Private ruling: Primary Care Infrastructure Grant
Published: January 2013
Ruling period: 1 July 2011 to 30 June 2013
Date scheme commenced: 4 August 2011

Ruling: Q1: Is the Grant paid by the government considered assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Is the Grant paid by the government out considered assessable income under section 15-10 of the ITAA 1997? | A2: Yes | Q3: Is the Grant paid by the government considered assessable under the capital gains tax (CGT) provisions of the ITAA 1997? | A3: No

Relevant facts and circumstances: You are the corporate trustee of a trust operating a business. You applied for, and were successful in, receiving a Grant from the Australian government. The Funding Agreement (Agreement) between the Commonwealth of Australia and you was signed during the 2011 income year. Both the commencement date for the works, as per an undated Deed of Variation, and the Practical Completion date were during the 2012 income year. The original Agreement shows that first payment was due to be made, within 14 days of execution of the Agreement. A second payment was due to be made later during the 2011 income year and the final payment was due to be made during the 2012 income year. However, as a result of the Deed of Variation, the payments were actually made at later dates. The Grant Guidelines provide that the works and facility must be continued to be used for the designated use for a designated period of two years. As a result of the capital works funded under the Grant, you have entered into a lease, to lease the new facility from completion for a period of two years, with an option to renew of a further two years.

Relevant legislative provisions: Section 6-5 Income Tax Assessment Act 1997 | Section 15-10 Income Tax Assessment Act 1997 | Section 104-25 Income Tax Assessment Act 1997 | Section 104-35 Income Tax Assessment Act 1997 | Section 118-20 Income Tax Assessment Act 1997

Reasons for decision: Summary: The Grant received is not assessable under section 6-5 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Section 6-5 of the ITAA 1997 considers the treatment of income according to ordinary concepts. It states: 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. 6-5(3) If you are a foreign resident…………. 6-5(4) In working out whether you have derived an amount of ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct. The legislation does not define 'income according to ordinary concepts'. However, there exists a considerable body of case law which identifies factors indicating the nature of ordinary income. Periodicity, recurrence or regularity is some of the main determinants of ordinary income. Whilst the Grant funding is made up of more than one lump sum payment, the recurrence of the three payments, which form the total Grant payment, is dependant upon very specific milestones in the Agreement and not upon the day to day business activities of the medical practice. In view of this, the Grant funding received is not considered to be ordinary income, and therefore not assessable under section 6-5 of the ITAA 1997. | Summary: The Grant received is assessable under section 15-10 of the ITAA 1997 as a bounty or subsidy. | Detailed Reasoning - Detailed reasoning: Section 15-10 of the ITAA 1997 states: 15-10 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. Given the decisions in Squatting Investments Co Ltd v. Federal Commissioner of Taxation (1953) 86 CLR 570; (1953) 10 ATD 126; (1953) 5 AITR 496 Reckitt and Colman Pty Ltd v. FC of T (1974) 74 ATC 4185; (1974) 4 ATR 501 and in First Provincial Building Society Ltd v. Commissioner of Taxation (1995) 56 FCR 320; 95 ATC 4145; (1995) 30 ATR 207 ( First Provincial Case ) it is now well accepted that a 'subsidy' includes a financial grant made by the government. In looking at the meaning of the phrase ' in relation to the carrying on of a business' Hill J stated in the First Provincial Case that: ...the relationship must be to the "carrying on" of the business. These words may perhaps be understood in opposition to a relationship with the actual business itself. They would make it clear, for example that a bounty received, merely in relation to the commencement of a business or the cessation of the business, would not be caught. The expression "carrying on of the business" looks, in my opinion, to the activities of that business which are directed towards the gaining or producing of assessable income, rather than merely to the business itself. Therefore it is not sufficient that the payment be received in relation to the business, but rather it must be in relation to the 'carrying on' of that business. The Grant payments were made to you by the Commonwealth to assist you to expand and upgrade your facilities to benefit the local community. It is a payment made in relation to the ongoing business of the trust, and not in relation to the cessation of one business and/or the commencement of another business. Therefore the funding is a subsidy within the meaning of section 15-10 of the ITAA 1997 and is assessable as statutory income. Taxation Ruling TR 2006/3 (TR 2006/3) provides some guidance on when a government grant (in this particular case a Government Payment to Industry) is assessable. Its states at paragraph 23: Conditional grants 23. Government financial assistance to business is sometimes provided on terms where the amount must be repaid unless the recipient meets agreed conditions within a specified period. The grant becomes unconditional when the recipient satisfies the required conditions of the agreement with the funding authority. It is at this time that a GPI is taken to be received, not at the time the conditional grant was paid. In accordance with the Grant Guidelines, there are some conditions placed on the funding, with the predominant condition being that the capital works created as a result of the funding must continue to be utilised for the delivery of the new expanded services for a period of 2 years. However, the only requirement for funds to be returned to the Commonwealth according to the Guidelines is at paragraph 2.4, Conditions of Funding, where it states: Funds unused and identified through audit processes at the end of an agreement must be returned to the Commonwealth. There is no mention in either the Guidelines or the Agreement of a requirement to refund funding to the Commonwealth if there is a breach of the Designated Use or the Designated Use Period. To the extent that the Grant is therefore not considered 'conditional' it is assessable on receipt. You will therefore be required to return the amount of the Grant paid to you in the relevant income years. | Summary: The Grant received is not assessable under any of the capital gains tax (CGT) provisions of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Under the Grant Program, the Commonwealth created a right in the trust to receive a payment/s under the Program. CGT event D1 (section 104-35 ITAA 1997) happened when you acquired the right to the payment and subsequently CGT event C2 (section 104-25 ITAA 1997) happened when the payment/s were actually received. You may have made either a capital gain or a capital loss from the CGT event C2 happening. However, section 188-20 of the ITAA 1997 states: 118-20 Reducing capital gains if amount otherwise assessable 118-20(1) A capital gain you make from a CGT event is reduced if, because of the event, a provision of this Act (outside of this Part) includes an amount (for any income year) in: (a) your assessable income or exempt income; or (b) …… As the Grant payment is considered to be a subsidy under section 15-10 of the ITAA 1997, subsection 118-20(1) of the ITAA 1997 applies to exclude that amount from being assessed under the provisions relating to capital gains.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.