Edited version of your written advice

Authorisation Number: 1012785652786

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This edited version has been found to be misleading or incorrect. It does not represent the ATO's view of the relevant law.

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Ruling

Subject: Assessability of government grant

Question 1

Will the grant be assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Will the grant be assessable as statutory income under section 15-10 of the ITAA 1997?

Answer

No

Question 3

Will the grant be an assessable recoupment under Subdivision 20-A of the ITAA 1997?

Answer

Yes

Question 4

Will Company X make a capital gain or loss under section 104-25 of the ITAA 1997 when the grant is received?

Answer

Yes

Question 5

If the answer to question 4 is yes, will the capital gain or loss be disregarded under section 118-37 of the ITAA 1997?

Answer

Yes

Question 6

Will section 59-30 of the ITAA 1997 apply if Company X repays the government agency some or all of the grant?

Answer

Yes

Question 7

Will subsection 170(10AA) of the Income Tax Assessment Act 1936 (ITAA 1936) apply to allow amendment of Company X's assessments to give effect to section 59-30 of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

Particular periods commencing with the period ending 30 June 20XX

The scheme commences in:

1 July 20XX

Relevant facts and circumstances

Background

Company X is a company incorporated for the purpose of facilitating the construction of the Company X Project.

Company X is wholly-owned by Company B.

Company B is an Australian subsidiary of Company A.

Company X is not a member of an income tax consolidated group.

The Company X Project

The Company X Project involves the design, construction, commissioning and operation of a facility which will be connected to existing plant.

The expenditure incurred to construct the Project will form part of the cost of depreciating assets for purposes of Division 40 of the ITAA 1997.

Company B will construct the Project under a contract with Company X and under a guarantee from Company A. The Project will subsequently be operated by Company B, with additional guarantee support from Company A, pursuant to an operations and maintenance agreement for a period that matches the project term.

On completion, the Project will be owned by Company X. Company Z will utilise the product of the Project. Company Z and Company B have executed an agreement to that effect. The agreement will be novated from Company B to Company X once the grant funds have been deposited in accordance with the Funding Agreement.

The grant

The financier is an independent statutory authority established under the Commonwealth Authorities and Companies Act 1997 (Cth)

Company X executed a funding agreement with the financier (the Funding Agreement) for funding. No consideration was provided by Company X to the financier for the funding.

The funding that will be provided to Company X will be part of a program initiated by the Australian Government and implemented by the financier.

The Project will not be commercially viable without the funding and construction of the Project will not commence until the grant funds are received.

Activities of Company X prior to receipt of the grant

At the time Company X receives the grant, it will only have undertaken very preliminary activities in contemplation of the commencement of its business.

Prior to receipt of the grant:

● Company X will have received initial equity funding from a third party investor (comprising of cash and equity commitments).

● Arrangements for the design and construction, operations and maintenance of the project will not have been executed, and only minor consulting and corporate set up costs will have been incurred by Company X.

Relevant legislative provisions

Commonwealth Authorities and Companies Act 1997

Income Tax Assessment Act 1997, section 6-5

Income Tax Assessment Act 1997, subsection 6-5(1)

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, subsection 20-25(1)

Income Tax Assessment Act 1997, subsection 20-30(1)

Income Tax Assessment Act 1997, Division 40

Income Tax Assessment Act 1997, section 59-30

Income Tax Assessment Act 1997, section 104-25

Income Tax Assessment Act 1997, section 108-5

Income Tax Assessment Act 1997, subsection 104-25(1)

Income Tax Assessment Act 1997, subsection 104-25(3)

Income Tax Assessment Act 1997, section 108-5

Income Tax Assessment Act 1997, section 118-37

Income Tax Assessment Act 1997, subsection 118-37(2)

Income Tax Assessment Act 1997, subsection 995-1(1)

Income Tax Assessment Act 1936, section 170

Income Tax Assessment Act 1936, subsection 170(10AA)

Reasons for decision

Question 1

Summary

The grant will not be assessable as ordinary income under section 6-5 of the ITAA 1997 as it is a government payment to industry to commence business and not income according to ordinary concepts.

Detailed reasoning

Subsection 6-5(1) of the ITAA 1997 provides that an entity's assessable income includes income according to ordinary concepts, called ordinary income. The grant will not be assessable under section 6-5 unless it is ordinary income.

