Edited version of private advice

Authorisation Number: 1052362457376

Date of advice: 04 March 2025

Ruling

Subject: Government grants

Question 1

Will the grants you received under a government program be assessable income under section 6-5 of the Income Tax Assessment Act 1997?

Answer 1

No

Question 2

Will the grants you received under a government program be assessable income under section 15-10 of the Income Tax Assessment Act 1997?

Answer 2

No

Question 3

Will the grants you received under a government program assessable recoupments under section 20-20 of the Income Tax Assessment Act 1997?

Answer 3

Yes

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

This private ruling is based on the facts and circumstances set out below. If your facts and circumstances are different from those set out below, this private ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You own a number of properties at a prominent location in a regional centre.

You derive income from renting these properties out to commercial tenants.

The site where your properties are located was impacted by a natural disaster and the area declared a disaster zone.

The buildings on your property that had been rented to commercial tenants were rendered unusable, their stock was lost, and many closed their business temporarily or permanently.

You applied for grants under a state government recovery program.

Your primary purpose in applying for these grants was to obtain funds to undertake work on your properties that might mitigate the impact of future natural disasters.

The work to be undertaken aimed to improve the resilience of your properties if faced with similar natural disasters in the future, and improve access to those properties during any such future events.

The work to be undertaken is of a capital nature, and you would be claiming deductions for this work under the provisions of Division 43 of the ITAA 1997 if the work was not funded by the government grants.

The grants were approved and to be paid in instalments on the reaching of set milestones set out in the proposed schedule of work you submitted with your applications.

Some of these milestone objectives have been completed and others are yet to be completed.

All work undertaken is be completed by external contractors engaged for that purpose.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 15-10

Income Tax Assessment Act 1997 Subdivision 20-A

Income Tax Assessment Act 1997 section 20-20

Income Tax Assessment Act 1997 subsection 20-20(2)

Income Tax Assessment Act 1997 subsection 20-20(3)

Income Tax Assessment Act 1997 subsection 20-25(1)

Income Tax Assessment Act 1997 subsection 20-25(2)

Income Tax Assessment Act 1997 section 20-40

Income Tax Assessment Act 1997 subsection 20-40(2)

Income Tax Assessment Act 1997 Subdivision 43-F

Reasons for decision

Question 1

Will the grants you received under a government program be assessable income under section 6-5 of the Income Tax Assessment Act 1997?

Summary

The grant monies you have received will not be assessable as ordinary income under section 6-5 of the ITAA 1997.

Detailed reasoning

Section 6-5 of the ITAA 1997 states that assessable income includes income according to ordinary concepts, or ordinary income. Examples of ordinary income include proceeds from carrying on a business, payments for personal services, salary and wages, and returns on investments in the form of dividends or interest.

The Commissioner's view on the taxation treatment of government payments to industry (GPI) is discussed in Taxation Ruling TR 2006/3 Income tax: government payments to industry to assist entities (including individuals) to continue, commence, or cease business. The discussion in TR 2006/3 on whether a GPI relates to the carrying on of a business distinguishes between the activities of that business that are directed towards the gaining or producing of assessable income and the business itself. In general terms the GPI needs to be related to the ongoing activities that are producing assessable income to be assessable under section 6-5 of the ITAA 1997.

More specific descriptions of GPI that are included as assessable income under section 6-5 of the ITAA 1997 are set out in paragraphs 10 to 15A of TR 2006/3. These include payments that provide income support, assist with business operating costs, or fund the cost of buildings or constructing substantial capital assets on performance of a contract if the receiving entity is in the business of building or constructing assets.

You have received X grants to undertake work that will improve the ability of your properties to withstand possible future natural disasters, and to improve access in the event of any such disasters. All the work being undertaken is to be completed by external contractors.

As the funding you are receiving in these grants is not to provide income support or assist with business operating costs, or otherwise assist you in your continued operations, and you are not in the business of building or constructing assets the funding will not be assessable under section 6-5 of the ITAA 1997.

Question 2

Will the grants you received under a government program be assessable income under section 15-10 of the Income Tax Assessment Act 1997?

