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Authorisation Number: 1012727966490

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Ruling

Subject: Income tax - Assessable income - Other types of income - Grants

Question 1

Will the funds received by the Company from the Agency be assessable to the Company as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Will the funds received from the Agency be assessable to the Company as statutory income under section 15-10 of the ITAA 1997?

Answer

No

Question 3

Will the funds received from the Agency be assessable to the Company as a capital gain under section 102-5 of the ITAA 1997?

Answer

No

Question 4

On the basis the Company chooses to calculate capital allowances on depreciating assets under Division 40 of the ITAA 1997, will the funds received from the Agency that relate to such expenditure be an assessable recoupment under Subdivision 20-A of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

All income years from 1 July 2014 to 30 June 2040

The scheme commences on:

In the year ending 30 June 2015

Relevant facts and circumstances

1. The Company is an Australian company that is an Australian resident for tax purposes.

2. The Agency is an independent statutory authority established by the Australian Government.

3. The Company is a special purpose entity that has been incorporated with the intention that it will own, construct and operate the Project.

4. The Company is seeking funding from the Agency.

5. Preliminary activities were undertaken including seeking consents, preliminary discussions and other feasibility activities.

6. In preparing the submission to the Agency:

• engaged various third parties to undertake due diligence and feasibility activities, including construction, review and audit of a detailed project financial model, market price forecasts, project design, and legal, commercial and tax support,

• contacted various debt funding parties and obtained letters of support, and

• obtained non-binding, indicative off-take contracts for products.

7. The Company entered into a binding Funding Agreement with the Agency. The Funding Agreement sets out the terms on which the Agency will provide the funds to enable the Company to undertake the Project.

8. The Agency will contribute funds for the Project in accordance with the Funding Agreement (the Funds).

9. The Project is dependent of receiving the Funds. The Project will not proceed without the Funds.

10. The Agency will transfer the Funds to the Company's bank account in accordance with the Funding Agreement. On the date that the Funds are paid into the Company's bank account, the Company will become the legal and beneficial owner of the Funds.

11. Once the Funds have been received, the Company will commence the Project by entering into the various agreements.

12. The Funds can only be used by the Company to construct the Project. When the Company spends the Funds, expenditure will form part of the cost base of depreciating assets and the Company will claim a deduction for the decline in value of the depreciating assets in accordance with Division 40 of the ITAA 1997.

13. Under the Funding Agreement the Company will provide contributions toward the Project other than the funding payable by the Agency.

14. Relevant terms of the Funding Agreement:

• the Company must submit a notice to the Agency if it wants to seek a variation to the Project.

• the Company must make or procure shareholder financial contributions.

• conditions must be satisfied before Funds are withdrawn.

• the Funds include a contingent amount to partly cover increases in price due to an adverse foreign exchange rate movement.

• the Company must only spend or legally commit the Funds for the Purposes of undertaking the Project and purposes that are incidental to the Project, and must only spend the Funds in accordance with the Budget.

• the Agency is entitled to recover from the Company any Funds which at any time have been spent other than in accordance with the Funding Agreement.

• the Agency is entitled to recover from the Company any Funds which have not been spent or legally committed for expenditure on expiry or termination of the Funding Agreement.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 15-10

Income Tax Assessment Act 1997 Subdivision 20-A

Income Tax Assessment Act 1997 section 20-20

Income Tax Assessment Act 1997 section 20-30

Income Tax Assessment Act 1997 parts 3-1 and 3-3

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 104-25

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

Income Tax Assessment Act 1997 subsection 110-55(6)

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

Income Tax Assessment Act 1997 section 775-30

Income Tax Assessment Act 1997 section 775-75(1)

Reasons for decision

Question 1

Summary

The Funds received by the Company from the Agency to commence the business is not income according to ordinary concepts. The receipt is not assessable income under section 6-5 of the ITAA 1997.

Detailed reasoning

Section 6-5 of the ITAA 1997 includes in your assessable income amounts of ordinary income. Ordinary income does not include receipts of a capital nature.

Taxation Ruling TR 2006/3 Income tax: government payments to industry to assist entities (including individuals) to continue, commence or cease business discusses the way in which various tax provisions apply to government payments to industry to assist the recipient to continue, commence or cease a business.

A 'government payment to industry' is defined in TR 2006/3 as a payment by the government, or entity chosen by the government to administer government funds.

Government payments to commence business include payments for the commencement of a business or to assist with the purchase of depreciating assets.

Regarding such payments, paragraphs 128 and 139 of TR 2006/3 state:

128. Government payments to industry [GPI] to commence or cease business are not assessable as ordinary income under section 6-5 or as a bounty or subsidy in relation to carrying on a business under section 15-10. However, the GPI may be taken into account in determining whether there is an assessable recoupment under Subdivision 20-A. If the GPI is not assessable under any of these provisions, the recipient will need to consider whether there are any CGT consequences.

139. A GPI paid to assist a new business with the purchase of a depreciating asset will not be assessable under section 6-5 as ordinary income as the GPI is capital in nature. The GPI will not be assessable under section 15-10 if it is received in relation to the commencement of a business.

It is accepted that the payment received by the Company is a government payment to industry because the Agency is a government entity and the payment is made to assist with the construction of the Project to achieve its objectives.

To receive the payment the Company has entered into a Funding Agreement with the Agency. The Company's obligations under the agreement are primarily limited to constructing the Project so that it is ready for use. Payment of the Funds is made to a bank account opened in the name of the Company. The Funds must only be used for the purpose of undertaking the Project and can only be withdrawn from the bank account when agreed project milestones are achieved.

