Private ruling: Income tax - Assessable income - Income vs capital
Published: June 2015
Ruling period: Year ended 30 June 2013 | Year ended 30 June 2014
Date scheme commenced: 1 July 2012

Ruling: Q1: Are the grant monies (Funding) provided by the Commonwealth of Australia (as represented by X under a program (Program) to company A (you) assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q3: (a) Did CGT event C2 in section 104-25 of the ITAA 1997 happen to you when you received payments upon the completion of several milestones as stated in the agreement (Agreement) between Commonwealth of Australia as represented by X and you? (b) If yes, will any capital gains made by you from the CGT event C2 be disregarded under paragraph 118-37(2)(a) of the ITAA 1997? | A2: (a) Yes. (b) Yes. | Q4: Is the Funding provided to you assessable as a recoupment under Subdivision 20-A of the ITAA 1997? | A3: No.

Relevant facts and circumstances: You were approved by the Commonwealth to receive funding to assist with the development of an a Centre at a property (Property). You entered into an agreement, in respect of the funding, with the Commonwealth of Australia as represented X under the Program. The Program Guidelines (Guidelines) form part of the facts of this ruling. In part, it provides the following: • In the 2009-10 Federal Budget, $ billion was provided under the Y Fund for major health infrastructure projects. • This funding included $ billion for national infrastructure projects. • The aim of the Centres initiative is to help improve access and support for patients in rural, regional and remote Australia, and to help close the gap in outcomes between the city and the country. The Agreement forms part of the facts of this ruling. In part, it provides the following: • The Agreement provides that the Commonwealth is to provide the Funds to you to carry out the project specified in the agreement, and in particular, to assist with the purchase of the Property and the construction of a Centre on that Property. • The Agreement provides that during the Designated Use Period you must not use the Property other than for the Designated Use of the agreement, without first obtaining the written consent of the Commonwealth. • The Agreement provides that the Project consists of: (a) the purchase of the Property by you; (b) the construction of a Centre on the Property; and (c) the upgrade of the existing centre to support the Centre on the Property to achieve the Program Objectives. • The Agreement provides that the Designated Use Period is the period commencing on the date that you achieve Practical Completion of the Works and expiring twenty (20) years after that date. • The Agreement provides that the Designated Use is the provision of service with the Centre to provide services to the surrounding communities with support from the existing centre that operates in a way that best achieves the Project Aim and Program Objective. • The Agreement provides that the maximum amount of Funds payable by the Commonwealth under the Agreement will be payable upon certain milestones which occur in the relevant years. • The Agreement provides that you must contribute to the Project and company B must contribute for the furniture, fittings and equipment installed and commissioned. You used the Funding for the purpose of undertaking capital works to the Property. You did not use the Funding to upgrade the existing centre. You did not use the Funding for the purchase of the Property or plant or equipment. Although the Agreement provides that the Commonwealth is to providing the funds to you to assist with the purchase of the Property, X insisted that you purchased the Property with your own funds. The Project was undertaken in accordance with the Guidelines and Agreement on all other aspects of the Project. You lease the centre which was built on the Property to an associated entity - company B, which operates the centre business in accordance with the requirements under the Guidelines and the Agreement. You do not have any involvement in the running of the centre post construction. As lessor of centre on the Property, you will have just one lease in place with the operator of the centre. You have not previously undertaken any property development activities of this nature. You operate an existing centre.

Relevant legislative provisions: Income Tax Assessment Act 1997 , Section 6-5 | Income Tax Assessment Act 1997 , Section 6-10 | Income Tax Assessment Act 1997 , Section 10-5 | Income Tax Assessment Act 1997 , Section 15-10 | Income Tax Assessment Act 1997 , Subdivision 20-A | Income Tax Assessment Act 1997 , Subsection 20-20(3) | Income Tax Assessment Act 1997 , Section 20-30 | Income Tax Assessment Act 1997 , Division 43 | Income Tax Assessment Act 1997 , Section 104-25 | Income Tax Assessment Act 1997 , Subsection 110-45(3) | Income Tax Assessment Act 1997 , Paragraph 118-37(2)(a)

