Edited version of private advice

Authorisation Number: 1051895888044

Date of advice: 20 September 2021

Ruling

Subject: Grants and assessable recoupments

Question 1

Is the grant received by Company A assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Is the grant received by Company A an assessable recoupment under Subdivision 20-A of the ITAA 1997?

Answer

Yes, but only to the extent that Company A can deduct an amount for the expenses it incurred in order to receive the grant

Question 3

Where expenditure in relation to the grant is deductible over two or more years, will section 20-40 of the ITAA 1997 operate such that the assessable recoupment to be included by Company A in assessable income in a particular year will equal the total amount of the deduction claimed in that year (in accordance with the method statement under subsection 20-40(2) of the ITAA 1997)?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2022

Year ended 30 June 2023

Year ended 30 June 2024

The scheme commences on:

1 July 2021

Relevant facts and circumstances

Company A was not incorporated under the Corporations Act 2001 but was registered under an act in a state of Australia.

Company A is a member-based entity and it operates a business in a local community. Company A chooses not to distribute income to its members.

The town in which Company A operates has been severely affected by a natural disaster. A registered charity, in accordance with its charitable purpose, is offering grants to selected entities to partially fund specified projects, and with the aim of assisting communities to recover from this natural disaster.

This charity has offered to fund part of the Company A's cost of building premises on vacant land owned by Company A, with Company A being the relevant party to the construction contract with a builder approved by the charity. In return, Company A must manage the constructed property in accordance with the terms set down in the agreement between Company A and the charity.

The grant will not cover the full cost of construction and Company A must lease the property to a target group affected by the natural disaster, as specified by the charity, and at a rate that is significantly less than the market rate for commercial properties in that location.

The agreement requires Company A to engage a building contractor to build the premises. It also includes a series of milestones that the charity requires Company A to meet before it releases its funds to Company A.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 subsection 6-5(1)

Income Tax Assessment Act 1997 section 15-15

Income Tax Assessment Act 1997 Subdivision 20-A

Income Tax Assessment Act 1997 section 20-20

Income Tax Assessment Act 1997 subsection 20-20(1)

Income Tax Assessment Act 1997 subsection 20-20(2)

Income Tax Assessment Act 1997 subsection 20-20(3)

Income Tax Assessment Act 1997 section 20-25

Income Tax Assessment Act 1997 subsection 20-25(1)

Income Tax Assessment Act 1997 paragraph 20-25(1)(a)

Income Tax Assessment Act 1997 paragraph 20-25(1)(b)

Income Tax Assessment Act 1997 subsection 20-20(2)

Income Tax Assessment Act 1997 section 20-35

Income Tax Assessment Act 1997 section 20-40

Income Tax Assessment Act 1997 subsection 20-40(1)

Income Tax Assessment Act 1997 subsection 20-40(2)

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 Division 43

Income Tax Assessment Act 1997 subsection 995-1

Income Tax Assessment Act 1936 section 117

Reasons for decision

All legislative references are to the ITAA 1997 unless otherwise indicated.

Question 1

Is the grant received by Company A assessable under section 6-5?

Summary

No, the grant received by Company A are not assessable as ordinary income under subsection 6-5(1) as Company A is not:

•         carrying on a business in relation to the activities, as it lacks the both the intention to and the prospect of a profit; or

•         entering into the arrangement for the purpose of making a profit from an isolated transaction.

Detailed reasoning

Subsection 6-5(1) provides that an entity's assessable income includes income according to ordinary concepts, called 'ordinary income'.

Taxation Ruling TR 2006/3[1] provides the Commissioner's view on the taxation treatment of government payments to industry to assist entities to continue, commence or cease business, including consideration of section 6-5 of the ITAA 1997.

