Edited version of your written advice

Authorisation Number: 1012493605726

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This edited version has been found to be misleading or incorrect. It does not represent the ATO's view of the relevant law.

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Ruling

Subject: Assessability of income

Question 1

Will the funds received by you from the Commonwealth government be assessable to you as income under section 6-5 or section 15-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Will the funds received by you from the Commonwealth government be assessable to you as a capital gain under section 102-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 3

On the basis that you choose to calculate capital allowances on depreciating assets under Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997), will the funds from the Commonwealth that relate to such expenditure, be an assessable recoupment under Subdivision 20-A of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

Financial year ended 30 June 2013

Financial year ended 30 June 2014.

The scheme commences on:

1 July 2012.

Relevant facts and circumstances

The arrangement that is the subject of the private ruling is described below.

You are a special purpose entity incorporated with the intention that you will construct and operate a X.

The financier is an independent statutory authority established under the Commonwealth Authorities and Companies Act 1997 (Cth).

It was agreed the financier provide initial grant funds (the Funds) to you for the construction of the X and a funding agreement was signed between you and the financier to that effect.

You have not yet commenced the Project, and have only undertaken certain preliminary organisational activities.

You do not have any tangible assets or employees, and have not entered into any agreements other than those identified above.

You will only commence the Project once you have received the Funds from the financier as you cannot proceed without the Funds.

The Funds are to be used solely for the construction of the X.

The financier is entitled to recover from you any of the Funds which have not been spent, or legally committed for expenditure by you in accordance with the Funding Agreement and payable by you as a current liability, and, any of the Funds which have been spent other than in accordance with the Funding Agreement.

The financier will transfer the Funds to your bank account in accordance the Funding Agreement which you will be able to periodically draw on pending the completion of a Project Milestone which signifies the completion of a particular stage of construction.

All drawdown milestones in the Funding agreement will be tied to construction milestones only.

The Commencement Date of the Funding Agreement is the date the Funding Agreement is executed by both parties.

The End Date of the Funding Agreement is X months after the date when:

(a) all process and performance testing required by Law or under your subcontracts has been carried out; and

(b) the Project has been demonstrated to operate satisfactorily, and is available to commence commercial operations,

in accordance with Project Milestones certification detailed in the Funding Agreement.

Upon completion of the Project (construction), you intend to obtain contracts for the purchase of X as detailed the Funding Agreement to enable commercial operational activity.

When you spend the Funds, expenditure will form part of the cost of depreciating assets and you intend to claim a deduction for the decline in value of the depreciating assets in accordance with Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997).

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5.

Income Tax Assessment Act 1997 section 15-10.

Income Tax Assessment Act 1997 section 102-5.

Income Tax Assessment Act 1997 paragraph 118-37(2)(a).

Income Tax Assessment Act 1997 subdivision 20-A.

Income Tax Assessment Act 1997 section 20-20.

Income Tax Assessment Act 1997 section 20-30.

Reasons for decision

Issue 1

Question 1

Detailed reasoning

Taxation Ruling TR 2006/3 contains the Commissioner's view regarding the way in which certain provisions, including section 6-5 and section 15-10 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to government payments to industry (GPI) to assist entities to continue, commence or cease business.

TR 2006/3 identifies the class of schemes to which the ruling applies as including grants paid or funded by the Commonwealth or a State, Territory or local government, or government agency and makes it clear that payments to assist with the purchase of depreciating assets fall within the categories of payments that the ruling covers, specifically, the category of government payments to commence business.

GPI to enable a business to commence are preliminary to establishing a business. As the GPI is preliminary to a business being established, it is not ordinarily received in the normal course of trade, or a receipt for which business is being carried on. Therefore, the GPI is not ordinary income and is not assessable under section 6-5 of the ITAA 1997.

A GPI to enable a business to commence is preliminary to establishing a business and therefore, cannot be a receipt in relation to the carrying on of a business and is not assessable under section 15-10 of the ITAA 1997.

It follows that paragraph 26 of TR 2006/3 provides the Commissioner's view that a GPI to commence business is not assessable as ordinary income of the recipient under section 6-5 of the ITAA 1997 or as a bounty or subsidy in relation to carrying on of a business under section 15-10 of the ITAA 1997.

