Edited version of private ruling

Authorisation Number: 1011682576117

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Ruling

Subject: Cap and Pipe the Bores government grant

Question 1

Is the government grant payment (the grant) to the taxpayer ordinary income of the taxpayer under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Advice/Answers

No.

Question 2

Is the grant to be made to the taxpayer, statutory income as an assessable bounty or subsidy under section 15-10 of ITAA 1997?

Advice/Answers

No.

Question 3

Is the grant statutory income of the taxpayer as an assessable recoupment under subdivision 20-A of ITAA 1997?

Advice/Answers

No.

Question 4

Does CGT event C2 happen to the taxpayer in relation to component A of the grant?

Advice/Answers

Yes, however as the payment is a reimbursement of your expenses under a scheme established by an Australian government agency, paragraph 118-37(2)(a) of the ITAA 1997 applies to disregard any capital gain or loss arising from the receipt of the reimbursement.

Question 5

Does CGT event C1 happen to the taxpayer in relation to component A of the grant?

Advice/Answers

Yes, CGT event C1 may happen, however there are no capital proceeds in relation to this event.

Question 6

Does CGT event C2 happen to the taxpayer in relation to component B of the grant?

Advice/Answers

Yes.

Question 7

Does CGT event H2 happen to the taxpayer in relation to component B?

Advice/Answers

No.

This ruling applies for the following periods:

Year ending 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

The scheme commences on:

Not yet commenced.

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.

The grant is payable as a partial reimbursement of the cost of work completed.

The grant has two components:

· Component A is a partial reimbursement of the cost of work completed which is incurred by and paid for by the taxpayer.

· Component B is a partial reimbursement to the taxpayer of the cost of work completed by and expenses incurred and paid by a company associated with the taxpayer.

Question 1 - Whether income according to ordinary concepts?

Under subsection 6-5(1) of the ITAA 1997, a payment or other benefit received by a taxpayer is included in assessable income if it is income according to ordinary concepts. Income according to ordinary concepts is not defined in the income tax legislation. However, principles to determine whether a receipt is income according to ordinary concepts have been developed by case law. In determining whether a receipt is income according to ordinary concepts, it is necessary to apply the relevant principles developed by case law to the facts of the particular case.

In Scott v. Federal Commissioner of Taxation (1966) 117 CLR 514 Windeyer J stated:

Whether or not a particular receipt is income depends upon its quality in the hands of the recipient.

In GP International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation (1990) 170 CLR 124; 90 ATC 4413; (1990) 21 ATR 1 the High Court stated at CLR 138, ATR 7; ATC 4420:

To determine whether a receipt is of an income or a capital nature, various factors may be relevant. Sometimes, the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence, sometimes, by the character of a right or thing disposed of in exchange for the receipt, sometimes by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business.

The nature of the grant and its relationship to the business activities of the taxpayer indicates that the grant is capital in nature.

The amount of the grant is therefore not considered to be income according to ordinary concepts.

Question 2 - Whether an assessable bounty or subsidy?

Section 15-10 of the ITAA 1997 includes in assessable income a bounty or subsidy that is received in relation to carrying on a business and that is otherwise not assessable as ordinary income. The basic tests contained in section 15-10 of the ITAA 1997 are that an amount is assessable income if it is:

· a bounty or subsidy;

· received in relation to carrying on a business; and

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

The taxpayer is not considered to be carrying on a business, as such the amount of the grant is not assessable to the taxpayer pursuant to section 15-10 of the ITAA 1997.

Question 3 - Whether an assessable recoupment?

The assessable recoupment provisions in subdivision 20-A of the ITAA 1997 need to be considered where a payment is to be received as recoupment of a loss or outgoing.

Taxation Ruling TR 2006/3 in considering the application of subdivision 20-A provides the following at paragraphs 137 and 138:

137. An amount is an assessable recoupment under these provisions to the extent it is:

· not income under ordinary concepts or otherwise assessable; and

· received either:

o by way of insurance or indemnity as recoupment of a deductible loss or outgoing; or

o as recoupment (other than by way of insurance or indemnity) of a deductible loss or outgoing that is listed in the table in section 20-30.

The items listed in section 20-30 include deductions for bad debts, rates or taxes, research and development activity expenditure, tax related expenses and capital allowances.

138. For the purposes of Subdivision 20-A, recoupment of a loss or outgoing includes any kind of recoupment, reimbursement, recovery, refund, insurance or indemnity. It also includes a grant in respect of a loss or outgoing. In addition, you are taken to receive an amount as recoupment of a loss or outgoing if another entity pays the amount for you in respect of a loss or outgoing you incur.

The grant provided to the taxpayer has two components:

We will address the application of Subdivision 20A to each component separately.

Component A

Component A of the grant is not income according to ordinary concepts and not otherwise assessable, see questions 1, 2, 4 and 5. However, the loss or outgoing incurred is not a deductible loss or outgoing covered by the list in section 20-30 of the ITAA 1997.

As such component A of the grant is not an assessable recoupment pursuant to subdivision 20-A of the ITAA 1997.

