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Edited version of private ruling
Authorisation Number: 1011675432697
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Ruling
Subject: government grant
Is the government grant you received considered assessable income?
Yes.
This ruling applies for the following period:
Year ended 30 June 2010
The scheme commences on:
1 July 2009
Relevant facts and circumstances
You applied for and were successful in receiving a government grant.
The object of applying for funding of the project was to provide necessary facilities and equipment to enhance and develop the current business.
The grant will be given in instalments.
Reasons for decision
Ordinary income
Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes income according to ordinary concepts (ordinary income) derived directly or indirectly from all sources during the income year.
The term ordinary income is not defined in the income tax legislation. However the courts have identified a number of factors which indicate whether the amount has the character of income according to ordinary concepts.
A frequent characteristic of income receipts is an element of periodicity, recurrence or regularity, even if the receipts are not directly attributable to services rendered.
The amount received is not considered to be income according to ordinary concepts as it lacks these characteristics and therefore it is not assessable under section 6-5 of the ITAA 1997.
Statutory income
Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in assessable income by another provision, are called statutory income and are also included in assessable income.
Bounties and subsidies
Bounties and subsidies are considered statutory income.
Section 15-10 of the ITAA 1997 states your assessable income includes a bounty or subsidy that:
(a) you receive in relation to carrying on a business; and
(b) is not assessable as ordinary income under section 6-5.
The Macquarie Dictionary (2nd edition) defines 'bounty' as:
A premium or reward, especially one offered by a government.
A subsidy is defined as:
A direct pecuniary aid furnished by a government to a private industrial undertaking, a cultural organisation, or the like.
The meaning of the word 'subsidy' was considered by the Full Federal Court in First Provincial Building Society Ltd v. Federal Commissioner of Taxation (1995) 56 FCR 320; 95 ATC 4145; (1995) 30 ATR 207 (First Provincial). Hill J (with whom Black CJ and Carr J agreed) stated that, in this context, the word means financial assistance given by the Crown and quoted with approval the following statement by Windeyer J in Placer Development Ltd v. Commonwealth of Australia (1969) 121 CLR 353 at CLR 373
The word is no longer used in its early sense of a grant to the Crown. It ordinarily means today not aid given to the Crown but aid provided by the Crown to foster or further some undertaking or industry. A subsidy was defined in America fifty years ago as a "legislative grant of money in aid of a private enterprise deemed to promote the public welfare". Shumaker and Longsdorf, Cyclopedic Law Dictionary. This I take to be, broadly speaking the sense in which the word is currently used in Australia
Following the decisions in Squatting Investments Co Ltd v. Federal Commissioner of Taxation (1953) 86 CLR 570; (1953) 10 ATD 126; (1953) 5 AITR 496, Reckitt and Colman v. FC of T 74 ATC 4185; (1974) 4 ATR 501and First Provincial, it is now well accepted that a 'subsidy' includes a financial grant made by a government.
The decision in First Provincial confirmed that section 15-10 of the ITAA 1997 (which replaced its antecedent, paragraph 26(g) of the Income Tax Assessment Act 1936 (ITAA 1936)) may apply to payments of a capital nature.
The grant received is considered a subsidy as you received a financial grant from a government department.
Received in relation to carrying on a business
The issue is then whether the bounty/subsidy has been received in relation to carrying on a business. Hill J in the First Provincial case, considered the meaning of the words 'received in relation to carrying on a business'. He stated that the receipt of the subsidy must relate to the activities of the business which are directed to the gaining or producing of assessable income.
As His Honour was discussing the antecedent of section 15-10 of the ITAA 1997, that is, paragraph 26(g) of the ITAA 1936, it is important to note that the former provision contained the words ' received in or in relation to carrying on of a business ... (emphasis added).' When the provision was incorporated into the ITAA 1997, it was rewritten as a bounty or subsidy 'you receive in relation to carrying on a business.'
In the First Provincial case judgment, Hill J. specifically discussed the relationship between the terms 'received in' and 'in relation to'. This has direct relevance to the interpretation of section 15-10 of the ITAA 1997 as the rewrite of the provision only contained the latter phrase. Hill J stated:
The word "in'' means "in the course of" and requires a direct relationship to exist between the bounty, on the one hand, and the carrying on of the taxpayer's business, on the other. The second limb comprehends a bounty or subsidy received "in relation to'' the carrying on of the taxpayer's business. These words no doubt are sufficiently wide to cover the first limb, but were obviously intended to extend it. Thus the relationship between the receipt of the bounty, on the one hand, and the carrying on of the business, on the other, may be less direct where the second limb is sought to be applied than where the first limb is applied.
It is clear from the First Provincial case, that the scope of the phrase 'in relation to carrying on a business' in section 15-10 of the ITAA 1997 is to be interpreted widely.
It is considered that the funding received is sufficiently connected to your current business activity to have been made in relation to the provision of services.
It does not necessarily mean that the business has to increase the production of assessable income; it only means that the receipt of the subsidy is related to the gaining or producing of assessable income within the business which is the case here.
The grant is considered statutory income and is assessable as a subsidy under section 15-10 of the ITAA 1997.
Assessable recoupment
Subsection 20-20(1) of the ITAA 1997 states an amount is not an assessable recoupment to the extent that it is ordinary income, or it is statutory income because of a provision outside Subdivision 20-A
As the grant is considered assessable income under section 15-10 of the ITAA 1997 (statutory income) it is not considered an assessable recoupment.