Edited version of your private ruling

Authorisation Number: 1012463651530

Ruling

Subject: Grants

Question 1

Will the partnership be carrying on an enterprise?

Answer

Yes

Question 2

Will funding received under the agreement be assessable income of the partnership?

Answer

Yes

Question 3

Will the partnership be able to account for the amount received as it is earned for agreed management activities over the period of the contract, based on the activities undertaken in each year?

Answer

Yes

This ruling applies for the following periods

Year ending 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

Year ending 30 June 2018

Year ending 30 June 2019

Year ending 30 June 2020

Year ending 30 June 2021

Year ending 30 June 2022

The scheme commences on

1 July 2012

Relevant facts and circumstances

The partnership owns a property.

The partnership previously carried on a primary production business on the property.

The Program is funded by state and federal governments.

The partnership has been offered and intends to enter into an agreement with a government authority for the conservation of certain land on the property.

The partnership expects to receive a payment under the agreement and to use these funds for conservation activities pursuant to its obligations under the agreement over the period of the agreement.

The government authority has asked for the ABN if any and GST registration status of the partnership in order to finalise the agreement.

During the course of the agreed plan the partnership will record the expenditure of the funds and if required will lodge Business Activity Statements.

The proposed contract between the partnership and the government authority specifies the rights and obligations of both landowner and the payer under the agreement. It includes a schedule of management actions the partnership needs to complete to receive payment.

The funds will be used to fulfil the partnership's obligations under the agreement.

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 Subsection 6-5(2)

A New Tax System (Goods and Services Tax) Act 1999 Section 9-20

Reasons for decision

Summary

The activities and arrangements proposed to be undertaken by the partnership in respect of intending to participate in the Program are in the nature of an enterprise as they are activities either in the form of business or in the nature of trade.

The payment you receive from the government authority under the Program will be included in your assessable income under section 6-5 of the ITAA 1997 as it is earned over the period of the contract.

Detailed reasoning

Carrying on an enterprise

The term 'enterprise' is broadly defined in the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to include an activity or series of activities done in a certain manner by certain entities. The activities covered include those done in the form of a business or an adventure or concern in the nature of trade.

Miscellaneous Taxation Ruling MT 2006/1 (MT 2006/1) explains the Commissioner's views on when an entity is carrying on an enterprise for the purposes of section 9-20 of the GST Act.

Paragraph 170 of MT 2006/1 states that the phrase 'in the form of a business' is broad and has as its foundation the longstanding concept of a business.

Goods and Services Tax Determination GSTD 2006/6 provides further guidance. Paragraph 11 discusses the phrase 'in the form of business':

11. An enterprise includes an activity, or series of activities, done in the form of a business. The phrase 'in the form of a business' is broad and has as its foundation the longstanding concept of a business. The wider phrase has not been considered by Australian courts. The definition clearly includes a business and the use of the phrase 'in the form of' indicates a wider meaning than the word 'business' on its own. This occurs in the case of non-profit entities. In such instances we consider that not all of the main features of a business such as a capacity to earn and distribute profits need to be present before an activity has the form of a business.

Further, paragraphs 13 to 14 explain the phrase 'in the form of an adventure or concern in the nature of trade':

13. An adventure or concern in the nature of trade includes a commercial activity that does not amount to a business but which has the characteristics of a business deal. However, the sale of the family home, a private car or other private assets is not, without other factors being present, an adventure or concern in the nature of trade.

14. As a matter of statutory interpretation the phrase 'in the form of an adventure or concern in the nature of trade' is wider than 'an adventure or concern in the nature of trade'. However, the underlying concept of an adventure or concern in the nature of trade does not logically lend itself, in any meaningful way, to being broadened. In a practical sense, an activity is either an adventure or concern in the nature of trade or it is not.

In your case, we consider the features relevant to the determination of whether the partnership will be carrying on an enterprise are:

· a serious endeavour to apply for the grant, which will lead to an ongoing operation over an extended period of time

· the repetitive nature of the work involved

· the partnership has a reasonable expectation of profit or gain

· the partnership will enter into an obligation with the payer, under which the partnership is required to deliver specified services. The payer makes the payment to the payee for the purpose of those services being delivered in pursuit of the payer's objects

From the information provided, it is considered that the activities and arrangements proposed to be undertaken by the partnership in respect of intending to participate in the Program are in the nature of an enterprise as they are activities either in the form of business or in the nature of trade.

Accordingly, the partnership will be entitled to be registered for GST under section 23-10 of the GST Act as it will be carrying on an enterprise in respect of participating in the Program. (However, you can choose whether or not to register for GST if your GST turnover is below the registration turnover threshold of $75,000).

Assessable income

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 Income Tax Assessment Act 1997 (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 had 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.

In MIM Holdings Ltd v. Commissioner of Taxation 97 ATC 4420; (1997) 36 ATR 108 Justices Northrop, Hill and Cooper 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:

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

o 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

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

The Program has been established by the Government to help address the loss of biodiversity. As part of the Program you, as the landowner, are to receive payment for the improvement or maintenance of biodiversity values. The contract between you and the Government authority specifies the rights and obligations of both parties under the Agreement. It includes a schedule of land management actions you need to complete over the specified period to receive payment.

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 payment is made in a single funding payment does not alter this conclusion.

Derivation

Under subsection 6-5(2) of the ITAA 1997, assessable income includes ordinary income derived during the income year.

Where an advance payment is made an amount received may not be derived as income when it is received, but when it is earned (Arthur Murray (NSW) Pty Ltd v. Federal Commissioner of Taxation (1965)114 CLR 314; (1965) 14 ATD 98; (1965) 9 AITR 673 ( Arthur Murray ). In that case the High Court decided that prepaid fees in relation to dancing lessons not yet delivered should not be treated as income derived at the time the fees were paid.

In Case U7 87 ATC 127; Tribunal Case 20 (1986) 18 ATR 3120 a company received, at the discretion of the grantor, an 'advance' of grant monies to which it would become entitled upon expenditure on the agreed research and development (R&D) activities. These monies were repayable if this expenditure was not made, or was less than the amount advanced. The AAT referred to the decision in Arthur Murray and considered that, in the relevant year the company had not done all that was required of it to earn the full amount prepaid to it.

This view is supported by the Commissioner in paragraphs 23 and 24 of Taxation Ruling TR 2006/3.

Having regard to the authorities cited and to the key consequences of the proposed Agreement, it is concluded that the lump sum payment for agreeing to undertake management actions over the term of the contract is to be accounted for as it is earned over the period of the contract. This means that the partnership's income tax return for each year covered by the agreement will include an amount for ongoing conservation management based on the activities actually undertaken in each year.