Although TR 2006/3 was issued in respect of payments from government agencies, paragraph 84 provides a summary of what should be examined when determining what is ordinary income:

'Ordinary income' includes income according to ordinary concepts. Income according to ordinary concepts is not defined in the taxation legislation. The characteristics of ordinary income have been developed by case law and generally fall into three categories:

•         income from providing personal services;

•         income from property; or

•         income from carrying on a business.

In respect of a government payment to industry (GPI) towards the cost of building or constructing a substantial asset, paragraph 15A of TR 2006/3 states:

GPI paid with the intention of funding the cost of building or constructing a substantial capital asset, but contingent on the performance of a contract to build or construct the asset, will generally be assessable under section 6-5 because the GPI will be derived in the course of carrying on a business of building or constructing the asset. While this will generally be the case where the entity is a company, it will be a question of scale and degree for other entities. The building or construction of the asset may alternatively be outside the course of business yet be the result of a transaction entered into with the purpose of making a profit.

The grant being provided by the charity is contingent on the performance of a contract to build or construct the asset[2] and each portion of the grant will not be paid until the relevant milestone set out in the agreement has been met.

However, the grant Company A will receive is not a GPI as described in TR 2006/3, and further, the payment will be made by a charity pursuing its charitable purpose. The purpose of the recipient of a GPI is not necessarily the same as purpose of the recipient of a grant made by a charity in relation to the construction of a substantial capital asset. Thus, the general presumption as to the recipient carrying on a business, as outlined in paragraph 15A of TR 2006/3, would not necessarily apply when construction to the recipient of a grant from a charity.

The second sentence of paragraph 15A of TR 2006/3 confirms the general presumption that where a company receives the GPI that is contingent on the performance of a contract, that payment would be assessable under section-6-5.

The Commissioner sets out his view as to when a company carries on a business in TR 2019/1[3], but TR 2019/1 does not apply to Company A as, although a company under subsection 995-1, it was not incorporated under the Corporations Act 2001[4].

In relation to entities not incorporated under the Corporations Act 2001, paragraph 10 of TR 2019/1 states:

For those companies and other entities not covered by this Ruling, it is necessary to consider whether their activities amount to the carrying on of a business in the way relevant for the provision in question by reference to:

•         the indicia of carrying on a business set out in the case law

•         the nature of and purpose for which the entity was established, and

•         the words and purpose of the provision and the context in which the concept of carrying on a business appears.

Paragraph 16 of TR 1999/14[5] states:

As outlined above, the first question should be: What business or businesses is the company carrying on? Generally, there is little difficulty in answering that question. As Mason J said in Brookton Co-operative (at CLR 451; ATC 4352; ATR 886):

'As a matter of common experience, companies are usually established for the purpose of carrying on a business. Consequently, to the question, "For what purpose is the X company established?", we expect to hear the response, "For the purpose of carrying on the business of..." '

If we examined the constituent documents of Company A and asked this question in respect of what Company A did before entering into the agreement with the charity, the answer would be that it carried on the business of a specified kind.

The activities being contemplated under the agreement, the construction, management and the eventual leasing of the units, are not activities that are part of running Company A's existing business.

Is Company A carrying on a business of building and construction or another new business?

The table at paragraph 18 of Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? sets out the indicators the Commissioner considers relevant in determining whether activities constitute the carrying on of a business.

The following table provides a summary of the main indicators of carrying on a business. The last three items shown are factors which support the main indicators.

By applying the above factors to the activities being conducted by Company A, the Commissioner can form a view on whether Company A is engaged in a business of building and construction.

Significant commercial activity?

The phrase 'significant commercial purpose' is referred to by Walsh J in Thomas v. FC of T 72 ATC 4094; (1972) 3 ATR 165, (Thomas) and discussed further by Gibbs CJ and Stephen J in Hope v. Bathurst City Council 80 ATC 4386. The 'significant commercial purpose or character' indicator is closely linked to the other indicators and is a generalisation drawn from the interaction of the other indicators. It is particularly linked to the size and scale of activity, the repetition and regularity of activity and the profit indicators. A way of establishing that there is a significant commercial purpose or character is to compare the activities with those of a taxpayer who is carrying on a similar activity that is a business. ^[6]

The grant that Company A will receive is less than the total cost of construction of the building.

