Edited version of your private ruling

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Ruling

Subject: Assessability of government grant

Question 1

Are recurring and one-off government grants considered assessable income under section 6-5 or section 15-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.
Question 2

If the recurring and one-off government grants are assessable can deductions be claimed under section 8-1 of the ITAA 1997 for non-depreciable, non-private expenditure incurred in relation to deriving assessable income with this funding?

Answer

Yes.

Question 3

If the recurring and one-off government grants are assessable can deductions be claimed under Division 40 of the ITAA 1997 over the effective life of any items of a capital nature that are acquired with this funding?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2009

Year ended 30 June 2010

Year ended 30 June 2011

Relevant facts and circumstances

The grant recipient operates under a partnership structure.

The grant recipient provides a service to a targeted section of the population. It applied for and received funding from the government.

The funding was managed and distributed by a community organisation which had the role of working with recipients to ensure that funds were spent in accordance with funding guidelines.

The funding Guidelines forms part of the facts of this ruling. In part, it provides information in relation to various aspects of the grant program including the focus, varying components, funding, participants, relationships, objectives, the agreement, expenditure plan, roles and responsibilities.

A generic Agreement forms part of the facts of this ruling. In accordance with the information provided under the Guidelines the Agreement, in part, provides a background to the funding and outlines specific requirements in relation to the obligations of the various parties involved and the way in which the funding is planned, used and substantiated.

An Application Pack forms part of the facts of this ruling. Most of the information contained within mirrors that provided in the Guidelines.

A letter from a government department that approved some of the funding forms part of the facts of this ruling. This letter approves some recurring and some one-off funding.

A letter from another government department that approved some of the funding under the program forms part of the facts of this ruling. This letter approves some one-off funding

In the private ruling application and during subsequent phone calls you provided the following information:

· Under the Agreement proprietors are directed as to how the monies were to be spent. You had to meet certain requirements in order to qualify and maintain the grant.

· Items purchased with the funding need to be pre approved and could be confiscated if the contract conditions were not complied with. Non-compliance could lead to future payments being discontinued.

· You confirmed that the funding amounts were paid by the government to the community organisation who was charged with the responsibility of distributing specific amounts to you, the proprietor. The one-off grants were spent on acquiring capital items.

· Out of the funding you received some one-off payments and one regular reimbursement of expenditure per fortnight to cover the cost of staffing.

Relevant legislative provisions

Income Tax Assessment Act 1997, Section 6-5

Income Tax Assessment Act 1997, Section 8-1

Income Tax Assessment Act 1997, Section 10-5

Income Tax Assessment Act 1997, Section 15-10

Income Tax Assessment Act 1997, Division 40

Income Tax Assessment Act 1997, Section 40-95

Income Tax Assessment Act 1997, Section 40-100

Income Tax Assessment Act 1997, Section 40-105

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 www.ato.gov.au 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

Note, unless otherwise stated all subsequent legislative references pertain to the ITAA 1997.

Question 1

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. Included in the list in section 10-5 are bounties and subsidies (section 15-10).

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 10 it states that a 'GPI to assist a business to continue operating, except where the payment is for agreeing to give up or sell part of the profit yielding structure, is included as assessable income of the recipient under section 6-5 or section 15-10.'

Ordinary Income (section 6-5)
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 6-5 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. This view is supported by ATO Interpretative Decision report, ATO ID 2003/902 which cited the same reasoning in finding that a government grant paid in two instalments to a medical practitioner was not assessable under section 6-5.

At paragraph 84, TR 2006/3 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 15-10)

Under section 6-10 some amounts that are not 'ordinary income' are included in your assessable income due to another provision of the tax law. These amounts are 'statutory income'. . Subsection 6-10(1) refers to provisions about assessable income - a summary list of these provisions is contained within section 10-5.

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

Section 15-10 provides that 'assessable income includes a bounty or subsidy that:

(a) is received in relation to carrying on a business; and

(b) is not assessable as ordinary income under section 6-5.'

Paragraph 96 of TR 2006/3 provides that a reference to a 'bounty or subsidy' includes a grant. Paragraph 100 of TR 2006/3 states, in part, 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.'

