Edited version of your private ruling

Authorisation Number: 1012505073352

Ruling

Subject: Government grant as assessable income

Question 1

Is the government grant paid to the taxpayer considered assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Is the government grant paid to the taxpayer considered assessable income under section 15-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 3

Is the government grant paid to the taxpayer considered assessable under the capital gains tax (CGT) provisions of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following period

Year ended 30 June 20BB

Year ended 30 June 20CC

The scheme commenced on

1 July 20AA

Relevant facts and circumstances

The taxpayer applied for a government grant which has been approved and subsequent grant funding paid in instalments in accordance with an agreement.

The taxpayer advised the Tax Office that the grant will allow for redevelopment and expansion of the facilities which will enhance its capacity and provide additional services to meet the demand of clients in the area.

The taxpayer advised the Tax Office it is obtaining council development consent and engaging architects and builders to undertake the work and that the centre will remain operational throughout the process and gradually expand into the new space.

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 104-25,

Income Tax Assessment Act 1997 section 104-35 and

Income Tax Assessment Act 1997 section 118-20.

Reasons for decision

Question 1

Summary

The grant received is not assessable under section 6-5 of the ITAA 1997.

Detailed reasoning

Section 6-5 of the ITAA 1997 considers the treatment of income according to ordinary concepts.

Subsection 6-5(1) of the ITAA 1997 provides that assessable income includes income according to ordinary concepts which is called ordinary income.

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident would include the ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

The legislation does not define income according to ordinary concepts. However, there exists a considerable body of case law which identifies factors indicating the nature of ordinary income.

MIM Holdings Ltd v. Commissioner of Taxation (MIM's case) (1997) 363 FCA at 13 per Northrop, Hill and Cooper JJ considers periodicity, recurrence or regularity are some of the main determinants of ordinary income.

GP International Pipecoaters Pty Ltd v. FCT (Pipecoaters case) (1990) 170 CLR 124 at 142 per Brennan, Dawson, Toohey, Gaudron and McHugh JJ and Hayes v. FCT (1956) 96 CLR 47 at 54-56 per Fullagar J considers a payment by gift or subsidy to replenish or augment the recipient's capital is not income under ordinary concepts as it is not a product or incident of the recipient's income producing activity.

Further, paragraph 52 of Taxation Ruling TR 2006/3 states that government payments to reimburse capital cost of restructure to industry to assist entities to continue business is not derived in the ordinary course of carrying on a business and is not considered to be ordinary income.

The grant funding was paid to the taxpayer in installments according to the funding agreement, and was not received as part of the day to day business activities of the centre.

Further, the taxpayer advised the Tax Office that the grant will allow for redevelopment and expansion of the centre which will enhance the capacity of the facilities and provide additional services to meet the demand of clients in the area.

Therefore, the grant funding received is not considered to be ordinary income, and therefore not assessable under section 6-5 of the ITAA 1997.

Question 2

Summary

The grant received is assessable under section 15-10 of the ITAA 1997 as a bounty or subsidy.

Detailed reasoning

A bounty or subsidy received in relation to carrying on a business, and is not assessable as ordinary income under section 6-5 of the ITAA 1997 is considered assessable income under section 15-10 of the ITAA 1997.

First Provincial Building Society Ltd v. Commissioner of Taxation (1995) 56 FCR 320; 95 ATC 4145; (1995) 30 ATR 207 (First Provincial Case) considers a subsidy to include a financial grant made by the government.

In looking at the meaning of the phrase in relation to the carrying on of a business, Hill J stated in the First Provincial Case that:

the relationship must be to the carrying on of the business. These words may perhaps be understood in opposition to a relationship with the actual business itself. They would make it clear, for example that a bounty received, merely in relation to the commencement of a business or the cessation of the business, would not be caught. The expression carrying on of the business looks, in my opinion, to the activities of that business which are directed towards the gaining or producing of assessable income, rather than merely to the business itself.

Therefore, it is not sufficient that the payment received is in relation to the business, but rather it must be in relation to the carrying on of that business.

Paragraph 53 of TR 2006/3 states that a bounty or subsidy is financial aid received from the government to help the business meet its new operating requirements. This would involve the update of the operating processes of the business, and is directly connected to the operations of the business, considered to be in relation to the carrying of the business.

The taxpayer advised the Tax Office that the grant payments were made by the government to the taxpayer to allow for redevelopment and expansion of the centre which will enhance the capacity of the facilities and provide additional services to meet the demand of clients in the area. It is a payment made in relation to the ongoing business of the taxpayer, and not in relation to the cessation of one business and/or the commencement of another business.

Paragraph 54 of TR 2006/3 states that a bounty or subsidy is not assessable as ordinary income under section 6-5 of the ITAA 1997, received in relation to carrying on the business. It is assessable under section 15-10 of the ITAA 1997 in the income year in which it is received.

The grant received is assessable under section 15-10 of the ITAA 1997 as a bounty or subsidy.

Question 3

Summary

The grant received is not assessable under any of the capital gains tax (CGT) provisions of the ITAA 1997.

Detailed reasoning

Subsection 104-35(1) of the ITAA 1997 provides CGT event D1 happens if a contractual right or other legal or equitable right is created in another entity.

Subsection 104-25(1) of the ITAA 1997 provides CGT event D2 happens if ownership of an intangible CGT asset ends by the asset being redeemed or cancelled.

Under the PCI grant program, the government created a contractual right in the company to receive payments under the program.

CGT event D1 would have happened when the taxpayer acquired the right to the payment and subsequently CGT event D2 when the payments were actually received.

You may have made either a capital gain or a capital loss from the CGT event D2 happening.

However, subsection 118-20(1) of the ITAA 1997 provides that a capital gain you make from a CGT event is reduced if, because of the event, a provision of this Act includes an amount in your assessable or exempt income.

As the grant payment is considered to be a subsidy under section 15-10 of the ITAA 1997, subsection 118-20(1) of the ITAA 1997 applies to exclude that amount from being assessed under the provisions relating to capital gains.

Therefore, the grant received is not assessable under any of the capital gains tax (CGT) provisions of the ITAA 1997.