Edited version of private advice

Authorisation Number: 5010081591040

Date of advice: 18 March 2022

Ruling

Subject: Non-assessable and non-exempt income

Question 1

Is the grant income receivable by Green Entity (the Entity) under the Local Economic Recovery Fund non-assessable and non-exempt income pursuant to section 59-60 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period

Year ended 30 June 20xx

The scheme commences on

1 July 20xx

Relevant facts and circumstances

BACKGROUND

Entity

On 20 January 20xx, the Entity was started. The Entity is developing a tourist attraction project (the Project).

LOCAL ECONOMIC RECOVERY (LER) PROGRAM:

On XX May 20XX, the Commonwealth Government announced that it would provide funding for bushfire affected communities to assist in the restoration of local economies. The funding is aimed at medium and long-term projects in regions most severely impacted by the 2019-2020 bushfires.[1]

The State Governments are responsible for selecting, delivering and managing the projects.[2] In relation to the local region, the Local Economic Recovery (LER) program is a program jointly funded by the Commonwealth and the State Government. The program provides funding for local projects to support recovery and encourage economic stimulus for bushfire affected regions.[3]

Grant funding received from the Department of Jobs, Precincts and Regions:

After May 2020, the Entity submitted a funding application with the Bushfire Recovery Grants Fund to assist with the financing of the Project.

a.         You state that the grants will be used to reimburse the Entity for expenses incurred in relation to the construction and operation of the Project.

The Funding Guidelines for Bushfire Recovery Grants (the Guidelines) provide that the Grants were 'established to support regional economic recovery by stimulating economic growth and building economic resilience in bushfire affected regions. The Guidelines further provide that the objectives of the program are to:

•         increase economic and social benefits through investment in enabling infrastructure

•         increase employment opportunities and decrease skills shortages in key sectors, including the promotion of Aboriginal participation

•         increase the capacity of the business community by enhancing employment, business and economic opportunities with a focus on tourism and primary industries, including small business or other sectors, consistent with the objectives of local and state government

•         increase business capability, including Aboriginal businesses, and continuity by providing increase opportunities to collaborate, innovate and drive change

•         increase longer term economic and community resilience for future emergency events

•         increase and restore visitor confidence in the region

•         protect and enhance Aboriginal culture, and support participation and ownership

•         addresses a need of the communities that has arisen due to the impact of the 2019-20 bushfires.

The Guidelines explain that proposed projects will be eligible for the grants if they produce an economic benefit to fire affected regions and align with one or more of the following categories:

In 20XX, a Grant Agreement (the Grant Agreement) was executed between the State Government and the Entity (as recipient). The Agreement provides that they had a right to receive a specified amount of grant funding.

The Grant Agreement requires that upon the completion of each of a specified number of stipulated milestones, the Entity will be provided grant funds to reimburse it for the costs of the Project's infrastructure construction.

The Grant Agreement provides that the combined Project phases will achieve the following outcomes:

•         Visitation across all seasons in a region that is typically a summer and holidays destination

•         A signature destination experience which will attract new markets and increase visitation to the local area.

•         Increased employment and education opportunities, up to 10 Full Time Equivalent (FTE) jobs during construction, up to 10 FTE ongoing jobs in Year 1 and up to 20 FTE jobs by Year 5

•         Increase economic flow-on benefits to the broader visitor economy through collaborative packaging with all sectors

•         Attract visitors to the region and encourage longer overnight stays

•         Develop packages that will attract new visitors, retain visitors for longer and encourage return visitation

•         Drive visitors to the region and build anticipation and awareness for ongoing local development.

The payments to be received by the Entity under the Grant Agreement will alleviate some of the economic burden from such things as increased holding costs due to project delays from the bushfires.

The payments received by the Entity under the Grant Agreement boost the cashflow of the Project. When compared to the scenario where the Grant payments are not available, this will result in them being able to bring forward the timeframe for the completion of the Project.

