Edited version of private advice

Authorisation Number: 1051799224004

Date of advice: 22 February 2021

Ruling

Subject: Early childhood education and care relief package payments

Question

Are Early Childhood Education and Care ("ECEC") Relief Package payments received included in assessable income pursuant to either section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) or section 15-10 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Background

The Early Childhood Education and Care (ECEC) Relief Package payments were made by the Australian Government and administered by the Department for Education, Skills and Employment.

The ECEC Relief Package payment was available from 6 April 2020 until 12 July 2020 to ensure ongoing availability of early childhood education and child care services for Australian families. Those services that remained open and had children enrolled, assuming the other conditions were met, were eligible to receive a weekly payment from government to ensure they could continue to deliver care. The payments were made instead of the usual Child Care Subsidy (CCS) and Additional Child Care Subsidy (ACCS) payments for eligible children, which were suspended from 6 April 2020 to 12 July 2020.

Under sections 205A and 205B of A New Tax System (Family Assistance) (Administration) Act 1999 and sections 60A to 60F of the Child Care Subsidy Minister's Rules 2017, payments were made where a child care provider (Provider) failed to give a 'care session report' due to circumstances which were beyond their control. Due to the COVID-19 pandemic and significant reduction in enrolments, payments were made to ensure the ongoing viability of Providers in the child care sector.

To be eligible to receive the ECEC payment, the Provider was required to meet the following conditions:

•         the service remains open and provides sessions of care to at least one child, unless closed on public health advice or by a state regulatory authority for COVID-19 health and safety reasons;

•         families and carers were not charged fees in relation to sessions of care provided to children during the period the Provider receives the ECEC payments;

•         priority of access was to be given to children of essential workers, vulnerable and disadvantaged children and previously enrolled children;

•         the Provider/service was to continue to record attendance of children;

•         where children enrol at a service who otherwise would be considered 'at risk' for the purposes of ACCS (child wellbeing) Providers were required to make a referral to an appropriate support agency as per the existing ACCS (child wellbeing) referral requirements; and

•         the Provider and service must comply with all other Family Assistance Law and National Law requirements, including remaining eligible for the CCS.

The eligibility conditions surrounding the payments were intended to ensure that, where possible, early childhood education and child care services remained open to provide child care and did not charge a fee for providing that service. The eligibility conditions included that families must not be charged any child care fees during the period, and therefore services were not able to collect any co-contribution or 'gap fee' amounts.

While Providers received the ECEC payments, they were not able to:

•         change their agreed 'service offer' with families as it existed prior to 6 April 2020, and/or

•         increase or add new administrative fees.

It was a condition of the ECEC payment that Providers not seek to replace the gap fee amount they would normally collect through new and additional charges to parents and carers. However, Providers were able to continue to charge administrative fees that do not form part of the session of care fee that a family's Child Care Subsidy was calculated on (for example, late pick-up fees) but services were not to increase these fees for the duration of the Relief Package or add new fees that were not listed in a family's Complying Written Agreement.

The ECEC Relief Package payments were discretionary payments made by government under Family Assistance Law, and failure by a Provider to comply with the conditions could result in the payments being reduced or suspended.

Providers could choose to opt out of receiving ECEC Relief Package payments for one or more of their services and continue to operate by charging full fees to families.

If a Provider wanted to opt back in, they were required to contact the department to reinstate their provider approval and receive a payment for the next following week.

Application to your circumstances

You are a Provider who received ECEC Relief Package payments the amount of which was determined based on the total fees charged by your service during a reference fortnight and the reference hourly fee (up to hourly rate cap) for a session of care. The ECEC payments were made weekly unless otherwise notified by the department.

Reasons for decision

Summary

The ECEC Relief Package payments are included in assessable income pursuant to section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). Alternatively, if the ECEC payments were not included in assessable income pursuant section 6-5 of the ITAA 1997, they would be included in assessable income under section 15-10 of the ITAA 1997.

Detailed reasoning

A government payment to industry to assist a business to continue operating, except where the payment is for agreeing to give up or sell part of the profit yielding structure, is either included in the assessable income of the recipient as ordinary income under section 6-5 or as a bounty or subsidy received in relation to carrying on a business under section 15-10 of the ITAA 1997.

Ordinary income

Subsection 6-5(2) of the 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 of payments being:

•         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 of an entity.

