Edited version of your private ruling

Authorisation Number: 1012566928054

Ruling

Subject: Government grant

Question 1

Is the government grant received by the company considered to be ordinary income and therefore assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

If the payment is not ordinary income, is the payment statutory income and therefore assessable income under section 6-10 of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

1 July 2013 - 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

· The company will receive a government grant provided by a government entity.

· The government entity has also provided the grant to a number of different organisations.

· The grant is to encourage, assist and foster a particular activity.

· The grant will be received in instalments upon reaching specific milestones as detailed in the funding agreement.

· Funding is to begin early in 2014.

· No expenditure to date has been claimed as a deduction.

· The grant will be used for the expansion of the company's current facilities and will include:

o The construction of a capital asset

o The purchase, installation and operation of equipment

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 15-10

Income Tax Assessment Act 1997 section 20-20

Reasons for decision

Ordinary Income

Section 6-5 of the ITAA 1997 provides that assessable income includes income according to ordinary concepts, which is called ordinary income.

The term 'ordinary income' is not defined in the ITAA 1997. Its meaning has evolved from case law, which has laid down certain established tests to determine whether receipts can be deemed as ordinary income.

In Scott v. Federal Commissioner of Taxation (1966) 117 CLR 514 Windeyer J stated:

Whether or not a particular receipt is income depends upon its quality in the hands of the recipient.

In GP International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation (1990) 170 CLR 124; 90 ATC 4413; (1990) 21 ATR 1 the High Court stated at CLR 138, ATR 7; ATC 4420:

To determine whether a recipient is of an income or a capital nature, various factors may be relevant. Sometimes, the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence, sometimes, by the character of a right or thing disposed of in exchange for the receipt, sometimes by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business.

In conclusion, the High Court accepted the proposition that a gift or subsidy to replenish or augment the recipient's capital is capital in nature (and not income under ordinary concepts) because in such a case, the receipt is not a product or incident of the recipient's income producing activity (at 170 CLR 142; 90 ATC 4422; (1990) 21 ATR 10),

Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business.

Characteristics of 'income' that have evolved from case law include receipts that:

· are earned

· are expected

· are relied upon, and

· have an element of periodicity, recurrence or regularity.

The government entity will provide a government grant to the company in instalments according to the completion of certain milestones in the funding agreement. It will not be received by the company as part of its current business activities as it is not a product or incident of the company's income producing activities. Rather, the grant will be used to construct a capital asset to expand its operations. In consideration of the above, the payment is capital in nature and does not fall within the ordinary meaning of income and is not assessable income under section 6-5 of the ITAA 1997.

Question 2

Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income also includes statutory income amounts that are not ordinary income but are included in assessable income by another provision.

The applicant has asked whether the grant is statutory income under the following categories:

· Section 15-10 of the ITAA 1997 - Bounties and Subsidies

· Section 20-20 of the ITAA 1997 - Assessable Recoupment

Each of the above categories of income will be assessed in turn.

Bounties and Subsidies

Section 15-10 of the ITAA 1997 states:

Your assessable income includes a bounty or subsidy that:

a) You receive in relation to carrying on a business; and

b) Is not assessable as ordinary income under section 6-5.

Therefore, the government grant will be assessable under section 15-10 in the income year in which it is received if it is:

· A bounty or subsidy

· Received in relation to carrying on a business; and

· Not assessable as ordinary income under section 6-5

Bounty or subsidy

The term 'bounty' and 'subsidy' are not defined terms; therefore the ordinary meaning of these terms will be applied.

Taxation Ruling 2006/3 Income tax: government payments to industry to assist entities (including individuals) to continue, commence or cease business, discusses the assessability of government payments to industry (GPIs). GPI's are payments by the government or entity chosen by the government to administer government funds. Paragraphs 94-97 of TR 2006/3 provide further guidance on the meaning of bounties and subsidies in relation to GPIs:

94. 'Subsidy' is defined as '1. a direct pecuniary aid furnished by a government to a private industrial undertaking, a cultural organisation, or the like; 2. a sum paid, often in accordance with a treaty, by one government to another, to secure some service in return; 3. a grant or contribution of money; The ordinary meaning adopted by case law is an 'aid provided by the Crown [government] to foster or further some undertaking or industry.