Summary

The grant monies you received will not be assessable income under section 15-10 of the ITAA 1997.

Detailed reasoning

Bounties and subsidies received in relation to carrying on a business may be assessable income under section 15-10 of the ITAA 1997 if they are not assessable as ordinary income under section 6-5 of the ITAA 1997. As stated in paragraph 2 of TR 2006/3 advice given on the taxation treatment of GPI through the course of the ruling applies to bounties, subsidies, and grants paid by governments or government agencies. References to bounties or subsidies include grants that encourage business or trade or address detrimental effects on business or trade.

Categories of government payments to industry that are assessable under section 15-10 of the ITAA 1997 are described in paragraphs 16 to 20 of TR 2006/3. These include capital payments received in relation to carrying on a business, reimbursement, assistance with, or direct payment for, legal, business, accounting, financial, or other professional advice that is not on the revenue account but is in relation to the carrying on of a business, and constructing or acquiring an asset, or assisting with the capital costs of restructuring an activity undertaken in relation to the carrying on of a business.

As noted in paragraph 102 of TR 2006/3 a GPI providing funds to acquire or construct an asset or assist with the capital costs of restructuring will be related to the carrying on of a business where the purpose of the asset or restructuring is to improve the manufacturing, processing, distribution, administrative, or other operations from which that business derives its income.

The government grants you have received are to improve the ability of your properties to withstand future natural disasters and do not relate to the carrying on of your commercial rental business or advice on the carrying on of your business, and you are not restructuring your business processes or operations. The grants you have received will not be assessable income under section 15-10 of the ITAA 1997

Question 3

Will the grants you received under a government program assessable recoupments under section 20-20 of the Income Tax Assessment Act 1997?

Summary

The grant monies received by the Trustee under the CLIRP program will be assessable recoupments under subsection 20-20(2) of the ITAA 1997. The monies have been granted and received as an indemnity against the expenses associated with approved capital works that can be claimed as deductions under Subdivision 43-F. The grant monies are to be included in assessable income year by year to the extent of the capital works deductions claimed each year.

Detailed reasoning

For GPI that are received as recoupment of certain deductible losses or outgoings and that are not otherwise assessable paragraph 136 of TR 2006/3 refers to the assessable recoupment provisions in Subdivision 20-A of the ITAA 1997.

The scope of the term recoupment for the purposes of subdivision 20-A is given in subsection 20-25(1):

Recoupment of a loss or outgoing includes:

(a) any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery, however described; and

(b) a grant in respect of the loss or outgoing.

Under subsection 20-25(2) if an amount in respect of a loss or outgoing that you incur is paid on your behalf you are taken to have received the amount as a recoupment of the loss or outgoing.

The conditions under which recoupment amounts received by way of insurance or indemnity are assessable are set out in subsection 20-20(2) of the ITAA 1997. Subsection 20-20(2) of the ITAA 1997 states that:

An amount received as recoupment of a loss or outgoing is an assessable recoupment if:

(a) received by way of insurance or indemnity; and

(b) you can deduct an amount for the loss or outgoing for the current year, or you have deducted or can deduct an amount for it for an earlier income year, under any provision of this Act.

The conditions under which other recoupment amounts are assessable are set out in subsection 20-20(3). Subsection 20-20(3) of the ITAA 1997 states that:

An amount you have received as recoupment of a loss or outgoing (except by way of insurance or indemnity) is an assessable recoupment if:

(a) you can deduct an amount for the loss or outgoing for the current year; or

(b) you have deducted or can deduct an amount for the loss or outgoing for an earlier income year;

under a provision listed in section 20-30.

Assessable recoupments by way of insurance or indemnity

For grant monies to be assessable recoupments under subsection 20-20(2) of the ITAA 1997 they need to be;

•                     received as insurance or an indemnity, and

•                     for outgoings or expenses that are deductible under another provision of the ITAA 1997.

The grant monies you have received were not received by way of insurance.

