Edited version of your private ruling

Authorisation Number: 1012511815344

Ruling

Subject: Assessability of government grant

Question 1

Did X merely act as an agent for Y in relation to the receipt of the grant, with Y being the beneficial recipient of the grant for taxation purposes?

Answer

Yes

Question 2

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

No

Question 3

Is the grant assessable income to Y under section 15-10 of the ITAA 1997?

Answer

No

Question 4

Is the grant assessable income to Y under the capital gains tax (CGT) provisions?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commenced on

1 July 2011

Relevant facts and circumstances

Y owns a property. Y does not carry on a business in their own right.

X operates a business from the property. There is no lease in place between Y and X.

Y successfully applied for a grant in relation to a government initiative. The funding was to extend the existing building on the property and refurbish part of the existing building. The property was required to be used for a specific purpose for a set period of time.

A government department administers the grant. The relevant government department insisted that the grant be paid to the X as the business owner, rather than Y as the property owner.

As a result, X entered into an agreement with the relevant government department.

The grant was paid in instalments; part was received in the 2011-12 financial year with the remaining amount being received in the 2012-13 financial year.

The funds were paid into a separate bank account administered by X from which funds were dispersed to extend and refurbish the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(2)

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 10-5

Income Tax Assessment Act 1997 Section 15-10

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Subsection 110-45(3)

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

Reasons for decision

Agent agreement

Under an 'agent agreement' an entity (the agent) may receive a payment from a third party on behalf of another entity (the principal). The relationship of the principal and the agent may arise from agreement or deed (express or implied), by operation of law or retrospectively by the principal's ratification of the acts done by the agent.

The question of whether receipts or gains constitute assessable income in the hands of an agent need only be addressed if those receipts or gains are derived beneficially by that agent. Therefore, an agent who receives an amount which is required to be applied or dealt with on behalf of a principal entity, or as the principal directs, will not need to consider whether they derived any assessable income. This question will fall to the principal.

Application to your circumstances

X entered into an agreement with the relevant government department; however this was as a result of a requirement of the department. The amounts received will be transferred directly to X. However, in accordance with the conditions of the agreement all funding is allocated to the completion of the project, being the renovation and extension of the property owned by Y.

In this case X is acting as an agent for Y who is the principal in this transaction. Whilst there is no formal agreement in place the stringent requirements of the agreement ensures that both entities continue to cooperate with regard to the expenditure of the funding. The implied nature of the agreement is acceptable in these circumstances.

If not for the relevant department's administrative requirements it would be reasonable to conclude that Y would have entered into the agreement on their own behalf. In any case, all of the funding is allocated to a project which will add value to an asset held solely by Y.

Despite no formal written agreement in relation to the passage of the funds from X to Y, the nature of the funding agreement and the actions of both parties strongly support the argument that Y is the beneficial recipient of the funding under what could be described as an informal agency agreement.

It follows that any questions regarding the assessability of the grant will apply to Y.

Ordinary income

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

Ordinary income is income according to ordinary concepts. Although the expression 'income according to ordinary concepts' is not defined in the ITAA 1997, there is a substantial body of case law from which a number of factors have been drawn to determine whether an amount has the character of income according to ordinary concepts.

A frequent characteristic of income receipts is an element of periodicity, recurrence or regularity, even if the receipts are not directly attributable to services rendered. This view is supported by ATO Interpretative Decision, ATO ID 2003/902 which cited the same reasoning in finding that a government grant paid in two instalments to a medical practitioner was not assessable under section 6-5.

ATO policy concerning government payments to industry (GPI) is set out in Taxation Ruling TR 2006/3. At paragraph 84 of TR 2006/3, 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.

Application to your circumstances
The grant does not constitute ordinary income. Whilst it was paid in separate instalments it does not possess the necessary elements of periodicity, recurrence or regularity that are common to receipts of ordinary income.

Further, in terms of TR 2006/3 it does not constitute income from the provision of personal services, is not sourced from property, and has not been derived directly from Y's usual business activities.

Accordingly, the grant is not assessable under section 6-5 of the ITAA 1997.

