Edited version of private ruling

Authorisation Number: 1011716131466

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Ruling

Subject: Whether a government grant is assessable income

Question

Is the Grant paid by the government considered assessable income?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 2011

Year ending 30 June 2012

Relevant facts and circumstances

You run a small business.

You have just commenced renovations to a very old and very small building.

A government department has made available some funding to be forwarded on to interested businesses.

A shortage of training places has been identified and the Grant is paid to help develop the businesses infrastructure so that it can increase its capacity and take on students.

Your business applied and was successful in being offered a grant provided you committed to training students for a set period. The Grant is to be paid in instalments over 2 financial years.

The Agreement provides that your business will be eligible to receive funding from the Commonwealth on the terms and conditions set out in this Agreement for the purpose of funding the business to carry out the infrastructure project described in the Agreement that increases capacity and improves distribution of teaching and training for students, trainees and other associated professionals undertaking continuing professional development.

It also indicates that the business must by the completion of the Capital Works have appropriate agreements in place with tertiary and other relevant organisations to ensure that at a minimum the number and type of students listed in a Schedule to the agreement will receive annual training placements at the business across the life of the Retention Period.

During a telephone conversation you advised of further relevant information.

Relevant legislative provisions

Income Tax Assessment Act 1997, section 6-5

Income Tax Assessment Act 1997, section 6-10

Income Tax Assessment Act 1997, subsection 6-10(1)

Income Tax Assessment Act 1997, section 10-5

Income Tax Assessment Act 1997, section 15-10

Income Tax Assessment Act 1936, paragraph 26(g)

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 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

Unless otherwise stated all legislative references pertain to 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 in terms of section 6-5, or

· If not ordinary income it may be included in your assessable income because it is caught under the general 'statutory income' provisions in section 6-10, as listed in section 10-5.

Ordinary Income

Section 6-5 states, in part, the following:

6-5(1) Your assessable income includes income according to ordinary concepts, which is called ordinary income.

6-5(2) If you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

The intent of section 6 is to include in assessable income those receipts which can be categorised as income according to ordinary concepts.

Although the expression 'income according to ordinary concepts' is not defined in the ITAA 1997, there is a substantial body of case law from which a number of factors have been drawn to determine whether an 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.

ATO policy concerning government payments to industry (GPI) is set out in Taxation Ruling TR 2006/3 Income Tax: government payments to industry to assist entities (including individuals) to continue, commence or cease business. At paragraph 84, it provides that ordinary income generally falls within three categories:

· Income from providing personal services,

· Income from property, or

· Income from carrying on a business.

Statutory Income - A Bounty or Subsidy

Section 6-10 provides that your assessable income may include some amounts that are not 'ordinary income'. These amounts are considered 'statutory income'. Subsection 6-10(1) refers to a summary list of these provisions that is contained within section 10-5.

One of the statutory income provisions listed in section 10-5 is section 15-10 which deals with bounties and subsidies.

Section 15-10 states 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.

With regards to GPI's, paragraph 96 of TR 2006/3 states that a 'reference to bounty or subsidy includes a grant that encourages business or trade.'

Paragraph 4 makes reference to bounties, subsidies, grants and rebates, and under the heading 'Government payments to continue business' it includes payments to assist with operating costs and payments to encourage business expansion.

In relation to carrying on a business

We must decide whether the bounty or subsidy has been received in relation to carrying on a business.

'In relation to'

Paragraph 100 of TR 2006/3 confirms that a grant '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…'

In the Full Federal Court in First Provincial Building Society Ltd v. FC of T (1995) 128 ALR 118; (1995) 95 ATC 4145; (1995) 30 ATR 207; (1995) 56 FCR 320 (First Provincial), Hill J was discussing the antecedent of section 15-10, that is, paragraph 26(g) of the Income Tax Assessment Act 1936 (ITAA 1936). He stated that 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 of a business.'

In First Provincial, Hill J specifically discussed the relationship between the terms 'received in' and 'received in relation to'. This has direct relevance to the interpretation of section 15-10 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.

'Carrying on a business'

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 is to be interpreted widely.

