Edited version of private advice

Authorisation Number: 1051640184604

Date of advice: 25 February 2020

Ruling

Subject: Grant payment

Question

Is the Business Assistance Grant assessable income under either section 6-5 or section 15-10 of the Income Tax Assessment Act 1997?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2019

The scheme commenced on

1 July 2018

Relevant facts

Entity A operates a business.

A government department introduced new rules which meant that some areas were no longer open to business. The Australian Government recognised the effect that the new rules may have on businesses and offered a one-off Business Assistance grant that was based on the business activity.

To be eligible to receive a grant, you had to be authorised and hold a relevant authorisation to operate a business in the relevant industry.

The grants were paid in lieu of the reduction of business areas and were calculated based on income and information from prior years to get an estimated average annual income forgone.

The Business Assistance grants offer assistance to affected entities as they adjust their business to the new operating environment.

Payments are GST exclusive.

Entity A received Business Assistance Grants.

The closure of the areas has reduced the value of entity A's business licence. Also, the terms and conditions of the licence have changed.

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 10-5

Income Tax Assessment Act 1997 Section 15-10

Income Tax Assessment Act 1997 Section 102-5

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 118-20

Reasons for decision

Ordinary income

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

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.

A frequent characteristic of income receipts is an element of periodicity, recurrence or regularity, even if the receipts are not received in relation to the carrying on of the daily business activities.

Taxation Ruling TR 2006/3 Income tax: government payments to industry to assist entities (including individuals) to continue, commence or cease business discusses whether various payments are assessable.

As outlined in paragraph 14 of TR 2006/3, a government payment for loss of profits because of government policy or industry restructure is assessable under section 6-5 of the ITAA 1997 in the income year in which it is derived.

Paragraph 85 of TR 2006/3 provides further guidelines to assist in determining the nature of a payment. Calculation of a payment by reference to expected profits made, or not made by the recipient but that would ordinarily have been expected to have been made is a factor supporting a conclusion of income. Also, the fact that a payment is a lump sum does not necessarily mean that the payment is capital.

In this case, entity A received grants. Based on the guidelines provided in TR 2006/3, it is arguable that the grant is assessable income under section 6-5 of the ITAA 1997.

Bounties and subsidies

Where the grant is not assessable as ordinary income under section 6-5 of the ITAA 1997, consideration needs to be given to section 15-10 of the ITAA 1997.

Under section 15-10 your assessable income includes a bounty or subsidy that you receive in relation to carrying on a business; and is not assessable as ordinary income under section 6-5.

Payments of financial assistance by government are commonly referred to as 'bounties', 'subsidies' or 'grants'. As 'bounty', 'subsidy' and 'grant' are not defined terms, the ordinary meaning of these terms applies (paragraph 93 of TR 2006/3).

The Macquarie Dictionary defines the term subsidy as including 'a grant by a government'. The ordinary meaning adopted by case law is 'aid provided by the Crown (government) to foster or further some undertaking or industry' (Placer Development Ltd v. Cth (1969) 121 CLR 353 at 373).

The Macquarie Dictionary defines bounty to include a premium or reward, especially one offered by a government.

A bounty or subsidy includes a grant that encourages business or trade and also a grant to address a detrimental effect on a business or trade (paragraph 96 of TR 2006/3).

Following the decisions in The Squatting Investment Co Ltd v. Federal Commissioner of Taxation (1953) 86 CLR 570; 10 ATD 126 and Reckitt & Colman Pty Ltd v FC of T 74 ATC 4185, it is now well accepted that a 'bounty' or 'subsidy' includes a financial grant made by a government.

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. A bounty or subsidy must be related to 'carrying on' the business and not merely for commencing or ceasing a business (paragraphs 100 and 101 of TR 2006/3).

In this case, the Grant was provided to offer assistance to affected businesses. Entity A has an ongoing business and the grant does not relate to commencing a new business or ceasing its existing business. Rather the grant relates to the continuation of the existing business.

In light of the full circumstances, the grant payments are considered to be a subsidy or bounty that falls within the scope of section 15-10 of the ITAA 1997. The payments are directly related to entity A's business. Therefore the payment is assessable under section 15-10.

Therefore where the grant is not assessable under section 6-5 of the ITAA 1997, it would be assessable under section 15-10 of the ITAA 1997.

Capital gains tax (CGT) provisions

A capital gain or capital loss may arise if a CGT event happens to a CGT asset. Section 108-5 of the ITAA 1997 states that a CGT asset is any kind of property, or a legal or equitable right that is not property. A license is a CGT asset. Although a CGT event may happen in relation to part of your license, section 118-20 of the ITAA 1997 provides that a capital gain you make is reduced if the amount is otherwise assessable under another provision of the ITAA 1997.

Therefore, where an amount is otherwise included as assessable income under section 15-10 of the ITAA 1997 then any capital gain will be reduced to nil.

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).