Private ruling: Grant income and the derivation of assessable income
Date of advice: 28 June 2018
Published: September 2018
Ruling period: 30 June 2014 | 30 June 2015
Date scheme commenced: 1 July 2013

Ruling: Q1: Will the grant be assessable in the 201X income year? | A1: Yes

Relevant facts and circumstances: You, being X were the recipient of a grant. The grant awarded to you was received in the 20XX income year (the grant). At the time of receiving the grant, you were not carrying on a business and the grant did not require you to conduct a business. It was a condition of the grant that you would use the funding during the 20XX income year to develop a concert and narration and provide performances. Most of the grant funding was used to meet performer, technical and equipment expenses. The remaining income after allowing for these expenses was used by you to promote and stage the concert and translate and publish the work.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5

Reasons for decision: Summary: The grant you have received is ordinary income and is assessable in the 20XX income year. | Detailed Reasoning - Detailed reasoning: Ordinary income as part of your assessable income 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 of the Income Tax Assessment Act 1997 (ITAA 1997) 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, the characteristics of ordinary income have been developed by case law and generally fall into three categories: ● Income from providing personal services; ● Income from property; or ● Income from carrying on a business A payment paid in consideration for the performance of services is generally income. Australian tax law generally requires the gross earnings or proceeds of a business, and not the gross profit, to be included in assessable income. Amounts received from transactions carried out in the ordinary course of business are income. When is income derived? An amount (including an amount which has been received), will not be included in assessable income for an income year, unless it has been derived during that year. The term ‘derive’, is defined in section 995-1(1) of the ITAA 1997 as having a meaning affected by subsection 6-5(4) of the ITAA 1997. Under subsection 6-5(4), a recipient is taken to have derived an amount as soon as it is applied or dealt with in any way on their behalf or as they direct. In Arthur Murray (NSW) Pty Ltd v FC of T (1965) 114 CLR 314 (Arthur Murray’s case), the High Court affirmed the proposition that in relation to the question of when income should be judged to have been derived, it was appropriate to have regard to the application of ordinary business and commercial principles. Barwick CJ and Kitto and Taylor JJ said in Arthur Murray case: “As Dixon J observed in Carden’s case: Speaking generally, in the assessment of income the object is to discover what gains have during the period of account come home to the taxpayer in a realised or realisable form”. In Arthur Murray case, the High Court treated the prepaid dance lessons not yet delivered as not being derived income at that time due to the following: “Thus in determining whether in such a case actual receipt had to be added to earning in order to find income, uncertainty of receipt, inherent in the circumstances of the earning appeared to his Honour to be decisive. Likewise, as it seems to us, in determining whether actual earning has to be added to receipt in order to find income, the answer must be given in the light of the necessity for earning which is inherent in the circumstances of the receipt”. | Detailed Reasoning - Application to your circumstances: In your case you received funding to deliver a project and provide a service. As you were an Australian resident, the funding provided is considered ordinary income and therefore assessable under section 6-5 of the ITAA 1997. The grant was derived in the 20XX income year, as it was a condition of the funding that you commence the project in the 20XX income year and by merely accepting the grant in early 20XX, you had not applied or undertook any activities to earn the grant amount prepaid to you. In fact, if you didn’t complete the activities in accordance with the grant conditions and milestones, you would be required to return the grant funding.