In deciding whether grant monies are received as an indemnity the nature of the term 'indemnity' must be determined. While the term indemnity is not defined in the ITAA 1997 or TR 2006/3 some guidance on its meaning in relation to the application of the provisions in subdivision 20-A can be found in case law.

In Denmark Community Windfarm Ltd v. FC of T [2018] FCAFC 11 (Denmark) the Full Federal Court held that Commonwealth Government grants to assist with the construction of wind turbines were assessable recoupments under subsection 20-20(2) of the ITAA 1997. In this case the Full Federal Court held that the meaning of the word 'indemnity' included 'a sum of money paid to compensate a person for liability, loss or expense incurred by the person' or 'compensation for damage or loss sustained' and 'something paid by way of such compensation'. The fact that the amounts were a government subsidy or rebate did not affect that position. The amounts bore the character of compensation for a liability, loss or expense incurred.

In Batchelor v FC of T [2014] FCAFC 41 (Batchelor), another case concerned with the application of subsection 20-20(2) of the ITAA 1997, Wigney J noted that the ordinary meaning of the term 'indemnity' 'was wide enough to encompass both the protection against loss that might occur in the future and compensation for loss or damage that might have occurred in the past'.

The government grants you have received are intended to compensate you for the expense of undertaking capital works to protect your commercial rental properties against the loss that might occur in future natural disasters. The nature of these payments falls within the meaning of the term 'indemnity' as it is used in section 20-20 of the ITAA 1997. This being the case they have been, and will be as you reach milestones outlined in the grant agreements, payments by way of indemnity. Your expenses in undertaking this work can be claimed as deductions under the capital works provisions of Division 43 of the ITAA 1997. As the grants have been received way of an indemnity against your deductible expenses in undertaking this work they will be assessable as recoupments under subsection 20-20(2) of the ITAA 1997.

Other recoupments

Under subsection 20-20(3) of the ITAA 1997 amounts received as recoupment of a loss or outgoing that are not received by way of insurance or indemnity are assessable recoupments if those amounts are deductible under a provision listed in section 20-30 of the ITAA 1997. The grants you have received to undertake this work will not be assessable recoupments under subsection 20-20(3) of the ITAA 1997 as they are by way of indemnity, and capital works deductions under the provisions in Division 43 of the ITAA are not listed in the provisions set out in section 20-30 of the ITAA 1997.

Assessable recoupments for amounts deductible over 2 or more income years

Under section 20-40 of the ITAA 1997 recoupments for amounts that can be deducted over 2 or more years are included in assessable income to the extent that the associated expenses are deductible in any one year. The method statement in subsection 20-40(2) of the ITAA sets out steps to be followed in calculating the amount of the recoupment to be included as assessable income in each year a related deduction is claimed. The purpose of this method statement is to ensure that the recoupment is included as assessable income to the extent of the related deductions claimed in that year, and only so far as they have not already been included for an earlier income year.

The grant monies you have received are recoupments for expenses associated with the capital works you are undertaking. Under Subdivision 43-F capital works deductions can be claimed at 2.5% over 40 years or 4% over 25 years depending on when it was incurred and the use of the capital works. The amount of the recoupments included as assessable income each year can be calculated by following the steps below.

Step 1

Add up all the assessable recoupments received for the loss or outgoing in the current and earlier years. This amount is the total assessable recoupment.

Step 2

Add up the amounts included in assessable income for earlier income years in respect of the loss or outgoing. This amount is the recoupment already assessed. (if no amount was included the recoupment already assessed is nil).

Step 3

Subtract the recoupment already assessed from the total assessable recoupment. The result is the unassessed recoupment.

Step 4

Add up each amount that you can deduct for the loss or outgoing for the current year, or you have deducted or can deduct for the loss or outgoing for an earlier income year. The result is the total deductions for the loss or outgoing.

Step 5

Subtract the recoupment already assessed from the total deductions for the loss or outgoing. The result is the outstanding deductions.

Step 6

The unassessed recoupment is included in your assessable income, unless it is greater than the outstanding deductions. In that case the amount of the outstanding deductions is included instead.