Edited version of private advice

Authorisation Number: 1051902737012

Date of advice: 22 September 2021

Ruling

Subject: Assessable recoupment

Question 1

Is the grant Company A received from the State Government assessable under section 20-20 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Is the grant Company A received from the Commonwealth Government assessable under section 20-20 of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

1 July 2020 to 30 June 20XX

1 July 2021 to 30 June 20XX

The scheme commences on:

1 April 20XX

Relevant facts and circumstances

         •            Company A is a private company limited by shares, incorporated in Australia.

Project

         •            Company A is undertaking a Project and has acquired plant, equipment and technology in order to commence the project.

         •            The plant, equipment and technology constitute depreciating assets of Company A.

         •            The project will result in Company A deriving assessable income.

         •            Company A has received a grant from a State Government and a second grant from the Commonwealth Government.

         •            The grants are only able to be used for 'Eligible Project Costs'. This is defined as the costs for:

-        The purchase of the plant, equipment and technology required for the Company A to deliver the Project; and

-        The installation and commissioning costs for the plant, equipment and technology required for the Project.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 20-20

Income Tax Assessment Act 1997 section 20-30

Reasons for decision

Question 1

Summary

The grant Company A received from the State Government is assessable under section 20-20 of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed reasoning

Ordinary income

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident includes the ordinary income they derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business.

For income tax purposes, an amount paid to compensate for a loss generally acquires the character of that for which it is substituted (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts (Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53). Where compensation is paid for the loss of a capital asset or capital amount then it will be regarded as a capital receipt and not ordinary income.

The grant is not earned by Company A in the course of carrying on its business, nor does it relate to services performed by Company A or to any loss of income by Company A. Therefore, the grant is not assessable as ordinary income under subsection 6-5(2) of the ITAA 1997.

Statutory income

Amounts that are not ordinary income but are included as assessable income are called statutory income (section 6-10 of the ITAA 1997).

The provisions dealing with statutory income are listed in section 10-5 of the ITAA 1997. Section 10-5 of the ITAA 1997 sets out lists of provisions in the Income Tax Assessment Act ITAA 1936 (ITAA 1936) and the ITAA 1997 dealing with assessable income. These include amounts that are statutory income - that is amounts that are not ordinary income. Included in this list are assessable recoupments found in Subdivision 20-A of the ITAA 1997 and bounties and subsidies under section 15-10 of the ITAA 1997.

Bounty or subsidy

Section 15-10 of the ITAA 1997 provides that your assessable income includes a bounty or subsidy that you receive in relation to carrying on a business, and that is not assessable as ordinary income under section 6-5 of the ITAA 1997.

Company A will receive a government grant to fund the purchase of assets necessary for the commencement of the Project. The grant is not assessable under section 15-10 (bounty or subsidy) as the payments are considered payments to commence business, rather than being in relation to carrying on the business of Company A.

This is consistent, with Taxation Ruling TR 2006/3 which discusses government payments to industry to assist entities to continue, commence or cease business.

Paragraph 4 states, in part, that government payments to commence business include payments to assist with the purchase of a depreciating asset. This is the case with the payment of the grant to Company A.

Paragraph 26 states that government payments to industry to commence or cease a business are not assessable as ordinary income of the recipient under section 6-5 of the ITAA 1997 or as a bounty or subsidy in relation to carrying on a business under section 15-10 of the ITAA 1997.

Assessable recoupment

Under Subdivision 20-A of the ITAA 1997certain amounts received by way of insurance, indemnity or other recoupment are assessable income if the amounts are not income under ordinary concepts or otherwise assessable.

Subsection 20-25(1) of the ITAA 1997 provides that a recoupment of a loss or outgoing includes:

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

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

The grant to Company A is a 'recoupment' for the purposes of Subdivision 20-A as the amount is a grant in respect of the loss or outgoing incurred in acquiring the assets for the Project.

