Edited version of private advice

Authorisation Number: 1012657878492

Ruling

Subject: Grants

Is the grant income derived progressively over five years using a straight line method?

Answer

No

This ruling applies for the following periods

Year ending 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

The scheme commences on

1 October 20XX

Relevant facts and circumstances

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

• Your private ruling application.

• Landholder Management Agreement including Property Works Plan

You conduct a business using land in an Australian state.

During the 2012-13 income year you entered into a Landholder Management Agreement (LMA) with a statutory authority ('the grantor'). The role of the grantor includes the administration and delivery of funding from an Australian Government environmental program.

In consideration of receiving funding, you agreed to undertake the activities and tasks described in accordance with the Agreement and the accompanying Property Works Plan (the Plan). These works include retaining and maintaining the habitat and works on the property for a period of years after the funded works in the agreement are completed.

The Plan provides details on the activity, timing and budget and states that on-ground works should be completed within 12 months of the agreement and all works must be completed by 30 June 2013.

You have agreed to spend the funds within twelve months of receipt.

Unspent funds must be returned to the grantor and the grantor may withhold, withdraw or require you to repay some or all of the funding if you do not meet your obligations under the Agreement.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 6-5(2)

Reasons for decision

Under subsection 6-5(2) of the ITAA 1997, assessable income includes ordinary income derived during the income year.

Therefore, an amount (including an amount which has been received), will not be included in assessable income for an income year, unless it has been derived during that year.

In Brent v. Federal Commissioner of Taxation (1971) 125 CLR 418; 71 ATC 4195; (1971) 2 ATR 563, the High Court said at CLR 420, ATC 4200, ATR 570:

'It has become well established that unless the Act makes some specific provision on the point the amount of income derived is to be determined by the application of ordinary business and commercial principles and that the method of accounting to be adopted is that which 'is calculated to give a substantially correct reflex of the taxpayer's true income'. (Commissioner of Taxes (South Australia) v Executor, Trustee and Agency Company of South Australia Limited (Carden's Case) (1938) 63 CLR 108, at pp 152-154).'

This reflects the view taken by the High Court in Arthur Murray (NSW) Pty Ltd v. Federal Commissioner of Taxation (1965) 114 CLR 314; 14 ATD 98; (1965) 9 AITR 673 ( Arthur Murray ).

In Case U7 87 ATC 127; Tribunal Case 20 (1986) 18 ATR 3120 a company received, at the discretion of the grantor, an 'advance' of grant monies to which it would become entitled upon expenditure on the agreed research and development (R&D) activities. These monies were repayable if this expenditure was not made, or was less than the amount advanced. The AAT referred to the decision in Arthur Murray and considered that, in the relevant year, the company had not done all that was required of it to earn the full amount prepaid to it.

At paragraphs 23 and 24 of Taxation Ruling TR 2006/3, the Commissioner states that government payments made in advance of performance of the obligations in return for which agreement to make the payments has been given, in situations where legal restrictions attach to the use of those payments, and where repayment of the monies will occur, should the obligations not be performed, or the restrictions breached, do not constitute income derived at the time of receipt. It is only at the later time, when obligations begin to be performed, and restrictions or conditions lift, and the recipient has done all required of it in order to retain the monies received, that it can be said that it will have begun to derive the amounts in question as income.

Having regard to the authorities cited and to the key consequences of the Agreement, it is concluded that the amounts under the Agreement are not derived as income on receipt or over a straight line period of five years. Rather, the amounts are assessable income to you as derived under section 6-5 of the ITAA 1997 when, and only to the extent, in an income year, they are applied towards the conduct of the activities.