Edited version of private advice

Authorisation Number: 1052343977373

Date of advice: 17 January 2025

Ruling

Subject: Non-assessable non-exempt income

Question 1

Are the grant payments you received from the Storm and Flood Disaster Recover Small Business Grant considered non-assessable non-exempt income under section 6-23 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

No.

Question 2

Are you entitled to claim a deduction for the depreciation of the retaining wall under Division 43 of the ITAA 1997?

Answer 2

Yes.

Question 3

Are you entitled to claim temporary full expensing for the retaining wall under Section 40-150 of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A 1997)?

Answer 3

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are a sole trader operating a small business.

You operate the business from your home, half of your home is used as a business premises for the activity.

You conducted business activities in your backyard. The backyard was held up by a retaining wall consisting of posts and sleepers made from timber.

During the months of XX and XX 20XX you experienced heavy storms which resulted in your backyard retaining wall collapsing and a part of the yard washing away.

As the yard was part of your business activities and the area needed to be safe for you to carry on a business you needed to repair the damage.

You subsequently applied for a grant made available to support small business affected by the disaster with the aid of an accountant.

You received a total of $XXX on XX 20XX under a Storm and Flood Disaster Recovery Small Business Grant.

You engaged a builder to remove the existing timber retaining wall and replace it with a new reinforced concrete sleeper wall, along with a concrete path on the top of the wall.

The builder issued a tax invoice number 3805 on XX October 20XX totalling $XXX (including GST). The tax invoice states it is the progress claim number 1 and details the work done.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-23

Income Tax Assessment Act 1997 section 11-15

Income Tax Assessment Act 1997 section 11-55

Income Tax Assessment Act 1997 section 15-10

Income Tax Assessment Act 1997 section 40-25

Income Tax Assessment Act 1997 section 40-45

Income Tax Assessment Act 1997 Division 51

Income Tax Assessment Act 1997 section 51-125

Income Tax Assessment Act 1997 Division 59

Income Tax Assessment Act 1997 section 59-55

Income Tax Assessment Act 1997 section 59-60

Income Tax Assessment Act 1997 section 59-85

Income Tax Assessment Act 1997 section 59-86

Income Tax Assessment Act 1997 section 59-99

Income Tax Assessment Act 1997 section 59-105

Income Tax Assessment Act 1997 Division 43

Income Tax Assessment Act 1997 subsection 43-10(2)

Income Tax Assessment Act 1997 subsection 43-20(1)

Income Tax Assessment Act 1997 section 43-140

Income Tax (Transitional Provision) Act 1997 Division 40

Income Tax (Transitional Provision) Act 1997 Subdivision 40-BB

Income Tax (Transitional Provision) Act 1997 section 40-150

Income Tax (Transitional Provision) Act 1997 subsection 40-150(2)

Income Tax (Transitional Provision) Act 1997 subsection 40-150(3)

Income Tax (Transitional Provision) Act 1997 subsection 40-150(4)

Income Tax (Transitional Provision) Act 1997 section 40-155

Income Tax (Transitional Provision) Act 1997 section 40-160

Income Tax (Transitional Provision) Act 1997 subsection 40-165(7)

Reasons for decision

Question 1

Are the grant payments you received from the Storm and Flood Disaster Recover Small Business Grant considered non-assessable non-exempt income under section 6-23 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

A grant payment is assessable income unless the income tax legislation or another Commonwealth law states that it is not assessable. The grant you have received is not deemed as non-assessable non-exempt income. The grant is assessable income to you.

Detailed reasoning

Generally, government grant payments can be assessable income in accordance with sections 6-5 or 15-10 of the ITAA 1997, subject to the nature and purpose of the grant. However, the income tax legislation can make certain income payments exempt income or non-assessable, non-exempt income. Section 6-20 of the ITAA 1997 provides for income that is exempt income as per a provision of the law. While section 6-23 of the ITAA 1997 provides that ordinary or statutory income may be non-assessable non-exempt (NANE) income if the income tax legislation, or another Commonwealth law, states that the income is both not assessable and not exempt.

Usually, payments received as a government support grant or payment to help recover from the effects of natural disaster are counted as assessable income unless they are made non-taxable by parliament.

Exempt income grant payments

Under Income Tax Assessment Act 1997 (ITAA 1997) section 11-15, the following natural disaster payments have been declared as exempt income:

•                2018 Storms - relief payments (section 51-125 of the ITAA 1997)

Division 51 of the ITAA 1997 provides the details of those ordinary and statutory income amounts that have been deemed as exempt income. The specific section of Division 51 that applies to the natural disaster payment has been stated above.

Non-assessable, non-exempt grant payments

The following natural disaster payments have been declared NANE income under section 11-55 of the ITAA 1997:

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

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

•                2019 floods - recovery grants including small business (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)

Division 59 of the ITAA 1997 provides the details of those ordinary and statutory income amounts that have been deemed as non-assessable non-exempt income. The specific section of Division 59 that applies to each natural disaster payment has been stated above.

Conclusion

The grant payment that you have received has not been declared by parliament as NANE as per section 11-55 or Division 59 of ITAA 1997 and is therefore considered assessable income in accordance with section 15-10 of the ITAA 1997. As outlined in paragraph 16 of Taxation Ruling TR 2006/3 Income tax: government payments to industry to assist entities (including individuals) to continue, commence or cease business, the grant you received is assessable under section 15-10 of ITAA 1997 because the grant (the law refers to as a bounty or subsidy) assists you to carry on your activity, its capital in nature and received in relation to carrying on your business.

