Edited version of your written advice

Authorisation Number: 1051225387254

Date of advice: 18 May 2017

Ruling

Subject: Income - grants

Question 1

Is the grant assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Is the grant assessable under section 15-10 of the ITAA 1997?

Answer

No

Question 3

Is the grant assessable under the capital gains tax provisions?

Answer

No

Question 4

Is the grant an assessable recoupment pursuant to Subdivision 20-A of the ITAA 1997 when deductions are claimed in relation to capital works under Division 43 of the ITAA 1997?

Answer

No

This ruling applies for the following periods:

Years ending 30 June 20YY - 20XY

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The Trust lodged an application for a grant under a government program.

The purpose of the grant was to enable an extension to be undertaken on the premises.

The tenant of the property is a related party.

The grant application was successful. The funding agreement was executed and the first payment in accordance with the milestones of the funding agreement was paid initially, with the balance of the funds paid during the 20ZZ financial year.

In relation to the properties owned, the Trust is a landlord who is in receipt of passive rental monies only. That is, the Trust carries out the sole function of owning and renting the premises in its entirety to a single tenant. It does not carry on a business, trade or employ staff.

Relevant legislative provisions

Income Tax Assessment Act 1997, Section 6-5

Income Tax Assessment Act 1997, Section 6-10

Income Tax Assessment Act 1997, Section 10-5

Income Tax Assessment Act 1997, Section 15-10

Income Tax Assessment Act 1997, Subsection 20-20(3)

Income Tax Assessment Act 1997, Section 20-40

Income Tax Assessment Act 1997, Section 104-25

Income Tax Assessment Act 1997, Paragraph 118-37(2)(a)

Income Tax Assessment Act 1997, Subsection 110-45(3)

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.

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.

In this case, the grant does not constitute ordinary income. Whilst it was 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 trust's usual business activities.

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

Bounty or Subsidy

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.'

To be assessable under section 15-10 of the ITAA 1997 the subsidy must relate to the 'carrying on' of the business, not merely to the commencement or cessation of it. The expression 'carrying on of the business' is limited to the activities of the business which are directed towards the gaining or producing of assessable income rather than merely to the business itself. (Paragraph 101 of TR 2006/3)

In this case, the Trust owns the property and has been allocated government funding to extend the facility located at the property. The Trust will not be operating business in the relevant industry or a business of leasing properties. Accordingly, any receipts in relation to the funding will not be assessed under section 15-10 of the ITAA 1997 as a bounty or subsidy.

Capital gains tax

Section 104-25 of the ITAA 1997 deals with cancellation, surrender and similar endings to CGT assets - a CGT event C2. A C2 event occurs when the ownership of an intangible CGT asset ends by the asset being released, discharged or satisfied. This would occur when a taxpayer's rights under an agreement come to an end - generally at the time the taxpayer's obligations have been discharged and the taxpayer receives payment.

A capital gain occurs if the capital proceeds from the ending of the rights are more than the asset's cost base.

CGT exemption under paragraph 118-37(2)(a)
Paragraph 118-37(2)(a) of the ITAA 1997 provides, in part, that a capital gain may be disregarded if you make it as a result of receiving a payment as reimbursement or payment of your expenses under a scheme established by an Australian government agency or local governing body.

In relation to this paragraph, the Revised Explanatory Memorandum (EM) in relation to the Tax Laws Amendment (2006 Measures No. 3) Act 2006 provides that the requirement that 'the scheme be established under an enactment or an instrument of a legislative character would be satisfied where the scheme is established that way either expressly or by necessary implication. An enactment would include an Appropriation Act (or equivalent) having regard to associated documentation such as budget papers. An instrument of a legislative character would include regulations (and similar instruments) and local government by-laws.'

In this case, CGT event C2 will have occurred when the Trust's rights under the funding agreement came to an end. However, we consider that the Federal Government program under which the grant was paid meets the requirements of paragraph 118-37(2)(a) of the ITAA 1997. Therefore, any capital gain made by the Trust from the C2 CGT event will be disregarded under paragraph 118-37(2)(a) of the ITAA 1997.

Note: Cost base reduction
Although there is no capital gain at the time of receipt of the grant, there will be capital gains consequences when you eventually dispose of the property. To the extent that the grant is received to fund the cost of constructing or renovating buildings on the property, it is a recoupment of those costs. This recoupment reduces the cost base of the property as per subsection 110-45(3) of the ITAA 1997.

Assessable recoupment

The meaning of an assessable recoupment is set out in section 20-20 of the ITAA 1997.

Recoupment of a loss or outgoing includes any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery however described and a grant in respect of the loss or outgoing: subsection 20-25(1) of the ITAA 1997.

An amount will be an assessable recoupment under subsection 20-20(2) of the ITAA 1997 if it is considered to be received by way of insurance or indemnity and the taxpayer can deduct or has already claimed a deduction for it.

A recoupment you receive except by way of insurance or indemnity will be an assessable recoupment if you can or have deducted an amount for the loss or outgoing in the current or an earlier year under a provision listed in section 20-30 of the ITAA 1997. Capital works deductions allowable under Division 43 of the ITAA 1997 are not listed in section 20-30 of the ITAA 1997.

In this case, we do not consider the grant to be an indemnity or by paid way of indemnity. Additionally, as capital works deductions are not listed in section 20-30 of the ITAA 1997, the grant monies will not be assessable as an assessable recoupment when deductions are claimed under Division 43 of the ITAA 1997.

Note: Depreciating assets

Deductions for depreciating assets under Division 40 of the ITAA 1997 are listed in section 20-30 of the ITAA 1997. Accordingly, to the extent that the grant is received to fund the cost of depreciating assets, such as plant and equipment, it is an assessable recoupment under subsection 20-20(3) of the ITAA 1997.