Edited version of your private ruling

Authorisation Number: 1012504135268

Ruling

Subject: Income tax: assessable income: government payments

Question 1

Will the funds received under an agreement be assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Will the funds received under an agreement be assessable as a capital gain under section 102-5 of the ITAA 1997?

Answer

No

Question 3

Will the funds received under an agreement be assessable under Subdivision 20-A of the ITAA 1997?

Answer

No

Question 4

Will the funds received under an agreement be assessable under Subdivision 20-A of the ITAA 1997?

Answer

No

Question 5

If the funds received under the agreement are assessable under any of the above (questions 1 -4), is the money assessable in the year the money is received?

Answer

Not applicable due to the funds not being assessable under any of the provisions in questions 1-4.

Question 6

If any of the funds received under the agreement are assessable under any of the above (questions 1-4), is the income assessable to the landholder or business operator?

Answer

Not applicable due to the funds not being assessable under any of the provisions in questions 1-4.

Question 7

If any of the monies receive are not expended is the full amount of the grant non-assessable non exempt income?

Answer

Yes

Question 8

If the landowner receives an amount as the owner of the land but the balance is received by the business operator as reimbursement of expenditure incurred under the contracts, are both of these amounts still non-assessable non-exempt income?

Answer

Yes provided the choice under subsection 59-65(2) is made by both the landowner and the business operator

This ruling applies for the following periods:

1 July 2012 - 30 June 2014

The scheme commences on:

1 July 2012

Relevant facts and circumstances

1. The landowner is the owner of a property (the property).

2. The landowner leases the property to the business operator.

3. The landowner is a partner of the business operator.

4. The business operator carries on a business from the property.

5. As a successful recipient of funding under a Commonwealth Government program a third party entered into a funding agreement with the Commonwealth of Australia (Commonwealth Agreement) which is subject to terms and conditions that require:

· Specific works to be completed;

· Assets to be acquired; and

· Specific infrastructure to be de-commissioned.

6. In accordance with the payment claims process, the business operator submitted payment claims to the third party in the income year ended 30 June 2013.

7. The third party paid the total of the claims to the business operator directly into its bank account in the income year ended 30 June 2013.

8. A residual amount representing the difference between the amount of the grant and the expenditure incurred in carrying out the work is to be paid upon completion of the last milestone of the work plan. The work plan sets out the following activities and tasks that need to be completed to demonstrate that the last milestone has been achieved:

a. Payment authorisation form completed by Business Operator

b. Tax invoice for milestone payment issued, along with all other documents specified in the agreement

c. Inspection of all above items and sign off that all are completed to satisfactory level, including decommissioning

d. Photo evidence of decommissioning

e. Decommissioning statement signed.

9. The process for claiming this residual payment is that the business operator will notify the third party, who will arrange for an audit to be conducted to ensure works have been completed as agreed. The third party will then approve the payment.

Tax and the payments

10. The business operator and the landowner will make the choice prescribed by Section 59-65 of the ITAA 1997.

11. The program is on the required list of programs as prescribed by section 59-70 of the ITAA 1997. The program is on the list at all relevant times.

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 Section 59-65

Income Tax Assessment Act 1997 Section 59-67

Income Tax Assessment Act 1997 Section 59-70

Income Tax Assessment Act 1997 Section 102-5

Reasons for decision

Question 1

Legislative references are to the ITAA 1997 unless stated otherwise.

Subsection 6-5(1) provides that assessable income includes income according to ordinary concepts.

However, subsection 6-15(3) provides that if an amount is non-assessable non-exempt income it is not assessable income.

Section 6-23 states that an amount of ordinary income or statutory income is non-assessable non-exempt income if a provision of this Act or another Commonwealth law states that it is not assessable income and is not exempt income.

A payment such as this type may be treated as non-assessable non-exempt income as set out in section 59-65.

Under subsections 59-65(2) and (3) an entity can only make the choice by the time it has to lodge its income tax return for the year that it derives the first payment or incurs its first expenditure. There is a transitional rule for choices to be made that would otherwise have had to be made before the amendments commenced.

Application to your circumstances

In this case, the grant was paid from a third party which received the funding from a program which in turn received the funding through the Commonwealth program. The funding is documented by written agreement - including the Commonwealth agreement and the agreement with the third party - which details agreed expenditure commitments. It is considered that the grant is reasonably attributable to the Commonwealth payment, and in these circumstances satisfies the definition in subsection 59-67(4).

In this case both the landowner and the business operator are a party to the agreement. Under the agreement the landowner has agreed to improvement of his assets. Similarly, the business operator, has agreed to the improvement of its assets - even if the assets are merely rights (under the lease) to use things that are to be improved. It is considered that both the landowner and the business operator are participants in the relevant program for the purposes of subsection 59-65(1).

The payments derived in this case are derived because of ownership of the relevant assets being improved, and not by virtue of a financial arrangement (see paragraph 59-65(1)(b)).

Finally, in this case, a valid choice intends to be made by the landowner and the business operator under subsections 59-65(2) and (3).

In these circumstances, provided a choice under subsection 59-65(2) is made, it is considered that section 59-65 applies and the funding under the agreement is non-assessable non-exempt income.

