Edited version of your private ruling

Authorisation Number: 1012514550184

Ruling

Subject: Non-Assessable Non-Exempt Income and Deductions for repairs.

Question 1

Is the grant received from the specific states Government as part of the Special Disaster Flood Assistance, non-assessable non-exempt income in accordance with section 6-23 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Can you claim a deduction for the full cost of the repairs to your property as a result of the flooding in accordance with section 25-10 of the ITAA 1997?

Answer

Yes

This ruling applies for the following period:

01 July 2010 to 30 June 2012

The scheme commences on:

01 July 2010

Relevant facts and circumstances

· You are a primary producer.

· Your property is used entirely for income producing purposes.

· Your property was damaged by floods that occurred from mm/yyyy to mm/yyyy.

· The damaged sections were repaired to their former condition with the same materials that existed previously.

· You received payments from the specific states Government under a special disaster assistance program.

· The grant was available to primary producers who suffered direct damage as a result of the flooding that occurred. The grant was paid to you in order to help meet the costs of repairing roads essential to the operation of your primary production business.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-23

Income Tax Assessment Act 1997 section 25-10

Income Tax Assessment Act 1997 section 59-55

Reasons for decision

Question 1

Summary

You received a recovery grant from the specific states Government as part of the special disaster assistance. The grant was covered by section 59-55 of the ITAA 1997 effectively making it non-assessable non-exempt income.

Detailed reasoning

Section 6-23 of the ITAA 1997 states that an amount of ordinary income or statutory income is non-assessable non-exempt income if a provision of the law states that it is not assessable income and is not exempt income.

Section 59-55 of the ITAA 1997 states the following:

2010-11 floods - recovery grants for small businesses and primary producers  

Payments under the Natural Disaster Relief and Recovery Arrangements (set out in a determination made by the Minister for Local Government, Territories and Roads on 21 February 2007) are not assessable income and are not exempt income, if:

(a) the payments are part of a Category C measure (within the meaning of the determination); and

(b) the Category C measure relates to the floods that occurred in Australia during the period that:

(i) occurred during the 2010-11 financial year; and

(ii) started on 29 November 2010; and

(c) the payments are:

(i) recovery grants for small businesses; or

(ii) recovery grants for primary producers.

A Category C measure as per the 2007 Determination for Natural Disaster Relief and Recovery Arrangements is:

a community recovery package designed to support a holistic approach to the recovery of regions, communities or sectors severely affected by a natural disaster. The package comprises one or more of the following:

a) a community recovery fund in circumstances where a community is severely affected and needs to restore social networks, community functioning and community facilities. Expenditure from the fund is aimed at community recovery, community development and community capacity building, and is administered by the state government in close collaboration with local government bodies or other community bodies;

b) recovery grants for small businesses where the business sector is severely affected and the community risks losing essential businesses. Grants to small businesses are aimed at covering the cost of clean-up and reinstatement, but not at providing compensation for losses;

c) recovery grants for primary producers where the farming sector is severely affected, with threats to viability and disruption of production likely to extend beyond the current season. Grants to primary producers are aimed at covering the cost of clean-up and reinstatement, but not at providing compensation for losses.

You are a primary producer who was affected by the floods that occurred in Australia during the relevant financial year.. You received a recovery grant aimed at covering the cost of clean-up and reinstatement of your income producing property. Therefore, the payment is covered by the provisions of section 59-55 of the ITAA 1997 and as such the payment is considered non-assessable non-exempt income.

Question 2

Can you claim a deduction for the full cost of the repairs to your property as a result of the flooding in accordance with section 25-10 of the ITAA 1997?

Summary

You can claim a deduction for the full cost of repairs to your property as a result of the flooding because your property is used entirely for income producing purposes and the repair falls within the meaning of a repair contained in Taxation Ruling TR 97/23 Income tax: deductions for repairs.

Detailed reasoning

Section 25-10 of the ITAA 1997 allows a deduction for expenditure incurred for repairs to premises (or part of premises) that was held solely for the purpose of producing assessable income.

Taxation Ruling TR 97/23 Income tax: deductions for repairs provides guidance as to what constitutes a deductible repair.

In accordance with paragraphs 13-15 of TR 97/23 a repair is:

the remedying or making good of defects in, damage to, or deterioration of, property to be repaired (being defects, damage or deterioration in a mechanical and physical sense) and contemplates the continued existence of the property…

A repair merely replaces a part of something or corrects something that is already there and has become worn out or dilapidated. Works can fairly be described as

'repairs' if they are done to make good damage or deterioration that has occurred by ordinary wear and tear, by accidental or deliberate damage or by the operation of natural causes (whether expected or unexpected) during the passage of time.

Your property is used entirely for income producing purposes and you have incurred costs to rectify damage caused by flooding. You incurred costs to repair the damage and return the property to its original condition with similar materials. This is considered a repair within the meaning of TR 97/23 and so you are able to claim a deduction for the repair in accordance with section 25-10 of the ITAA 1997.

There is no provision in the tax law that reduces your deduction by the amount of your recovery grant. In Media Release No 016 issued 21 January 2011 by the Assistant Treasurer the following announcement was made in relation to the recovery grants:

Such grants would normally be treated as assessable income, with taxpayers able to claim deductions for the associated expenditure. However, in light of the extraordinary hardship suffered by those affected by the recent flooding, the Government has decided to make these payments non-assessable, non-exempt income. This ensures the grants are exempt from income tax, while also avoiding interactions with other areas of the income tax.

It appears the intention behind the recovery grants is to be exempt from income tax but not to prevent other areas of the tax laws (such as deduction provisions) from applying. Therefore, you can claim a deduction for the full cost of repairs to your property.