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Edited version of your written advice
Authorisation Number: 1051220263482
Date of advice: 2 May 2017
Ruling
Subject: Assessable recoupment
Question 1
Are the grant monies considered to be an indemnity or by way of indemnity?
Answer
No
Question 2
Are the grant monies an assessable recoupment pursuant to Subdivision 20-A of the Income Tax Assessment Act 1997 (ITAA 1997) when deductions are claimed in relation to capital works under Division 43 of the ITAA 1997?
Answer
No
This ruling applies for the following periods:
Years ending 30 June 20YY - 20ZZ
The scheme commenced on:
1 July 20XX
Relevant facts and circumstances
A related entity initially successfully applied for a grant under a government program. However it was determined that Y should have in fact applied for the grant.
Accordingly, Y submitted a new application for the grant. You were advised that the application would have to be re-considered and there was no guarantee that the application would be successful.
Y was ultimately successful in its application for the grant, with a Funding Agreement being executed.
The grant amount was $XXX. The grant was for the construction of a project relating to the aims of the funding program.
Construction had already commenced on the project prior to the final approval of the grant.
Y had made considerations and ensured that they would be able to fund the project should the grant application be unsuccessful.
Payments are made upon the relevant milestone requirements being met.
The purpose of the grant is to assist Y with the construction and fit out of the project.
Y will carry out the sole function of owning and renting the premises. It will not employ staff and will be a commercial landlord only.
Under the agreement Y is required to perform the Project including carrying out the works. The property must be suitable for the designated use and approved by the relevant government department. Y must also provide monthly reports.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subdivision 20-A
Reasons for decision
The meaning of an assessable recoupment is set out in section 20-20 of the ITAA 1997.
Recoupment of a loss or outgoing includes any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery however described and a grant in respect of the loss or outgoing: subsection 20-25(1) of the ITAA 1997.
An amount will be an assessable recoupment under subsection 20-20(2) of the ITAA 1997 if it is considered to be received by way of insurance or indemnity and the taxpayer can deduct or has already claimed a deduction for it.
A recoupment you receive except by way of insurance or indemnity will be an assessable recoupment if you can or have deducted an amount for the loss or outgoing in the current or an earlier year under a provision listed in section 20-30 of the ITAA 1997. Capital works deductions allowable under Division 43 of the ITAA 1997 are not listed in section 20-30 of the ITAA 1997.
The term 'indemnity' as used in subsection 20-20(2) of the ITAA 1997 is not a defined term and is given its ordinary meaning. 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 ITAA 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, Goldsbrough Mort and Co Ltd v. FC of T 76 ATC 4343; (1976) 6 ATR 580 and Commercial Banking Company of Sydney Limited v. FC of T 83 ATC 4208; (1983) 14 ATR 142.
These cases make it clear that an amount received by way of indemnity is not restricted to payments received under 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.
In this case, Y has received a grant to assist with the construction and fit out of a project in line with the program objectives. Y commenced work on the project prior to receiving final approval for the funding and will not be funded for the entire project costs.
We do not consider the grant monies to be an indemnity or by paid way of indemnity.
Additionally, as capital works deductions are not listed in section 20-30 of the ITAA 1997, the grant monies will not be assessable as an assessable recoupment when deductions are claimed under Division 43 of the ITAA 1997.
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