ATO ID 2004/937: Assessability of payments made by a government authority under a capital support fund
Date of decision: 05 November 2004
Year of income: Year ended 30 June 2005 Year ended 30 June 2006 Year ended 30 June 2007 Year ended 30 June 2008 Year ended 30 June 2009 Year ended 30 June 2010
Business line: Private Groups and High Wealth Individuals

Issue
Are payments received by the taxpayer from the relevant government authority under a capital support fund program assessable under section 15-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
Yes. Payments received by the taxpayer from the relevant government authority under the capital support fund program are assessable under section 15-10 of the ITAA 1997.

Facts
The taxpayer is carrying on a business. The taxpayer entered into an agreement with the relevant government authority for funding under a capital support fund. The capital support fund is an initiative of the government to assist with the capital cost of certain projects. The government has allocated certain amounts to the fund for this purpose. The project proposed by the taxpayer involves a certain project. The agreement between the taxpayer and the government authority provides for payments to be made to the taxpayer at the completion of specific milestones set out in the agreement. A number of milestone payments are made to the taxpayer as per the agreement. These milestone payments are calculated on a percentage basis of the total capital cost of the projects.

Reasons for decision
Summary: Section 15-10 of the ITAA 1997 includes in assessable income amounts received as a bounty or subsidy in relation to the carrying on of a business where that amount is not assessable as ordinary income under section 6-5 of the ITAA 1997. A bounty or subsidy includes a grant and other financial assistance provided by government to assist businesses ( The Squatting Investment Co Ltd v Federal Commissioner of Taxation (1953) 86 CLR 570; (1953) 10 ATD 126; (1953) 5 AITR 496). The payments received from the relevant government authority under the program are in the nature of a bounty or subsidy as they are payments made by the government that are designed to assist with the capital costs of establishing certain infrastructure. 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, and the payment is directed to the income earning activity of the business ( First Provincial Building Society Ltd v Commissioner of Taxation (1995) 56 FCR 320; 95 ATC 4145; (1995) 30 ATR 207) ( First Provincial) . In First Provincial , the Full Federal Court held that, as the payment there assisted the taxpayer to continue to carry on the taxpayer's business activities, it was made in relation to the carrying on of its business, although it lacked the necessary connection with the taxpayer's business activities to constitute ordinary income. The payments made by the relevant government authority under the capital support fund are received in relation to carrying on a business as they are made to assist the taxpayer to carry on a business involving the establishment of certain infrastructure. The payments are not assessable as ordinary income under section 6-5 of the ITAA 1997, as they are capital in nature. In GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124; 90 ATC 4413; (1990) 21 ATR 1 the High Court commented on the characterisation of a subsidy that is intended to assist the recipient with capital costs, saying that such receipts would be capital in nature. The court stated at CLR 124; ATC 4422; ATR 10 that: ...it is necessary to consider the taxpayer's submission that the cases show that a receipt of moneys intended by payer and payee to recoup a recipient's capital expenditure is a receipt of a capital nature. That proposition can be accepted when the amount is received by way of gift or subsidy to replenish or augment the payee's capital, for in such a case the receipt cannot fairly be said to be a product or incident of the payee's income-producing activity. The payments received by the taxpayer from the relevant government authority under the capital support fund will therefore be capital and thus are not ordinary income under section 6-5 of the ITAA 1997 and are bounties or subsidies received in relation to carrying on a business. The payments are therefore included in the taxpayer's assessable income under section 15-10 of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 section 15-10 section 6-5
Case references: The Squatting Investment Co Ltd v Federal Commissioner of Taxation (1953) 86 CLR 570 (1953) 10 ATD 126 (1953) 5 AITR 496
Subject references: Government grants income Income