Edited version of your written advice

Authorisation Number: 1012930357856

Date of advice: 23 December 2015

Ruling

Subject: Income - grant

Question 1

Are the payments you receive under the Program assessable?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2015

Year ending 30 June 2016

The scheme commenced on:

1 July 2014

Relevant facts and circumstances

You operate a business as a sole trader.

You accepted an offer of funding to enter into the Program Funding Agreement.

You were eligible for funding of $X to be paid in instalments.

The Program was established to provide support to approved businesses in your industry in providing access to professional development for their staff.

The Program Funding Agreement provides that the funding you receive can only be spent in relation to professional development activities for eligible staff employed by your business. Spending can include:

• Formal training

• Training offered by Registered Training Organisations

• Informal training

• Resources

• Travel to attend training courses

• Wages for staff used to replace eligible staff who are absent while undertaking a professional development activity.

Examples of what the funding cannot be spent on include:

• Wage increases or increased remuneration to your employees or contractors including overtime payments

• Professional development activities that ate not related to the work of your employees or contractors

• Any professional development activities that are undertaken outside of the funding period, that have already been funded, that requires overseas travel

• Purchase of major capital equipment

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 10-5

Income Tax Assessment Act 1997 Section 15-10

Reasons for decision

Ordinary income

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

Ordinary income is income according to ordinary concepts. 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 (GPI) is set out in Taxation Ruling TR 2006/3. At paragraph 84 of TR 2006/3, 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.

Application to your circumstances
The grant does not constitute ordinary income. Whilst it will be 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 it does not constitute income from the provision of personal services, is not sourced from property, and has not been derived directly from the your usual business activities.

Accordingly, the grant is not assessable under section 6-5 of the ITAA 1997.

Statutory Income - a Bounty or Subsidy

Under section 6-10 of the ITAA 1997 some amounts that are not 'ordinary income' are included in your assessable income due to another provision of the tax law. These amounts are referred to as 'statutory income'. Subsection 6-10(1) of the ITAA 1997 refers to provisions about assessable income - a summary list of these provisions is contained within section 10-5 of the ITAA 1997.

Section 15-10 of the ITAA 1997 provides that 'assessable income includes a bounty or subsidy that:

(a) is received in relation to carrying on a business; and

(b) is not assessable as ordinary income under section 6-5.'

Taxation Ruling TR 2006/3 deals with the assessability of government payments to industry to continue, commence or cease business. Paragraph 96 of TR 2006/3 states that a 'reference to bounty or subsidy includes a grant that encourages business or trade.'

'In relation to' carrying on a business

Paragraph 100 of TR 2006/3 confirms that a grant 'will be "in relation to" carrying on a business when there is a real connection between the payment and the business. The term "in relation to" includes within its scope payments that have a direct or indirect connection to the business…'

In the Full Federal Court in 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), Hill J was discussing the antecedent of section 15-10, that is, paragraph 26(g) of the Income Tax Assessment Act 1936 (ITAA 1936). He stated that it is important to note that the former provision contained the words ' received in or in relation to carrying on of a business ... (emphasis added).' When the provision was incorporated into the ITAA 1997, it was rewritten as a bounty or subsidy 'you receive in relation to carrying on of a business.'

In First Provincial, Hill J specifically discussed the relationship between the terms 'received in' and 'received in relation to'. This has direct relevance to the interpretation of section 15-10 of the ITAA 1997 as the rewrite of the provision only contained the latter phrase. Hill J stated:

The word "in'' means "in the course of" and requires a direct relationship to exist between the bounty, on the one hand, and the carrying on of the taxpayer's business, on the other. The second limb comprehends a bounty or subsidy received "in relation to'' the carrying on of the taxpayer's business. These words no doubt are sufficiently wide to cover the first limb, but were obviously intended to extend it. Thus the relationship between the receipt of the bounty, on the one hand, and the carrying on of the business, on the other, may be less direct where the second limb is sought to be applied than where the first limb is applied.

It is clear from the First Provincial case, that the scope of the phrase 'in relation to carrying on a business' in section 15-10 of the ITAA 1997 is to be interpreted widely.

Application to your circumstances

The Program under which the funding was paid was administered by a government department to address concerns that quality and tailored professional development activities can be difficult to access in your industry.

In your case, the funding of $X will be paid to assist in you providing your employees and contractors with training and professional development.

In accordance with TR 2003/3, the funding is considered a Bounty or Subsidy for the purpose of section 15-10 of the ITAA 1997. As it is not considered ordinary income, for it to be assessable it must have been 'received in relation to carrying on a business'.

The connection between the funding and the business may be either direct or indirect, however, the expression 'carrying on of the business' does require that for the funding to be assessable it must contribute towards the activities of the business which are directed at the gaining or producing of assessable income rather than merely at the business itself.

In your case, the funding agreement requires that the funding be directed towards the professional development of your eligible staff to aid in them carrying out their work in your business. We consider that the funding you receive is paid in relation to the business activities you carry out.

It follows that the funding instalments will be considered assessable income under section 15-10 of the ITAA 1997 in the year of receipt.