Edited version of private ruling

Authorisation Number: 1011476377486

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Ruling

Subject: Tax treatment of the payment received?

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

Yes.

2. Will payment received be included as assessable income in the 2009-10 income year?

Yes.

3. Will the amount received be treated the same when it was used for different purposes?

Yes.

4. Is the payment received assessable as a capital gain under Part 3-1 of the ITAA 1997?

No.

5. If you meet the definition of a small business, are the small business concessions available?

Not applicable.

This ruling applies for the following periods

1 July 2009 to 30 June 2010.

The scheme commences on:

1 July 2009.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are a primary producer and owned land purchased after 20 September 1985.

The corporation is required to provide a service to the owner or occupier of each property.

You have entered into a contract with the corporation and whilst the service will be reduced, you are provided with a payment to re-connect the service.

Part of the payment will be paid to third parties on your behalf.

The entity making the payment satisfies the definition of a government entity.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Section 15-10.

Income Tax Assessment Act 1997 Division 104.

Income Tax Assessment Act 1997 Subsection 110-60(4).

Income Tax Assessment Act 1997 Division 152.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA of the ITAA 1936, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Income

Taxation Ruling TR 2006/3 outlines how government payments to industry to assist entities (including individuals) to continue, commence or cease business, are treated for tax purposes.

In the Definitions at paragraph 154, contained in TR 2006/3, it states:

'Government' means the Commonwealth or a State, Territory or local government or government agency.

'Government payment to industry' means a payment by the government, or entity chosen by the government to administer government funds.

Paragraph 10 of TR 2006/3 states a Government Payment to Industry (GPI) 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 included in the hands of the recipient and assessable under section 6-5 or section 15-10 of the ITAA 1997.

Paragraph 12 of TR 2006/3 states a GPI to assist with business operating costs or liabilities is ordinary income in the hands of the recipient and is assessable under section 6-5 in the income year it is derived.

Paragraph 16 of TR 2006/3 states a GPI that assists a business to carry on its activities and is:

· a bounty or subsidy

· capital in nature, and

· received in relation to carrying on a business,

is assessable under section 15-10 of the ITAA 1997 in the income year in which it is received.

Section 15-10 of the ITAA 1997 also provides that an amount is included in assessable income if it is not assessable as ordinary income under section 6-5 of the ITAA 1997.

Ordinary income

Whether or not something is income according to ordinary concepts is a question of both fact and law. In cases where a receipt arises as a normal incident of a taxpayer's regular income earning or business activity such a receipt will clearly be income.

Characteristics of income that have evolved from case law include receipts that:

· are earned

· are expected

· are relied upon, and

· have an element of periodicity, recurrence or regularity.

Bounty or subsidy

TR 2006/3 discusses the term bounty or subsidy as follows:

93. 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.

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.

TR 2006/3 considers the extent to which GPI form part of the assessable income of a recipient. In so doing, it draws a distinction between bounties, subsidies, grants or rebates (paid or funded by the Commonwealth, a state, a territory, a government agency or a local government) made to assist businesses to continue operating and those which are made to assist the commencement or cessation of business operations.

Paragraph 19 of TR 2006/3 states a GPI received to acquire or construct an asset or assist with the capital costs of restructuring, that is an activity in relation to carrying on a business, is assessable income under section 15-10.

In relation to carrying on a business

'Business' is defined in section 995-1 of the ITAA 1997 as 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'. Taxation Ruling TR 97/11 provides further guidance on whether an activity carried on by a taxpayer amounts to a business.

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 First Provincial Building Society Ltd v. Federal Commissioner of Taxation (1995) 56 FCR 320; 95 ATC 4145; (1995) 30 ATR 207 (First Provincial):

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.

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 First Provincial:

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.

TR 2006/3 explains at paragraph 102 that a GPI received to acquire or construct an asset is received in relation to carrying on a business.

In what year is the payment assessable?

Section 15-10 of the ITAA 1997 states that a bounty or subsidy that you receive is included as assessable income. The bounty or subsidy is included in your assessable income in the year in which it is received.

If an amount would be assessable as statutory income apart from the fact that the recipient has not received it, the amount becomes assessable as soon as it is applied or dealt with in any way on the recipient's behalf or as directed by the recipient (subsection 6-10(3) of the ITAA 1997).

Therefore, if an amount would be assessable under section 15-10 of the ITAA 1997 and is paid on behalf of the recipient directly to a supplier in respect of an expense the recipient incurred, it becomes assessable to the recipient at the time it is so paid to the supplier.

Bounty or subsidy received otherwise than in cash

If a non-cash bounty or subsidy is assessable income under section 15-10 of the ITAA 1997, the amount to include in assessable income is the money value of the benefit.

Section 21 of the ITAA 1936 deems that the 'money value' of any consideration paid or given 'otherwise than in cash' is paid or given. Accordingly, the 'money value' of any benefit received through a government grant is deemed to have been paid to the recipient and, if applicable, is included as assessable income under section 15-10 of the ITAA 1997.

Capital gain

A capital gain or a capital loss may arise if a capital gains tax (CGT) event happens to a CGT asset. Section 108-5 of the ITAA 1997 provides that a CGT asset is any kind of property, or a legal or equitable right that is not property.

Section 118-20 of the ITAA 1997 provides that a capital gain will be reduced if the amount is otherwise assessable under another provision of the ITAA 1997. Therefore, whilst a CGT event may in fact happen, if an amount is otherwise included as assessable income under section 15-10 of the ITAA 1997 the Division 104 of the ITAA 1997 capital gain will be disregarded to the extent of that assessable income included.

Application to your circumstances

You received a sum of money. Part of the sum was paid directly to third. The balance of the payment will be used to provide assets to re-connect to the service.

All payments were completed before 30 June 2010.

You carry on a business of primary production on the property that is the subject of the payment. The land is an inherent part of the primary production business.

There is a real connection between the payment and the primary production business and therefore the payment is 'in relation to' carrying on the business.

The payment was not received as a product or incident of the income producing activity of the business. It was received for the purpose of assisting with costs of acquiring or constructing assets which are capital in nature. This component is therefore not income according to ordinary concepts.

The payment is financial assistance given to assist in the carrying on of your business and is considered to be a bounty or subsidy.

As the payment is a bounty or subsidy, received in relation to carrying on the business and is not assessable under section 6-5 of the ITAA 1997, it is treated as assessable income under section 15-10 of the ITAA 1997.

The payment made on your behalf and the balance of the payment were all made to you during the 2009-10 income year. Therefore, the total sum of the payment will be included in your assessable income in the 2009-10 income year.

The full amount of the bounty or subsidy will be treated the same for tax purposes. Even though you did not receive all of the payment, it was paid on your behalf.

The payment will not be considered under the capital gain provisions as it is fully assessable under another provision of the ITAA 1997.