Reasons for decision: Summary: A payment or other benefit received by a taxpayer is included in their assessable income if it is income according to ordinary concepts. Section 6-5 states, in part: 6-5(1) Your assessable income includes income according to ordinary concepts, which is called ordinary income. 6-5(2) If you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Although the expression 'income according to ordinary concepts' is not defined in the ITAA 1997, there is a substantial body of case law from which a number of factors have been drawn to determine whether an amount has the character of income according to ordinary concepts. ATO policy concerning government payments to industry is set out 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). At paragraph 84, it provides that ordinary income generally falls within three categories: • Income from providing personal services, • Income from property, or • Income from carrying on a business. Further, paragraph 85 of TR 2006/3 lists guidelines established from case law which are of assistance in determining the nature of a receipt. A frequent characteristic of income receipts is an element of periodicity, recurrence or regularity, even if the receipts are not received in relation to the carrying on of the daily business activities. However, the proceeds of an isolated transaction which is not in the ordinary course of business, even if received as a lump sum, may be income according to ordinary concepts if the purpose of the transaction is to make a profit. This view is supported by ATO Interpretative Decision ATO ID 2003/902 Income Tax General Practitioner (GP) Links Amalgamation Incentive Payments: whether ordinary income which cited the same reasoning in finding that General Practitioner (GP) Links Amalgamation Incentive Payments grant paid in two instalments to a medical practitioner by the Commonwealth was not assessable under section 6-5. The payments were not received in relation to the carrying on of the daily business activities of the medical practice, but rather in relation to the structure of the entity that conducts the business, and the transactions had not been entered into by the medical practitioner with a view to making a profit. | Detailed Reasoning - Application to your circumstances: The Funding received by you does not constitute ordinary income. Whilst the Funding has been paid in separate instalments it does not possess the necessary elements of periodicity, recurrence or regularity that are common to receipts of ordinary income. Further, in terms of TR 2006/3, the funding does not constitute income from the provision of personal services; is not sourced from property; and has not been derived either directly from your usual business activities in relation to the existing business activity of the existing centre or from the actual operation of the centre from the Property. | Detailed Reasoning - Question 2: Section 6-10 states that your assessable income includes some amounts that are not 'ordinary income'. These amounts are 'statutory income'. Section 10-5 contains a summary list of the provisions which include amounts in your assessable income that are not ordinary income. One of the statutory income provisions listed in section 10-5 is section 15-10, which deals with the treatment of bounties and subsidies. Section 15-10 provides that: Your assessable income includes a bounty or subsidy that: (a) you receive in relation to carrying on a business; and (b) is not assessable as ordinary income under section 6-5. In determining the correct treatment of the Funding it needs to be considered whether the Funding constitutes a bounty or subsidy that has been received 'in relation to carrying on a business'. | Detailed Reasoning - Bounty or Subsidy: Payments of financial assistance by government are commonly referred to as 'bounties', 'subsidies' or 'grants'. As 'bounty', 'subsidy' and 'grant' are not defined terms, the ordinary meaning of these terms applies. (Paragraph 93 of TR 2006/3) 'Subsidy' is defined as a direct pecuniary aid furnished by a government to a private industrial undertaking, a cultural organisation, or the like, or a grant or contribution of money. The ordinary meaning adopted by case law is an aid provided by the Crown [government] to foster or further some undertaking or industry. (Paragraph 94 of TR 2006/3) 'Bounty' is defined to include 'a premium or reward, especially one offered by a government'. When 'bounty' and 'subsidy' are positioned together the compound term is interpreted as describing financial assistance given to assist business. (Paragraph 95 of TR 2006/3) Carrying on a business Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11) provides the Commissioner's views on what constitutes 'the carrying on of a business'. Paragraph 13 of TR 97/11 provides that the courts have held that the following indicators are relevant: • whether the activity has a significant commercial purpose or character; • whether the taxpayer has more than just an intention to engage in business; • whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity; • whether there is repetition and regularity of the activity; • whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business; • whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit; • the size, scale and permanency of the activity; and • whether the activity is better described as a hobby, a form of recreation or a sporting activity. In considering these indicators against the facts of each case the Commissioner recognises that no one indicator is conclusive. The determination of the question is generally the result of a process of weighing all the relevant indicators. | Detailed Reasoning - In relation to carrying on a business: 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 includes within its scope payments that have a direct or indirect connection to the business (Paragraph 100 of TR 2006/3). The bounty or subsidy must relate to the activities of the business which are directed towards the gaining or producing of assessable income rather than merely to the business itself, and thus not merely to the commencement or cessation of it ( First Provincial Building Society Ltd v. FC of T (1995) 128 ALR 118; (1995) 95 ATC 4145; (1995) 30 ATR 207; (1995) 56 FCR 320 ( First Provincial )). (Paragraph 101 of TR 2006/3) Payments made towards the restructuring of business operations with a view to improving overall efficiency are considered to be 'in relation to carrying on a business'. However, some business restructures may not be 'in relation to carrying on a business', for