Private ruling: Assessable income: government grant
Date of advice: 20 March 2017
Published: August 2017
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q5: Is the Grant paid via the Service Trust to the Super Fund considered assessable income of the Super Fund under the capital gains tax (CGT) provisions of the ITAA 1997? Advice/Answers No.


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, Subsection 20-20(3) | Income Tax Assessment Act 1997, Section 20-40 | Income Tax Assessment Act 1997, Subsection 20-40(2) | Income Tax Assessment Act 1997, Division 40 | Income Tax Assessment Act 1997, Division 43 | Income Tax Assessment Act 1997, Section 104-25 | Income Tax Assessment Act 1997, Paragraph 118-37(2)(a) | Income Tax Assessment Act 1997, Subsection 110-45(3)

Reasons for decision: Summary: Under an 'agent agreement' an entity (the agent) may receive a payment from a third party on behalf of another entity (the principal). The relationship of the principal and the agent may arise from agreement or deed (express or implied), by the operation of law or retrospectively by the principal's ratification of the acts done by the agent. The question of whether receipts or gains constitute assessable income in the hands of an agent need only be addressed by the agent if those receipts or gains are derived beneficially by that agent. Therefore, an agent who receives an amount which is required to be applied or dealt with on behalf of a principal entity, or as the principal directs, will not need to consider whether they have derived any assessable income. This question falls to the principal. | Detailed Reasoning - Application to your circumstances: You advise that the funding application was lodged in the name of the Service Trust and not the Super Fund. The funding Guidelines provide that this is a requirement of the relevant government authority. The amounts received will be transferred from the government authority directly to the Service Trust. However, in accordance with the conditions of the Agreement all funding is allocated to the completion of the project, being the renovation of the building owned by the Super Fund. In your case the Service Trust is acting as agent for the Super Fund which is the principal in this transaction. Whilst there is no formal agreement in place the stringent requirement of the Agreement with the government authority ensures that both entities continue to cooperate with regard to the expenditure of the funding. The implied nature of the agreement is acceptable in these circumstances. If not for the government authority's administrative requirements it would be reasonable to conclude that the Super Fund would have lodged the application on its own behalf. In any case, all of the funding is allocated to a project which will add value to an asset held solely by the Super Fund. Despite no formal written agreement in relation to the passage of the funds from the Service Trust to the Super Fund, the nature of the funding Agreement and the actions of both parties strongly support the argument that the Super Fund is the beneficial recipient of the funding under what could be described as an informal agency agreement. It follows that any questions regarding the assessability of the grant will apply to the Super Fund. | Detailed Reasoning - Question 2: A payment or other benefit received by a taxpayer is included in assessable income if: ● It is income according to ordinary concepts in terms of section 6-5, or ● If not ordinary income it may be included in your assessable income because it is caught under the general 'statutory income' provisions in section 6-10, as listed in section 10-5. Included in the list in section 10-5 are bounties and subsidies (section 15-10). | Detailed Reasoning - Ordinary Income: Section 6-5 states, in part, the following: 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. … The intent of section 6-5 is to include in assessable income those receipts which can be categorised as income according to ordinary concepts. 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. A frequent characteristic of income receipts is an element of periodicity, recurrence or regularity, even if the receipts are not directly attributable to services rendered. This view is supported by ATO Interpretative Decision report, ATO ID 2003/902 which cited the same reasoning in finding that a government grant paid in two instalments to a medical practitioner was not assessable under section 6-5. ATO policy concerning government payments to industry (GPI) 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. 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. | Detailed Reasoning - Application to your circumstances: The Grant does not constitute ordinary income for either the Service Trust or the Super Fund. The Service Trust As discussed in question 1, for the purposes of this arrangement the Service Trust is merely acting as 'agent' for a transaction in which the grant is beneficially received by the 'principal' i.e. the Super Fund. It follows that the Service Trust is not caught under section 6-5. The Super Fund Whilst it will be 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 it does not constitute income from the provision of personal services, is not sourced from property, and has not been derived directly by the Super Fund in relation to its usual income earning activities. | Detailed Reasoning - Statutory Income - a Bounty or Subsidy: Under section 6-10 some amounts that are not 'ordinary income' are included in your assessable income due to another provision of the tax law. These amounts are 'statutory income'. Subsection 6-10(1) refers to provisions about assessable income - a summary list of these provisions is contained within section 10-5. 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 'assessable income includes a bounty or subsidy that: (a) is received in relation to carrying on a business; and (b) is not assessable as ordinary income under section 6-5.' | Detailed Reasoning - In relation to carrying on a business: In determining the correct treatment of the payment it needs to be considered whether the bounty or subsidy has been received 'in relation to carrying on a business.' Taxation Ruling TR 97/11 provides the Commissioner's views on what constitutes 'the carrying on of a business'. At paragraph 13 he outlines the following indicators: ● 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... ● 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. 