Private ruling: Subsidy; assessable recoupment
Date of advice: 11 July 2019
Published: September 2019
Ruling period: For income year ended 30 June 20xx | For income year ended 30 June 20yy

Ruling: Q1: Are the payments received by the Entity from a government agency an assessable recoupment under section 20-20 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. The payments are assessable as a subsidy or bounty under section 15-10 of the ITAA 1997, and therefore excluded from being an assessable recoupment pursuant to subsection 20-20(1) of the ITAA 1997. | Q2: Are the payments received by the Entity from a government agency assessable as a subsidy or bounty under section 15-10 of the Income Tax Assessment Act 1997 ? | A2: Yes. | Q3: Does the table of deductions in subsection 20-30(1) of the ITAA 1997 for which recoupments are assessable include deductions claimed for building improvements pursuant to Division 43 of the ITAA 1997? | A3: In light of the Answer to Question 1, this Question does not need to be addressed.

Relevant facts and circumstances: The Entity operates a medical centre. It provides general practitioner services to the local community. The Entity received a grant from a government agency totalling $xxxx. The funds from the grant are to be used to fund certain building improvements which includes additional rooms and installation of equipment. The funding for these improvements was undertaken with the aim of providing additional space to enable the Entity to improve or increase the level of health services delivered to the local community. It will also enable the Entity to increase its levels of training for health practitioners by taking on an increased number of health professional training placements. The Entity has entered into an agreement with the government agency. The Entity is required to comply with a number of conditions in the agreement. Under the terms of the agreement, the Entity will receive the grant payments upon its achievement of milestones in accordance with the scheduled timeframes. The grant payments are to be paid into the entity's bank account. Further, the entity is required make a contribution of $yyyy towards the cost of the construction and installation of equipment. There are no contributions to be made by any other party. One of the requirements for eligibility of the grant is that the applicant conducts a general medical practice.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 2-10 | Income Tax Assessment Act 1997 section 2-15 | Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 15-10 | Income Tax Assessment Act 1997 subsection 20-20(1) | Income Tax Assessment Act 1997 subsection 20-20(2) | Income Tax Assessment Act 1997 subsection 20-20(3) | Income Tax Assessment Act 1997 subsection 20-30 | Income Tax Assessment Act 1997 subsection 20-30(1) | Income Tax Assessment Act 1997 Subdivision 20-A | Income Tax Assessment Act 1997 section 995-1

Reasons for decision: Summary: Under section 20-20 of Subdivision 20-A of the ITAA 1997, an amount received as recoupment of a loss or outgoing will be an assessable recoupment in either of the following circumstances: (1) the amount was received by way of insurance or indemnity and the loss or outgoing was deductible under any provision of the ITAA 1997 or Income Tax Assessment Act 1936 (see subsection 20-20(2)), or (2) the amount was not received by way of insurance or indemnity and the loss or outgoing was deductible under a provision of the ITAA 1997 or Income Tax Assessment Act 1936 listed in section 20-30 (see subsection 20-20(3)). However, under subsection 20-20(1) of the ITAA 1997 an amount is excluded from being an assessable recoupment to the extent that it is ordinary income or is statutory income because of a provisions outside of Subdivision 20-A. Exclusion from Subdivision 20-A - Bounty or subsidy The first issue that needs to be considered is whether the grant payments received by the Entity falls under the exclusion in subsection 20-20(1) because the grant payments are ordinary income or statutory income of the Entity under a provision outside of Subdivision 20-A. The provision outside of Subdivision 20-A which is relevant to this case, is section 15-10 of the ITAA 1997. Section 15-10 is a statutory income provision (see section 10-5) which deals with the treatment of bounties or subsidies. Section 15-10 provides that an amount is included in a taxpayer's assessable income if it is: · a bounty or subsidy; · received in relation to carrying on a business; and · not assessable as ordinary income under section 6-5. The terms 'bounty' and 'subsidy' are not defined in income tax legislation and therefore take its ordinary meaning. The Macquarie Dictionary [Online edition] defines the term 'subsidy' as including 'a grant or contribution of money'. The ordinary meaning adopted by case law is 'aid provided by the Crown (government) to foster or further some undertaking or industry - see Placer Development Ltd v. Cth (1969) 121 CLR 353 at 373. Following the decisions in The Squatting Investment Co Ltd v. Federal Commissioner of Taxation (1953) 86 CLR 570; 10 ATD 126 and Reckitt & Colman Pty Ltd v FC of T 74 ATC 4185 , it is now well accepted that a 'bounty' or 'subsidy' includes a financial grant made by a government. The grant payments received by the Entity is such a bounty or subsidy as it is aid provided by the government to assist in the construction of certain capital works and for the installation of equipment. 