Edited version of your written advice

Authorisation Number: 1051446328093

Date of advice: 13 November 2018

Ruling

Subject: Government Grant

Question 1

Is the grant funding received by you assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Is the grant funding received by you assessable under section 15-10 of the ITAA 1997?

Answer

No.

Question 3

Is the grant funding received by you be an assessable recoupment under Subdivision 20-A of the ITAA 1997?

Answer

Yes.

Question 4

Where expenditure in relation to the grant is deductible over two or more years, will section 20-40 of the ITAA 1997 operate such that the total assessable recoupment to be included in your assessable income in a particular year will equal the total amount of the deduction claimed in that year (under the method statement under subsection 20-40(2)?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You received a government grant.

The purpose of the grant was to assist you to establish a business by providing funding for the purchase of equipment to be used in the new business.

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 section 20-25

Income Tax Assessment Act 1997 section 20-40

Reasons for decision

Summary

The grant was received to assist in the establishment of a new business rather than to assist in the carrying on of an existing business. Therefore, as per TR 2006/3, the grant is not assessable under section 6-5 or section 15-10 of the ITAA 1997.

However, the grant is an assessable recoupment under Subdivision 20-A of the ITAA 1997 as it was paid to compensate you for expenditure that you would be entitled to deductions in relation to.

As expenditure in relation to the grant 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.

Detailed reasoning

Question 1

Section 6-5 Ordinary Income

Section 6-5 of the ITAA 1997 provides that if you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Ordinary income does not include receipts of a capital nature.

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.

Taxation Ruling TR 2006/3 Income tax: government payments to industry to assist entities (including individuals) to continue, commence or cease business discusses the way in which various tax provisions apply to government payments to industry to assist the recipient to continue, commence or cease a business.

A ‘government payment to industry’ is defined in TR 2006/3 as a payment by the government, or entity chosen by the government to administer government funds.

Government payments to commence business include payments to assist with the purchase of depreciating assets so a business can commence.

Regarding such payments, paragraphs 128 and 139 of TR 2006/3 state:

128. Government payments to industry [GPI] to commence or cease business are not assessable as ordinary income under section 6-5 or as a bounty or subsidy in relation to carrying on a business under section 15-10. However, the GPI may be taken into account in determining whether there is an assessable recoupment under Subdivision 20-A. If the GPI is not assessable under any of these provisions, the recipient will need to consider whether there are any CGT consequences.

139. A GPI paid to assist a new business with the purchase of a depreciating asset will not be assessable under section 6-5 as ordinary income as the GPI is capital in nature. The GPI will not be assessable under section 15-10 if it is received in relation to the commencement of a business.

You were provided the grant funds to assist you to establish a business rather than to assist you to carry on an existing business. Consequently the grant funding is not assessable as ordinary income.

Question 2

Section 15-10 Bounties and Subsidies

Section 15-10 of the ITAA 1997 provides that assessable income includes a bounty or subsidy that:

(a) is received in relation to carrying on a business; and

(b) is not assessable as ordinary income under section 6-5 of the ITAA 1997.

To be assessable under section 15-10 of the ITAA 1997, the grant must be in relation to the carrying on of a business. Payments ‘to commence or cease business’ as opposed to ‘in relation to carrying on a business’ are not considered to be assessable as ordinary income under section 6-5 or as a bounty or subsidy under section 15-10.’ (Paragraphs 103 and 128 of TR 2006/3)

The grant funding was not in relation to existing business activities but to commence a new activity and therefore the grant is not assessable under section 15-10 of the ITAA 1997.

Question 3

Section 20-20 Assessable recoupment

Under Subdivision 20-A of the ITAA 1997, certain amounts received by way of insurance, indemnity or other recoupment are assessable income if the amounts are not income under ordinary concepts or otherwise assessable.

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

● you received the amount by way of insurance or indemnity; and

● 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.

Section 20-40 of the ITAA 1997 discusses when and how much is included in assessable income if the expense is deductible over two or more income years.

In the case Denmark Community Windfarm Ltd v. Commissioner of Taxation [2018] FCAFC 11 the Federal Court held that a government grant provided to the taxpayer to assist with the cost of acquiring and installing wind turbines was an amount received by way of indemnity as it was compensation for expenditure incurred by the taxpayer. Consequently the grant was held to be an assessable recoupment under subsection 20-20(2) of the ITAA 1997.

Also, TR 2006/3 states at paragraph 27:

A GPI received to assist the recipient to commence business with the purchase of a depreciating asset, the cost of which is deductible under Division 40, is assessable under the assessable recoupment provisions in Subdivision 20-A

The grant funding you received was to compensate you for the cost of equipment you were to acquire in order to commence a business. You are, and will be, entitled to deductions in relation to your expenditure of the grant funds. Therefore, the grant funding is an assessable recoupment under section 20-20 of the ITAA 1997.

Question 4

Section 20-40 If the expense is deductible over two or more income years

If expenditure in relation to the grant 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.

Further at paragraph 140 of TR 2006/3:

to the extent that the GPI is a recoupment of the cost of the depreciating asset (for which capital allowance deductions are available for the decline in value), it is an assessable recoupment under Subdivision 20-A. The amount of assessable recoupment may be included over more than one income year, limited to the amount that can be deducted under Division 40.

The grant funds are assessed for tax purposes in accordance with the method statement contained in section 20-40 of the ITAA 1997.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).