95. 'Bounty' is defined to include 'a premium or reward, especially one offered by a government'. When 'bounty' and 'subsidy' are positioned together the compound term is interpreted a describing financial assistance given to assist business.

96. 'Grant' is defined to include 'that which is granted, as a privilege or right, a sum of money, as for a student's maintenance, or a tract of land'. A reference to 'bounty or subsidy' includes a grant that encourages business or trade and also a grant to address a detrimental effect on a business or trade.

97. Not all government grants are bounties or subsidies for the purposes of section 15-10. It is essential to determine that the grant is actually for. The question as to the nature and quality of any payment must be determined by reference to the agreement or the terms which created in the recipient the right to the government grant. Any factors used to calculate the amount of payment are of marginal, if any, assistance in determining what the payment is for.

In this case, a government entity has provided a grant to a number of organisations. It is considered that the grant is a GPI. The terms of the funding agreement support such an argument that the grant is to encourage, assist and foster a particular activity. It is considered that this grant falls within the definition of a bounty or subsidy.

In relation to carrying on a business

The meaning of the expression "in relation to carrying on a business" was considered in First Provincial by Hill J who noted that a bounty or subsidy received "in relation to" has a less direct relationship with the carrying on of the business than if it had been received "in carrying on a business". However, the relationship must still be a real one and a merely remote connection between the payment and the carrying on of the business is not sufficient.

In First Provincial the taxpayer, a building society, received an ex-gratia payment by the Government which assisted it to meet the capital adequacy requirements without the need for capital restructure and therefore was of a capital nature. The Court held that as the payment assisted the taxpayer to continue to carry on its building society activities; it was made in relation to the carrying on of its business and was therefore assessable under section 26(g) (the former provision).

Paragraph 102 of TR 2006/3 states:

A GPI received to acquire or construct an asset or assist with the capital costs of restructuring a business to improve the manufacturing, processing, distribution, administrative or other operations of a business is received in relation to carrying on a business. Similarly, a GPI received to assist with the capital costs of restructuring a business to assist that business to improve its overall efficiency is received in relation to carrying on a business. Some business restructures may not be in relation to carrying on a business, for example if a business changes its structure to facilitate a new

In this case, a government entity will provide a grant to the company. The grant will be used to expand the entity's current operations. This includes the construction of a capital asset and the purchase, installation and operation of equipment.

It is considered that the grant will be received in relation to the company's existing business as the grant will be used to assist with the capital costs of expanding its current operations.

Therefore, the payment will be in relation to carrying on a business.

Not ordinary income

As discussed in question 1 above, the grant does not fall within the definition of ordinary income.

Conclusion

The government grant received by the company is considered to be statutory income as it falls within the definition of a bounty or subsidy in section 15-10 of the ITAA 1997. On this basis, the government grant will be assessable income under section 6-10 of the ITAA 1997.

Assessable recoupment

Assessable income includes an amount that you receive by way of a recoupment if it is for a deductible expense and it is not otherwise assessable income (section 20-10 of the ITAA 1997).

Subsection 20-20(3) of the ITAA 1997 states:

An amount you have received as "recoupment of a loss or outgoing (except by way of insurance or indemnity) is an assessable recoupment if:

a) You can deduct an amount for the loss or outgoing for the current year; or

b) You have deducted or can deduct an amount for the loss or outgoing for an earlier income year;

Under a provision listed in section 20-30.

In this case, the grant received by the entity will be assessable income under section 15-10 of the ITAA 1997. Therefore, the conditions for an assessable recoupment will not be satisfied.