In Scott v. Commissioner of Taxation (NSW) (1935) 35 SR (NSW) 215, Jordan CJ held that the meaning of 'income' was to be determined according to 'ordinary concept and usages' at 219 as follows:

The word "income" is not a term of art, and what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income, must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income, or that special rules are to be applied for arriving at the taxable amount of such receipts: A.-G. for British Columbia v. Ostrum ([1904] AC 144 at 147); Lambe v. Inland Revenue Commissioners ([1934] 1 KB 178 at 182-3).

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)discusses the taxation consequences of receipt by an entity of a government payment to industry.

Paragraph 85 of TR 2006/3 provides guidelines to assist taxpayers in determining the nature of a receipt and include:

•         Whether or not a particular receipt is ordinary income depends on its character in the hands of the recipient

•         Regard must be given to all facts - as such, a broad view must be taken of the taxpayer's situation and it is necessary to consider all of the relevant facts and circumstances of the taxpayer

•         The test for determining if a payment is income or capital is an objective test

•         A lump sum payment does not result in a conclusion that the payment is capital

•         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

•         The character of a single lump sum payment is determined by examining the character of the whole payment in the hands of the recipient. The Commissioner will have regard to all circumstances giving rise to the payment

•         A payment that is provided for a purpose which is not part of the recipient's business may not be income in nature, and

•         A payment for surrender of part of a profit earning structure may be a capital receipt.

It is not essential for all of the above characteristics to exist for a receipt to be considered income according to ordinary concepts.

The distinction between amounts received on income and capital account has been likened to the difference between a tree and the fruit of a tree. In the High Court decision FC of T v Darcy Peter Smith 81 ATC 4114; 11 ATR 538 (DP Smith), Gibbs, Stephen, Mason and Wilson JJ jointly made the following observations in relation to payments made under a personal disability insurance policy:

... If the ability to earn is the tree, and income the fruit thereof, a policy of insurance against impairment of the fruit-bearing capacity of the tree may well take the form of providing the fruit until such time as the tree recovers its proper role. The degree of correspondence, if any, between the moneys payable under the policy and the actual pecuniary loss of revenue suffered by the insured is a relevant factor, but it is not necessary to look for an indemnity measured with any precision against the loss. Any fruit is better than none, whether or not it represents adequate compensation for the loss.

In that case, particular features of the insurance policy made it unlikely that payments received under it would bear any direct correlation to the actual loss of earnings suffered by the insured individual. Despite this, the High Court held that the purpose of the policy was to diminish the adverse economic consequences of injury by accident and to provide indemnity against income loss arising from the inability to earn. Accordingly, the payments received by the taxpayer were clearly stamped with a revenue character and were therefore assessable.

It was recognised in First Provincial Building Society Limited v Commissioner of Taxation (1995)56 FCR 320, that not all receipts of a taxpayer carrying on a business will be income. The determinant as to whether a payment amounts to income in ordinary concepts is 'the relationship between the payment and business activities of the applicant.'

Application to your circumstances

The ECEC payments you received from government were made to ensure that, where possible, early childhood education and child care services remained open to provide child care for families and did not charge a fee for providing that service. The ECEC payments were made to you as a Provider to secure the services of your business to provide or make available early childhood education and child care services to Australian families. The ECEC payments were made to you for providing the services in circumstances where one of the eligibility criteria for the ECEC payments was that you could not charge the families. The conditions under which you received the ECEC payments for families of your service supports a conclusion that the payments are income according to ordinary concepts from your carrying on of that business.

As a Provider, you were able to choose whether to participate in the ECEC scheme and offer those services to families under the government agreement or continue to operate independently and charge families for your services under your usual fee structure. As you chose to provide the services to families and carers under the government agreement, you were bound not to charge an additional amount to the families and carers for the provision of those services.

You agreed to, and were contracted by, the government to make available and provide those services where charging the fees would be a breach of that agreement to provide the service.

The circumstances were such that participation in the ECEC Relief package operated as a modification of existing government support payments available for the provision of early childhood education and child care services for Australian families. The payment was therefore designed to assist child care service providers to remain in business and continue their income producing activities.

Further, TR 2006/3 Income tax: government payments to industry to assist entities (including individuals) to continue, commence or cease businessprovides guidance in relation to "payments to continue business".