Relevant legislative provisions

Section 6-5 of the Income Tax Assessment Act 1997

Section 59-60 of the Income Tax Assessment Act 1997

Reasons for Decision

Question 1

Is the grant income receivable by the Entity under the Stimulus Grant non-assessable and non-exempt income pursuant to section 59-60?

EXPLANATION OF THE LEGISLATION:

Non-assessable and non-exempt income

Section 6-23 provides that ordinary or statutory income may be non-assessable non-exempt income if the income tax legislation, or another Commonwealth law, states that the income is both not assessable and not exempt. Therefore, in order to determine whether the concession in section 59-60 could apply, it is first necessary to determine whether the receipts are ordinary or statutory income.

Ordinary Income

Section 6-5 of the ITAA 1997[4] provides that a taxpayer's assessable income includes income according to ordinary concepts, known as ordinary income. However, the legislation does not provide guidance on the meaning of 'income according to ordinary concepts' in section 6-5. As such, guidance on the meaning of the term and for determining whether a receipt will be ordinary income can be found in case law.

In Scott v. Commissioner of Taxation (NSW) (1935)[5], Jordan CJ held that the meaning of 'income' was to be determined according to 'ordinary concept and usages.

Ordinary income will generally have the characteristics of being periodic, recurring, and regular. Such characteristics of income have been emphasised by decisions in FC of T v. Dixon (1952)[6]and Just v. FC of T (1949)[7].

Payments which are received for labour or services clearly constitute ordinary income (per Hill J in Reuter v. FC of T[8]):

Perhaps the most usual usage of the word "income" in ordinary speech is to describe that which comes in as a reward for services. Amounts such as salary, wages, commission, tips and the like, are universally regarded as income and it is immaterial whether they are paid under or pursuant to a contract of service or services on the one hand, or gratuitously on the other. So, too, for income tax purposes, it would be immaterial whether an amount which is a reward for services is paid to the taxpayer in advance of the services being performed (eg, a signing-on fee) or after the services have been performed, or whether the payment is made by the person for whom the services are performed or by some other person. It will also be generally immaterial whether the amount paid is paid periodically or in a lump sum. What will matter is the character of the payment as a reward for services or, as it was put by Fullagar J in Hayes v FC of T (1956) 11 ATD 68 at 74; (1956) 96 CLR 47 at 57-58, whether the receipt is a 'product' of the taxpayer's services.

In FC of T v. Myer (1987)[9], the High Court held that a receipt from an isolated transaction may be characterised as ordinary income where there is a profit-making intention in the course of carrying out a business operation or commercial transaction.

Guidance on whether government payments are assessable income can be found in 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). Paragraph 4 of TR 2006/3 explains that the government payments made to entities considered to be for the continuation of business include payments to assist with operating costs, encourage business expansion and to fund the building or construction of depreciating assets.

Paragraph 12 of TR 2006/3 explains that government payments made to assist with operating costs and liabilities will be ordinary income of the recipient and therefore to be included in the recipient's assessable income pursuant to section 6-5 in the year in which it is derived.

The main characteristics that are generally applicable to a receipt being considered as income are:

b.         received periodically and regularly

c.         received for personal services (for example, salary and wages)

d.         received from property and investment returns (for example, dividends and interest)

e.         relied upon or expected

f.          earned

g.         for the replacement of income; and

h.         derived by way of a profit-making intention or carrying on a business.

Therefore, ordinary income generally bears a direct relationship to some form of input or investment made by the taxpayer. It is important to note however, that it is not necessary for all of these characteristics to exist in order for a receipt to be considered under ordinary concepts.

Application to your circumstances:

In 2020, the Entity lodged a submission for funding from the Bushfire Recovery Grants Fund.

The Grant Agreement executed provides, among other things, that the Entity had a right to receive a specified amount of grant funding. In order to determine whether this grant funding is assessable income pursuant to section 6-5, it is necessary to consider the terms and purposes of the receipt and whether these are consistent with the ordinary meaning of the term income.

