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Edited version of private advice

Authorisation Number: 1051672865156

Date of advice: 13 May 2020

Ruling

Subject: The assessability of a grant

Question 1

Is the Grant you received assessable as a subsidy or bounty under section 15-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Is the Grant you received an assessable recoupment under subdivision 20-A of the ITAA 1997?

Answer

In light of the answer to Question 1, this question does not need to be addressed.

This ruling applies for the following period:

Income year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are in business providing services.

You received a Grant from a government.

The Grant has enabled you to purchase a new item as part of your business expansion.

The full funding was received in the 20XX income year and expended in full on the purchase of the item.

The new item was purchased in your name.

The new item enables you expand your business by allowing you to provide additional services to clients involved in businesses like yours.

You have provided documentary evidence to support your claims.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 15-10

Income Tax Assessment Act 1997 subdivision 20-A

Reasons for decision

Summary

The Grant received is assessable as statutory income under section 15-10 of the ITAA 1997.

Statutory income

Section 15-10 is a statutory income provision (see section 10-5) which deals with the treatment of bounties or subsidies.

Section 15-10 provides that an amount is included in a taxpayer's assessable income if it is:

Bounty or subsidy

The terms 'bounty' and 'subsidy' are not defined in income tax legislation and therefore take its ordinary meaning. The Macquarie Dictionary [Online edition] defines 'subsidy' as including 'a grant or contribution of money'. The ordinary meaning adopted by case law is 'aid provided by the Crown (government) to foster or further some undertaking or industry - see Placer Development Ltd v. Cth (1969) 121 CLR 353 at 373.

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.

The Grant received by you is such a bounty or subsidy as it is aid provided by a government to assist you in your business activities.

Received in relation to carrying on a business

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) provides guidance on the meaning of 'in relation to carrying on a business' in section 15-10 in paragraphs 99 to 101.

Paragraph 100 examines the meaning of 'in relation to' and based on the decision in First Provincial First Provincial Building Society Ltd v FC of T (1995) 56 FCR 320; 95 ATC 4145 (First Provincial) concludes that the term includes within its scope payments that have a direct or indirect connection to the business.

As stated by Hill J in at 333:

The words 'in relation to' are words of wide import. They are capable of referring to any relationship between the 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.

In O'Grady v. Northern Queensland Company Limited (1990) 169 CLR 356 (O'Grady), McHugh J also said at CLR 376:

the prepositional phrase "in relation to" is indefinite. But, subject to any contrary indication derived from its context or drafting history, it requires no more than a relationship, whether direct or indirect, between two subject matters (emphasis added)

The comments by Hill J in First Provincial and McHugh J in O'Grady make it clear that all that is required for a bounty or subsidy to be received in relation to carrying on a business is that there is 'a relationship' to the carrying on of a business that is not so remote as to be insignificant. It is also clear from the use of the expression 'any relationship' by Hill J and the conclusion that the relationship may be indirect that there is no requirement that the relationship be the dominant or main relationship. The degree of the connection will be a matter of judgement on the facts of each case (see O'Grady (1989-90) 169 CLR 356 at 376).

Your Grant was received in relation to carrying on a business by allowing you to purchase a new item in order to provide services to businesses like yours.

Ordinary income

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

Section 15-10 applies to payments which are not assessable as ordinary income under section 6-5. Ordinary income can be distinguished from capital receipts, which will not constitute income according to ordinary concepts

The courts have also identified a number of factors that indicate whether an amount has the character of income:

The Grant made to you is not ordinary income as it is not a product or incident of your income producing activity which is services. Instead, the Grant was given to you to augment the capital of your business as it was used to purchase a new item to add additional services to those you already provide.

The Grant received by you, therefore, capital in nature and thus is not ordinary income under section 6-5 of the ITAA 1997.

Conclusion

As the Grant received by you meets all the requirements of section 15-10 as it is a bounty or subsidy, received in relation to carrying on a business and is not assessable as ordinary income. It is, therefore, assessable as statutory income under section 15-10 of the ITAA 1997.

As the Grant is assessable under section 15-10, subsection 20-20(1) will exclude the grant payments from being an assessable recoupment for the purposes of section 20-20 or the ITAA 1997.

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