Edited version of private ruling

Authorisation Number: 1011514009576

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Income Tax - proceeds of project fund

Question 1

Will proceeds from the project fund be assessable income?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commences on:

2010

Relevant facts and circumstances

You are carrying on a business.

The project fund provides support for new capital investment that will expand your business in order to achieve certain outcomes.

A copy of the funding agreement has been provided.

Under the terms of the funding agreement you are committed to funding the project with at least an equal amount.

You are also required to achieve certain milestones and report on these. Subject to this and other requirements funds will be paid to you.

Relevant legislative provisions

Income Tax Assessment Act 1997 6-5 and

Income Tax Assessment Act 1997 15-10.

Reasons for decision

All references made in these reasons for decision are to the Income Tax Assessment Act 1997 unless otherwise stated.

Question 1

Summary

The funds to be provided to you are assessable income on the basis that they are statutory income under section 15-10.

Detailed reasoning

Taxation Ruling TR 2006/3 provides the Commissioner's opinion on the treatment of government payments to industry to assist entities to continue, commence or cease business.

At paragraph 10 of TR 2006/3 it states that 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 as assessable income of the recipient under section 6-5 or section 15-10.

Section 15-10 states:

Your assessable income includes a bounty or a subsidy that:

· you receive in relation to carrying on a business; and

· is not assessable as ordinary income under section 6-5.

Bounty or a subsidy

A bounty or a subsidy includes a grant and other financial assistance provided by the government to assist businesses.

At paragraph 96 of TR 2006/3 it states that '...a reference to a 'bounty or a subsidy' includes a grant that encourages business or trade…'.

In paragraph 97 of TR 2006/3 it is noted that 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 payments you receive from the fund are in the nature of a bounty or subsidy as they are payments made to assist with the costs of a specific project targeting new capital investment.

In relation to carrying on 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, and the payment is directed towards the income earning activity of the business. In First Provincial Building Society Ltd v. Commissioner of Taxation (1995) 56 FCR 320; 95 ATC 4145; (1995) 30 ATR 207, the Full Federal Court held that, as the payment there assisted the taxpayer to continue to carry on the taxpayer's business activities, it was made in relation to the carrying on of its business, although it lacked the necessary connection with the taxpayer's business activities to constitute ordinary income.

The payments the fund makes to you are received in relation to carrying on a business as they are made to assist you expand your business in order to achieve certain outcomes.

Ordinary income

Income according to ordinary concepts is not defined in the taxation legislation. The characteristics of ordinary income have been developed by case law and generally fit into three categories:

· income from providing personal services

· income from property; or

· income from carrying on a business.

The payments made by the Fund are not assessable as ordinary income under section 6-5 as they are capital in nature. In G.P International Pipecoaters Pty Ltd (1990) 170 CLR 124; 90 ATC 4413; (1990) 21 ATR 1 the High Court commented on the characterisation of a subsidy that is intended to assist the recipient with capital costs, saying that such receipts would be capital in nature. The court stated at CLR 124; ATC 4422; ATR 10 that:

…it is necessary to consider the taxpayer's submission that the cases show that a receipt of moneys intended by payer and payee to recoup a recipient's capital expenditure is a receipt of a capital nature. That proposition can be accepted when the amount is received by way of gift or subsidy to replenish or augment the payee's capital, for in such a case the receipt cannot fairly be said to be a product or incident of the payee's income-producing activity.

The payments you receive under the fund will therefore be capital and thus are not ordinary income under section 6-5. They are bounties or subsidies and will be received in relation to carrying on a business. The payments are therefore assessable income under section 15-10.

The grant is to be paid in instalments which will not be paid unless certain conditions are met. Although the provider is entitled to recover any funds which are unspent or not spent in accordance with the agreement, the funds will be assessable in the year of tax that they are received.