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Ruling

Subject: Assessability of a Government Grant

Question 1

Is the Government Grant assessed as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Is the Government Grant assessed as a bounty or subsidy under section 15-10 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2011

Relevant facts and circumstances

The Government Grant program provides business planning and development support to help certain entities which have recently made, or are about to make, a commitment in a particular business endeavour.

Prior to 30 June 2010 - Business asset acquired

Prior to 30 June 2010 - Business activities commenced and the asset was used in the course of carrying on that business

Post 30 June 2010 - An application was lodged with the relevant Government Department in relation to one component of the Grant.

Post 30 June 2010 - The Government Department advised that some unspecified amount of funding had been approved.

Post 30 June 2010 - An application was lodged with the relevant Government Department in relation to a second component of the Grant.

Post 30 June 2010 - The Government Department advised that a specified amount of funding had been approved in relation to the first component.

Post 30 June 2010 - The Government Department advised that specified amount of funding had been approved in relation to the second component.

Relevant legislative provisions

Income Tax Assessment Act 1997, section 6-5

Income Tax Assessment Act 1997, section 15-10

Reasons for decision

Note: Unless otherwise stated, all subsequent legislative references are to the ITAA 1997.

Question 1
Subsection 6-5(1) provides that an amount is included in assessable income if it is income according to ordinary concepts (ordinary income). However, as there is no definition of ordinary income in income tax legislation, it is necessary to apply principles developed by the courts to the facts of a particular case.

In accordance with Taxation Ruling TR 2006/3, whether or not a particular receipt is ordinary income depends on its character in the hands of the recipient.

A generally decisive consideration is whether the payment is the product in a real sense of any employment, services or business carried on by the recipient.

Application to your circumstance
The receipt of the Government Grant is not a normal incident of your business. It follows that the Government Grant does not constitute ordinary assessable income under section 6-5.

Question 2
Section 15-10 provides that an amount is included in assessable income if it is a bounty or subsidy received in relation to carrying on a business which is not already caught as ordinary income under section 6-5.

The terms bounty and subsidy are not defined in income tax legislation. The ordinary meaning adopted by case law is an aid provided by the Crown (government) to foster or further some undertaking or industry. It is now well accepted that a subsidy or bounty includes a financial grant made by a government.

In accordance with TR 2006/3, 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 term 'in relation' includes within its scope payments that have a direct or indirect connection to the business. However, a bounty or subsidy must be related to carrying on the business not merely for commencing or ceasing a business.

Paragraph 18 of TR 2006/3 provides that a government grant to reimburse, assist with or directly pay the cost of obtaining legal, business, accounting, financial or other professional advice that is not in the ordinary course of business will not be on revenue account. Where the government grant is not on revenue account but never the less is a bounty or subsidy in relation to carrying on a business it is assessable under section 15-10 in the year of receipt.

Likewise, paragraph 19 provides that a government grant received to acquire an asset that is associated with the carrying on of a business is also assessable under section 15-10.

Application to your circumstance
As stated above, a financial grant made by a government is considered a bounty or subsidy.

We consider that you have been carrying on a business at least since the date on which the business asset acquired pre 30 June 2010 was first used. That was also pre 30 June 2010.

The applications and approvals in relation to the Government Grant were lodged subsequent to the commencement of the business activities i.e. in the year ended 30 June 2011.

As the Government Grant is a bounty or subsidy paid in relation to, but subsequent to the point in time at which your business commenced being carried on, it constitutes assessable income under section 15-10 and is assessable in the year ended 30 June 2011.