The purpose of the LER payment is to reimburse the Entity for costs incurred in relation to the construction and operation of the Project. That is, the payment of the relevant Grant will be received by the Entity for the construction of depreciating assets. Consequently, and consistent with paragraphs 4 and 12 and Example 8A of TR 2006/3 is ordinary income and will be assessable income of the Trust pursuant to section 6-5 in the year in which it is incurred.[10]

2019-20 Bushfires - disaster relief payments and non-cash benefits:

Division 59 provides that certain amounts of ordinary or statutory income are non-assessable non-exempt income.

Section 59-60 was introduced to make certain payments and benefits, associated with relief and recovery from the 2019-20 bushfires, received by entities, which otherwise have been subject to tax, as non-assessable and non-exempt income. As a result, the eligible recipients are not subject to income tax on the payments or benefits received.

In particular, subsection 59-60(1) provides that where a payment, or non-cash benefit, is provided to an entity, that would otherwise be assessable income of the entity, the payment or non-cash benefit will not be assessable income and will not be exempt income if the following conditions are satisfied:

(a) the payment has been made or the benefit provided directly as a result of the bushfires commencing in Australia in the 2019-20 financial year; and

(b) the purpose of the payment or benefit is to provide the entity with relief from, or assist the entity in recovering from, the effects of the bushfires; and

(c) the payment is made, or the benefit is provided, by:

(i) the Commonwealth; or

(ii) a State or Territory; or

(iii) a municipal corporation; or

(iv) a *local governing body. [11]

Subsection 59-60(2) also provides that payments or non-cash benefits will not be assessable income and will not be exempt income if the payments or non-cash benefits are made to an entity if the payments or benefits:

i.           relate to the bushfires commencing in Australia in the year ended 30 June 2020, and

j.           are of a kind prescribed by the regulations for the purposes of subsection 59-60(2).[12]

The Explanatory Memorandum to Treasury Laws Amendment (2019-20 Bushfire Tax Assistance) Bill 2020 (the EM), which introduced section 59-60, makes it clear that subsections 59-60(a) and (b) require for the purpose of the payment or benefit is to provide the recipient entity with relief, or assist with the recovery from, the bushfires commencing in Australia in the year ended 30 June 2020. Moreover, the EM states that the payment of benefit must be a direct result of these bushfires.

Specifically, paragraph 1.22 of the EM provides that an example of payments with the purpose of providing an entity with relief, or recovery, from the bushfires 2019-20 would include Disaster Recovery Assistance for which an entity is eligible as direct result of those bushfires. The EM explains that the purpose of this is to ensure that the tax relief is available in relation to relief and recovery payments provided to entities who were affected by the 2019-20 bushfires.

The EM also states that payments or benefits provided on commercial terms, such as payments received through the carrying on of a business, would be excluded from the purpose of obtaining relief or recovery from the bushfires.[13]

Subsection 59-60(3) then provides that the section does not apply to the following:

k.         a payment or benefit made to an individual in their capacity as an employee or contractor (including a payment of an entitlement to paid leave)

l.           workers' compensation payments, or

m.        compensation or damages payments made to an entity as a result of an order of a court or tribunal or settlement of a claim.

Application to your circumstances:

In order to determine whether the Grant funding received by the Entity is not assessable income and not exempt income, it is necessary to consider whether the conditions in subsection 59-60(1) have been satisfied. Broadly, these conditions that the Entity must satisfy are that:

n.         the amount received by the Entity was directly as a result of the 2019-20 bushfires (paragraph 59-60(1)(a))

o.         the purpose of the payment is to provide the Entity with relief from, or assist the Entity with recovery from, the effects of the bushfires, and (paragraph 59-60(1)(b)), and

p.         the amount was paid to the Entity by either a Commonwealth, State, municipal corporation or local governing body (paragraph 59-60(1)(c)).

