Edited version of private advice

Authorisation Number: 1052332423499

Date of advice: 21 November 2024

Ruling

Subject: Government grants

Question 1

Are the proceeds received under the Grant non-assessable non-exempt (NANE) income under section 11-55 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

If the proceeds from the Grant are not NANE income under section 11-55 of the ITAA 1997, are they non-assessable income for any other reasons?

Answer

No.

Question 3

In the event that the Grant proceeds are assessable income, are recipients entitled to deductions for expenses that they have incurred, which they received funding/reimbursement for?

Answer

Yes, provided all the requirements of the relevant deduction provision are satisfied.

Question 4

In the event that the Grant proceeds are not assessable income, are recipients entitled to deductions for expenses that they have incurred, which they received funding/reimbursement for?

Answer

Not necessary to answer.

This ruling applies for the following period:

Income year ended 30 June 2023

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

1.      The Trust carries on a business.

2.      The Government provided support for certain industries impacted by an Event, including the Grant.

3.      The Grant provided funding assistance to businesses in the relevant industries who were impacted by the Event.

4.      To be eligible for the Grant a business must have incurred costs related to the Event.

5.      The Grant can only be used to cover costs of certain activities.

6.      The Grant required recipients to incur eligible expenditure, and then reimbursed the recipient for the expenditure up to a limit.

Relevant legislative provisions

Section 6-5 of the Income Tax Assessment Act 1997

Section 6-10 of the Income Tax Assessment Act 1997

Section 6-15 of the Income Tax Assessment Act 1997

Section 6-20 of the Income Tax Assessment Act 1997

Section 6-23 of the Income Tax Assessment Act 1997

Section 8-1 of the Income Tax Assessment Act 1997

Section 11-5 of the Income Tax Assessment Act 1997

Section 11-15 of the Income Tax Assessment Act 1997

Section 11-55 of the Income Tax Assessment Act 1997

Section 15-10 of the Income Tax Assessment Act 1997

Reasons for decision

Section 6-23 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that 'an amount of ordinary income or statutory income is non-assessable non-exempt income if a provision of this Act or another Commonwealth law states that it is not assessable income and is not exempt income'.

Section 11-55 of the ITAA 1997 lists various provisions that make amounts non-assessable non-exempt income, including:

•         2019-20 bushfires - payments for volunteer work with fire services (section 59-55 of the ITAA 1997)

•         2019-20 bushfires - disaster relief payments and non-cash benefits (section 59-60 of the ITAA 1997)

•         2019 floods - recovery grants (section 59-85 of the ITAA 1997)

•         2019 floods - on-farm grant program (section 59-86 of the ITAA 1997)

•         2021 floods and storms - recovery grants (section 59-99 of the ITAA 1997)

•         Cyclone Seroja - recovery grants (section 59-105 of the ITAA 1997)

The Grant relates to the Event and is not covered by any of the above provisions, or any other provisions listed in section 11-55 of the ITAA 1997.

As such, the proceeds received under the Grant are not non-assessable non-exempt income under section 6-23 of the ITAA 1997.

Question 2

Section 6-15 of the ITAA 1997 states:

(1)    If an amount is not ordinary income, and is not statutory income, it is not assessable income (so you do not have to pay tax on it).

(2)    If an amount is exempt income, it is not assessable income.

(3)    If an mount is non-assessable non-exempt income, it is not assessable income.

Subsection 6-20(1) of the ITAA 1997 states that 'an amount of ordinary income or statutory income is exempt income if it is made exempt from income tax by a provision of this Act or another Commonwealth law'.

Subsection 6-20(2) of the ITAA 1997 states that 'ordinary income is also exempt income to the extent that this Act excludes it (expressly or by implication) from being assessable income.

Section 11-5 of the ITAA 1997 provides a list of provisions that make certain entities exempt from income tax. Section 11-15 of the ITAA 1997 provides a list of provisions that make certain ordinary income or statutory income exempt from income tax, including:

• 2018 storms - relief payments.

The Grant is not covered by any of the provisions in sections 11-5 or 11-15 of the ITAA 1997.

Case law has also identified several types of receipts that are not considered to be ordinary income, including gifts, prizes and awards (not related to your business/ income producing activity), betting and gambling wins (unless won as part of your betting or gambling business/ income producing activity), and mutual receipts.

The Grant does not fall within any of these types of receipt.

As such, the Grant is not non-assessable income.

Question 3

Assessable income

Subsection 6-5(1) of the ITAA 1997 states 'your assessable income includes income according to ordinary concepts, which is called ordinary income'. Subsection 6-5(2) of the ITAA 1997 states that 'if you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year'.

Taxation Ruling TR 2006/3 Income Tax: government payments to industry to assist entities (including individual) to continue, commence or cease business (TR 2006/3) sets out the Commissioners view about the income tax treatment of government payments to industry, and states the following about 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; or

•           income from carrying on a business.