example if a business changes its structure to facilitate a new activity. This is decided on the merits of each case. (Paragraph 102 of TR 2006/3) Government payments 'to commence or cease business' as opposed to 'in relation to carrying on a business' are not considered to be assessable as ordinary income under section 6-5 or as a bounty or subsidy under section 15-10.' (Paragraphs 103 and 128 of TR 2006/3.) Application to your circumstances The Funding received by you is financial assistance given to assist your business to construct a new centre. As such, it is a bounty or subsidy; however the Funding received by you does not constitute an assessable bounty or subsidy. For a bounty or subsidy to be considered assessable under section 15-10 the receipt must be in relation to the carrying on of a business. You received the Funding and used it to construct a new centre. You own the centre but you do not operate the centre business. The business is run by a related entity. Your only activity in relation to the centre is to act in the capacity of lessor of the Property itself and to derive periodical rental payments from the entity that operates the business. You do not own any other rental properties and therefore are not considered to be conducting a business in this regard. Further, your only other business activity is operating the existing centre. You are not involved in any other income earning activities. With regard to the use of the Funding, we find that it has not been used in relation to: • increasing the efficiency of the existing cancer centre business, • the actual carrying on of the new cancer care centre business activity, • the carrying on of a rental property business, or • any other type of business activities. Taking into account the indicators in TR 97/11, as the extent of your activities as a lessor align more readily with the type of activities generally undertaken by an investor, it is clear that you are not carrying on a business in this regard. As you are not carrying on the new centre business or a business of leasing properties, any receipts in relation to the Funding are not assessed under section 15-10 as bounties or subsidies. | Detailed Reasoning - Question 3: (a) Section 104-25 deals with cancellation, surrender and similar endings to CGT assets: CGT event C2. A CGT event C2 occurs when the ownership of an intangible CGT asset ends by the asset in a number of ways including being released, discharged or satisfied. This would occur when a taxpayer's rights under an agreement come to an end - generally at the time the taxpayer's obligations have been discharged and the taxpayer receives a payment. A capital gain occurs if the capital proceeds from the ending of the rights are more than the asset's cost base | Detailed Reasoning - Application to your circumstances: CGT event C2 in section 104-25 happened to you when you received payments upon the completion of several milestones as stated in the Agreement Under the Program, the X created rights in you to receive payments upon the completion of several milestones as stated in the Agreement. These rights were satisfied for the purposes of CGT event C2 when the X made the payments to you. As such, CGT event C2 happened to you. If the Funding paid to you exceeded the cost base of the rights, you made a capital gain equal to the difference between the Funding to you and the cost base of the rights | Detailed Reasoning - (b): Paragraph 118-37(2)(a) provides, in part, that a capital gain may be disregarded if you make it as a result of receiving a payment as reimbursement or payment of your expenses under a scheme established by an Australian government agency or local governing body under an enactment or an instrument of a legislative character. In relation to this paragraph, the Revised Explanatory Memorandum (EM) in relation to the Tax Laws Amendment (2006 Measures No. 3) Act 2006 provides that the requirement that 'the scheme be established under an enactment or an instrument of a legislative character' would be satisfied where the scheme is established that way either expressly or by necessary implication. An enactment would include an Appropriation Act (or equivalent) having regard to associated documentation such as budget papers. An instrument of a legislative character would include regulations (and similar instruments) and local government by-laws. | Detailed Reasoning - Application to your circumstances: Any capital gain made by you from the C2 CGT event will be disregarded at the time of the receipt of the Funding. The introduction to the Guidelines states that the Funding was announced by the Australian Government in the 2008-09 Federal Budget. The Commonwealth administers the program via X. We find that the Health and Hospital Fund constitutes a scheme established by an Australian government agency, namely the X, and it is a payment received as reimbursement or payment of expenses incurred in relation to the scheme. Therefore, any capital gain made by you from the CGT event C2 will be disregarded under paragraph 118-37(2)(a). | Detailed Reasoning - Question 4: A recoupment of a loss or outgoing includes any kind of reimbursement and it also includes a grant in respect of a loss or outgoing. Paragraph 137 of TR 2006/3 explains that an amount will be an assessable recoupment to the extent it is not ordinary income or otherwise assessable, and it is received as a recoupment of a deductible loss or outgoing by way of insurance or indemnity, or otherwise as a recoupment of a deductible loss or outgoing listed in the table in section 20-30. Division 43, in relation to capital works, is not included in the table in section 20-30. | Detailed Reasoning - Application to your circumstances: You advise that the Funding you received has been spent solely on undertaking capital works to the Property which are classified as Division 43 capital works. For an amount to be considered as an assessable recoupment, subsection 20-20(3) requires that the expenditure be incurred and then a corresponding deduction be claimed under one of the provisions listed in the table provided under section 20-30. As Division 43 is not listed in that table, it follows that this particular Program funding stream is not subject to the Subdivision 20-A assessable recoupment provisions. As such, the Funding provided to you is not assessable as a recoupment.

Is the Funding provided to you assessable as a bounty or subsidy under section 15-10 of the ITAA 1997? | Reasons for decision: Note, unless otherwise stated all subsequent legislative references pertain to the ITAA 1997.