The premises will include shared facilities plus a number of commercial units available for lease. This indicates the size and scale of the activity, and the future repetition of leasing to obtain lease income, is commercial. However, Company A is required to charge less than an arm's length rent to future tenants and does not have an expectation of profit from the future leasing of the premises. The absence of an expectation of profit does not indicate a business will be carried on

Intention of Company A in engaging in the activity

The intention of the taxpayer in engaging in the activity is a relevant indicator: see Thomas. However, a mere intention to carry on a business is not enough. There must be activity. Brennan J in Inglis v. FC of T 80 ATC 4001 at 4004-4005; (1979) 10 ATR 493 at 496-497 said that:

'The carrying on of a business is not a matter merely of intention. It is a matter of activity.... At the end of the day, the extent of activity determines whether the business is being carried on. That is a question of fact and degree.'

In this case, the construction activity is preparatory to the ultimate activity of leasing of units to members of the target group.

The grant assists in the cost of construction, but in return for receiving the grant, Company A must accept the restrictions and conditions put in place by the charity, and which exclude the ability to profit from the ultimate activity to an extent that is inconsistent with a commercial purpose.

Does Company A intend to make a profit from the activity?

Company A does not view its involvement as a profit-making venture, and it did not develop the initial concept. The charity was a co-developer of the initiative and it approached Company A to seek its assistance in constructing the premises.

Company A only agreed to become involved as Company A's board is of the view that the project is essential to the town's survival, which benefits its members.

Company A will not profit from the construction activity itself, and the restrictions and provisions of the agreement put in place by the charity preclude Company A from charging the tenants a rental rate such that Company A could anticipate generating a profit from leasing the premises to members of the target group.

The activity is or will be profitable

Company A will not profit from the construction activity. The Grant will be less than the total cost of construction.

In respect of the ultimate leasing activity, and as above, the restrictions and provisions of the grant agreement and the ongoing cost of maintaining the property lead Company A to anticipate that leasing of the premises will not be profitable.

However, should the leasing activities in fact generate a profit (which would be slim, if at all) the Company A Board has determined that the profit will be used to advertise the businesses of the tenants.

Repetition and regularity of activity

The construction activity and grant to be paid in respect of the construction costs is an isolated activity.

The activities that will repeated on a regular basis will be the leasing activities, although the terms of the grant agreement will limit the rental income that can be derived.

Activity is carried on in a similar manner to that of the ordinary trade

An activity is more likely to be a business when it is carried on in a manner like that in which other participants in the same industry carry on their activities. Lord Clyde in IR Commissioners v. Livingston at TC 542 said that:

'... the test, which must be used to determine whether a venture... is, or is not, "in the nature of trade", is whether the operations involved in it are of the same kind, and carried on in the same way, as those which are characteristic of ordinary trading in the line of business in which the venture was made.'

As previously discussed, an entity in the business of building and construction would not ordinarily trade in such a way that it is unable to profit from the building and construction activity itself, or the asset that is constructed.

Activity organised and carried on in a businesslike manner and systematically - records are kept

In Newton v. Pyke (1908) 25 T.L.R. 127 the court suggested that business should be conducted systematically. A business is characteristically carried on in a systematic and organised manner rather than on an ad hoc basis. An activity should generally conform with ordinary commercial principles to amount to the carrying on of a business.

In Ferguson v. FC of T (1979) 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884 the Full Federal Court was influenced by the systematic and organised nature of the taxpayer's activities. Fisher J said at FLR 324-325; ATC 4271; ATR 884:

'... the venture had a commercial flavour, was conducted systematically and...in a business-like manner. It could not be said that there was anything haphazard or disorganised in the way in which he carried out the activity.'