Component B

Component B whilst not income according to ordinary concepts is assessable as a capital gain, see question 6.

As such component B of the grant is not an assessable recoupment pursuant to subdivision 20-A of the ITAA 1997.

Question 4 - Whether CGT event C2 happens in relation to component A?

Component A of the grant is a reimbursement of a percentage of the costs incurred by the taxpayer.

Entry into the agreement gives the taxpayer the legal right to receive Component A of the grant. This right is a CGT asset under paragraph 108-5(1)(b) of the ITAA 1997.

Section 104-25 of ITAA 1997 provides the following:

104-25(1)
	CGT event C2 happens if your ownership of an intangible *CGT asset ends by the asset: (a) being redeemed or cancelled; or (b) being released, discharged or satisfied; or (c) expiring; or (d) being abandoned, surrendered or forfeited; or (e) if the asset is an option - being exercised; or (f) if the asset is a *convertible interest - being converted.
	History S 104-25(1)(f) amended by No 163 of 2001. For application provisions, see note under Div 974 heading. S 104-25(1) amended by No 94 of 1999.
104-25(2)

The time of the event is:
(a) when you enter into the contract that results in the asset ending; or
(b) if there is no contract - when the asset ends.

You make a capital gain if the *capital proceeds from the ending are more than the asset's *cost base. You make a capital loss if those capital proceeds are less than the asset's *reduced cost base.

It is considered that Component A of the grant is the capital proceeds for a CGT event C2 that happens when the taxpayer's right to receive that amount is satisfied.

Paragraph 118-37(2)(a) of ITAA 1997 provides the following:

118-37(2) A *capital gain or *capital loss is disregarded if you make it as a result of receiving a payment or property as reimbursement or payment of your expenses, or receiving or using a voucher or certificate, under:

(a) a scheme established by an *Australian government agency, a *local government body or a *foreign government agency under an enactment or an instrument of a legislative character; or

As the payment is a reimbursement of your expenses under a scheme established by an Australian government agency, paragraph 118-37(2)(a) of the ITAA 1997 applies to disregard any capital gain or loss arising from the receipt of the reimbursement.

Question 5 - Whether CGT event C1 happens in relation to component A?

Section 104-20 of ITAA 1997 provides the following:

SECTION 104-20 Loss or destruction of a CGT asset: CGT event C1

104-20(1) CGT event C1 happens if a *CGT asset you own is lost or destroyed.

104-20(2) The time of the event is:

(a) when you first receive compensation for the loss or destruction; or

(b) if you receive no compensation - when the loss is discovered or the destruction occurred.

104-20(3) You make a capital gain if the *capital proceeds from the loss or destruction are more than the asset's *cost base. You make a capital loss if those capital proceeds are less than the asset's *reduced cost base.

CGT event C1 may happen in relation to component A, however there are no capital proceeds in relation to this event

Question 6 - Whether CGT event C2 happens in relation to component B?

Entry into the agreement also gives the taxpayer a legal right to receive Component B of the grant. This right is a CGT asset under paragraph 108-5(1)(b) of the ITAA 1997.

Section 104-25 of ITAA 1997 provides the following:

SECTION 104-25  Cancellation, surrender and similar endings: CGT event C2
	104-25(1)
	CGT event C2 happens if your ownership of an intangible *CGT asset ends by the asset: (a) being redeemed or cancelled; or (b) being released, discharged or satisfied; or (c) expiring; or (d) being abandoned, surrendered or forfeited; or (e) if the asset is an option - being exercised; or (f) if the asset is a *convertible interest - being converted.
	History S 104-25(1)(f) amended by No 163 of 2001. For application provisions, see note under Div 974 heading. S 104-25(1) amended by No 94 of 1999.
104-25(2)

The time of the event is:
(a) when you enter into the contract that results in the asset ending; or
(b) if there is no contract - when the asset ends.

You make a capital gain if the *capital proceeds from the ending are more than the asset's *cost base. You make a capital loss if those capital proceeds are less than the asset's *reduced cost base.

It is considered that CGT event C2 under section 104-25 of the ITAA 1997 happens when the right under the agreement is satisfied by payment of Component B of the grant to the taxpayer.

Paragraph 118-37(2)(a) of ITAA 1997 provides the following:

118-37(2) A *capital gain or *capital loss is disregarded if you make it as a result of receiving a payment or property as reimbursement or payment of your expenses, or receiving or using a voucher or certificate, under:

(a) a scheme established by an *Australian government agency, a *local government body or a *foreign government agency under an enactment or an instrument of a legislative character; or

Component B of the grant represents a reimbursement of a percentage of costs incurred. However, the costs are incurred by the associated company and not by the taxpayer. Paragraph 118-37(2)(a) of ITAA 1997 does not apply to disregard any capital gain or loss arising because the costs are not incurred by the taxpayer.

Question 7 - Whether CGT event H2 happens in relation to component B?

CGT event H2 can only happen if no other CGT event happens (subsection 102-25(3) of ITAA 1997). As CGT event C2 happens in this situation, no CGT event H2 happens.