Edited version of your private ruling

Authorisation Number: 1012551614467

Ruling

Subject: Income - grants

Question 1

Does the grant form part of the assessable income of the entity under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Does the grant form part of the assessable income of the entity under section 15-10 of the ITAA 1997?

Answer

Yes

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

You commenced a business during the 2010-11 financial year.

Your main activity is developing a product.

You applied for and received a grant.

The Fund providing the grant has certain aims.

Eligibility for funding is governed by a set of principles, which include:

· Certain entities including small enterprises with an annual turnover less than $x million and individuals are eligible for funding.

· The grant values generally range up to a limited amount but larger amounts may be awarded conditionally, and applicants will be required to demonstrate achievement of a significant commercial milestone to access the additional funds.

· Grants from the Fund do not require matching funding and are not repayable unless an amount remains unacquitted.

· Projects should be focused around certain activities that demonstrate the commercial potential.

· Funded projects will be developed around milestones that lead to clear gains in commercial potential and are to be completed within 12 months.

· The funding body maintains the right to invest in new ventures arising from those project activities.

The grant funds cannot be used for infrastructure.

The grant payments (GST exclusive) were made between the 2011-12 and 2012-13 financial years.

Each payment was connected to a milestone.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 6-10
Income Tax Assessment Act 1997 Section 10-5
Income Tax Assessment Act 1997 Section 15-10

Reasons for decision

A payment or other benefit received by a taxpayer is included in assessable income if:

· it is income according to ordinary concepts under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), or

· it is 'statutory income' under section 6-10 of the ITAA 1997.

Ordinary Income

ATO policy concerning government payments to industry (GPI) is set out in Taxation Ruling TR 2006/3 Income Tax: government payments to industry to assist entities (including individuals) to continue, commence or cease business. At paragraph 84, 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.

The Fund payment does not constitute ordinary income as it is not income from the provision of personal services, is not sourced from property, and has not been derived directly from any existing business activity. It also does not possess the necessary elements of periodicity, recurrence or regularity that are common to receipts of ordinary income.

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. One of the statutory income provisions listed in section 10-5 of the ITAA 1997 is section 15-10 of the ITAA 1997, which deals with the treatment of bounties and subsidies.

Section 15-10 of the ITAA 1997 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

Generally, government credits, grants, rebates, bounties and subsidies are assessable income in the hands of the recipient if they are received in, or in relation to, the carrying on of a business. This generally includes amounts of a capital nature.

'In relation to'

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. Amounts relating to the commencement or cessation of a business may not be assessable income but may give rise to a capital gain.

A grant 'will be "in relation to" carrying on a business when there is a real connection between the payment and the business. The term "in relation to" includes within its scope payments that have a direct or indirect connection to the business…' (Paragraph 100 of TR 2006/3)

Application to your circumstances

The grant paid to you under the Fund was for the purpose of supporting the costs of commercial development incurred by your existing business.

For your entity, the carrying on of an enterprise with an annual turnover of less than $x million was a precondition of a grant payment under the Fund. This requirement meant that there was a direct and essential connection between the receipt of the grant and the carrying on of your business.

Therefore, the payment is considered to be income in your hands and is required to be brought to account as assessable income under section 15-10 of the ITAA 1997.