In respect of the construction of the premises, Company A will be the principal to the construction contract and liable for the cost of construction. The charity will release a portion of grant once it is satisfied that the relevant milestone is met. The organisation and approach to construction will be undertaken by the building contractor engaged by Company A to construct the premises. Company A must agree to allow the audit of the arrangement and records, as required by the charity.

Company A will undertake its obligations under the grant agreement in a businesslike manner and keep relevant records. Further, after completion, Company A's initial tenants have been selected and Company A will need keep the necessary records that relate to being the lessor of the constructed premises.

However, Company A will undertake the construction, and conduct the leasing of the premises, in a businesslike manner in order to maximise the benefit to the local community, and thus indirectly to members of Company A.

Size and scale of the activity

The size or scale of the activity is not a determinative test, and a person may carry on a business though in a small way (Thomas at ATC 4099; ATR 171).

Although of significant size and scale, the provision of the grant and the construction of the premises is a one-off activity and Company A does not profit directly from that activity.

Once delivered Company A's total property leasing income will only come from the leasing of the premises.

Hobby, recreation or sporting activity

The construction of the premises is not a hobby, recreation or sporting activity of CCSL, it is a preliminary activity that will allow Company A to offer the premises for lease, albeit for an amount that is not anticipated to generate a profit at any time in the future.

A business plan exists

The grant agreement forms the basis on the overall project, and it includes the requirement to engage in the construction activity and specifies what must be constructed. The Grant Agreement also dictates the terms on which Company A can undertake the ultimate leasing activity.

It is the grant agreement that sets the parameters under which both the building and leasing activities can be conducted.

Commercial sales of product

The premises will not be sold. The grant agreement will require Company A to retain the buildings and lease them to members of the targeted group.

Company A will limit the range of possible tenants to those members of Company A that are also members of the target group, and charge a less-than-market rental to those tenants (in accordance with the terms of the agreement). Thus, the leasing activities are not commercial.

Taxpayer has knowledge or skill

The construction process will be undertaken by external contractors engaged by Company A. The contractors engaged will have the required skills to construct the premises.

Under the agreement Company A must nominate an identified individual to be the building supervisor. That individual will oversee the work being conducted by contractor and will assess and certify that the work has been completed in accordance with the agreement.

Company A does not have the skills to construct or supervise the construction of the premises. Those skills will be the contractor's and supervisor's.

Company A has agreed to manage the property once delivered, and it has acknowledged in the agreement that it has (or will acquire) the skill to manage the premises once delivered.

Conclusion: Is Company A carrying on a business of building or construction?

In looking to assist targeted businesses in the town, the charity needed to locate a place to construct premises for those businesses in that town. It identified the land owned by Company A as its preferred location.

Company A, who has members who will benefit from the use of the premises once the buildings are delivered, agreed to become a party to the agreement. Company A's involvement is as a result of it owning the vacant land that was identified as being suitable.

In each construction project that the charity funds there is be a landowner in the selected community that, as the landowner, will directly benefit from ownership of the land on which the building will be constructed. In this instance it is Company A that benefits in respect of the rebuilding project being undertaken in the town.

The fact that the grant agreement includes specified terms under which the charity will release funds does not result in Company A is carrying on a business of building or construction. By inserting conditions and milestones into their grant agreements, the trustees of the charity, as trustees of a charitable fund, are exercising good governance by ensuring funds are not wasted and are dispersed in accordance with the charity's charitable purpose.

In weighing up the above factors, it is the lack of intention to make a profit, the inherent unprofitability of the activities, and the non-commercial rental on future leasing activities, that leads to the conclusion that Company A is not carrying on a business in undertaking to satisfy milestones and thus receive the grant. The activities that Company A must perform in accordance with the grant agreement before the charity will release the funds to Company A do not amount to Company A conducting a business of building and construction, or of any other business.

Is Company A making a profit from an isolated transaction?