Insurance or indemnity

Subsection 20-20(2) of the ITAA 1997 provides that:

an amount 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 the loss or outgoing for an earlier income year under any provision of this Act.

For the recoupment of the loss or outgoing to be an assessable recoupment under subsection 20-20(2) of the ITAA 1997, the amount the taxpayer receives must be by way of insurance or indemnity. It is clear in this case that the recoupment will not be received by way of insurance.

Indemnity is not a defined term and therefore must be given its ordinary meaning. The Macquarie Dictionary, definition of indemnity includes compensation for damage or loss sustained.

The issue of whether an amount is received by way of indemnity for the purposes of the predecessor provision to subsection 20-20(2) of the ITAA 1997 (paragraph 26(j) of the Income Tax Assessment Act 1936) has been considered in a number of cases including: Federal Commissioner of Taxation v. Wade (1951) 84 CLR 105; (1951) 9 ATD 337; 5 AITR 214, Robert v. Collier's Bulk Liquid Transport Pty Ltd (1959) VR 280, Goldsbrough Mort & Co Ltd v FC of T (1976) 76 ATC 4343, 6 ATR 580 (Goldsbrough); and Commercial Banking Company of Sydney Limited v. FC of T 83 ATC 4208 (1983); 14 ATR 142 (Commercial Banking).

These cases make it clear that an amount received by way of indemnity is not restricted to amounts received under a contract of indemnity. This was made clear by Hunt J. in Commercial Banking who, referring to the decision in Goldsbrough, stated

... his Honour was correct in ruling that the expression "by way of... indemnity" should not be construed narrowly in the sense of "pursuant to a contract of indemnity".

The cases also make it clear that an amount received 'by way of indemnity' would include a receipt pursuant to an antecedent obligation (whether by virtue of a contract, statute or a breach of some common law duty of care) to make good or compensate for a loss which arises after the obligation comes into existence.

Therefore, the phrase 'by way of indemnity' broadens the range of receipts to be considered an assessable recoupment under subsection 20-20(2) of the ITAA 1997 to include receipts other than amounts received under a contract of indemnity.

Here, the grant partially compensates Company A for the outgoing to fund the purchase of the assets needed for the Project and to commence the project. As such, the grant is an amount received by way of indemnity.

An amount for the loss or outgoing can be deducted under a provision of the ITAA 1997, as a deduction for the decline in value of the assets acquired is available under Division 40 of the ITAA 1997. Therefore, the grant amount received is considered an assessable recoupment under subsection 20-20(2) of the ITAA 1997.

Other recoupment

Subsection 20-20(3) of the ITAA 1997 provides that:

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.

Under subsection 20-20(3) of the ITAA 1997, an amount received as recoupment of a loss or outgoing (except by way of insurance or indemnity) is an assessable recoupment if it is paid to cover the cost of a deductible expense listed in section 20-30 of the ITAA 1997 and the deduction can be claimed in the current year or in an earlier income year. The list in section 20-30 includes deductions claimed under Division 40 for the decline in value of capital assets (item 1.9 in the table in subsection 20-30(1) of the ITAA 1997).

The grant is an amount received as recoupment for the loss or outgoing paid to cover the cost of Division 40 depreciating assets for the Project. As Company A would be entitled to a deduction, under Division 40 for decline in value of the depreciating assets, the grant is an assessable recoupment.

This is supported by paragraph 27 of TR 2006/3, which states that government payments to industry to assist the recipient to commence business with the purchase of a depreciating asset, the cost of which is deductible under Division 40 of the ITAA 1997 is assessable income under the assessable recoupment provisions in Subdivision 20-A of the ITAA 1997.

Question 2

Summary

The grant Company A received from the Commonwealth Government is assessable under section 20-20 of the ITAA 1997.

Detailed reasoning

The grant received by Company A from the Commonwealth Government is an assessable recoupment under section 20-20 of the ITAA 1997 for the same reasons given above in relation to the State Government Grant.