Edited version of private advice

Authorisation Number: 1052341999482

Date of advice: 03 January 2025

Ruling

Subject: Government grants

Question 1

Is the Grant Payment that you received under the Grant Program assessable income in accordance with section 6-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20YY

Year ended 30 June 20ZZ

The scheme commenced on:

In the year ended 30 June 20XX

Relevant facts and circumstances

You are an individual taxpayer, registered for an ABN, and you operate a business as a sole trader.

You are not a registered charity with the Australian Charities and Not-for-profits Commission, nor are you a not-for-profit.

In the year ended 30 June 20XX you applied for a Federal Government grant (The Grant) under the Grant Program.

The 'Grant Guidelines' document provided by the relevant Government Department sets out the objectives of the Grant Program and amongst numerous objectives, aims to reduce certain running costs for small and medium businesses.

The Grant Guidelines provide information about the Grant Program, grant amount and grant period. The Grant Guidelines also set out the eligibility criteria, what the grant money can be used for, how to apply for the grant, the grant selection process, notification of successful grant applications, and how grant activities are monitored.

The Grant Guidelines set out specific activities that are eligible for grant funding.

Paragraph 4 of the Guidelines sets out the eligibility criteria to be met for an entity's application to be considered and requires that the entity is a certain size business with an employee headcount within a particular range and be a business that has been in operation for multiple years.

The Grant Program issued grants up to a set maximum amount.

You met the eligibility criteria for the Grant Program, and in the year ended 30 June 20XX you applied for a grant to complete works to your office space that you own.

In the year ended 30 June 20YY you were advised that your application was successful, and you were offered a grant under the Grant Program. In accordance with the grant process outlined in the Grant Guidelines you were issued with a Letter of Agreement.

The Grant Agreement listed the total maximum Grant Amount you were to be paid, the project start date and estimated project end date.

In relation to taxation, the Grant Guidelines states that grants are assessable income for taxation purposes unless exempted by taxation law.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-1

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 15-10

Income Tax Assessment Act 1997 Division 59

Reasons for decision

Issue 1

All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise indicated.

Question 1

Is the Grant Payment that you received under the Grant Program assessable income in accordance with section 6-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

The Grant Payment is assessable income as it is either ordinary income in accordance with section 6-5 or statutory income in accordance with section 15-10. The amount is not declared as non-assessable non-exempt income by any provision of the Act.

Detailed reasoning

Assessable income

Subsection 6-1(1) states that assessable income consists of both ordinary income and statutory income.

Section 6-1 also states that some ordinary income and some statutory income is exempt income (subsection 6-1(2)); exempt income is not assessable income (subsection 6-1(3)); and some ordinary income and some statutory income is neither assessable income nor exempt income (subsection 6-1(4)). Division 59 sets out specific amounts that are non-assessable non-exempt income.

Ordinary income

Subsection 6-5(1) states that 'assessable income includes income according to ordinary concepts, which is called ordinary income'.

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

Statutory income

Statutory income is income that is not ordinary income, but income included as assessable income by way of a specific legislative provision. Specifically relevant to your circumstances, section 15-10 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.

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), provides the Commissioner's view on the application of certain provisions of the ITAA 1997 to recipients of government payments to industry to assist the recipient to continue, commence or cease 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 but does not apply to exempt entities specified in section 11-5 of the ITAA 1997.

The Grant Payment you received was funded by the Commonwealth government and you are not an exempt entity as specified in section 11-5 of the ITAA 1997. Therefore TR 2006/3 provides guidance as to the tax treatment of the Grant Payment you received.

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.

The payment made to you was not paid to commence or cease your business but was paid as part of the continuation of your business. The Grant Guidelines requires that for an entity to be eligible to receive a grant under the Grant Program, the entity must be a business that has been in operation for multiple years.

In relation to the taxation of GPI payments to continue a business, paragraph 10 of TR 2006/3 states:

Ruling

Government payments to continue business

(1)           A GPI to assist a business to continue operating, except where the payment is for agreeing to give up or sell part of the profit yielding structure, is included as assessable income of the recipient under section 6-5 or section 15-10.

As discussed above, subsection 6-5(1) defines 'ordinary income' as income according to ordinary concepts, which includes income from rendering personal services, income from property and income from carrying on a business.

Where a GPI is not assessable as ordinary income but is a 'bounty' or 'subsidy' that is received in relation to carrying on a business, it is assessable as statutory income in accordance with section 15-10.

In relation to section 15-10, TR 2006/3 states:

Ruling

...

Section 15-10

(16)        A GPI that assists a business to carry on its activities and is:

•                     a bounty or subsidy;

•                     capital in nature; and

•                     received in relation to carrying on a business,

is assessable under section 15-10 in the income year in which it is received.

...

(19)        A GPI received to acquire or construct an asset or assist with the capital costs of restructuring, that is an activity in relation to carrying on a business, is assessable income under section 15-10 if the GPI is not ordinary income under section 6-5. This will be the case even if eligibility for the GPI is dependant upon legislative changes having an adverse effect upon a business.