Although Company A is not in the business of building or construction, it may have entered into the agreement with the purpose of making a profit.

Whether a transaction is entered into with the purpose of making a profit is outlined in in paragraphs 6 to 14 of Taxation Ruling TR 92/3[7]:

6. Whether a profit from an isolated transaction is income according to the ordinary concepts and usages of mankind depends very much on the circumstances of the case. However, a profit from an isolated transaction is generally income when both of the following elements are present:

(a) the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain; and

(b)the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction.

7. The relevant intention or purpose of the taxpayer (of making a profit or gain) is not the subjective intention or purpose of the taxpayer. Rather, it is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstances of the case.

8. It is not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose for entering into the transaction. It is sufficient if profit-making is a significant purpose.

9. The taxpayer must have the requisite purpose at the time of entering into the relevant transaction or operation. If a transaction or operation involves the sale of property, it is usually, but not always, necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property.

10. If a transaction or operation is outside the ordinary course of a taxpayer's business, the intention or purpose of profit-making must exist in relation to the transaction or operation in question.

11. The transaction may take place in the course of carrying on a business even if the transaction is outside the ordinary course of the taxpayer's business.

12. For a transaction to be characterised as a business operation or a commercial transaction, it is sufficient if the transaction is business or commercial in character.

13. Some matters which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction are the following:

(a) the nature of the entity undertaking the operation or transaction;

(b) the nature and scale of other activities undertaken by the taxpayer;

(c) the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained;

(d) the nature, scale and complexity of the operation or transaction;

(e) the manner in which the operation or transaction was entered into or carried out;

(f) the nature of any connection between the relevant taxpayer and any other party to the operation or transaction;

(g) if the transaction involves the acquisition and disposal of property, the nature of that property; and

(h) the timing of the transaction or the various steps in the transaction.

14. It is not necessary that the profit be obtained by a means specifically contemplated (either on its own or as one of several possible means) when the taxpayer enters into the transaction. It is sufficient that the taxpayer enters into the transaction with the purpose of making a profit in the most advantageous way and that a profit is later obtained by any means which implements the initial profit-making purpose. It is also sufficient if a taxpayer enters into the transaction with the purpose of making a profit by one particular means but actually obtains the profit by a different means.

We must examine the factors outlined in paragraph 13 in determining whether Company A is carrying on a business of building and construction.

What this ruling examines is whether the activities around the construction of the premises results in the grant becoming assessable income under section 6-5.

If we examine this aspect in isolation, and broadly consistent with the consideration of the factors in the carrying on of a business, there is no profit-making intent and no potential to make a profit, either in relation to the construction of the premises and/or the subsequent leasing of the premises.

Therefore, the payments received by Company A under the grant agreement will not be assessable as ordinary income to Company A under section 6-5.[8]

Question 2

Is the grant received by Company A an assessable recoupment under Subdivision 20-A of the ITAA 1997?

Summary

Yes, but only to the extent that Company can deduct an amount for the expenses it incurred in order to receive the grant.

Detailed reasoning

Under Subdivision 20-A, certain amounts received by way of insurance, indemnity or other recoupment are assessable income if amounts are not income under ordinary concepts or assessable income under another provision outside Subdivision 20-A.

Section 20-20 defines an assessable recoupment as:

Exclusion

20-20(1)

An amount is not an assessable recoupment to the extent that it is *ordinary income, or it is *statutory income because of a provision outside this Subdivision.

Insurance or indemnity

20-20(2)

An amount you have received as *recoupment of a loss or outgoing is an assessable recoupment if:

(a) you received the amount by way of insurance or indemnity; and

(b) 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 for an earlier income year, under any provision of this Act.

Other recoupment

20-20(3)

An amount you have received as *recoupment of a loss or outgoing (except by way of insurance or indemnity) is an assessable recoupment if:

(a) you can deduct an amount for the loss or outgoing for the *current year; or

(b) you have deducted or can deduct an amount for the loss or outgoing for an earlier income year;

under a provision listed in section 20-30.