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 guidance on the meaning of 'in relation to carrying on a business' in section 15-10 in paragraphs 99 to 101. Paragraph 100 examines the meaning of 'in relation to' and based on the decision in First Provincial First Provincial Building Society Ltd v FC of T (1995) 56 FCR 320; 95 ATC 4145 ( First Provincial ) concludes that the term includes within its scope payments that have a direct or indirect connection to the business As stated by Hill J in at 333: The words 'in relation to' are words of wide import. They are capable of referring to any relationship between the two subject matters, in the present case the receipt of the bounty or subsidy, on the one hand, and the carrying on of the business, on the other... the degree of connection will be 'a matter of judgment on the facts of each case'....What is necessary, at the least, in the present context is that there be a real connection... the relationship need not be direct, it may also be indirect. In O'Grady v. Northern Queensland Company Limited (1990) 169 CLR 356 ( O'Grady) , McHugh J also said at CLR 376: the prepositional phrase "in relation to" is indefinite. But, subject to any contrary indication derived from its context or drafting history, it requires no more than a relationship, whether direct or indirect, between two subject matters (emphasis added) The comments by Hill J in First Provincial and McHugh J in O'Grady make it clear that all that is required for a bounty or subsidy to be received in relation to carrying on a business is that there is 'a relationship' to the carrying on of a business that is not so remote as to be insignificant. It is also clear from the use of the expression 'any relationship' by Hill J and the conclusion that the relationship may be indirect that there is no requirement that the relationship be the dominant or main relationship. The degree of the connection will be a matter of judgement on the facts of each case (see O'Grady (1989-90) 169 CLR 356 at 376). However, a bounty or subsidy to commence or cease a business is not included in assessable income as a bounty or subsidy in relation to carrying on a business under section 15-10 of the ITAA 1997 (see paragraphs 26 and 101 of TR 2006/3). The Entity has not used the grant payments to commence a new business or cease its existing business of carrying on a medical practice (otherwise the Entity would have been ineligible to receive the grant payment). In Plant v FCT (2004) 58 ATR 1070, a taxpayer received a grant which was used to build a much larger workshop. The larger workshop was built in order to enable the taxpayer to expand their business, employ more staff and further develop a product which was in development. One of the conditions of the grant was that the taxpayer was required to spend the grant on a new workshop, spend at least an equivalent amount of their own money on the project, and adhere to certain performance conditions relating to boosting the local economy. The AAT held that the grant constituted a subsidy that was assessable under section 15-10 because it provided financial assistance to aid in the construction of a new workshop which was directly related to the ongoing business. The new workshop formed part of the ongoing business of the taxpayer - the taxpayer did not start up a new business but continued their original business in the new premises. Alternatively, the subsidy was directly related to improving the local economy and indirectly carrying on a business. In the case at hand, the Entity carried on the business of conducting a general medical practice, which provided various health services to the community. The grant payments received by the Entity were used to fund the construction of a building extension which contains additional rooms and associated equipment. It is through these additional facilities that the Entity, as a general medical practice, will deliver health services on an expanded basis, to the local community. It will also enable the Entity to take on an increased number of health professional training placements which will also contribute to the delivery of increased health services by the practice. In light of the above, the grant payments are considered to be a subsidy or bounty that falls within the scope of section 15-10. These payments are directly related to the Entity's carrying on of a business as a general medical practice as they were paid in order to enable the Entity to enhance its capacity to provide health services to the community. Ordinary income - section 6-5 As mentioned earlier, section 15-10 does not apply to payments which are assessable as ordinary income under section 6-5. Ordinary income can be distinguished from capital receipts, which will not constitute income according to ordinary concepts The courts have also identified a number of factors that indicate whether an amount has the character of income: · The receipt is earned, · The receipt is expected, · The receipt is relied upon, · The receipt has an element of periodicity, recurrence or regularity, or · The receipt is for the replacement of income. No single factor is determinative of the receipt's character, but some factors may be more relevant than others in light of the circumstances of the case : Federal Commissioner of Taxation v. Montgomery ( 1999) 198 CLR 639. Further, the High Court in Scott v. Federal Commissioner of Taxation (1966) 117 CLR 514 also stated that the nature of the receipt should be considered in light of the nature of the payment in the hands of the recipient. Relevantly, in G.P. 