The Guidelines explain the purpose of the funding grants are to stimulate economic growth and building economic resilience to the regions affected by the 2019-20 bushfires. Due to the fact that the Entity received the funding through the Economic Stimulus Grant, which is available to regions affected by the 2019-20 bushfires, paragraph 59-60(1)(a) is satisfied. As the Grant is provided by both Commonwealth and the State Government, paragraph 59-60(1)(c) is also satisfied.

Although the funding may assist the Entity's cashflow and may even enable it to deliver the Project earlier than had it not received the funds, the purpose of the funding is not to provide the Entity with relief or recovery from the bushfires as is necessary in paragraph 59-60(1)(b). Rather, the Guidelines detail that the primary objectives for the provision of grant funding include, among other things, to:

q.         increase economic and social benefits through investments

r.          increase employment, particularly for the Aboriginal community, with a focus on tourism

s.         increase and restore visitor confidence in the region

t.          protect and enhance Aboriginal culture, and

u.         address a need of the communities that has arisen due to the 2019-20 bushfires.

As such, the Guidelines demonstrate that this Grant funding is not aimed at providing the recipient entities with relief, or assistance with recovery, from the 2019-20 bushfires as is required in paragraph 59-60(1)(b). Rather, the purpose of this Grant funding to the Entity is to provide broader regional relief and recovery from the bushfires in the form of economic benefits to the region as a whole, such as restoring tourism and increasing employment, particularly of the Aboriginal community.

Also demonstrating that the purpose of the Grant funding is not to provide direct assistance to the Entity with its recovery, or assist with relief, from the 2019-20 bushfires is the Grant Agreement. The Grant Agreement makes it clear that the Project, and therefore associated payments, are to assist the Entity with the construction of its facilities rather than enable the Entity to gain relief or recovery from the bushfire. The Agreement also outlines the outcomes expected from the Project are for the broader economic benefit of the region, including such things as increasing employment and education opportunities, increasing the number of visitors to the region and increased economic flow-on benefits.

In conclusion, as the payments are not directly made to the Entity to assist it with recovery, or relief, from the 2019-20 bushfires, the Trust does not satisfy paragraph 59-60(1)(b).

As the Entity does not satisfy paragraph 59-60(1)(b), it is not necessary to consider the other conditions of subsections 59-60(2) and (3). As a result, the grant income receivable by the Entity under the Economic Stimulus Grant is not non-assessable and non-exempt income pursuant to section 59-60.

Question 2

Does the Commissioner agree that where section 59-60 of the ITAA 1997 does not apply, section 6-5 should apply to grant payments in relation to the Grant Agreement?

Application to your circumstances

For the reasons detailed in Question 1 above, where section 59-60 does not apply to the payments made under the Grant Agreement, these amounts are ordinary income and are assessable to the Entity the pursuant to section 6-5.

[1]https://recovery.gov.au/sites/default/files/files/FAQs%20Funding%20for%20bushfire%20recovery%20projects%20as%20at%2030%20June%202021(1).pdf

[2] www.recovery.gov.au

[3] https://www.vic.gov.au/local-economic-recovery-program-bushfire-affected-communities.

[4] all future references to the legislation are to the Income Tax Assessment Act 1997, unless otherwise stated.

[5] 35 SR (NSW) 215

[6] 86 CLR 540; 10 ATD 82.

[7] 8 ATD 419.

[8] 93 ATC 4037; (1993) 111 ALR 716 at ATC 4047; ALR 730.

[9] 163 CLR 199.

[10] See also example 8A at paragraphs 54A to 54C of Taxation Ruling TR 2006/3 Income Tax: government payments to industry to assist entities (including individuals) to continue, commence or cease business.

[11] The Note to this subsection provides that payments covered by the subsection would include Disaster Recovery Allowance paid under the Social Security Act 1991 and payments made under disaster recovery funding arrangements made by or on behalf of the Commonwealth.

[12] As of the date of this ruling, there are no regulations for the purposes of subsection 59-60(2) of the Income Tax Assessment Act 1997.

[13] Paragraph 1.23 of The Explanatory Memorandum to Treasury Laws Amendment (2019-20 Bushfire Tax Assistance) Bill 2020.