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Ruling

Subject: Assessability of Biodiversity Fund grant

Question 1

Are the amounts you receive from a government authority, under an agreement whereby you undertake to provide certain services consistent with their objectives, included in your assessable income?

Answer

Yes.

Question 2

Are the expenses associated with earning the payments deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2012
Year ending 30 June 2013
Year ending 30 June 2014

The scheme commenced on:

1 July 2011

Relevant facts

As part of an Australian Government Package, a Government Department is responsible for the Program.

You successfully applied for funding and have entered into an agreement with the Government authority whereby you will provide a number of services over a period of time based on your proposed management plan. These services are aimed at contributing to the Program's objectives.

In accordance with the Agreement the funding will be paid in three annual instalments (of varying amounts).

A copy of the funding agreement between the Government (as represented by the Department) and you forms part of the facts of this ruling.

You operate a small business and you are registered for GST.

The funds allocated under the agreement cannot be used to conduct 'business as usual' activities.

As you are registered for GST in relation to your business, the allocation of funds includes GST.

In consideration of the provision of funds, you must perform the project consistently with the program objectives within the project period.

You also have to meet certain milestones as specified in the milestone schedule and meet reporting requirements;

If the funds are not spent in accordance with the Agreement the Commonwealth may, by written notice to you, direct you to repay the funds.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Summary

The amounts you receive from the government authority, whereby you undertake to provide certain services, are included in your assessable income under section 6-5 of the ITAA 1997.

You are entitled to claim a tax deduction for any deductible expenses incurred in earning this income.

Detailed reasoning

An amount is included in assessable income if it is income according to ordinary concepts, which is called ordinary income (section 6-5 of the ITAA 1997). 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.

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.

In determining whether a payment has the character of income or capital, regard must be has to the character of the receipt in the hands of the recipient ( Scott v. Federal Commissioner of Taxation ( 1966) 117 CLR 514; (1966) 14 ATD 286; (1966) 10 AITR 367; Hayes v. Federal Commissioner of Taxation (1956) 96 CLR 47; (1956) 11 ATD 82; (1956) 4 AITR 248 ( Hayes ); Federal Coke Co Pty Ltd v. FC of T 77 ATC 4255; (1977) 7 ATR 519).

In MIM Holdings Ltd v. Commissioner of Taxation 97 ATC 4420; (1997) 36 ATR 108 Justices Northrop, Hill and Cooper, relying on Hayes and Reuter v. FC of T 93 ATC 5030; (1993) 24 ATR 527 said that 'amounts paid in consideration of the performance of services will almost always be income'.

The question of whether an amount is a product of the taxpayer's services (that is, paid in consideration of the performance of the taxpayer's services) has been considered in a number of High Court decisions.

The following guidance is afforded by those decisions:

· the whole of the circumstances must be considered;

· a generally decisive consideration is whether the receipt is the product in a real sense of any employment of, or services rendered by the recipient, or of any business, or any revenue production activity carried on by the recipient;

· other considerations that are relevant but not decisive include:

· the motive of the donor (payer) in paying the amount;

· the regularity and periodicity of the payment, however a payment in a lump sum does not require a conclusion that the payment is capital; and

· the recipient's expectation that an amount will be received.

As part of the Program you are to receive payment for certain services.

The contract between you and the Government authority specifies the rights and obligations of both you and the payer under the Agreement. It includes a schedule of management actions you need to complete to receive payment. Under the Agreement you agree to provide services over the specified period in return for consideration.

The fund payments are the product of the services that you perform.

Other factors such as your expectation to receive payment in return for undertaking the activities as set out in the contract and the purpose of the Government in making the payment (to provide an incentive for recipients to carry out the work) also support the conclusion that the ongoing payments are the product of the services rendered.

Accordingly the amounts received under the contract are ordinary income and are assessable under section 6-5 of the ITAA 1997. The fact that the payments are made in three annual lump sum payments does not alter this conclusion.

Section 8-1 - General deductions

You are entitled to claim tax deductions for any deductible expenses incurred in the course of producing the assessable income as represented by the management payments. This would typically include the following expenditure:

· annual rates and insurance payments (appropriately apportioned where they also relate to property other than the project site;

· any compliance costs; and

· labour and administration costs for management actions (other than your labour).