Edited version of private advice

Authorisation Number: 1051991022848

Date of advice: 22 February 2023

Ruling

Subject: Assessable income - government grant

Question 1

Are the grant monies assessable to the M Trust?

Answer

No.

Question 2

Are the grant monies assessable as ordinary income to the N Trust?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20YY

The scheme commences on:

1 July 20YY

Relevant facts and circumstances

The M Trust was established in its current structure with its core business of testing a product to ensure it is safe for use and defect free. This is done by many methods. The nature of the work is such that the building constructed must conform with stringent safety requirements to ensure no negative effects to the environment or staff/population. The grant funding was to enable the business to take on more work and employ more people in this remote area rather than being forced to send the work to the capital city. The business had previously leased premises but due to the inability to get approval to conduct certain tests, it was forced to decline opportunities.

The N trust was established with the purpose of acquiring a property that was considered a potential site for the building. The block was purchased freehold. It was decided to seek grant assistance to construct the building.

One of the criteria for applying for the grant was that the applicant was a viable going concern.

The M Trust received grant funding from the State government department to assist in the construction of the building in the remote area. All funds were received.

The grant agreement was between the State government and the Trustee of the M Trust. The payment was to be transferred to The M Trust bank account under this agreement.

To be entitled to any payment under the agreement the grantee has to prove to the State that it has secured the Funding, which is to be applied to the Project.

The application for the grant was made in the associated trading entity, the M Trust. Funding was transferred to the landowner and construction completed.

All funding was directly applied for the construction of Division X assets.

The grantee agreed to commence and complete the Project within certain timeframes.

The premises are being leased indefinitely to the trustee of M Trust.

The lease has been established on an 'arms length' basis.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 subsection 6-10(1)

Income Tax Assessment Act 1997 section 15-10

Reasons for decision

Before considering the nature of the money received, it must be looked to who is ultimately the recipient of the grant money.

An agent may receive a payment on behalf of a principal if there is an agency agreement in effect. Agency can arise from agreement or deed (express or implied), by operation of law or the by later ratification of the acts performed by the agent: Leipner v McLean (1909) 8 CLR 306; 15 ALR 470.

Amounts that are paid to the agent which are required to be applied to or dealt with on behalf of the principal, or as the principal directs, do not constitute assessable income in the hands of the agent. Whether the funds will be assessable or not will be from the principal's position.

In this case we accept that the M Trust was acting as an agent for the N Trust and can be evidenced by the grant money being used at the direction of the N Trust and for the benefit of the N Trust property. Therefore, the grant monies are not assessable to the M Trust.

Ordinary income

Subsection 6-5(1) of the ITAA 1997 provides that a taxpayer's assessable income includes income according to ordinary concepts.

While the legislation does not outline or define the characteristics of ordinary income, case law indicates that ordinary income generally falls into three categories:

              i.                income from rendering personal services,

             ii.                income from property, or

           iii.                income from carrying on a business.

The courts have also identified a number of factors that indicate whether an amount has the character of income including the receipt is earned, expected, relied upon, has an element of periodicity, recurrence or regularity, or the receipt is for the replacement of income. No single factor is determinative of the receipt's character, but some factors may be more relevant than others in light of the circumstances of the case (Federal Commissioner of Taxation v Montgomery (1999) 198 CLR 639).

Statutory income

A taxpayer's assessable income also includes some amounts that are not ordinary income (statutory income) (subsection 6-10(1) of the ITAA 1997).

The types of statutory income in section 10-5 of the ITAA 1997. Section 15-10 of the ITAA 1997 states that 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.

Taxation Ruling TR 2006/3 Income tax: government payments to industry to assist entities (including individuals) to continue, commence or cease business expresses the Commissioner's view on the characterisation of government payments made to assist recipients with their business. Example 8A considers Government Payments to Industry (GPI) for the cost of building a capital asset:

Example 8A - Payment to fund the cost of constructing new assets

54A. To support investment in renewable energy, the government offers a GPI with the intention of reimbursing part of the cost of constructing renewable energy plants. A corporate group which carries on an energy generation business undertakes preliminary work in respect of securing a GPI from the government. A special purpose vehicle (SPV) is then created within the group to receive the GPI and perform the relevant construction activities required under a contract with the government to receive the GPI. Before construction begins, the GPI is paid as a lump sum into a bank account to which the government and the SPV are joint signatories. Under the contract, upon the SPV satisfying each of a series of construction milestones for the construction of the plant, the government undertakes to allow the SPV to drawdown an instalment of the GPI funds. After construction is completed the SPV will either use the plant in the course of an electricity generation business of its own or lease the plant to a related party for use in the course of the related party's energy generation business.

54B. The GPI instalments are derived by the SPV for performance of the obligations under the contract relating to the construction of the plant. The instalments are therefore received in the course of a business of constructing the plant and are therefore assessable under section 6-5 in the income years in which the instalments are derived. Alternatively, the GPI instalments may be considered to have been derived from an isolated transaction entered into with an intention to profit.^[10A]

54C. If the GPI is not ordinary income of the SPV, it is assessable under section 15-10 in the income year in which it is received.

In this case, the N Trust used the grant monies to perform the relevant construction activities required under the grant agreement. After construction was completed, the building was leased to a related entity, the M Trust, for use in the course of their business.

We consider the payments were derived by the N Trust for performance of the obligations under the grant agreement relating to the construction of the building. Therefore, the instalments are considered to be received in the course of a business of constructing the property and are therefore assessable under section 6-5 of the ITAA 1997.