85. Case law has established the following guidelines to assist in determining the nature of a receipt:

•           the nature of a payment is determined by examining the character of the payment in the hands of the recipient;

•           regard must be given to all facts, as such a broad view must be taken of a taxpayer's situation and it is necessary to consider the total situation of the taxpayer;

•           it is necessary to apply 'a business conception to the facts of the case';

•           the test in determining if a payment is income or capital is an objective test;

•           the question is not decided by determining whether the expenditure by the payer is revenue or capital in nature;

•           the question is not decided by determining whether any expenditure the recipient is required to make is revenue or capital in nature;

•           the question is not decided by determining the nature of the measure used to calculate the payment;

•           where a recipient provides consideration for a payment, the nature of that consideration is generally taken to be the nature of the payment;

•           a payment that is provided for a purpose which is not part of the recipient's business will not be income in nature;

•           periodicity, regularity or recurrence may show a payment to be income;

•           a payment paid in consideration for the performance of services is generally income;

•           calculation of a payment by reference to expected profits made, or not made by the recipient but that would ordinarily have been expected to have been made, is a factor supporting a conclusion of income;

•           a payment provided for a particular revenue expense is a factor supporting a conclusion of income;

•           a payment from an isolated transaction entered into with an intention to profit may still be income;

•           a payment in a lump sum does not require a conclusion that the payment is capital;

•           a payment made to compensate for the restriction of a person's capacity to perform services or to carry on a business may be a capital payment;

•           a payment by gift or subsidy to replenish or augment the recipient's capital is not income under ordinary concepts as it is not a product or incident of the recipient's income producing activity;

•           a payment for the sterilisation of a capital asset of a business is a capital receipt; and

•           a payment for surrender of part of the profit earning structure is a capital receipt.

The Grant provided funding to businesses in certain industries that were impacted by the Event.

The Grant could be used to cover the cost of certain activities.

In the circumstances, the Grant is not considered to have the character of ordinary income in the hands of the recipient.

The Grant is not ordinary income and is not assessable income under section 6-5 of the ITAA 1997.

Subsection 6-10(1) of the ITAA 1997 states 'your assessable income also includes some amounts that are not ordinary income'. Subsection 6-10(2) of the ITAA 1997 states 'amounts that are not ordinary income, but are in included in your assessable income by provisions about assessable income, are called statutory income'.

Section 15-10 of the ITAA 1997 states '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'.

The meaning of bounty and subsidy is not provided in the ITAA 1997, and the ordinary meaning of these terms apply. TR 2006/3 states the following about the meaning of 'bounty and 'subsidy':

94. 'Subsidy' is defined as '1. a direct pecuniary aid furnished by a government to a private industrial undertaking, a cultural organisation, or the like; 2. a sum paid, often in accordance with a treaty, by one government to another, to secure some service in return; 3. a grant or contribution of money'. The ordinary meaning adopted by case law is an 'aid provided by the Crown [government] to foster or further some undertaking or industry' a reference to 'bounty or subsidy' includes a grant that encourages business or trade,

95. 'Bounty' is defined to include 'a premium or reward, especially one offered by a government'. When 'bounty' and 'subsidy' are positioned together the compound term is interpreted as describing financial assistance given to assist business.

A bounty or subsidy will be 'in relation to' carrying on a business when there is a real connection between the payment and the business. The term 'in relation to' includes within its scope payments that have a direct or indirect connection to the business. (paragraph 100 of TR 2006/3)

A bounty must be related to 'carrying on' the business not merely for commencing or ceasing the business. (paragraph 101 of TR 2006/3)

The Grant provided funding assistance to minimise the impacts of the Event. To be eligible to the Grant, a recipient had to have a business. The Grant could be used to cover the cost of certain activities that responded to the impacts of the Event.

The Grant is a bounty or subsidy that was received in relation to carrying on a business.

As such, the Grant is assessable income under section 15-10 of the ITAA 1997.

Deductions

Section 8-1 states:

(1)   You can deduct from your assessable income any loss or outgoing to the extent that:

(a)    it is incurred in gaining or producing your assessable income; or

(b)    it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

(2)    However, you cannot deduct a loss or outgoing under this section to the extent that:

(a)    it is a loss or outgoing of capital, or of a capital nature; or

(b)    it is a loss or outgoing of a private or domestic nature; or

(c)    it is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income; or

(d)    a provision of this Act prevents you from deducting it.

To be eligible for the Grant an applicant had to be carrying on a business, must have been impacted by the Event, and must have incurred costs as a result of the Event. The costs were incurred in carrying on a business, and the requirements of subsection 8-1(1) of the ITAA 1997 are satisfied. However, to be able to claim a deduction for the cost of an activity, the relevant cost must not be of a type excluded under subsection 8-1(2) of the ITAA 1997. If the costs of an activity is of a type excluded by section 8-1(2) the cost cannot be deducted under section 8-1.

Other deduction provisions in the ITAA 1997 may also apply to allow a deduction for the cost of an activity, including section 25-10 (repairs to premises), Division 40 (depreciating assets) and Division 43 (capital works). A deduction can only be claimed under these provisions if the relevant cost meets the requirements of the relevant provision.