In application to this case, you will receive a Commonwealth government grant to fund the construction of an X and associated equipment. You have not yet commenced the Project, and have only undertaken certain preliminary organisational activities. You do not have any tangible assets or employees, and have not entered into any agreements other than those identified above. You will only commence the Project once you have received the Funds from the financier as you cannot proceed without the Funds. Further, the X cannot commence business until the X is constructed.

When you spend the Funds, expenditure will form part of the cost of depreciating assets and you intend to claim a deduction for the decline in value of the depreciating assets in accordance with Division 40 of the ITAA 1997.

Upon completion of the Project (construction), you intend to obtain contracts for the purchase of X as detailed the Funding Agreement to enable commercial operational activity.

Accordingly, the Commonwealth government grant is not assessable under either section 6-5 (as ordinary income) or under section 15-10 of the ITAA 1997 (as a bounty or subsidy) as the payments are considered payments to commence business, more specifically to assist with the purchase of depreciating assets, namely the X and associated equipment.

Question 2

Detailed reasoning

Paragraph 118-37(2)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a capital gain or capital loss is disregarded if you make it as a result of receiving a payment as reimbursement or payment of your expenses under a Commonwealth, State, Territory, local government or foreign government scheme established under an enactment or an instrument of a legislative character.

The financier is an independent statutory authority established under the Commonwealth Authorities and Companies Act 1997 (Cth).

It was agreed that the financier would provide initial grant funds to you for the construction of an X and associated equipment.

The financier will transfer the Funds to your bank account in accordance with the Funding Agreement which you will be able to periodically draw on pending the completion of a Project Milestone which signifies the completion of a particular stage of construction. All drawdown milestones are tied to construction milestones only.

The Funds are to be used solely for the construction of the X. Consequently, the financier is entitled to recover from you any Funds which have not been spent, or legally committed for expenditure by you in accordance with the Funding Agreement and payable by you as a current liability, and, any funds which have been spent other than in accordance with the Funding Agreement.

Accordingly, any capital gain/loss pertaining to the Commonwealth government funds accessible upon completion of construction milestones only, will be disregarded pursuant to paragraph 118-37(2)(a) of the ITAA 1997.

Question 3

Detailed reasoning

Under Subdivision 20-A of the Income Tax Assessment Act 1997 (ITAA 1997), 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.

Specifically, under section 20-20 of the ITAA 1997, an amount is an assessable recoupment to the extent that it is:

● not income under ordinary concepts or otherwise assessable, and

● received either:

● by way of insurance or indemnity as recoupment of a deductible loss or outgoing, or

● as recoupment (other than by way of insurance or indemnity) of a deductible loss or outgoing that is listed in the table in section 20-30 of the ITAA 1997.

Sections 20-35 and 20-40 of the ITAA 1997 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.

Taxation Ruling TR 2006/3 contains the Commissioner's view regarding the way in which certain provisions, including Subdivision 20-A of the ITAA 1997, apply to government payments to industry (GPI) including recoupment amounts.

Paragraph 138 of TR 2006/3 explains that for the purposes of Subdivision 20-A of the ITAA 1997, recoupment of a loss or outgoing includes any kind of recoupment, reimbursement, recovery, refund, insurance or indemnity, including a grant in respect of a loss or outgoing.

In your case, the government body, the financier, will transfer the Funds to your bank account from which you will be able to periodically draw, pending the completion of a particular construction Project Milestone. In effect, the grant compensates you for the outgoing to construct the X and associated equipment and is thus a recoupment amount.

When you spend the Funds, expenditure will form part of the cost of depreciating assets and you intend to claim a deduction for the decline in value of the depreciating assets in accordance with Division 40 of the ITAA 1997, which is referrable to item 1.9 of the table in section 20-30 of the ITAA 1997.

As the Funds are a recoupment amount, and, the amount you can deduct for your loss or outgoing is in the table in section 20-30 of the ITAA 1997, the grant amount received is considered an assessable recoupment under section 20-20 of the ITAA 1997.

To avoid doubt, paragraph 27 of TR 2006/3 provides the Commissioner's view that a GPI received to assist the recipient to commence business with the purchase of a depreciating asset, the cost of which is deductible under Division 40 of the ITAA 1997, is assessable income under the assessable recoupment provision in Subdivision 20-A of the ITAA 1997.