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Ruling:

Subject: Rebates for renewable energy

Question 1

Will the grant received by you be assessable income under section 6-5 or section 15-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

On the basis that you choose to calculate capital allowances on depreciating assets under Subdivision 328D of the ITAA 1997, will the grant received that relates to such expenditure, be an assessable recoupment under Subdivision 20-A of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

The scheme commenced on

1 July 2011

Relevant facts

You are acquiring large depreciating assets that will be used in a business.

The business cannot commence until the assets are in place.

The government has approved a grant to assist with the cost of the assets.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 15-10

Income Tax Assessment Act 1997 Subdivision 20-A

Income Tax Assessment Act 1997 Subsection 20-20(2)

Income Tax Assessment Act 1997 Section 20-35

Income Tax Assessment Act 1997 Section 20-40

Reasons for decision

Note that all subsequent legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated.

Question 1

Taxation Ruling TR 2006/3 discusses government payments to industry to assist entities to continue, commence or cease business.

Paragraph 4 states in part government payments to commence business include payments to assist with the purchase of a depreciating asset.

Paragraph 26 states government payments to industry to commence or cease a business are not assessable as ordinary income of the recipient under section 6-5 or as a bounty or subsidy in relation to carrying on a business under section 15-10.

In application to this case, you received a government grant to fund the purchase and installation of certain depreciating assets. You cannot commence business until the assets are purchased and installed. The government grant is not assessable under either section 6-5 (as ordinary income) or under section 15-10 (bounty or subsidy) as the payments are considered payments to commence business, more specifically to assist with the purchase of depreciating assets.

Question 2

Under Subdivision 20-A certain amounts received by way of insurance, indemnity or other recoupment are assessable income if the amounts are not income under ordinary concepts or otherwise assessable.

Under subsection 20-20(2), an amount received as recoupment of a loss or outgoing is an assessable recoupment if:

· you received the amount by way of insurance or indemnity; and

· you can deduct an amount for the loss or outgoing for the current year, or you have deducted or can deduct an amount for the loss or outgoing for an earlier income year under any provision of this Act.

Sections 20-35 and 20-40 discuss when and how much is included in assessable income if the recoupment is received before the income year of the deduction and if the expense is deductible over two or more income years, respectively.

For the recoupment of the loss or outgoing to be an assessable recoupment under subsection 20-20(2) of the ITAA 1997, the amount the taxpayer receives must be by way of insurance or indemnity. It is clear in this case that the recoupment will not be received by way of insurance.

Indemnity is not a defined term and therefore must be given its ordinary meaning. The Macquarie Dictionary, [Multimedia], version 5.0.0, 1/10/01, definition of indemnity includes compensation for damage or loss sustained.

The issue of whether an amount is received by way of indemnity for the purposes of the predecessor provision to subsection 20-20(2) of the ITAA 1997 (paragraph 26(j) of the Income Tax Assessment Act 1936) has been considered in a number of cases including: Federal Commissioner of Taxation v. Wade (1951) 84 CLR 105; (1951) 9 ATD 337; 5 AITR 214, Robert v. Collier's Bulk Liquid Transport Pty Ltd (1959) VR 280, Goldsbrough Mort & Co Ltd v FC of T (1976) 76 ATC 4343, 6 ATR 580 (Goldsbrough); and Commercial Banking Company of Sydney Limited v. FC of T 83 ATC 4208 (1983); 14 ATR 142 (Commercial Banking).

These cases make it clear that an amount received by way of indemnity is not restricted to amounts received under a contract of indemnity. This was made clear by Hunt J. in Commercial Banking who, referring to the decision in Goldsbrough, stated

... his Honour was correct in ruling that the expression "by way of... indemnity" should not be construed narrowly in the sense of "pursuant to a contract of indemnity".

The cases also make it clear that an amount received 'by way of indemnity' would include a receipt pursuant to an antecedent obligation (whether by virtue of a contract, statute or a breach of some common law duty of care) to make good or compensate for a loss which arises after the obligation comes into existence.

Therefore, the phrase 'by way of indemnity' broadens the range of receipts to be considered an assessable recoupment under subsection 20-20(2) of the ITAA 1997 to include receipts other than amounts received under a contract of indemnity.

The grant partially compensates you for the outgoing to acquire and install the depreciating assets. That being so, the grant is an amount received by way of indemnity. You can deduct an amount for the loss or outgoing under a provision of the Income Tax Assessment Act 1997. Therefore, the grant amount received is considered an assessable recoupment under subsection 20-20(2) of the ITAA 1997.