The terms 'bounty' and 'subsidy' are not defined in the legislation. TR 2006/3 provides the following guidance as to their meaning:

Bounty or Subsidy

(93)        Payments of financial assistance by government are commonly referred to as 'bounties', 'subsidies', or 'grants'. As 'bounty', 'subsidy' and 'grant' are not defined terms, the ordinary meaning of these terms applies.

(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'.

(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.

(96)        'Grant' is defined to include 'that which is granted, as a privilege or right, a sum of money, as for a student's maintenance, or a tract of land'. A reference to 'bounty or subsidy' includes a grant that encourages business or trade and also a grant to address a detrimental effect on a business or trade.

(97)        Not all government grants are bounties or subsidies for the purposes of section 15-10. It is essential to determine what the grant is actually for. The question as to the nature of and quality of any payment must be determined by reference to the agreement or the terms which created in the recipient the right to the government grant. Any factors used to calculate the amount of payment are of marginal, if any, assistance in determining what the payment is for.

Considering the statements about the intended outcomes of the Grant Program and the list of eligible activities potentially funded by the Grant Program, the Commissioner is satisfied that the Grant Payment provided by the Grant Program comprises of financial assistance provided by the Government to assist the eligible businesses and thus meets the meaning of 'grant or subsidy' in section 15-10.

Paragraphs 99 to 106 of TR 2006/3 discuss when a bounty or subsidy payment will be 'in relation to' carrying on a business. Paragraphs 100 and 102 state:

(100)        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.

...

(101)        A GPI received to acquire or construct an asset or assist with the capital costs of restructuring a business to improve the manufacturing, processing, distribution, administrative or other operation of a business is received in relation to carrying on a business...

As the Grant Guidelines provide that the Grant Program was designed in part to assist applicable businesses to manage specific business running costs, and one of the intended outcomes was to reduce their certain bills, the Commissioner is satisfied that the Grant Payment is received in relation to your business as it intentionally assists with reducing the costs of operating your business.

Paragraphs 33 to 54C provide examples about government payments to continue a business. Example 5 is particularly relevant:

Example 5 - Payment to assist with change to operations for environmental purposes - payment in relation to multiple factors

(40)        A business operates in an industry that uses equipment that produces pollutants and damages the environment. The government offers each business in the industry a grant as an incentive for the business to adopt new manufacturing technology. The business receives a grant as a lump sum payment which is adjudicated by an assessor using the following terms of reference:

•                     an estimate of the loss in value of the depreciating asset/s being made redundant;

•                     an estimate of the loss in income incurred by the stoppage in production to allow the new depreciating asset/s to be installed,

and a separate payment for:

•                     a reimbursement of up to $10,000 for the costs incurred in installing the depreciating asset/s.

(41)        Apart from the reimbursement amount the payment received is an undissected amount made for multiple claims and is not capable of being separated into assessable and non assessable components. The nature of the payment is determined by examining the character of the lump sum payment in the hands of the recipient.

(42)        The payment is not a normal incident of the recipient's business, nor is it paid for a purpose for which the business is carried on. The undissected amount is for the sterilisation of the existing depreciating assets and updating to new depreciating assets. The amount is a capital receipt as it is for the sterilisation of the depreciating asset/s and the enduring benefit of the new depreciating asset/s. The reimbursement amount is also a capital receipt for the same reason.

(43)        The total amount of the payment, comprising the undissected amount and the reimbursement amount, is given as financial assistance to the business to use depreciating assets that are less polluting. The payment is a bounty or subsidy being financial assistance given to assist the business.

(44)        The words 'received in relation to carrying on a business' in section 15-10 require a relationship between the payment and the carrying on of the business. The payment is received by the business for replacing assets used in the manufacturing operations of the business. The assets are connected directly to the operations of the business. As such, the payment is received in relation to carrying on the business.

(45)        The payment is a bounty or subsidy, is received in relation to carrying on a business and is not assessable as ordinary income under section 6-5. Therefore, the payment is assessable income under section 15-10.

Similarly to the reimbursement payment discussed in Example 5 above, the Grant Payment that you received is a capital receipt and is a bounty or subsidy being financial assistance given to assist your business. The Grant Payment is received in relation to carrying on your business and is assessable income under section 15-10, unless it is declared non-assessable non-exempt income under a provision of Division 59.

Division 59 lists particular amounts, including certain government grant payments, that are specifically non-assessable non-exempt income. For example, subject to an entity meeting certain criteria, income received through certain Covid-19 business grants and support programs was specifically non-assessable non-exempt income and listed as such under Division 59 (e.g. sections 59-90, 59-95, 59-96, 59-97 and 59-98).

The Grant Payment that you received is not an amount that is listed in Division 59 as non-assessable non-exempt income. As the amount is not non-assessable non-exempt income, and as concluded above, the Grant Payment is statutory income as per section 15-10, the Grant Payment is assessable income in accordance with section 6-1.