Question 2

Are you entitled to claim a deduction for the depreciation of the retaining wall under Division 43 of the ITAA 1997?

Summary

Division 43 allows a deduction for capital expenditure incurred in construction of capital works used to gain or produce income. The improvement to the retaining wall is considered a capital work. You are unable to claim a deduction under Division 43 for the apportioned costs of the improvements.

Detailed reasoning

Division 43 of the ITAA 1997 provides for an entitlement to a deduction for capital expenditure incurred in the construction of buildings and other capital works used to produce assessable income.

Division 43 applies to capital works that are buildings or structural improvements and to extensions, alterations or improvements to those buildings or structural improvements as stated in subsection 43-20(1) of the ITAA 1997.

Division 43 of the ITAA 1997 provides that you can deduct an amount for capital works in an income year.

Subsection 43-10(2) of the ITAA 1997 states that you can only deduct the amount if:

a)             the capital works have a construction expenditure area; and

b)             there is a pool of construction expenditure for that area; and

c)              you use your area in the way set out in the table of section 43-140 of ITAA 1997 (current use year). You need to consider the portion of the area used for the purpose of producing assessable income.

The deduction can be claimed for 40 years from the date the construction is completed. The rate of deduction per income year is 2.5%.

Capital works also generally include improvements to buildings as stated in subsection 43-20(1) of the ITAA 1997.

Conclusion

In your case, the underpinning of the foundations of the property and the improvement of the retaining wall is considered to be a capital works expense and you are entitled to a capital works deduction under Division 43 of the ITAA 1997:

•                for 2.5% of the cost of the installation in your home property over 40 years,

•                from the date construction is completed,

•                apportioned based on the private and business use of the works, and

•                while the property is producing assessable income.

Question 3

Are you entitled to claim temporary full expensing for the retaining wall under Section 40-150 of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A 1997)?

Summary

Temporary Full Expensing (TFE) allows for the immediate deduction of depreciating assets for small business entities. The eligibility criterion does not allow temporary full expensing for assets that are deductible under Division 43. As the improvement is a capital work deductible under Division 43 it is not deductible under temporary full expensing.

Detailed reasoning

Temporary Full Expensing (TFE) means the immediate deduction of the cost of depreciating assets during specified dates in accordance with the provisions in Subdivision 40-BB of the ITTPA 1997. For the purposes of Division 40, the TFE rules in Subdivision 40-BB of the ITTPA 1997 modify the decline in value of qualifying depreciating assets held for an income year by allowing eligible entities to claim an upfront deduction for the cost of those depreciating assets. TFE supports businesses and encourages investment, as eligible businesses can claim an immediate deduction for the business portion of the cost of an asset in the year it is first used or installed ready for use for a taxable purpose.

Section 40-25 of the ITAA 1997 allows deductions for the decline in value of depreciating assets to the extent the asset's decline in value is attributable to its use, or it being installed ready for use, for a taxable purpose.

Small business entity

Section 40-155 of the ITTPA 1997 defines which businesses are regarded as a 'small business entity' for an income year if:

a)             you are a small business entity for the income year; or

b)             you would be a small business entity for the income year if:

                               (i)                  each reference in Subdivision 328-C of the Income Tax Assessment Act 1997 (about what is a small business entity) to $10 million were instead a reference to $5 billion; and

                              (ii)                  the reference in paragraph 328-110(5)(b) of the Act to a small business entity were instead reference to an entity covered by this section.

Eligible assets

Sections 40-150 and 40-160 and subsection 40-165(7) of the ITTPA 1997 outlines which assets are eligible for temporary full expensing:

•                new or second-hand (if it is a second-hand asset, only available for entities with an aggregated turnover of below $50 million)

•                first held by the entity at or after 7.30pm AEDT on 6 October 2020

•                first used or installed ready for use by you for a taxable purpose between 7.30pm AEDT on 6 October 2020 and 30 June 2023.

Exceptions to being an 'eligible asset'

An asset is not an eligible asset where the asset meets any of the following circumstances:

•                the asset is covered under Division 43 of the ITAA 1997 for buildings and other capital works and improvements. Or the asset is an asset that is outlined in section 40-45 of the ITAA 1997 which states which asset Division 40 of the ITAA 1997 does not apply (subsection 40-150(2) of the ITTPA 1997),

•                it is reasonable to conclude the asset is not located in Australia or the asset will not be used principally in Australia for the principal purposes of carrying on a business (subsection 40-150(3) of the ITTPA 1997), and

•                it is allocated to a low-value pool or software development pool under Subdivision 40-E of the ITAA 1997 or it is a primary production depreciation asset that can be deducted under Subdivision 40-F of the ITAA 1997 (subsection 40-150(4) of the ITTPA 1997).

Conclusion

To be eligible for temporary full expensing, the asset must be an eligible asset. Buildings and other capital works and improvements that are deductible under Division 43 of the ITAA 1997 are not an eligible asset for TFE purposes,

In your case, the work carried out to the backyard retaining wall amounts to an improvement. The improvement of the retaining wall is a capital work eligible for a deduction under Division 43 of the ITAA 1997. As a result, you are not entitled to a deduction to the improvement to the retaining wall under the TFE provisions.