Private ruling: Assessable income – Government grant
Date of advice: 28 September 2017
Published: February 2018
Ruling period: Year ended 30 June 2015 | Year ended 30 June 2016 | Year ended 30 June 2017
Date scheme commenced: 1 July 2014

Ruling: Q1: Will the Grant paid by the Commonwealth of Australia to Company X under the Grant Agreement be assessable under section 6-5 of the Income Tax Assessment Act 1997 (‘ITAA 1997’)? | A1: No | Q2: Will the Grant paid by the Commonwealth of Australia to Company X under the Grant Agreement be assessable under section 15-10 of the ITAA 1997? | A2: Yes | Q3: Will the Grant paid by the Commonwealth of Australia to Company X under the Grant Agreement be subject to the CGT provisions in Parts 3-1 and 3-3 of the ITAA 1997? | A3: No

Relevant facts and circumstances: Background Company X is in the food manufacturing and processing industry. Company X wanted to grow profits and sought to produce a new line of products. The production of these new products requires certification from a specific regulator in regards to production requirements. The existing plant could not fulfil these requirements. Company X requires a new specialist designed facility to meet the specific production requirements. The new building will allow Company X to manufacture and process the new line of products. Company X also proposes to train new specialist staff at this new facility. The construction of the new building has now been completed. The original manufacturing plant is continuing being used to produce the previous products. A Government Department Grant The Government Grant aims to achieve the objective of encouraging economic growth and jobs in the specific State. The Fund will support new projects that create sustainable business growth and job opportunities that will contribute to the strengthening of the State’s economy. Successful applicants are required to enter into a Grant Agreement with the Government Department, acting on behalf of the Commonwealth. The Grant Agreement shall include the specified terms and conditions prescribed by the Government Grant. Grant Agreement Company X entered into a Grant Agreement (‘ Grant Agreement’ ) with the Commonwealth of Australia. Some of the relevant terms of the Grant Agreement include: The purpose of the Grant is to construct a new plant for manufacturing and processing a new line of products. The new facility will also be used to train specialised staff. The Grant is paid to Company X in a number of instalments. Company X shall provide a progress report to the Commonwealth before each payment. Company X shall provide matching contributions to the Grant. If matching contributions are not provided, then the Commonwealth may suspend payment of the Grant, or terminate the Agreement.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 6-1(1) | 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 Parts 3-1 and 3-3 | Income Tax Assessment Act 1997 Subsection 104-25(1) | Income Tax Assessment Act 1997 Paragraph 104-25(1)(b) | Income Tax Assessment Act 1997 Subsection 104-25(3) | Income Tax Assessment Act 1997 Section 108-5 | Income Tax Assessment Act 1997 Section 118-20

Reasons for decision: Summary: Subsection 6-1(1) of the ITAA 1997 provides that a taxpayer’s assessable income includes ordinary income and statutory income. Section 6-5 of the ITAA 1997 states that your assessable income includes income according to ordinary concepts derived by you as an Australian resident directly or indirectly from all sources, whether in or out of Australia during the income year. Income according to ordinary concepts is not defined in the taxation legislation. 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. Paragraph 85 of Taxation Ruling TR 2006/3 states that case law has established various guidelines to assist in determining the nature of a receipt. Specifically, the guidelines include: ● the nature of a payment is determined by examining the character of the payment in the hands of the recipient, and ● a payment by subsidy to replenish or augment the recipient's capital is not income under ordinary concepts as it is not a product or incident of the recipient's income producing activity. In applying the principles established in relevant cases as referred in TR 2006/3, it is our view that the payments made to Company X under the Grant Agreement are not income under ordinary concepts as it is not a product or incident of Company X’s income producing activity. Instead, the payments are to augment Company X’s capital and are used for upgrading or installing infrastructure. Therefore, the receipt of the payment is capital in nature and is not assessable as ordinary income under section 6-5 of the ITAA 1997. Statutory income pursuant to section 6-10 of the ITAA 1997 is amounts that are not ordinary income but are included in assessable income by other provisions. Many of these provisions are listed in section 10-5 of the ITAA 1997. Relevantly, bounties or subsidies may be included in assessable income under section 15-10 of the ITAA 1997. Section 15-10 of the ITAA 1997 provides that 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. A bounty or subsidy includes a grant and other financial assistance provided by Government to assist business ( The Squatting Investment Co v Federal Commissioner of Taxation (1953) 86 CLR 570; (1953) 10 ATD 126; (1953) 5 AITR 496). Not all government grants are bounties or subsidies for the purposes of section 15-10 of the ITAA 1997. It is essential to determine what the grant is actually for. The question as to the nature and quality of any payment must be determined by reference to the Grant Agreement (i.e. the terms in which Company X received the right to the government grant). Taxation Ruling TR 2006/3 provides the Commissioner’s view on government payments which are paid to assist entities to continue, commence, or cease business. Relevantly, paragraph 19 states that a government payment to industry (‘ GPI ’) received to acquire or construct an asset or to assist with the capital costs of restructuring is assessable income under section 15-10 of the ITAA 1997 if that is an activity in relation to carrying on a business. Paragraph 100 of TR 2006/3 states that a bounty or subsidy will be ‘in relation to’ carrying on a business when there is a real connection (direct or indirect) between the payment and the business. Furthermore, paragraph 102 provides the Commissioner’s view on what constitutes ‘the carrying on of a business’. It states that a GPI received to acquire or construct an asset or assist with the capital costs of restructuring a business to improve the manufacturing, processing, distribution, administrative or other operations of a business is received in relation to carrying on a business. Similarly, a GPI received to assist with the capital costs of restructuring a business and to assist that business to improve its overall efficiency is received in relation to carrying on a business. The Grant Agreement provides that the purpose of the Grant (payable in five instalments) is to help Company X construct a new specialist designed facility. This purpose supports the Government Grant objectives (i.e. funding new projects to create sustainable business growth and job opportunities that contribute to the strengthening of the State’s economy). Accordingly, the payment to Company X under the Grant Agreement was to assist with its capital costs of constructing a new plant and acquiring new equipment to grow its business. The project relates to its business expansion of manufacturing a new line of products and training new qualified staff, which are extensions to the current products Company X are manufacturing. Therefore, the Grant is not a payment to commence a new business. It relates to the continuation and expansion of Company X’s existing business. The Commissioner is satisfied that there is a requisite connection between the receipt of the Grant by Company X and the carrying on of a business. Therefore, the Grant received by Company X is assessable under section 15-10 of the ITAA 1997, as it is received in relation to carrying on a business. A CGT asset is defined in section 108-5 of the ITAA 1997 and includes any kind of property. Specifically, a right to payment created by contract is a CGT asset. Paragraph 104-25(1)(b) of the ITAA 1997 states that CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset being released, discharged or satisfied. Relevantly, the right of Company X to receive the Grant is discharged or satisfied each time it receives a payment resulting in CGT event C2 happening to that part of the right. Company X makes a capital gain if the capital proceeds for the part of the right that is satisfied is more than the cost base of that part of the right, subsection 104-25(3) of the ITAA 1997. However, section 118-20 of the ITAA 1997 provides that a capital gain you make is reduced if the amount is otherwise assessable under another provision of the ITAA 1997. Therefore, whilst CGT event C2 may in fact happen, if an amount is otherwise included as assessable income under section 15-10 of the ITAA 1997 then any capital gain will be disregarded to the extent of that statutory income included. Accordingly, each instalment of the Grant is not subject to the capital gains tax provisions.