In respect of what is a recoupment, subsection 20-25(1) states:

Recoupment of a loss or outgoing inclusively as:

(a) any kind or recoupment, reimbursement, refund, insurance, indemnity or recovery, however described; and

(b) a grant in respect of the loss or outgoing.

Under the grant agreement, Company A will be invoiced for the work being completed by the building contractor and the charity will agree to pay some of the total amount that will be invoiced. The raises the question as to whether the grant agreement is an indemnity.

The term 'indemnity' is not defined in either of the Income Tax Assessment Acts. It therefore must take its ordinary meaning. In Denmark Community Windfarm Ltd v. Federal Commissioner of Taxation 2018 ATC 20-646 (Denmark Case) and by way of reference to dictionary definitions and the case of Batchelor v Federal Commissioner of Taxation (2014) 219 FCR 453, it was noted that the ordinary meaning of the word 'indemnity' includes 'a sum of money paid to compensate a person for liability, loss or expense incurred by the person' or 'compensation for damage or loss sustained' and 'something paid by way of such compensation'[9]. As such, it held that a grant was received by the taxpayer as compensation for an 'expense' incurred by it, and so fell within the meaning of the word 'indemnity'.[10]

In the Denmark Case, the Full Federal Court affirmed the Federal Court decision that a government grant provided to a taxpayer to compensate for the liability incurred in acquiring and installing wind turbines was an amount received by way of indemnity as it was compensation for expenditures incurred by the taxpayer. The Full Court stated at paragraph 39:

In the present case, the amounts received by Denmark under the Grant were received pursuant to the Agreement dated 18 May 2011. The Agreement provided that the Grant was to meet 50% of the Eligible Project Costs to be incurred by Denmark in the construction of two wind turbines, up to a maximum of $2,487,800. The Grant was payable in instalments on the completion of identified project milestones. In these circumstances, the amounts received by Denmark fell within the ordinary meaning of the word "indemnity", which includes, as noted by the primary judge at [50], "a sum of money paid to compensate a person for liability, loss or expense incurred by the person". The fact that the amounts were a government subsidy or rebate does not affect the position. The amounts nevertheless bear the character of compensation for a liability, loss or expense incurred.

In applying the decision in the Denmark Case, the charity is compensating Company A for the cost of constructing the premises. The payments received by Company A will be by way of 'indemnity' for the purposes of paragraph 20-25(1)(a).

The three subsections of section 20-20 operate as follows:

•        subsection 20-20(1) will exclude a recoupment that is ordinary income or that is statutory income because of a provision outside of Subdivision 20-A; or

•        subsection 20-20(2) will apply if the recoupment is not excluded by subsection 20-20(1) and was made by way of insurance or indemnity; or

•        subsection 20-20(3) will apply if the recoupment is not excluded by subsection 20-20(1) and it was not made by way of insurance or indemnity.

Subsection 20-20(1) will not apply because (as above) the payments are not ordinary income of Company A and, although not individually addressed, the grant is not statutory income under another statutory income provision outside of Subdivision 20-A[11].

With reference to the decision in the Denmark Case, the grant payments will be an assessable recoupment under subsection 20-20(2) because those payments will be indemnities on the basis that Company A will:

•        receive an amount from the charity (or the charity will pay the contractor directly on behalf of Company A) for the costs Company A will incur under the contract to construct the premises; and

•        be able to deduct an amount for those outgoings in the current year or has deducted or can deduct an amount for it for an earlier income year under any provision of the ITAA 1997.

As the recoupment is by way of indemnity, subsection 20-20(3) will not apply.

Question 3

Where expenditure in relation to the grant is deductible over two or more years, will section 20-40 operate such that the assessable recoupment to be included by Company A in assessable income in a particular year will equal the total amount of the deduction claimed in that year (in accordance with the method statement under subsection 20-40(2))?

