Edited version of your written advice

Authorisation Number: 1012849692826

Date of advice: 29 July 2015

Ruling

Subject: Whether the Government grant received is assessable income

Question 1

Is the Government Grant received by the entity in the 2012-13 and 2013-14 financial years assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Is the Government Grant received by the entity in the 2012-13 and 2013-14 financial years assessable income under section 15-10 of the ITAA 1997 as a bounty or subsidy?

Answer

Yes

This ruling applies for the following periods

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commenced on

1 July 2012

Relevant facts

The entity operates a business of manufacturing items.

A Government has made funding available for further investment and funding projects that improve infrastructure, support industry attraction and help grow existing businesses. It is expected that the fund will deliver structural change, population growth and employment outcomes to the area by supporting viable projects.

The entity entered into an agreement with the relevant Minister.

As per the agreement the entity received a grant and was paid the proceeds of the grant in a number of allocations over two financial years.

The agreement stated the grant was to be used by the entity to assist with a project for the upgrading of the existing factory and to purchase and install plant and equipment to produce a new product.

The grant was given to assist the entity to carry out the project by the payment of money from the fund to the entity by way of reimbursement of a percentage of the reimbursable costs incurred by the entity.

Some of the project outcomes included purchasing various machines and erecting a facility and environs.

Assumptions

Nil

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 15-10

Reasons for decision

Question 1

Section 6-5 of the ITAA 1997 considers the treatment of income according to ordinary concepts.

Subsection 6-5(1) of the ITAA 1997 provides that assessable income includes income according to ordinary concepts which is called ordinary income.

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident would include the ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

The legislation does not define income according to ordinary concepts. However, there exists a considerable body of case law which identifies factors indicating the nature of ordinary income.

MIM Holdings Ltd v. Commissioner of Taxation (MIM case) (1997) 363 FCA at 13 per Northrop, Hill and Cooper JJ considers periodicity, recurrence or regularity are some of the main determinants of ordinary income.

GP International Pipecoaters Pty Ltd v. FCT (Pipecoaters case) (1990) 170 CLR 124 at 142 per Brennan, Dawson, Toohey, Gaudron and McHugh JJ and Hayes v. FCT (1956) 96 CLR 47 at 54-56 per Fullagar J considers a payment by gift or subsidy to replenish or augment the recipient's capital is not income under ordinary concepts as it is not a product or incident of the recipient's income producing activity.

Further, paragraph 52 of Taxation Ruling TR 2006/3 states that government payments to reimburse capital costs of restructure to industry to assist entities to continue business is not derived in the ordinary course of carrying on a business and is not considered to be ordinary income.

In this case a grant was received in a number of instalments from the Government to undertake a project. It was not received as part of the day to day activities of the business.

Further, the grant will allow for redevelopment and expansion of the business which will enhance the capacity of the facilities and provide additional services to clients. The works proposed will provide new facilities which will allow the business to start to produce a new product.

As the grant was given to augment the entity's capital assets the grant received is not considered to be ordinary income, and therefore not assessable under section 6-5 of the ITAA 1997.

Question 2

A bounty or subsidy received in relation to carrying on a business, which is not assessable as ordinary income under section 6-5 of the ITAA 1997 is considered assessable income under section 15-10 of the ITAA 1997.

First Provincial Building Society Ltd v. Commissioner of Taxation (1995) 56 FCR 320; 95 ATC 4145; (1995) 30 ATR 207 (First Provincial Case) considers a subsidy to include a financial grant made by the government.

In looking at the meaning of the phrase in relation to the carrying on of a business, Hill J stated in the First Provincial Case that:

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 the 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 to the business itself.

Therefore, it is not sufficient that the payment received is in relation to the business, but rather it must be in relation to the carrying on of that business.

Paragraph 19 of TR 2006/3 states a Government Payment to Industry (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. This will be the case even if eligibility for the GPI is dependent upon legislative changes having an adverse effect upon a business.

Paragraph 53 of TR 2006/3 states that a bounty or subsidy is financial aid received from the government to help the business meet its new operating requirements. This would involve the update of the operating processes of the business, and is directly connected to the operations of the business, considered to be in relation to the carrying of the business.

Paragraph 54 of TR 2006/3 states that a bounty or subsidy is not assessable as ordinary income under section 6-5 of the ITAA 1997, received in relation to carrying on the business. It is assessable under section 15-10 of the ITAA 1997 in the income year in which it is received.

In this case the grant payments were made by the Government to assist the entity to acquire and construct assets. The works proposed will provide a new facility and equipment which will allow the business to start to produce a new product. It is considered that the financial aid in the form of a grant received by the entity is considered a subsidy.

The grant received by the entity is assessable under section 15-10 of the ITAA 1997 as a bounty or subsidy.