The Funds will not be assessable income under section 6-5 of the ITAA 1997 because they are a government payment to industry used to commence a business, namely to construct the Project and purchase depreciating assets for the Project.

Question 2

Summary

The Funds received by the Company from the Agency are to commence the business and are not a bounty or subsidy that is received in relation to carrying on a business. The receipt is not assessable income under section 15-10 of the ITAA 1997.

Detailed reasoning

As discussed in Question 1, government payments to industry to commence a business are not assessable as a bounty or subsidy in relation to carrying on a business under section 15-10 of the ITAA 1997.

Section 15-10 of the ITAA 1997 deals with amounts received in relation to carrying on a business.

ATO ID 2010/38 Income Tax Bounty and subsidies: financial assistance received in commencing a business - whether received 'to commence a business' provides guidance on when a business commences for the purposes of section 15-10 of the ITAA 1997.

The commencement of a business is a specific point in time and a question of fact. The crucial point is where the taxpayer is committed to proceed with the implementation of its purpose to carry on its business. ATO ID 2010/38 states:

A bounty or subsidy is received to 'commence a business' if the bounty or subsidy is to enable the recipient to reach the necessary point where the recipient is committed (and such commitment is demonstrated in its activities) to proceed with the implementation of its purpose to carry on a business. However, a bounty or subsidy that is received in relation to activities of an entity as it commences its business is not received to commence the business if the decision to commence is not dependent upon the receipt of the bounty or subsidy.

In the case of the Company, the decision to commence the business is dependent on receiving the Funds from the Agency. It is only after the Agency has deposited the Funds into the Company bank account that the Company will be required to commit to the Project by entering into the various agreements as required under the Funding Agreement. Once the Company has entered into the various project documents it will have 'committed to proceed with the implementation of its purpose to carry on a business', namely delivery of the Project. At this point the Company commences its business.

Therefore, we consider that the Funds received by the Company are received to commence a business and are not in relation to carrying on a business. The Funds will not be assessable income under section 15-10 of the ITAA 1997.

Question 3

Summary

The Funds that are received by the Company from the Agency are not assessable to the Company as a capital gain under section 102-5 of the ITAA 1997.

Detailed reasoning

A payment received under the scheme to commence a business is subject to the capital gains tax (CGT) provisions in Parts 3-1 and 3-3 of the ITAA 1997.

Section 102-5 of the ITAA 1997 includes a net capital gain made for the income year in your assessable income. A capital gain or loss is made if a CGT even happens to a CGT asset.

Entering into the Funding Agreement with the Agency creates a legal right for the Company to enforce the contract and receive funds under the terms of the Funding Agreement, which is an intangible CGT asset. CGT event C2 in section 104-25 of the ITAA 1997 happens to the right to receive the grant when it is satisfied.

However, any capital gain or capital loss made as a result of a payment under the Funding Agreement is disregarded under paragraph 118-37(2)(a) of the ITAA 1997. Under this provision a capital gain or loss is disregarded where it is made as a result of receiving a payment as reimbursement of your expenses under a scheme established by an Australian government agency.

Any capital gain or loss made in relation to the payment of the Funds will be disregarded under this provision because:

• the Agency is an Australian government agency

• The scheme was established by legislation

• under the Funding Agreement the Funds are provided to the Company as a payment to assist with the costs associated with undertaking the Project and represent a reimbursement of expenses to be incurred by the Company.

Additionally, to the extent that an amount paid to commence a business relates to the acquisition of a new CGT asset that is not a depreciating asset, the expenditure is excluded from the cost base (or reduced cost base) of the new CGT asset under subsection 110-45(3) or subsection 110-55(6) of the ITAA 1997.

The Funds that are received by the Company from the Agency are not assessable to the Company as a capital gain under section 102-5 of the ITAA 1997.

Question 4

Summary

The Funds received by the Company from the Agency for the purchase of depreciating assets, for which deductions for decline in value are available under Division 40, is assessable income under the assessable recoupment provisions in Subdivision 20-A.

Detailed reasoning

Subdivision 20-A of the ITAA 1997 includes in your assessable income certain amounts received by way of insurance, indemnity or other recoupment if it is for a deductible expense and is not otherwise assessable income.

Recoupment of a loss or outgoing includes a grant in respect of the loss or outgoing.

To be an assessable recoupment under section 20-20 of the ITAA 1997 the deductible loss or outgoing must be listed in the table in section 20-30 of the ITAA 1997. The table includes deductions under Division 40 of the ITAA 1997 (item 1.9) and section 775-30 of the ITAA 1997 (item 1.28).

Paragraph 27 of TR 2006/3 states:

27. A GPI received to assist the recipient to commence business with the purchase of a depreciating asset, the cost of which is deductible under Division 40, is assessable income under the assessable recoupment provisions in Subdivision 20-A.

The Company will use the Funds to commence the business which includes expenditure that will form part of the cost base of depreciating assets, for which the Company will claim a deduction for the decline in value under Division 40 of the ITAA 1997.

As the Funds are not otherwise assessable, they will be an assessable recoupment under Subdivision 20-A to the extent that the deductible loss or outgoing is deductible under Division 40 of the ITAA 1997.

The Funds also include a foreign exchange contingency amount. This amount can form part of the cost base of depreciating assets by operation of section 775-75(1) of the ITAA 1997 and be included as an assessable recoupment on the basis that a deduction is made under Division 40 of the ITAA 1997.

Where the forex realisation loss amount does not form part of the cost base of depreciating assets the forex contingency amount will be an assessable recoupment to the extent that the loss is deductible under section 775-30 of the ITAA 1997.

The Funds will be assessable to the Company as statutory income under the assessable recoupment rules in Subdivision 20-A of the ITAA 1997.