Edited version of private ruling

Authorisation Number: 1011700812550

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Ruling

Subject: Funding

Question

Is the grant received assessable income in the year of receipt?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commenced on

1 July 2009

Relevant facts and circumstances

The arrangement that is the subject of the Ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· the application for private ruling, and

· the funding agreement between you and a government department.

You carry on a business that provides health services.

The aim of the government program is to improve access to health services by providing funding to rural and remote communities to establish new or enhance existing, walk-in/walk-out primary health care and medical facilities, where the lack of infrastructure (capital works and/or equipment) is a barrier to the delivery of essential health services.

The grant was restricted and:

· was to be utilised in full for the building project,

· was unable to be transferred or used to make provision for tax liability, and

· the infrastructure must remain as a health facility for a minimum of 10 years.

The funds were paid in the income years.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Section 15-10.

Reasons for decision

Summary

Under section 15-10 of the Income Tax Assessment Act 1997 (ITAA 1997), your assessable income for a year includes a bounty or subsidy you receive in carrying on a business. It is considered that the grant is a bounty or subsidy received in carrying on your business. Therefore, your funding received under the government program is assessable income in the year of receipt.

Detailed reasoning

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, namely, income form rendering personal services, income from property and income from carrying on a business.

Other 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.

The money received under the funding agreement does not have the above characteristics and is not regarded as ordinary income.

Statutory income is not ordinary income, but is included in assessable income by specific provisions of the income tax law (section 6-10 of the ITAA 1997).

These specific provisions are listed in section 10-5 of the ITAA 1997. The list includes bounties and subsidies, which are included in assessable income by virtue of the section 15-10 of the ITAA 1997.

Section 15-10 of the ITAA 1997 provides that 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 of the ITAA 1997.

The Macquarie Dictionary 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.'

In addition, the decisions in various cases such as Squatting Investments Co Ltd v. FC of T (1953) 86 CLR 570; (1953) 10 ATD 126; (1953) 5 AITR 496, Reckitt and Colman Pty Ltd v. FC of T (1974) 74 ATC 4185; (1974) 4 ATR 501 and First Provincial Building Society Ltd v. Federal Commissioner of Taxation (1995) 56 FCR 320; 95 ATC 4145; (1995) 30 ATR 207 confirm that a 'subsidy' includes a financial grant made by the government.

The funding you received under the program was not derived in the normal course of carrying on your business. It is considered to be a capital sum to expand the infrastructure of your business.

The Explanatory Memorandum to section 15-10 of the ITAA 1997 states that any bounties or subsidies of a capital nature related to carrying on of business will be assessable under this provision.

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 relationship can be either direct or indirect. A grant received to assist with the capital costs of restructuring a business to improve its operations is received in relation to carrying on a business.

In your case, the aim of the funding under the program is to improve access to health services in rural and remote communities by providing infrastructure funding. It is considered that the funding was received in relation to the carrying on of your business, as the funding will enable you to expand the business.

Therefore, the money received under the program is assessable under section 15-10 of the ITAA 1997.

The wording in section 15-10 of the ITAA 1997 states that your assessable income includes a bounty or subsidy that you receive. That is the funding payments are assessable in the income year you receive it.