Taxation Ruling TR 2006/3 Income Tax: government payments to industry to assist entities (including individuals) to continue, commence, or cease business provides the Commissioner's view on the tax treatment of government payments to industry to assist entities to continue, commence or cease business, including section 6-5 of the ITAA 1997. TR 2006/3 applies to schemes involving grants paid or funded by the Commonwealth or State, Territory or local government

The grant is not a concessional loan

The government payments to industry (GPIs) that are covered by TR 2006/3 do not include concessional loans. These are described in paragraph 22 of TR 2006/3 as:

Financial assistance provided by government by way of a loan provided at a concessional rate of interest is not a GPI. The difference between the normal market rate of interest and the concessional rate of interest is also not a GPI.

An essential feature of a loan is a definitive obligation to repay the principal on entering of the agreement. ATO ID 2010/147 Income tax: Bounties and subsidies - whether a repayable government payment a ‘bounty or subsidy' considered whether a government payment which was subject to repayment on the occurrence of certain subsequent events was a bounty or subsidy for the purposes of section 15-10 of the ITAA 1997. In considering this question, it was necessary to consider the issue of whether the government payment was a loan. ATO ID 2010/147 concluded that a government payment would not be characterised as a loan (which would not be a bounty or subsidy for the purposes of section 15-10 of the ITAA 1997) where a definite obligation to repay the principal sum is absent on entering the agreement. Where the provision of the government payment is subject to a contingent liability that may result in repayment in limited circumstances that may or may not ever eventuate, the obligation to repay the funding will not exist at the time the funding agreement was entered into.

Company X does not have a definite obligation to repay the grant when the Funding Agreement is entered into. An obligation to repay any amount of the grant only arises under the Funding Agreement if:

● the initial agreement between Company Z and Company B is extended or a further agreement is entered into; and

● Company X has already achieved certain financial conditions.

Therefore, Company X only has a contingent obligation to repay the grant and it is not a concessional loan.

The grant is a government payment to industry to commence business as contemplated by TR 2006/3

Paragraph 26 of TR 2006/3 provides that government payments to commence or cease a business are not assessable as ordinary income of the recipient under section 6-5 of the ITAA 1997. Government payments to commence business contemplated by TR 2006/3 include payments:

● to assist with the cost of evaluating whether to commence a business;

● to reimburse the cost of taxation advice;

● for the commencement of a business; or

● to assist with the purchase of a depreciating asset.

The grant will be for the purposes of assisting with the construction of depreciating assets. The Project will not be commercially viable without the grant and the Project will not proceed until the grant is received. These factors indicate that the grant is a government payment to commence business as discussed in TR 2006/3. Applying the guidance in TR 2006/3, the grant is not assessable as ordinary income of the recipient under section 6-5 of the ITAA 1997.

Question 2

Summary

The grant will not be assessable as statutory income under section 15-10 of the ITAA 1997 as it is not received in relation to carrying on a business.

Detailed reasoning

Section 15-10 of the ITAA 1997 provides:

15-10 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.

In order for the grant to be assessable under section 15-10 it must be:

● a bounty or subsidy;

● received in relation to carrying on a business; and

● not assessable as ordinary income under section 6-5 of the ITAA 1997

The grant is not ordinary income

For the reasons already outlined reasoning for question 1, the grant is not assessable as ordinary income under section 6-5 of the ITAA 1997.

The grant is a subsidy

The terms 'bounty' or 'subsidy' are not defined terms for the purposes of either the ITAA 1997 or the ITAA 1936 and their ordinary meanings should be applied. The Courts in their consideration of how the terms were used in paragraph 26(g) of the ITAA 1936 (the predecessor to section 15-10 of the ITAA 1997) have provided guidance as to their meaning which is relevant for section 15-10 of the ITAA 1997 (see Plant v. FCT 2004 ATC 2364).

In Reckitt and Colman Pty Ltd v. FCT (1974) 4 ATR 501; Mahoney J said that the terms 'bounty' or 'subsidy' include a financial grant made by the State for the purpose of encouraging a particular activity in the field of trade and commerce. In First Provincial Building Society Ltd v. Commissioner of Taxation (1995) 30 ATR 207, Hill J referred to Jowitt's Dictionary of English Law's observation that the word subsidy generally means 'financial assistance granted by the Crown' and said that 'This is the meaning which the word truly has in the present context'.

As the grant is provided under a federal government scheme to provide funding support to regional Australia, the grant is a ‘subsidy' for the purposes of section 15-10 of the ITAA 1997.