Paragraph 102 of TR 2006/3 states, in part, that a 'GPI received to acquire or construct an asset … is received in relation to carrying on a business.'

Application to your circumstances
You advise that you applied on behalf of the proprietor for the funding from the government. Grants were approved by the relevant Departments. The community organisation liaised with you to form an expenditure plan that was acceptable under the Guidelines.

Assessable as ordinary income (section 6-5)
For the purposes of determining their assessability as ordinary income under section 6-5 the payments made out of the funding can be split into two categories.

Firstly, there exists a sequence of one-off payments which directly relate to the acquisition of a series of specified capital items.

Secondly, there exists a series of recurring periodical fortnightly payments which subsidise the costs of additional staffing.

For the purpose of section 6-5 there is a strong argument that the one-off receipts do 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 they do not constitute income from the provision of personal services, are not sourced from property, and have not been derived directly from your usual business activities in relation to the business. Therefore, it may be concluded that these one-off payments are not ordinary income under section 6-5.

The treatment of the recurring fortnightly payments is not as clear. Whilst they are not derived from personal services, property or directly in relation to your usual business activities, it may be argued that they do in fact represent receipts in place of, and displaying the same character as payments that you have decided not to charge the service recipients in relation to the services you provide. These charges would form part of your ordinary taxable income. It therefore follows that the fortnightly payments received from the government funding in this regard may be assessable under section 6-5.

Assessable as a Bounty or Subsidy (section 15-10)
We have established that the government grants in question satisfy the definition of 'Bounty or Subsidy'. Therefore, if the grants are not already caught as assessable income under section 6-5, then provided that they are received in relation to carrying on a business they will be assessable under section 15-10.

In accordance with TR 2006/3 these grants, whether one-off or recurring payments are all "in relation to" carrying on a business because there is a real connection between the payment and the business that is being carried on.

It follows that regardless of whether the grants are caught under section 6-5 or section 15-10 they will all constitute assessable income for the purposes of the ITAA 1997.

Question 2

Subsection 8-1(1) states, in part, that 'You can deduct from your assessable income any loss or outgoing to the extent that … it is incurred in gaining or producing your assessable income; or … it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.'

Further to this, subsection 8-1(2) provides that 'you cannot deduct a loss or outgoing under this section to the extent that … it is a loss or outgoing of a capital, or of a capital nature; or … it is a loss or outgoing of a private or domestic nature; or it is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income'.

Application to your circumstances

To the extent that the funding is received and expended in relation to the derivation of assessable income from the carrying on of your business and the expenditure does not fall within one of the subsection 8-1(2) exceptions then you may claim a deduction. An example of a fully deductible expense would be the cost of staffing.

Question 3

In accordance with Division 40 some expenditure, such as the cost of acquiring capital assets, is generally not deductible in full in the year that the expenditure is incurred.

Generally, the value of a capital asset you hold that provides a benefit over a number of years declines over its effective life. Because of this, the cost of capital assets used in gaining assessable income can be written off over a period of time as tax deductions.

Effective life
With regard to the effective life of a capital item section 40-95 provides that you have a choice between two methods.

Firstly, under section 40-100 you may request the Commissioner to make a written determination of an appropriate effective life of a depreciating asset.

Alternatively, under section 40-105 you may self-assess the effective life of a depreciating asset by estimating the period (in years, including fractions of years) it can be used for a taxable purpose, having regard to the wear and tear you reasonably expect from your expected circumstances of use and assuming that it will be maintained in reasonably good order and condition.

If you determine that the effective life of a capital item is greater than one year then the expenditure must be apportioned and claimed over those years.

If you determine that the effective life of a capital item is one year or less then the whole amount may be claimed as a deduction in the year in which the expense is incurred.

Note that Taxation Ruling TR 2011/2 addresses the effective life of depreciating assets and whilst not binding on you it does provide an extensive list of capital items that you may wish to reference if you decide to make a determination under self-assessment.

Application to your circumstances

Provided they are used in the course of carrying on your business and they satisfy the requirements of Division 40 the capital assets you have acquired using the funding received under the funding program may be deductible over their effective life.

This would include the capital items that you have stated you acquired.