Edited version of your written advice

Authorisation Number: 1012850683960

Date of advice: 29 July 2015

Ruling

Subject: Whether the Government grant is assessable income

Question 1

Is the grant, provided by the Commonwealth of Australia to the entity, assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Is the grant provided to the entity assessable as a bounty or subsidy under section 15-10 of the ITAA 1997?

Answer

Yes

This ruling applies for the following period

Year ended 30 June 2014

The scheme commenced on

1 July 2013

Relevant facts

The entity operates a business.

The entity entered into an agreement with the Commonwealth of Australia to receive a grant to purchase and refurbish a property to provide a particular service to the public.

The entity purchased and renovated the property.

The entity moved its business operations to the purchased and renovated property.

The entity was required to carry out, or arrange for the carrying out of the renovation and fit-out of the existing building on the property.

As part of the funding agreement the entity was required to contribute an amount (GST inclusive) to the project.

Funding amounts received by the entity from the Commonwealth were based on reaching the following milestones:

• Initial requirements - financial & legal, property

• Confirmation of property details

• Budget, plan, risk, resources & project plan stage

• Commencement of refurbishment and fitout

• Refurbishment and fitout

• Certificate of practical completion issued; and

• Final project report.

Various amounts were received from the Commonwealth upon reaching the appropriate milestones.

Assumptions

Nil

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 15-10

Reasons for decision

Note, unless otherwise stated all subsequent legislative references pertain to the ITAA 1997.

Question 1

A payment or other benefit received by a taxpayer is included in their assessable income if it is income according to ordinary concepts.

Section 6-5 states, in part:

6-5(1) Your assessable income includes income according to ordinary concepts, which is called ordinary income.

6-5(2) If you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Although the expression 'income according to ordinary concepts' is not defined in the ITAA 1997, there is a substantial body of case law from which a number of factors have been drawn to determine whether an amount has the character of income according to ordinary concepts.

ATO policy concerning government payments to industry is set out in Taxation Ruling TR 2006/3 Income tax: government payments to industry to assist entities (including individuals) to continue, commence or cease business (TR 2006/3). At paragraph 84, it provides that ordinary income generally falls within three categories:

• Income from providing personal services,

• Income from property, or

• Income from carrying on a business.

Further, paragraph 85 of TR 2006/3 lists guidelines established from case law which are of assistance in determining the nature of a receipt.

A frequent characteristic of income receipts is an element of periodicity, recurrence or regularity, even if the receipts are not received in relation to the carrying on of the daily business activities.

Application to your circumstances

The Funding received by the entity does not constitute ordinary income.

Whilst the Funding has been paid in separate instalments it does not possess the necessary elements of periodicity, recurrence or regularity that are common to receipts of ordinary income.

Further, in terms of TR 2006/3, the funding does not constitute income from the provision of personal services; is not sourced from property; and has not been derived directly from your usual business activity conducted on the property.

The grant funding is not assessable as ordinary income under section 6-5.

Question 2

Section 6-10 states that your assessable income includes some amounts that are not 'ordinary income'. These amounts are 'statutory income'. Section 10-5 contains a summary list of the provisions which include amounts in your assessable income that are not ordinary income.

One of the statutory income provisions listed in section 10-5 is section 15-10, which deals with the treatment of bounties and subsidies.

Section 15-10 provides that:

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 determining the correct treatment of the funding it needs to be considered whether the funding constitutes a bounty or subsidy that has been received 'in relation to carrying on a business'.

Bounty or Subsidy

Payments of financial assistance by government are commonly referred to as 'bounties', 'subsidies' or 'grants'. As 'bounty', 'subsidy' and 'grant' are not defined terms, the ordinary meaning of these terms applies. (Paragraph 93 of TR 2006/3)

'Subsidy' is defined as a direct pecuniary aid furnished by a government to a private industrial undertaking, a cultural organisation, or the like, or a grant or contribution of money. The ordinary meaning adopted by case law is an aid provided by the Crown [government] to foster or further some undertaking or industry. (Paragraph 94 of TR 2006/3)

'Bounty' is defined to include 'a premium or reward, especially one offered by a government'. When 'bounty' and 'subsidy' are positioned together the compound term is interpreted as describing financial assistance given to assist business. (Paragraph 95 of TR 2006/3)

In relation to carrying on a business

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, and includes within its scope payments that have a direct or indirect connection to the business (Paragraph 100 of TR 2006/3).

The bounty or subsidy must relate to the activities of the business which are directed towards the gaining or producing of assessable income rather than merely to the business itself, and thus not merely to the commencement or cessation of it (First Provincial Building Society Ltd v. FC of T (1995) 128 ALR 118; (1995) 95 ATC 4145; (1995) 30 ATR 207; (1995) 56 FCR 320 (First Provincial)). (Paragraph 101 of TR 2006/3)

Payments made towards the restructuring of business operations with a view to improving overall efficiency are considered to be 'in relation to carrying on a business'. However, some business restructures may not be 'in relation to carrying on a business', for example if a business changes its structure to facilitate a new activity. This is decided on the merits of each case. (Paragraph 102 of TR 2006/3)

Government payments 'to commence or cease business' as opposed to 'in relation to carrying on a business' are not considered to be assessable as ordinary income under section 6-5 or as a bounty or subsidy under section 15-10.' (Paragraphs 103 and 128 of TR 2006/3)

Application to your circumstances

The Funding received by the entity from the Government is financial assistance given to assist the entity's business to purchase and renovate an existing property and convert it into a location where it can operate its business. As such, it is a bounty or subsidy.

The bounty or subsidy was received in relation to the carrying on a business therefore the payment is assessable under section 15-10.