The grant is not received in the relation to carrying on a business

Paragraph 101 of TR 2006/3 distinguishes between a bounty or subsidy that is related to carrying on a business and one which is merely for commencing or ceasing a business. The latter is not considered to be in relation to carrying on a business. In First Provincial Building Society v Federal Commissioner of Taxation 56 FCR 320 at 333, Hill J stated in the context of former subsection 26(g) of the ITAA 1936:

…the relationship must be to the ‘carrying on' of the business. These words may perhaps be understood in opposition to a relationship with the actual business itself. They would make it clear, for example that a bounty received, merely in relation to the commencement of a business or the cessation of the business, would not be caught. The expression ‘carrying on of a business' looks, in my opinion, to the activities of that business which are directed towards the gaining or producing of assessable income, rather than merely the business itself.

Applied in the present circumstances, the grant would not be received in relation to carrying on a business. When it is received, the requisite relationship with the ‘carrying on' of the business will not exist. The Project is not commercially viable without the receipt of the grant and the Project will not proceed without its receipt. The grant is an amount received in relation to the commencement of a business and not the ‘carrying on' of a business.

The grant is not assessable as statutory income under section 15-10 of the ITAA 1997 as it is not received in relation to the carrying on of a business.

Question 3

Summary

The grant will be an assessable recoupment under Subdivision 20-A of the ITAA 1997 as it is neither ordinary nor statutory income and it is an amount received as a recoupment of a loss or outgoing for which a deduction is available under a provision listed in subsection 20-30 of the ITAA 1997.

Detailed reasoning

Subdivision 20-A of the ITAA 1997 includes in assessable income certain amounts, termed assessable recoupments.

The grant will be an assessable recoupment for an income year as defined in section 20-20 of the ITAA 1997 if:

● it is not ordinary income or statutory income because of a provision outside Subdivision 20-A;

● it is received as recoupment of a loss or outgoing (except by way or insurance or indemnity); and

● an amount is deductible for the loss or outgoing for the current year or for a loss or outgoing in an earlier income year under a provision listed in subsection 20-30(1) of the ITAA 1997.

The grant is not ordinary or statutory income outside of Division 20-A

As concluded in questions 1 and 2, the grant is not ordinary income under section 6-5 of the ITAA 1997 or statutory income under section 15-10 of the ITAA 1997. The grant would also not be ordinary or statutory income in any other provision outside of Division 20-A.

The grant is a recoupment of a loss or outgoing

The term ‘recoupment of a loss or outgoing' is defined in subsection 20-25(1) of the ITAA 1997 as including a grant in respect of the loss or outgoing. This definition is sufficiently broad to cover the grant which is a government grant provided for the purposes of the Project.

An amount is deductible for the loss or outgoing under section 20-30

Section 20-30 of ITAA 1997 includes a table showing deductions under the ITAA 1997 for which recoupments are assessable. Item 1.9 of the table concerning capital allowances under Division 40 of the ITAA 1997 is relevant to Company X's circumstances.

The expenditure Company X will incur to construct the Project will form part of the cost of depreciating assets. Company X will be entitled to claim a deduction for the decline in value of those depreciating assets under Division 40 of the ITAA 1997.

This is supported by paragraph 27 of TR 2006/3 which provides that a government payment to industry 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.

Conclusion

As the grant is not otherwise ordinary or statutory income, and is a recoupment of an outgoing which is deductible under section 20-30, it is an assessable recoupment under Subdivision 20-A of the ITAA 1997.

Question 4

Summary

Company X will make a capital gain under section 104-25 of the ITAA 1997 when the grant is received as the capital proceeds from CGT event C2 happening will exceed the cost base of the relevant CGT asset.

Detailed reasoning

Section 104-25 of the ITAA 1997 concerns capital gains or losses arising from the ending of intangible CGT assets. Subsection 104-25(1) of the ITAA provides that:

104-25(1) CGT event C2 happens if your ownership of an intangible *CGT asset ends by the asset:

(a) being redeemed or cancelled; or

(b) being released, discharged or satisfied; or

(c) expiring; or

(d) being abandoned, surrendered or forfeited; or

(e) if the asset is an option - being exercised; or

(f) if the asset is a *convertible interest - being converted.

A CGT asset is defined in section 108-5 of the ITAA 1997 as any kind of property or a legal or equitable right that is not property.

On entering the Funding Agreement, Company X has received an intangible legal right, being the right to receive the grant, subject to the terms of the Funding Agreement. That right is a CGT asset under section 108-5 of the ITAA 1997. On receipt of the funds, the right to receive the grant will end through being satisfied and CGT event C2 will happen.

