Edited version of private advice

Authorisation Number: 1051903391170

Date of advice: 6 October 2021

Ruling

Subject: Income tax and GST - grant payment

Issue 1

Question 1

Is the grant assessable income pursuant to section 6-5 or 15-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Issue 2

Question 1

Is GST payable on the Grant?

Answer

No

This ruling applies for the following periods:

For a number of years commencing in the year ended 30 June 20XX.

The scheme commences on:

During the year ended 30 June 20XX

Relevant facts and circumstances

1.            You are registered for GST.

2.            You received a grant of money (the Grant) pursuant to a written agreement (the Deed), between you and a government entity (and as varied by a Deed of Variation).

3.            Under the terms of the deed the government entity agrees to grant the 'Funds' to You, and You must use the 'Funds' only for the purposes of the 'Project' pursuant to the terms of the Deed.

4.            The Project is for you to acquire certain specified assets, collectively referred to as the 'Assets' in the ruling.

5.            Your business involves holding the Assets and commercialising them.

6.            You have started this commercialisation.

7.            The Grant is for a total of $X (GST inclusive) and is paid in instalments as set out in the Deed.

8.            The Deed of Variation does not change the use of the 'Funds' by You.

9.            You have provided a copy of the Deed agreement and the Deed of Variation.

10.         Provision of the Funds in accordance with the Deed is subject to some initial conditions precedent and also some continuing conditions.

11.         If the Funds have not been fully drawn down by the Sunset Date the government entity's obligation to provide the Funds shall cease.

12.         The ability to purchase some of the assets specified in the Deed is restricted by availability. Certain assets are purchased on the open market through a contract of sale. No assets in this category are currently for sale and none have been available for sale for over a year.

13.         You have received over half of the grant amount so far, paid over multiple instalments.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 9-10

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 15-10

Reasons for decision

Issue 1

Question 1

Summary

The grant provided is not assessable income pursuant to sections 6-5 or 15-10 of the ITAA 1997.

Detailed reasoning

Government payments to industry (GPI)

Taxation Ruling TR 2006/3 Income tax: government payments to industry to assist entities (including individuals) to continue, commence or cease business (TR 2006/3) applies to recipients of government payments to industry to assist the recipient to continue, commence or cease a business. TR 2006/3 applies to schemes where bounties, subsidies, grants and rebates are paid or funded by the Commonwealth or a State, Territory or local government or government agency. As the entity providing the grant is a government entity, TR 2006/3 is applicable.

TR 2006/3 states that GPIs fall into one of three broad categories; payments to continue a business, payments to commence a business and payments to cease a business. There are different potential tax consequences depending on how the payment is categorised.

Section 6-5 of the Income Tax Assessment Act 1997

Section 6-5 of the ITAA 1997 provides that an entity's assessable income includes income according to ordinary concepts, called ordinary income.

TR 2006/3 contains the Commissioner's opinion on the application of section 6-5 of the ITAA to GPI. Paragraph 84 states:

Ordinary Income

84. '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

•                     income from carrying on a business.

Paragraph 85 of TR 2006/3 then sets out guidelines established by case law to assist in determining the nature of a receipt.

TR 2006/3 also confirms that while payments received in the course of continuing a business may be ordinary income in accordance with section 6-5 of the ITAA 1997, payments received to commence a business will not be ordinary income and subsequently will not be assessable under section 6-5.

Are the grant payments made to You to commence a business or continue a business?

Example 9 in TR 2006/3 discusses that where a GPI is preliminary to a business being established it is not a receipt ordinarily received in the normal course of trade or for which business is being carried on.

Paragraph 129 confirms that a GPI to enable a business to commence is considered to be preliminary to establishing a business:

129. A GPI to assist with the cost of evaluating whether to commence a business, or to enable a business to commence are preliminary to establishing a business. As the GPI is preliminary to a business being established it is not ordinarily received in the normal course of trade, or a receipt for which business is being carried on. The GPI is not ordinary income and is not assessable under section 6-5.

The Grant was paid to You to enable You to acquire the Assets.

The terms of the Deed provide for you to use up to a total amount of $X (including GST) to purchase the Assets including up to a set total amount of a certain asset. The ability to purchase this asset is restricted by availability and the price is set via contract of sale when purchased on the open market. How much of the Grant amount You could use at any point in time, and the ability to use the total Grant amount is affected by the availability of this asset and is not within the control of the parties to the Deed.

