Edited version of your private ruling

Authorisation Number: 1012555167298

Ruling

Subject: Government grant

Question 1

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

Answer

No

Question 2

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

Answer

No

Question 3

Is the grant assessable under the capital gains tax provisions?

Answer

No

Question 4

To the extent that the grant is used to fund the purchase of depreciating assets for which a deduction is available for under Division 40 of the ITAA 1997, is the grant assessable under subsection 20-20(3) 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

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The trust owns properties that are leased to a related party. The related party operates its business from the property.

The trust is not carrying on any other business activities.

The trust successfully applied for a grant in relation to a government initiative. A government department administers the grant.

The grant was paid in instalments.

The grant contributed to the funding of the project work identified in the agreement.

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

Income Tax Assessment Act 1997 Subsection 20-20(3)

Income Tax Assessment Act 1997 Section 20-40

Income Tax Assessment Act 1997 Section 20-30

Income Tax Assessment Act 1997 Section 104-25

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

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

Reasons for decision

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 of the ITAA 1997.

ATO policy concerning government payments to industry 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 will be 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 the trust's usual business activities.

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

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.'

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.

The trust owns the relevant property and has applied for government funding to undertake capital works to expand their existing facility. The trust will not be operating a business. This will be conducted by other parties.

The trust's only activity will be to act in the capacity of lessor in relation to the property and to derive periodical rental payments from the related entity. Further, it will not be involved in any other income earning activities outside of the leasing of these facilities.

As the extent of the trust's activities as a lessor will be aligned more readily with the type of activities generally undertaken by an investor, it is clear that the trust will not be carrying on a business in this regard.

As the trust will not be carrying 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 government department creates rights in the trust 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 to are made to the trust.

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

We find that the government initiative 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 the trust from the C2 CGT event will be disregarded under paragraph 118-37(2)(a) of the ITAA 1997.

Note: Cost base reduction

Although there is no capital gain at the time of receipt of the grant, there will be capital gains consequences when the trust eventually disposes of the property. To the extent that the grant is received to fund the cost of purchasing land and buildings or for constructing or renovating buildings, it is a recoupment of those costs. This recoupment reduces the cost base of the property as per subsection 110-45(3) of the ITAA 1997.

Assessable recoupment

Recoupment is a defined term and has the meaning given by subsection 20-25(1) of the ITAA 1997. Under paragraph 20-25(1)(b) of the ITAA 1997, a recoupment of a loss or outgoing includes a grant in respect of the loss or outgoing.

If the cost of a depreciating asset is deductible under Division 40 of the ITAA 1997 over two or more income years, section 20-40 of the ITAA 1997 applies so that the total of assessable recoupments to be included in assessable income at a particular time is limited to the total amount of the loss or outgoing that can be or has been deducted at that time. Any part of an assessable recoupment that is not included in assessable income in the year of receipt because of this limit is assessable in later income years to the extent that further amounts are deductible under Division 40 of the ITAA 1997 for the depreciating asset in the later income years.

Application to your circumstances

To the extent that the grant is received to fund the cost of depreciating assets, such as necessary equipment and furniture, it is an assessable recoupment under subsection 20-20(3) of the ITAA 1997.