Whether a capital gain or loss arises from the happening of CGT event C2 is determined under subsection 104-25(3) of the ITAA 1997 which provides:

104-25(3) You make a capital gain if the *capital proceeds from the ending are more than the asset's *cost base. You make a capital loss if those capital proceeds are less than the asset's *reduced cost base.

In the current circumstances, Company X will make a capital gain on receipt of the grant funding. The amount of the grant funding will form the capital proceeds from the ending of the CGT asset. The cost base of the CGT asset will be nil as the total of the 5 elements of its cost base is zero. Therefore, Company X will make a capital gain under section 104-25 of the ITAA 1997 when the grant is received.

Question 5

Summary

The capital gain made on receipt on the grant will be disregarded under section 118-37 of the ITAA 1997 as it has arisen due to a reimbursement or payment of Company X's expenses under a scheme established by an Australian government agency under an enactment or instrument of a legislative character.

Detailed reasoning

Subsection 118-37(2) of the ITAA 1997 provides:

118-37(2) A *capital gain or *capital loss is disregarded if you make it as a result of receiving a payment or property as reimbursement or payment of your expenses, or receiving or using a voucher or certificate, under:

(a) a scheme established by an *Australian government agency, a local governing body or a *foreign government agency under an enactment or an instrument of a legislative character…

As concluded in question 4, a capital gain will be made by Company X on the receipt of the grant. Under subsection 118-37(2) of the ITAA 1997, that capital gain will be disregarded if:

● the grant is a reimbursement or payment of Company X's expenses; and

● it is made under a scheme established by an Australian government agency under an enactment or a scheme of a legislative character.

Pursuant to the Funding Agreement, the grant funds may only be used for the purposes of the Project. The funds will be employed to satisfy Company X's expenses in relation to the Project. Therefore, the grant will be a reimbursement or payment of Company X's expenses.

The grant will also satisfy the requirement that it be a payment that is a reimbursement of payment under a scheme established by an Australian government agency under an enactment or a scheme of a legislative character.

The term ‘Australian government agency' is defined in section 995-1(1) of the ITAA 1997 to include an authority of the Commonwealth or of a State or a Territory. The financier is an independent statutory authority established under the Commonwealth Authorities and Companies Act 1997 and is therefore an Australian government agency for the purposes of the ITAA 1997.

The grant will be paid under a scheme established by an Australian government agency established under an enactment or instrument of a legislative character.

Company X's capital gain on receipt on the grant will be disregarded under section 118-37 of the ITAA 1997 as the capital gain is made as a result of receiving a reimbursement or payment of Company X's expenses made under a scheme established by an Australian government agency under an enactment or instrument of a legislative character.

Question 6

Summary

Section 59-30 of the ITAA 1997 will apply if Company X repays the financier some or all of the grant as Company X will not be able to deduct the repayment for any income year.

Detailed reasoning

Subsection 59-30 of the ITAA 1997 provides:

59-30(1) An amount you receive is not assessable income and is not *exempt income for an income year if:

(a) you must repay it; and

(b) you repay it in a later income year; and

(c) you cannot deduct the repayment for any income year.

Company X has an obligation to repay some or all of the grant when certain conditions are met. Specifically, Company X must repay some or all of the grant after the end of the financial year if certain conditions relating to an extended or further agreement are met.

If Company X repays some or all of the grant, it will not be able to claim a deduction for the repayment in any income year.

As the requirements of section 59-30 of the ITAA 1997 are met, section 59-30 of the ITAA 1997 will apply if Company X repays some or all of the grant. Any amount Company X repays to which section 59-30 applies will not be assessable income or exempt income.

Question 7

Summary

Subsection 170(10AA) of the ITAA 1936 will apply to allow amendment of Company X's assessments to give effect to section 59-30 of the ITAA 1997.

Detailed reasoning

Section 170 of the ITAA 1936 provides the circumstances under which an assessment may be amended. Subsection 170(10AA) lists provisions for which assessments may be amended at any time in order to give effect to the listed provisions. Relevantly, item 22 in subsection 170(10AA) lists section 59-30 of the ITAA 1997.

As noted above, section 59-30 of the ITAA 1997 will apply if Company X repays all or part of the grant.

The applicability of subsection 170(10AA) in such circumstances is confirmed by paragraph 122 of TR 2006/3 which provides that:

[s]ection 170(10AA) of the ITAA 1936 allows an amendment of an assessment at any time to give effect to section 59-30.

Therefore, subsection 170(10AA) of the ITAA 1936 will apply allow an amendment of Company X's assessments to give effect to section 59-30 of the ITAA 1997.