Paragraph 102 of TR 2006/3 states, in part, that a 'GPI received to acquire or construct an asset … to improve the … operations of a business is received in relation to carrying on a business.' These payments are assessable under section 15-10…'

The expression 'carrying on of the business' is however limited to the activities of the business which are directed towards the gaining or producing of assessable income rather than merely to the business itself.

It follows that a government grant paid towards the infrastructure or other operations of a business will only be in relation to the 'carrying on of the business' where the funding contributes in some way towards the derivation of assessable income by the business.

Application to your circumstances:

Ordinary Income

The Grant does not constitute ordinary income.

Whilst it will be paid in separate instalments it does not possess the necessary elements of periodicity, recurrence or regularity that are common to receipts of ordinary income.

Further, in terms of TR 2006/3 it does not constitute income from the provision of personal services, is not sourced from property, and has not been derived directly from your usual business activities as a medical practitioner.

Bounty or Subsidy

The program under which the Grant was paid was funded by the Australian Government to address an identified critical shortage of professionals by investing in teaching and training infrastructure designed to support undergraduate students.

In your case, the funding will be paid to help develop the businesses infrastructure including buildings and information technology (IT) resources.

You advise that you have just commenced renovations to a building. This includes the renovation and fitting out of five rooms and a staff room / library. New IT resources including computing equipment will also be installed.

In accordance with the requirements of the Grant agreement these amenities will be available to be used by students. You advise that the students will be located in the new rooms. They will have access to the staff room / library and will use the other rooms, but in a predominantly observational capacity.

Other than the rooms in which the students are located during their placement all other renovated rooms and equipment will be incorporated into the business to be utilised by staff during the normal course of their day to day duties. Once the training period is complete all facilities will be available for use by the existing business with the additional capacity allowing you the choice of attracting another employee.

In accordance with TR 2003/3, the Grant is considered a Bounty or Subsidy for the purpose of section 15-10. As it is not considered ordinary income, for it to be assessable it must have been 'received in relation to carrying on a business'

The connection between the Grant and the business may be either direct or indirect, however, the expression 'carrying on of the business' does require that for the Grant to be assessable it must contribute towards the activities of the business which are directed at the gaining or producing of assessable income rather than merely at the business itself.

In your case, the funding agreement requires that the Grant be directed towards the infrastructure and equipment necessary to support the training needs of the tertiary students. There is no mention of contributing towards the usual business activities. In fact, you point out that the commitment to the training program will more likely be a drain on resources and inhibit the income earning potential of the business.

Whilst we accept this argument, it remains that a significant proportion of the additional amenities and facilities provided for under the Grant funding will be available to and immediately utilised by the current employees in the day to day operation of the business and in the generation of assessable income. Upon the completion of the three year commitment all facilities will readily fold back into and be available to the business with the additional space allowing for the prospect of employing further employees (which was part of the governments initial intention in establishing the program).

Conclusion

The Grant is a subsidy which will be used to provide infrastructure and equipment which will be used not only to provide training to tertiary students, but also in relation to the carrying on of your current business activities and the derivation of assessable income.

It follows that the Grant instalments will be considered assessable income under section 15-10 in the year of receipt.

Additional information on reimbursements

Taxation Ruling TR 92/15 discusses what we consider constitutes a reimbursement. It is irrelevant whether the payment is made in one or multiple instalments. Paragraph 3 states the following:

A payment is a reimbursement when the recipient is compensated exactly (meaning precisely, as opposed to approximately), whether wholly or partly, for an expense already incurred although not necessarily disbursed. In general, the provider considers the expense to be its own and the recipient incurs the expenditure on behalf of the provider. A requirement that the recipient vouch expenses lends weight to a presumption that a payment is a reimbursement rather than an allowance. A requirement that the recipient refunds unexpended amounts to the employer adds further weight to that presumption.

Your situation differs from this in that the grant does not relate to an exact outgoing. Whilst having to remain within the bounds of the Grant agreement, the way in which the money is spent is at your discretion. The provider does not consider the expense/s to be its own.