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. Although the grant payments are made to the Entity periodically, the payments made to the Entity are not ordinary income as they are not a product or incident of the Entity's income producing activity which is the conduct of a general medical practice. Instead, the grant payments were given to augment the capital of the Entity as they were used to construct building improvements from which the Entity will provide its medical services. The grant payments received by the Entity from the government agency are therefore, capital in nature, and thus are not ordinary income under section 6-5 of the ITAA 1997. Consequently, as the grant payments received by the Entity meets all the requirements of section 15-10, they are assessable as bounties or subsidies under section 15-10. As it is concluded, that the grant payments are assessable under section 15-10, subsection 20-20(1) will exclude the grant payments from being an assessable recoupment for the purposes of section 20-20. In Question 1, it was concluded that the grant payments received by the Entity were assessable as a subsidy or bounty under section 15-10. Refer to Question 1 for our reasoning on this issue. It was concluded in Question 1 that the grant payments were excluded from being an assessable recoupment pursuant to subsection 20-20(1) of the ITAA 1997. Consequently, the provisions in section 20-30, which contain a table of deductions for which recoupments are assessable, does not have any application here. However, the following advice is provided about whether a deduction claimed under Division 43 falls into item 1.9 of the table in subsection 20-30(1). Moreover, whether the term ' capital allowances' , which is stated in Column 3 of item 1.9, carries the definition of the term 'capital allowance' in section 995-1 of the ITAA 1997 that includes, amongst others, deductions under Division 43. Subsection 20-20(3) states the following: 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. Therefore, under subsection 20-20(3) a recoupment amount (except an insurance or indemnity) received for a deductible loss or outgoing will be an assessable recoupment, only if the loss or outgoing is deductible under a provision listed in section 20-30. Subsection 20-30(1) sets out in tabular form, the deductible provisions in the Income Tax Assessment Act 1997 for which recoupments are assessable recoupments. Column 2 (headed 'Provision') of the table lists the specific legislative provisions for which a recoupment will be an assessable recoupment. Column 3 (headed 'Description of Expense') provides a description of the expense that relates to the legislative provision, as specified, in Column 2. For example, item 1.3 specifies section 25-5 with an accompanying description of tax-related expenses, item 1.4 specifies section 25-35 with the description of 'bad debts' as the expense. Item 1.9 of the table lists Division 40 (Column 2) with a description of the expense as 'capital allowances' (Column 3). In the Income Tax Assessment Act 1997 , most defined terms are identified by an asterisk appearing at the start of the term (see section 2-10 of the ITAA 1997). These defined terms will be listed in the Dictionary in section 995-1 which will provide the definition or location of that definition. Section 2-15 provides three qualifications to this general rule in section 2-10. These apply where the term occurs in non-operative material, where it occurs more than once in the same subsection, or where the term is one of a number of basic key terms. As the term ' capital allowances' in item 1.9 of the table in subsection 20-30(1) is not an asterisked term and none of the qualifications in section 2-15 apply, it will not carry the definition found in the Dictionary in section 955-1 of the term ' capital allowance '. In the context of subsection 20-20(3) (which refers specifically to a provision listed in section 20-30) and given the table's structure, it is considered that the term 'capital allowances' in Column 3 in item 1.9 is the description of the expense that relates to the legislative provision listed in Column 2 of that same item, which is Division 40. Division 40 deals with capital allowances. Accordingly, under item 1.9 of the table, only recoupments of losses and outgoings that are deductible under Division 40 (not Division 43) can be treated as an assessable recoupment. Division 43 is not one of the provisions listed in the table subsection 20-30(1), and therefore recoupments for deductions claimed under Division 43 will not be an assessable recoupment under subsection 20-20(3).