On the basis of the words of the legislation, relevant decisions of the courts and the Commissioner's public guidance, it is considered that an ECEC payment is assessable income in the hands of the recipient. Accordingly, the ECEC payments are included in your assessable income pursuant to 6-5 of the ITAA 1997 as ordinary income.

Bounties and subsidies

Even if the ECEC payments were not included in your assessable income pursuant to section 6-5 of the ITAA 1997, section 15-10 of the ITAA 1997 would apply to include the amount in your assessable income.

Under section 15-10 of the ITAA 1997, your assessable income includes a bounty or subsidy that you receive in relation to carrying on a business; and which is not assessable as ordinary income under section 6-5 of the ITAA 1997.

Paragraph 93 of TR 2006/3 Income tax: government payments to industry to assist entities (including individuals) to continue, commence or cease business provides guidance in relation to payments of financial assistance by government which are commonly referred to as 'bounties', 'subsidies' or 'grants'. As 'bounty', 'subsidy' and 'grant' are not defined terms, the ordinary meaning of these terms will apply.

Paragraphs 94-97 of TR 2006/3 provide further guidance on the meaning of bounties and subsidies in relation to a government payment to industry (GPI):

94. 'Subsidy' is defined as '1. a direct pecuniary aid furnished by a government to a private industrial undertaking, a cultural organisation, or the like; 2. a sum paid, often in accordance with a treaty, by one government to another, to secure some service in return; 3. a grant or contribution of money; The ordinary meaning adopted by case law is an 'aid provided by the Crown [government] to foster or further some undertaking or industry.

95. 'Bounty' is defined to include 'a premium or reward, especially one offered by a government'. When 'bounty' and 'subsidy' are positioned together the compound term is interpreted as describing financial assistance given to assist business.

96. 'Grant' is defined to include 'that which is granted, as a privilege or right, a sum of money, as for a student's maintenance, or a tract of land'. A reference to '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.

97. Not all government grants are bounties or subsidies for the purposes of section 15-10. It is essential to determine what the grant is actually for. The question as to the nature and quality of any payment must be determined by reference to the agreement or the terms which created in the recipient the right to the government grant. Any factors used to calculate the amount of payment are of marginal, if any, assistance in determining what the payment is for.

Paragraph 20 of TR 2006/3 also states that a GPI received for agreeing to give up, or sell, part of the profit yielding structure of a business, is not received in relation to carrying on a business.

Paragraphs 100 and 101 of TR 2006/3 explains when a bounty or subsidy will be in relation to carrying on a business:

100. 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. As stated by Hill J in the First Provincial case:

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

101. A bounty or subsidy must be related to 'carrying on' the business not merely for commencing or ceasing a business. As stated by Hill J in the First Provincial case:

the relationship must be to the 'carrying on' of the business. These words may perhaps be understood in opposition to a relationship with the actual business itself. They would make it clear, for example that a bounty received, merely in relation to the commencement of a business or the cessation of the business, would not be caught. The expression 'carrying on of a business' looks, in my opinion, to the activities of that business which are directed towards the gaining or producing of assessable income, rather than merely to the business itself.

Application to your circumstances

In the case of the ECEC Relief Program, the payments were provided to assist early childhood education and child care services businesses to continue to provide those services to ensure they could continue to deliver care. The ECEC payments were made instead of the usual Child Care Subsidy (CCS) and Additional Child Care Subsidy (ACCS) payments for eligible children, which were suspended from 6 April 2020 to 12 July 2020.

You are the Provider of an ongoing childhood education and child care services business. As such, the ECEC payment does not relate to commencing a new business or ceasing an existing business. Rather the payment relates to the continuation of your existing early childhood education and child care services business.

For the reasons given above we consider the ECEC is a payment made to encourage the continuation of services by Providers in the child care services industry. Therefore, the payment is a bounty or subsidy that has a real connection with the carrying on of the business of the recipient in the child care services industry.

For the reasons set out above, we do not accept that the ECEC is made to you on capital account for agreeing to give up, or sell, part of the profit yielding structure of your business.

Accordingly, if the ECEC was not assessable under section 6-5 (contrary to the Commisisoner's ruling above) the Commissioner considers that the payment falls within the definition of a bounty or subsidy that is received by you in relation to carrying on a business and therefore would be assessable income under section 15-10 of the ITAA 1997.

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