Private ruling: A government grant
Published: June 2014
Ruling period: Year ending 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 1 July 2012

Ruling: Q1: Are the government grant payments and co-contributions assessable as ordinary income? | A1: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 6-15 | Income Tax Assessment Act 1936 Section 21A

Reasons for decision: Summary: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business. Other characteristics of income that have evolved from case law include receipts that: • are earned • are expected • are relied upon, and • have an element of periodicity, recurrence or regularity. A payment paid in consideration for the performance of services is generally income as highlighted in Hayes v FCT (1956) 96 CLR 47, 111 ALF 716. The Commissioner's view on the assessability of government payments to industry are 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 . As outlined in paragraph 12 of TR 2006/3, a government payment to industry to assist with business operating costs or liabilities is ordinary income in the hands of the recipient and is assessable under section 6-5 of the ITAA 1997. The grant is paid by the Department for the purposes of the economic development. Entity A entered into the agreement on the basis that they will carry out the project requirements and were successful in obtaining the grant. The grant instalments provided by the Department to Entity A is to help fund the implementation of the project as outlined in the project business plan. This indicates that the activity is part of the business of the company. The company is providing services and skills to meet the requirements under the agreement. The grant instalments are conditional upon the Department being satisfied that the relevant requirements are met. The payments received as outlined in the grant agreement are earned by Entity A in carrying out the project. The payments are earned, as the company has to undertake the project to receive the payments, and the payments are also expected and relied upon as the company had to apply for the grant. The payment also has an element of periodicity, recurrence or regularity, in respect that the payments are paid in instalments at the start, during and at the end of the project. The Department also has the discretion to withhold, suspend, cancel or terminate any payment or payments due if the relevant conditions are not satisfied. The grant instalments are to assist with business operating costs and are ordinary income in the hands of the company and are assessable under section 6-5 of the ITAA 1997. Similarly, the cash co-contributions are regarded as ordinary assessable income under section 6-5 of the ITAA 1997. Section 21A of the Income Tax Assessment Act 1936 provides that any non-cash business benefit is to be treated as convertible to cash for the purpose of determining the income of a taxpayer from the carrying on of a business. Non-cash business benefit is defined in subsection 21A(5) to include property and services provided in respect of a business relationship. Therefore the in-kind contributions are also regarded as assessable income. Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income, it is not assessable income. The payments made under the project are not made exempt from income tax by any provision in the legislation.

Relevant facts: The arrangement that is the subject of the Ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are: | • the application for private ruling including the Grant Agreement. | Entity A has been provided with a grant from the government (the Department). | The grant is for a project. | The grant is received providing other entities provide contributions to complete the project. | There is a set amount that must be spent as project expenditure. | The Department will advance the grant amount in instalments. | Entity A must provide to the Department reports at the times specified in the grant details including six monthly project reports. | Entity A must spend not less than a specified amount of project expenditure as outlined in the project business plan. | Entity A must ensure cash and in-kind co-contributions are contributed to the project.