Accordingly, the funding under the agreement is not assessable under section 6-5 (see subsection 6-15(3)).

It is noted that there are circumstances where there may need to be a consideration as to whether the funding under the Agreement is assessable under section 6-5 or other provisions about assessable income in the ITAA 1997, including where:

· a payment is to be treated as if it had never been made under the program to the extent that the Commonwealth seeks to recover the payment (see subsection 59-67(6) );

· the integrity rule contained in subsection 59-65(4) applies - see question 8 below.

It is noted that where the choice has been made to make the payment non-assessable non-exempt income that the following will also occur:

· any capital gains and losses arising from transferring rights under the program are disregarded (see subsection 110-38(7); Subsection 110-55(9G); paragraphs 118-37(1)(ga) and (gb))

· deductions for expenditure required under the program are forgone (see section 26-100);

· expenditure required under the program from the cost of any asset acquired is excluded (see Section 40-222, subsection 40-515(3), section 40-540, section 43-70(2)).

Question 2

Subsection 6-10(2) prescribes that amounts that are not ordinary income, but are included in assessable income by provisions about assessable income, are called statutory income.

Section 5-10 sets out that, in particular circumstances a 'bounty or subsidy' is included in assessable income. Section 15-10 is a provision about assessable income, so a 'bounty or subsidy' is statutory income if it is included in assessable income under section 15-10.

Section 6-23 states that an amount of ordinary income or statutory income is non-assessable non-exempt income if a provision of this Act or another Commonwealth law states that it is not assessable income and is not exempt income.

For the reasons detailed in question 1 above, it is considered that section 59-65 applies in this case and the funding under the agreement is non-assessable non-exempt income. It is therefore not possible for section 15-10 to apply in circumstances where the funding under the agreement is non-assessable non-exempt income.

In these circumstances it is not necessary to consider whether the funding would be statutory income under section 15-10. However, as noted above, there are circumstances where there may need to be a consideration as to whether the funding under the Agreement is assessable under provisions about assessable income in the ITAA 1997 including section 15-10, including where:

· a payment is to be treated as if it had never been made under the program to the extent that the Commonwealth seeks to recover the payment (see subsection 59-67(6) );

· the integrity rule contained in subsection 59-65(4) applies.

Question 3

As set out in question 1, as a consequence of a taxpayer making the choice under subsection 59-65(2) any capital gains and losses arising from transferring rights under the program are disregarded (see subsection 110-38(7); Subsection 110-55(9G); paragraphs 118-37(1)(ga) and (gb)). Accordingly, any capital gain is not included in assessable income.

Question 4

Subsection 20-20(2) states:

An amount you have received as ^*recoupment of a loss or outgoing is an assessable recoupment if:

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

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

As set out in question 1, as a consequence of a taxpayer making the choice under subsection 59-65(2) expenditure that is made because of the payments is not deductible and does not form part of the cost of any asset it is spent on (see section 26-100; Section 40-222; subsection 40-515(3), section 40-540, section 43-70(2)).

In these circumstances, where the choice under subsection 59-65(2) has been made, there will not be an assessable recoupment for the purposes of subsection 20-20(2). In this case, provided the landowner and the business operator make a valid choice under subsection 59-65(2), the funding cannot be assessable under Subdivision 20-A.

Question 5

This question is not applicable due to the funds not being assessable under any of the provisions in questions 1-4.

Question 6

This question is not applicable due to the funds not being assessable under any of the provisions in questions 1-4.

Question 7

Subsection 59-67(6) operates to treat a payment as if it had never been made under the program to the extent that the Commonwealth seeks to recover the payment.

In this case, the funding under the agreement is more than the expenditure incurred.

The Commissioner accepts that the residual payment made in accordance with the agreement entered into with the third party and the agreement between the third party and the Commonwealth.

In these circumstances, the Commissioner accepts that the full amount of the funding will be non-assessable non-exempt income if a valid choice is made in accordance with subsection 59-65(2).

However, in the event that the Commonwealth seeks to recover a payment from The landowner and/or the business operator (for example, if the Commonwealth seeks to recover the residual payment) then the amount that the Commonwealth seeks to recover will no longer be treated as non-assessable non-exempt income by virtue of subsection 59-67(6).

Question 8

The EM explains 'that amendments can prevent an amount being NANE income for a taxpayer, despite the taxpayer having made the choice, if its obligations under the program are satisfied because an associate incurred the required expenditure for it, rather than because it incurred the expenditure itself. In that case, the choice will only apply if the associate also makes the choice'.

In this case, the landowner and the business operator are associates. It is possible for the integrity rule in subsection 59-65(4) to apply, particularly if the landowner complies with the agreement because the business operator incurs the expenditure on the relevant infrastructure works.

However, on the facts, both the landowner and the business operator intend to make the choice under section 59-65. In these circumstances, the integrity provision is satisfied and both the landowner and the business operator are bound by the choice.

That is, the consequences of the choice (such as the funding being non-assessable non-exempt income and the expenditure is not deductible to any entity) will only apply if both the landowner and the business operator have made the choice.