Statutory Income - a Bounty or Subsidy

Under section 6-10 of the ITAA 1997 some amounts that are not 'ordinary income' are included in your assessable income due to another provision of the tax law. These amounts are referred to as 'statutory income'. Subsection 6-10(1) of the ITAA 1997 refers to provisions about assessable income - a summary list of these provisions is contained within section 10-5 of the ITAA 1997.

Section 15-10 provides that 'assessable income includes a bounty or subsidy that:

(a) is received in relation to carrying on a business; and

(b) is not assessable as ordinary income under section 6-5.'

In relation to carrying on a business
In determining the correct treatment of the payment it needs to be considered whether the bounty or subsidy has been received 'in relation to carrying on a business.'

Taxation Ruling TR 97/11 provides the Commissioner's views on what constitutes 'the carrying on of a business'. At paragraph 13 the following indicators are outlined:

· whether the activity has a significant commercial purpose or character...

· whether the taxpayer has more than just an intention to engage in business...

· whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity...

· whether there is repetition and regularity of the activity...

· whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business...


· whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit...


· whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit...

· the size, scale and permanency of the activity..., and

· whether the activity is better described as a hobby, a form of recreation or a sporting activity...

In considering these indicators against the facts of each case the Commissioner recognises that no one indicator is conclusive. The determination of the question is generally the result of a process of weighing all the relevant indicators.

To be assessable under section 15-10 of the ITAA 1997 the subsidy must relate to the 'carrying on' of the business, not merely to the commencement or cessation of it. The expression 'carrying on of the business' is limited to the activities of the business which are directed towards the gaining or producing of assessable income rather than merely to the business itself (paragraph 101 of TR 2006/3).

Application to your circumstances
The grant does not constitute an assessable bounty or subsidy.

To be considered assessable under section 15-10 of the ITAA 1997 the receipt must be in relation to the carrying on of a business.

Y, as the beneficial recipient of the grant is not carrying on a business in their own right.

With regard to the use of the funding, we find that it is not used in relation to:

· increasing the efficiency of an existing business, or

· the actual carrying on of a business activity.

As Y does not carry on a business, any receipts in relation to the funding will not be assessed under section 15-10 of the ITAA 1997 as a bounty or subsidy.

Capital gains tax
Section 104-25 of the ITAA 1997 deals with cancellation, surrender and similar endings to CGT assets - a CGT event C2. A C2 event occurs when the ownership of an intangible CGT asset ends by the asset being released, discharged or satisfied. This would occur when a taxpayer's rights under an agreement come to an end - generally at the time the taxpayer's obligations have been discharged and the taxpayer receives payment.

A capital gain occurs if the capital proceeds from the ending of the rights are more than the asset's cost base.

CGT exemption under paragraph 118-37(2)(a)
Paragraph 118-37(2)(a) of the ITAA 1997 provides, in part, that a capital gain may be disregarded if you make it as a result of receiving a payment as reimbursement or payment of your expenses under a scheme established by an Australian government agency or local governing body.

In relation to this paragraph, the Revised Explanatory Memorandum (EM) in relation to the Tax Laws Amendment (2006 Measures No. 3) Act 2006 provides that the requirement that 'the scheme be established under an enactment or an instrument of a legislative character would be satisfied where the scheme is established that way either expressly or by necessary implication. An enactment would include an Appropriation Act (or equivalent) having regard to associated documentation such as budget papers. An instrument of a legislative character would include regulations (and similar instruments) and local government by-laws.'

Application to your circumstances

Under the agreement, the relevant government department creates rights for Y to receive payments upon the completion of several milestones as stated in the agreement. These rights will be satisfied under CGT event C2 when the payments are made to Y.

Y will make a capital gain equal to the difference between the capital proceeds and the cost base of the rights.

We find that the program meets the requirements of paragraph 118-37(2)(a) of the ITAA 1997 as outlined in the revised EM and the grant complies because it is a payment received as reimbursement or payment of expenses incurred in relation to the program.

Therefore, any capital gain made by Y from the C2 CGT event will be disregarded under paragraph 118-37(2)(a) of the ITAA 1997.