Your business involves holding the Assets and commercialising them. You have commenced commercialisation of the Assets. The Grant was provided to you in order for you to purchase the Assets that you required to commence your business. Due to the nature of the industry and the availability of the Assets the commencement of the business was, and was expected to be, staged. You applied for one Grant amount and the total amount of the Grant funds were approved in one instance to enable You to commence your business. The payment of the Grant in instalments reflects the staged nature of the business commencement due to restrictions within the industry. This differs from a situation in which one Grant was provided for the commencement of a busines and another Grant was separately provided for the continuation of a business. In your circumstances the Grant was a GPI provided to enable a business up to a certain size to commence (Asset availability permitting). As such, in accordance with the principles contained in TR 2006/3, the Grant is not ordinary income and not assessable under 6-5 of the ITAA 1997.

Section 15-10 of the Income Tax Assessment Act 1997

Section 15-10 of the ITAA 1997 states:

Bounties and subsidies

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.

Paragraph 103 of TR 2006/3 confirms that a GPI received by an entity as assistance to commence a business does not satisfy the requirement of subsection 15-10 of the ITAA 1997 that the amount is paid in relation to carrying on a business.

As concluded above, the Grant You received is a GPI received as assistance to commence a business. As such the Grant is not assessable under section 15-10 of the ITAA 1997.

Issue 2

Question 1

Detailed reasoning

Under section 9-5 of the GST Act, an entity makes a taxable supply if:

•                    the entity makes the supply for consideration

•                    the supply is made in the course or furtherance of an enterprise that the entity carries on

•                    the supply is connected with Australia, and

•                    the entity is registered or required to be registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

The first requirement of a taxable supply to be satisfied is that there is a supply for consideration.

The term 'supply' is defined in section 9-10 of the GST Act as meaning any form of supply whatsoever and includes:

•                    a supply of goods or services;

•                    a provision of advice or information;

•                    a grant, transfer or surrender of real property;

•                    a creation, grant, transfer, assignment or surrender of any right; or

•                    an entry into, or release from, an obligation to: do anything, refrain from an act, or tolerate an act or situation.

Financial assistance payments

Goods and Services Tax Ruling GSTR 2012/2 provides the Commissioner's views on when a financial assistance payment is consideration for a supply.

In GSTR 2012/2, the term 'financial assistance payment' is intended to encompass a wide range of payments. This includes payments:

•                    made to provide support or aid to the payee, and/or

•                    provided to support or aid in the implementation of government policy and initiatives.

In your case, you entered into a written agreement with the government entity for a grant of money.

The objective of the Deed agreement is the provision of funding by the government entity to You for the acquisition of the Assets, which are stipulated within the context of the government entity's authority to provide grants as per government policy.

In your circumstances, the payments received from the government entity by You are considered to be financial assistance payments. They were made to you by way of the provision of funding to support or aid in the implementation of government policy and initiatives.

Sufficient nexus between supply and payment

For a financial assistance payment to be consideration for a supply, it is not sufficient for there to be a supply and a payment. The financial assistance payment must be consideration for that supply. Paragraph 15 of GSTR 2012/2 explains that there must be a sufficient nexus between:

•                    the financial assistance payment made by the payer, and

•                    a supply made by the payee.

A financial assistance payment is consideration for a supply if the payment is 'in connection with', 'in response to' or 'for the inducement of' a supply. The test is an objective one. Paragraph 16 of GSTR2012/2 discusses factors that are to be taken into account when examining an arrangement and states.

16. Reference to all of the surrounding circumstances of the arrangement, in particular any written documentation, determines whether a financial assistance payment is 'in connection with', 'in response to' or 'for the inducement of' a supply. The surrounding circumstances may include the statutory purpose of the payer in providing the financial assistance, the activities which are to be undertaken by the payee and any other terms and conditions attached to the payment. However, none of these factors will be determinative on their own and the arrangement must the considered as a whole. The description the parties may give to the arrangement, whilst relevant, is not determinative.

The guidance at paragraph 56 of GSTR 2012/2 is of particular relevance. Paragraph 56 discusses payments for no supply and states:

56. In particular, there is no supply where the agreement between the parties is not binding and creates expectations alone. However, the payee may still make a supply in the absence of enforceable obligations. Where there is an agreement that does not bind the parties in some way there may still be a supply where there is something else, such as goods or some other benefit, passing between the parties.

In your case, there is no obligation to acquire the Assets that the Deed arrangement imposes on You. There is merely an expectation that You agreed to undertake the project to acquire the Assets. Further, there is no supply, such as goods or some other benefit, passing between you and the government entity in the acquisition of the Assets.

Therefore, there is insufficient nexus between the financial assistance payments made by the government entity and there are no obligations you entered into for the payments to be consideration for that supply.

Consequently, you are not making a supply for consideration in relation to the payments you received from the government entity.

Accordingly, the supply is not a taxable supply for which you are liable to remit GST.

Additional information

If the consideration was grossed up for GST then it is recommended you speak to the grantor to discuss repayment of the GST amount. Additionally, if you have issued a tax invoice or the grantor has issued a recipient created tax invoice this needs to be withdrawn.