the Club in instalments according to the completion of certain milestones in the funding agreement. The Grant will be used to supply, install and integrate a diesel generator. This is an item of capital expenditure. In these situations, the grant will take on the character of the expenditure, which therefore makes the Grant a capital receipt. The Grant is not received by the Club as part of its current business activities, as the generator aimed to be used in disaster relief situations is separate from its business activities. The Grant also does not have the characteristics listed above.

The Grant payment therefore does not fall within the ordinary meaning of income and is not assessable income under section 6-5 of the ITAA 1997.

Question 2

Summary

The government grant received by the Club is not considered as assessable income under section 15-10 of the ITAA 1997 as it was not received by the Club in relation to carrying on a business.

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.

From the decisions in Squatting Investments Co Ltd v. FC of T (1953) 86 CLR 570; (1953) 10 ATD 126; (1953) 5 AITR 496 Reckitt and Colman Pty Ltd v. FC of T (1974) 74 ATC 4185; (1974) 4 ATR 501 and in First Provincial Building Society Ltd v. Federal Commissioner of Taxation (1995) 56 FCR 320; 95 ATC 4145; (1995) 30 ATR 207 (First Provincial) it is now well accepted that a 'subsidy' includes a financial grant made by the government.

Following the decision in First Provincial it is accepted that section 15-10 of the ITAA 1997 (which replaced paragraph 26(g) of the Income Tax Assessment Act 1936) may apply to payments of a capital nature.

Section 15-10 of the ITAA 1997 applies if the payment was received '...in relation to the carrying on of a business' either in the past or in the future.

Paragraphs 99-101 of Taxation Ruling TR 2006/3 Income tax: government payments to industry to assist entities (including individuals) to continue, commence or cease business (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.

Paragraph 4 of TR 2006/3 gives further guidance on what classifies as government payments to continue business in relation to bounties, subsidies, grants and rebates. These government payments to continue business include:

• provide income support;

• assist with operating costs;

• reimburse the cost of obtaining advice to evaluate current business operations;

• assist due to the loss of anticipated business profits flowing from a contract that is cancelled because of government policy or industry restructure;

• assist due to an anticipated loss or diminution in value of a depreciating asset or other assets;

• assist with improving the viability, sustainability and profitability of a business adversely affected by legislative changes;

• encourage business expansion;

• allow restructuring to remain viable;

• assist with capital costs of restructure to remain viable;

• assist with interest accruing on business loans;

• provide loans at a concessional rate of interest; or

• undertake research and development activities.

The Club operates as a registered licenced club, with dining, bars and poker machines, and derives its income from these operations. The Club also provides sporting and recreational facilities for its members and community participation.

The Club received the Grant for the purchase, installation and integration of a generator, to allow for 24 hour power supply to the club building in emergency situations. The Club has stated that during times of natural disaster it will not be running as a registered club but as a disaster relief centre for the benefit of the community.

Considering The Club's business activities and the objects of the organisation, it is not satisfied that there is a real connection between the grant payment and the business operation, either by a direct or an indirect connection.

Question 3

Summary

The costs associated with maintaining the generator, including depreciation, are not tax deductible as they relate to non-assessable, non-taxable income.

Detailed reasoning

Under 8-1(1) of the ITAA 1997 a deduction can be made from assessable income for any loss or outgoing that is incurrent in gaining or producing your assessable income or it is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

A deduction cannot be made against non-assessable non-exempt income, as under paragraph 8-1(2)(c) of the ITAA 1997, a loss or outgoing is not deductible to the extent that it is incurred in relation to gaining or producing non-assessable non-exempt income.

As stated above in question 1 and 2, the Grant is non-assessable income. Therefore on the facts provided the costs associated with maintaining the generator, including deprecation cannot be claimed as a deduction.

Question 4

Summary

The mutuality principle is not applicable due to the answers above.

Detailed reasoning

The mutuality principle is not applicable in this circumstance due to the answers to questions 1, 2 and 3. As there is no taxable income under sections 6-1 or 15-10 of the ITAA 1997 and no taxation deductions available the mutuality principle does not apply.

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