Edited version of private advice

Authorisation Number: 1012636325790

Ruling

Subject: Industry grant given to factory landlord

Questions and Answers:

1. Is the government business funding directly received by the Family Trust assessable to the Family Trust under section 15-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes.

2. Is the government business funding indirectly received by the Investment Trust assessable to the Investment Trust under any tax provision?

No.

This ruling applies for the following periods:

Year ending 30 June 2013

Year ending 30 June 2014

The scheme commences on:

1 July 2012

Relevant facts and circumstances

The Investment Trust (landlord) owns a production facility and rents it to, their related entity, the Family Trust (the tenant). The Investment Trust does not carry on a business. The Family Trust does carry on a business.

As a business entity, the tenant was eligible to apply and enter into a funding agreement, for the specified purpose of:

• An extension to the landlord's workshop and finishing area assets.

• An extension to the landlord's warehousing and distribution centre assets.

• The purchase and installation of new kinds of manufacturing, storage and distribution assets by the landlord.

• The achievement of many additional full time employees by the tenant.

In summary, the expansion doubled the industrial floor space and production capacity, doubled the tenant's employment capacity and provided an industrial facility with new kinds of production, storage and distribution capabilities that did not previously exist.

The tenant directed that the funding they were eligible to be paid into the landlord's bank account.

The landlord intends to claim related capital allowances and capital works deductions. Both landlord and tenant contend the tenant was acting as an agent for the landlord at the time the funding agreement was entered into (although the tenant was under no obligation to give the landlord the funding under their rental/lease agreement with the landlord).

Although only the tenant was eligible to apply for the grant, it was known to the grantor and intrinsic in the application approval decision that the landlord would ultimately receive the grant funds.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 15-10

Income Tax Assessment Act 1997 Section 20-25

Income Tax Assessment Act 1997 Section 110-45

Income Tax Assessment Act 1997 Section 110-55

Reasons for decision

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.

Subsection 20-20(1) of the ITAA 1997 states an amount is not an assessable recoupment to the extent that it is ordinary income or it is statutory income because of a provision outside this Subdivision.

In relation to government payments received to continue business activity, paragraphs 19, 21, 44 and 100 of Taxation Ruling TR 2006/3 (which is about government payments to industry) state:

19. A GPI received to acquire or construct an asset or assist with the capital costs of restructuring, that is an activity in relation to carrying on a business, is assessable income under section 15-10.

21. To the extent the GPI is assessable as ordinary income or under section 15-10, it is not included in the termination value of a depreciating asset, nor will it be an assessable recoupment under Subdivision 20-A.

44. The words 'received in relation to carrying on a business' in section 15-10 require a relationship between the payment and the carrying on of the business. The payment is received by the business for replacing assets used in the manufacturing operations of the business. The assets are connected directly to the operations of the business. As such, the payment is received in relation to carrying on the business.

100. A bounty or subsidy 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. As stated by Hill J in the First Provincial case:

The words 'in relation to' are words of wide import. They are capable of referring to any relationship between two subject matters in the present case the receipt of the bounty or subsidy, on the one hand, and the carrying on of the business, on the other.....the degree of connection will be 'a matter of judgment on the facts of each case'... What is necessary, at the least, in the present context is that there be a real connection...the relationship need not be direct, it may also be indirect.

The phrase 'in relation to' was also considered by the High Court in PMT Partners Pty Ltd (In Liquidation) v. Australian National Parks & Wildlife Service (1995) 184 CLR 301. Brennan CJ, Gaudron and McHugh JJ observed, in considering the application of the Commercial Arbitration Act 1985 (NT), at 313:

Inevitably, the closeness of the relation required by the expression 'in or in relation to' in s 48 of the Act, indeed, in any instrument - must be ascertained by reference to the nature and purpose of the provision in question and the context in which it appears.

In that case Toohey and Gummow JJ also observed:

It is apparent that the words 'in or in relation to' are particularly wide. ... Cases concerning the interpretation of this phrase in other statutory contexts are of limited assistance. However, the cases do show that the words are prima facie broad and designed to catch things which have sufficient nexus to the subject. The question of sufficiency of nexus is, of course, dependent on the statutory context. (at 330) ...

The connection which is required by the phrase 'in relation to' is a question of degree. There must be some "association" which is "relevant" or "appropriate". The question of the relevance or appropriateness of the connection is a question which cannot be divorced from the particular statutory context. (at 331)

Goods and Services Tax Ruling GSTR 2000/37 discusses the general law in relation to agency relationships. Paragraph 10 of GSTR 2000/37 explains that:

An intermediary may be authorised by another party to do something on that party's behalf. Generally, the intermediary is called an agent. The party who authorises the agent to act on their behalf is called the principal.

In your case, we consider the government funding directly received by the Family Trust is assessable to the Family Trust under section 15-10 of the ITAA 1997 because the funding was received in relation to carrying on a business. If the Family Trust was not carrying on a business and if the new assets acquired were not connected to the business of the Family Trust, the funding would not have been granted. Although the Family Trust itself did not use the funding to acquire its own capital assets, the assets acquired by the Investment Trust are connected to the operations of the Family Trust business. In other words, there is a sufficiency of nexus in the statutory context, given the wording in section 15-10 is broad.

As for the Investment Trust, due to the explicit interrelationship between it, the Family Trust and the approval of the grant, we consider, in your unique circumstances, there are no tax implications for the Investment Trust in your case, including as a recoupment, because the Family Trust is assessable on the grant.

As for the 'agency' matter, we consider the Family Trust was not an agent on behalf of the Investment Trust because the Investment Trust had no explicit right to apply for the funding.