Disclaimer
This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your written advice

Authorisation Number: 1051446996466

Date of advice: 13 November 2018

Ruling

Subject: Assessable income - government grant - deductions - repairs

Question 1

Is the $X grant received for phase one of the project assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Is the $X grant received for phase two of the project assessable income under section 15-10 of the ITAA 1997?

Answer

Yes

Question 3

Is the entity entitled to a deduction under section 8-1 of the ITAA 1997 in relation to expenditure incurred to complete phase one of the project?

Answer

Yes

Question 4

Is the entity entitled to a (repair) deduction for the expenditure incurred in relation to the work undertaken to complete Phase Two of the project?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2017

Year ended 30 June 2018

Year ending 30 June 2019

The scheme commenced on:

1 July 2016

Relevant facts

The entity previously received funding under a government project to restore a site to enable a mixture of business operations to be carried on.

The entity has completed all the relevant requirements for that government grant.

The entity is now the legal owner of the site.

The entity has leased some of the buildings on the site and returned rental income over a number of income years in their tax returns.

The entity sought further funding under another government grant.

The entity submitted an application to secure the funding.

The entity’s application provided the following:

Phase One

Action

Amount

Obtain legal and commercial advice in respect of the project

$X

Undertake testing of various products

$X

Obtain legal and commercial advice for contracts

$X

Obtain engineering advice

$X

Obtain advice on the inter-related issues of the business

$X

Total (not including GST)

$X

Phase Two

Action

Amount

Carry out repairs to the site

$X

Total (not including GST)

$X

The entity entered into a Grant Deed (the Deed) to secure the funding.

The Deed relevantly provided:

A Deed of Variation was executed and the Deed was amended to extend the payment of the instalments and reporting requirements.

The entity has provided updated plans and progress reports for the project.

To receive a funding payment the entity is required to complete all of the milestones for the project and submit an invoice for payment along with evidence of expenditure and confirmation that the milestones have been completed.

At the time the entity purchased the industrial site a building on the site was damaged due to the weather conditions.

On DD/MM/YYYY work was undertaken to repair the damage to the building.

Tax invoices were issued for the repair of the damage to the building.

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 8-1

Income Tax Assessment Act 1997 section 15-10

Income Tax Assessment Act 1997 section 25-10

Income Tax Assessment Act 1997 paragraph 110-25(4)(b)

Income Tax Assessment Act 1997 section 40-880

Income Tax Assessment Act 1997 paragraph 40-880(5)(b)

Reasons for decision

Phase One Funding

Grants received by a business in relation to the carrying on of that business are generally assessable income either according to ordinary concepts under section 6-5 of the ITAA 1997, or as a bounty or subsidy under section 15-10 of the ITAA 1997.

The commencement of a business is a question of fact. In determining when a business commences there are three indicators that must be present before it can be said that a business has commenced:

In this case, the entity had previously applied for, and received a grant to fund the acquisition of the site. The entity had undertaken and completed various development activities to refurbish the site. Various buildings on the site have been re-furbished and leased out to various tenants. The entity has returned income from leasing in their tax returns. The entity is considered to be carrying on a business of developing the site for the purpose of earning assessable income from the rent it receives.

Taxation Ruling TR 2006/3 discusses government payments to industry to assist entities to continue, commence or cease business. Paragraph 85 of TR 2006/3 provides a summary of the guidelines which have been developed to determine the nature of a receipt.

Whether or not a particular receipt is ordinary income depends on its character in the hands of the recipient not the nature of the asset acquired with the payment of the grant. In GP International Pipecoaters Pty Ltd v Commissioner of Taxation (Cth) (1990) 170 CLR 124, the Full High Court stated at 136-7:

The grant is received following specified activities the entity is required to perform as outlined in its application to secure the funding from the Grantor. This includes gathering legal, commercial and professional and engineering advice as outlined in Phase One of the project. As noted at paragraph 13 of TR 2006/3 where government payments to industry reimburse, assist with, or directly pay on behalf of the recipient, the costs of obtaining legal, business, accounting, financial or other professional advice in the ordinary course of business, the payment is ordinary income and is assessable income under section 6-5 of the ITAA 1997.

Therefore, the $X of the grant for Phase One of the project is included in the entity’s assessable income under section 6-5 of the ITAA 1997 when it is derived. The entity is considered to have derived the funding when it is entitled to receive it.

Phase Two Funding

For the purposes of section 15-10 of the ITAA 1997, a bounty or subsidy must be related to ‘carrying on’ a business, not merely for commencing or ceasing a business (paragraph 101 of TR 2006/3).

Paragraph 102 of TR 2006/3 clarifies that a government payment is assessable income under section 15-10 of the ITAA 1997 if it is received for the purpose of an existing business to:

In this case, the entity is carrying on a business and the grant paid by the Grantor is to assist with the re-construction of an asset held by the entity. Accordingly, the amount of $X for Phase Two of the project is assessable under section 15-10 of the ITAA 1997 when the entity is entitled to receive it.

Phase One Deduction

Section 8-1 of the ITAA 1997 allows you to claim a deduction for a loss or outgoing that is incurred in gaining or producing your assessable income, or is necessarily incurred in carrying on a business to gain or produce assessable income. These deductions are limited by the exclusion of losses or outgoings that are capital, private or domestic in nature.

In this case, the entity has incurred expenses in order to meet the milestones to receive the funding under the project. The expenditure arises out of the day to day activities of an ongoing business activity carried on by the entity to develop the site. Therefore, the expenditure in respect of seeking the legal, commercial, professional and engineering advice is deductible under section 8-1 of the ITAA 1997.

Phase Two Deduction

Section 25-10 of the ITAA 1997 allows a deduction for the cost of repairs to premises used for income producing purposes. However, subsection 25-10(3) does not allow a deduction for repairs where the expenditure is of a capital nature.

Taxation Ruling TR 97/23 explains the principles and the circumstances in which expenditure incurred for repairs is an allowable deduction. The term ‘repair’ means the remedying or making good of defects in, damage to, or deterioration of property as long as the restoration is of the entirety and does not change the character of the property. The cost of repairing an income producing property is deductible.

However, TR 97/23 states that expenditure to remedy defects, damage or deterioration in existence at the date of acquisition is constituted as initial repairs and no deduction is allowable:

In this case, a review of the information provided indicates the deterioration of the building existed at the time of acquisition of the site and not as a result of operation undertaken by the entity. Therefore, the work undertaken is considered an initial repair and not deductible under section 25-10 of the ITAA 1997 as the work is capital in nature.

Where work is undertaken as part of the cost of maintaining a property such as initial repairs, these costs form part of the third element of the cost base of the property under paragraph 110-25(4)(b) 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).