Edited version of your written advice

Authorisation Number: 1012936575656

Date of advice: 13 January 2016

Ruling

Subject: Whether the grant is assessable only when it is unconditional

Question 1

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

Answer

Yes, but only to the extent as outlined in Question 2.

Question 2

Does a portion of the applicable funding become assessable on each yearly anniversary of the completion of the works?

Answer

Yes

This ruling applies for the following periods

Year ended 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

Year ending 30 June 2018

Year ending 30 June 2019

Year ending 30 June 2020

Year ending 30 June 2021

The scheme commenced on

1 July 2014

Relevant facts

The entity purchased a business from its previous owners and started operating the business.

The entity entered into an agreement to receive funding. It purchased and renovated a property with the funding.

The property was renovated and the business moved its operation to the property.

As part of the funding agreement the entity was required to contribute an amount to the renovation.

Funding amounts received were based on reaching certain milestones.

Relevant legislative provisions

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

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)

The Funding received by the entity is financial assistance given to assist the business to purchase and renovate an existing property. 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, however only a fraction of the total amount paid is considered a bounty or subsidy on the anniversary of receiving the funds.

Question 2

Paragraph 118 and 119 of TR 2006/3 discuss conditional grants. Conditional grants made by government that are convertible to a grant after a specified period or on attainment of milestones and subject to agreed performance criteria are not in themselves a GPI at the time they are received.

Where a recipient satisfies the terms of a conditional grant and is entitled to have the conditional grant converted to a grant, a GPI has been earned in the income year of conversion to the extent that the amount is no longer conditional or subject to repayment. Depending on the terms of the agreement, this might be at different points during the period.

In this case the funding only becomes a bounty or subsidy when all conditions attached to it are met. If all conditions contained in the agreement are not met the entity will be required to repay some of the funding. The amount to be repaid at any particular time is contained in the agreement (using the repayment amount formula). When all conditions have been satisfied at the end of a particular completed year (anniversary date), the funding attributable to the period from either the practical completion of the works (in the first year) or the anniversary date (in subsequent years) then becomes a bounty or subsidy and therefore assessable under section 15-10 at that time. The period during which conditions apply to the funding is called the designated use period (DUP). The DUP commences on the date that the entity achieves practical completion of the works and expires, a number of years after that date.

As an example, if after the first anniversary of the practical completion of the works all conditions outlined under the agreement at that time are not met and the government has a right to demand repayment, the amount to be repaid will be a certain fraction of the total funding. On the first anniversary after the practical completion of the works a certain fraction of the total funding becomes a bounty or subsidy (as that portion is unconditional) and at that point becomes assessable income under section 15-10 of the ITAA 1997. This will also happen at the second, third and subsequent anniversaries until the last anniversary.