Summary

Yes, given the nature of the expenditure being incurred, the grant amounts will be applied to expenses that are deductible over two or more years.

Most of the grant will be used will applies to expenditure that would be in respect of the cost of capital works to which Division 43 applies.

However, the grant agreement states that Company A will provide certain fixtures and fittings. The cost of these fixtures and fittings may fall outside of the capital works provisions under Division 43 because that expenditure is in respect of tangible depreciating assets that is deductible under Division 40.

Both Division 43 and Division 40 allow for deductions to be spread over a period of two or more years. When the provisions within these Division apply to Company A to spread the deduction over two or more years the method statement under subsection 20-40(2) will apply when calculating the amount of assessable recoupment that will arise in respect of these deductions.

Detailed reasoning

Subsection 20-40(1) states:

This section includes an amount in your assessable income if:

(a) you receive in the ^*current year an ^*assessable recoupment of a loss or outgoing for which you can deduct amounts over 2 or more income years; or

(b) you received in an earlier income year an ^*assessable recoupment of a loss or outgoing of that kind (unless all of the recoupment has already been included in your assessable income for one or more earlier income years by this section or a ^*previous recoupment law).

(This section applies even if the recoupment was received before the first of those income years.)

In respect of a Division 40 and government payments to industry (GPI) that are assessable recoupments, paragraph 140 of TR 2006/3^,[12] states:

To the extent that the GPI is a recoupment of the cost of a depreciating asset (for which capital allowance deductions are available for the decline in value), it is an assessable recoupment under Subdivision 20-A. The amount of assessable recoupment may be included over more than one income year, limited to the amount that can be deducted under Division 40 of ITAA 1997.

As set out in Subdivision 43-F, eligible construction expenditure is written-off at 2.5% over 40 years or 4% per year over 25 years, depending on when it was incurred and the use of the capital works.

Similarly, Division 40 spreads the deduction for the cost of depreciating assets over the effective life of the asset which depending on the effective life of the asset could spread the deduction over two or more years.

The amount of an assessable recoupment in respect of a deduction under Division 43, and Division 40 will also be limited to the loss or outgoing that Company A can or has deducted at a particular time.

Therefore, to the extent the grant will be applied to an outgoing that is deductible over two or more years under either Division 40 or Division 43, that portion of the grant will be assessed for tax purposes in accordance with the method statement contained in section 20-40 of the ITAA 1997.

If Division 40, or another provision outside of Division 40 allows Company A to deduct the cost of a depreciating asset in a single year of tax, then the method statement will not apply. The assessable recoupment will be determined in accordance with section 20-35, and will be the amount that Company A can or has deducted in that single year of tax.

[1] Income Tax: government payments to industry to assist entities (including individuals) to continue, commence or cease business

[2] Albeit that the contract to construct the asset will be between Company A and the building contractor

[4] Paragraph 8 of TR 2019/1 explains who the ruling applies to.

[5] Taxation Ruling TR 1999/14 Income tax: determining the co-operative status of a company which makes loans to shareholders

[6] TR 97/11 paragraph 29

[7] Income tax: whether profits on isolated transactions are income

[8] However, it is noted that the future rental income Company A would be ordinary income of Company A, regardless of whether the rent is received from the carrying on of a business or not.

[9] Paragraph 50 of the decision in the Denmark Case

[10] Paragraph 54 of the decision in the Denmark Case

[11] Section 10-5 provides a summary list of statutory provisions. Based on the terms of the agreement, none of the other statutory provisions

[12] See also paragraph 14 of Taxation Determination TD 2006/31: Income tax: is a government rebate received by a rental property owner an assessable recoupment under subsection 20-20(3) of the Income Tax Assessment Act 1997 , where the owner is not carrying on a property rental business and receives the rebate for the purchase of a depreciating asset (for example an energy saving appliance) for use in the rental property