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Edited version of your written advice
Authorisation Number: 1013048609306
Date of advice: 8 July 2016
Ruling
Subject: Act of grace payment
Question 1
Are the act of grace payments regarded as assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
No.
Question 2
Are the act of grace payments regarded as assessable income under subsection 20-20(2) of the ITAA 1997?
Answer
Yes.
This ruling applies for the following period
Year ended 30 June 2016
The scheme commenced on
1 July 2015
Relevant facts
Entity A operates a business.
Entity A has their business at site B and pays rent to entity C.
Works on site B were carried out which impacted the business.
Following discussions with the relevant authority, the lessor applied on behalf of entity A for financial relief. The application was successful and it was recommended relief proceed by way of an act of grace payment in line with the rental paid.
Entity A received an amount, being an act of grace payment for immediate financial assistance for the business equivalent to rent for a specified period.
Later, entity A received a further payment, being an act of grace payment for immediate financial assistance for the business equivalent to rent for a further period.
The payment was approved under the relevant legislation.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5.
Reasons for decision
Ordinary income
Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that assessable income includes ordinary income.
Generally speaking, a receipt will be ordinary income if it is a receipt arising out of a person's employment, business activities or income producing activities. This will be so even if the receipt is not directly related to any service provided by the recipient to the donor (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 10 ATD 82; (1952) 4 AITR 443).
Other characteristics of ordinary income that have evolved from case law include receipts that:
• are earned,
• are expected,
• are relied upon, and
• have an element of periodicity, recurrence or regularity.
Whether or not a particular receipt is income depends upon its quality in the hands of the recipient (Scott v. Federal Commissioner of Taxation (1966) 117 CLR 514).
In this case, entity A received act of grace payments. Act of grace payments are made in special circumstances. In this case the payments were equivalent to rent expenses for the specified periods.
The fact that entity A operates a continuing business on site B explains how it was eligible to receive the payments, however it is not determinative of the character of the payment.
The payments to entity A were not earned, expected or regular or in respect of a trading receipt. Although the payment can be said to be relied upon, there is no connection between the business activities of entity A and the payments.
It is therefore considered that the acts of grace payments, in your particular circumstances, are not ordinary income and are not assessable income under section 6-5 of the ITAA 1997.
Where a payment is not assessable as ordinary income under section 6-5 of the ITAA 1997, it may be assessable as statutory income under other provisions (section 6-10 of the ITAA 1997).
Statutory income - assessable recoupment
Subsection 20-20(2) of the ITAA 1997 provides that an amount received as a recoupment of a loss or outgoing is an assessable recoupment if:
• you received the amount by way of insurance or indemnity, and
• you can deduct an amount for the loss or outgoing for the current year, or you have deducted or can deduct an amount for it in an earlier income year, under any provision of this Act.
Indemnity is not a defined term in the ITAA 1997 and therefore must be given its ordinary meaning. Indemnity as defined in the Macquarie Dictionary includes compensation for damage or loss sustained; something paid by way of such compensation.
In your case the payments received are regarded as an amount received by way of indemnity due to the works being carried out near the business and the associated financial loss to the business. The rental expenses paid by entity A to the lessor are an allowable deduction. Therefore the payments are an assessable recoupment under subsection 20-20(2) of the ITAA 1997.
The fact that the act of grace payments were discretionary and there was no automatic entitlement to the payments do not change the nature of the payment. They are regarded as an assessable recoupment and form part of entity A's assessable income.