'In relation to' A grant 'will be “in relation to” carrying on a business when there is a real connection between the payment and the business. The term “in relation to” includes within its scope payments that have a direct or indirect connection to the business…' (Paragraph 100 of TR 2006/3) In the Full Federal Court decision in 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 ), Hill J was discussing the antecedent of section 15-10, that is, paragraph 26(g) of the Income Tax Assessment Act 1936 (ITAA 1936). He stated that it is important to note that the former provision contained the words ' received in or in relation to carrying on of a business ... (emphasis added).' When the provision was incorporated into the ITAA 1997, it was rewritten as a bounty or subsidy 'you receive in relation to carrying on of a business.' In First Provincial , Hill J specifically discussed the relationship between the terms 'received in relation to' and 'received in'. He concluded that the scope of the term 'received in relation to' was sufficiently broad enough to also cover the meaning of the narrower 'received in' which implied a more direct connection. 'Carrying on a business' or 'commencement' The First Provincial case demonstrates that the scope of the phrase 'in relation to carrying on a business' in section 15-10 is to be interpreted widely. Payments made towards the restructuring of business operations with a view to improving overall efficiency are generally considered to be 'in relation to carrying on a business'. (Paragraph 102 of TR 2006/3) '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) To be assessable under section 15-10 the subsidy must relate to the 'carrying on' of the business, not merely to the commencement or cessation of it. the First Provincial case illustrates that the expression 'carrying on of the business' is limited to the activities of the business which are directed towards the gaining or producing of assessable income rather than merely to the business itself. (Paragraph 101 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.) Single periodical rental receipts With reference to the indicators provided under TR 97/11, the derivation of a single periodical rental receipt does not constitute the receipt of business income. | Detailed Reasoning - Application to your circumstances: The Grant does not constitute an assessable bounty or subsidy for either the Service Trust or the Super Fund. The Service Trust As discussed in question 1, for the purposes of this arrangement the Service Trust is merely acting as 'agent' for a transaction in which the grant is beneficially received by the 'principal' i.e. the Property Trust. It follows that the Service Trust is not caught under section 15-10. The Super Fund To be considered assessable under section 15-10 the receipt must be in relation to the carrying on of a business. You advise that the Super Fund's only activity is, and will be to act as lessor in relation to the property and to derive a single periodical rental payment from the Service Trust. Other than collecting rent it has no involvement with the business activities conducted on the premises. Taking into account the indicators in TR 97/11, as the extent of the Super Fund's activities as a lessor align more readily with the type of activities generally undertaken by a passive investor it is clear that the Super Fund is not carrying on a business in this regard. As the Super Fund is not carrying on the business or a business of leasing properties any receipts in relation to the funding are not 'received in relation to carrying on a business' as is the requirement for assessability as a bounty or subsidy under section 15-10. The receipt is on capital account and must be considered with regard to the CGT provisions (see Question 5). | Detailed Reasoning - Question 4: To the extent that the grant is received to fund the cost of depreciable assets it is an assessable recoupment under subsection 20-20(3). If the cost of a depreciable asset is deductible under Division 40 over two or more income years, section 20-40 applies so that the total of assessable recoupments to be included in assessable income at a particular time is limited to the total amount of the loss or outgoing that can be or has been deducted at that time. Any part of an assessable recoupment that is not included in assessable income in the year of receipt because of this limit is assessable in later income years to the extent that further amounts are deductible under Division 40 for the depreciating asset in the later income years. Refer to the method statement in subsection 20-40(2). Application to your circumstances To the extent that the Grant is expended on Division 40 depreciable assets that are deductible over two or more years (e.g. lift vehicle, lift cables and pulleys) the table of assessable recoupments in section 20-30 references the expenditure as being subject to the Subdivision 20-A assessable recoupment provisions. Section 20-40 operates such that the total of the assessable recoupments to be included in the assessable income of the Super Fund in a particular year will equal the amount of the depreciation deduction that has been claimed in relation to those items in that year. To the extent that expenditure is incurred on an asset (e.g. a lift well) that is deductible under the Division 43 capital works provisions (not included in the section 20-30 table) it is excluded from the Subdivision 20-A assessable recoupments provisions. | Detailed Reasoning - Capital gains tax provisions: Section 104-25 deals with cancellation, surrender and similar endings to CGT assets, a CGT event C2. A C2 event occurs when the ownership of an intangible CGT asset ends by the asset 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 payment. A capital gain occurs if the capital proceeds from the ending of the rights are more than the asset's cost base. CGT exemption under paragraph 118-37(2)(a) 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. 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: The Service Trust As discussed in question 1, for the purposes of this arrangement the Super Fund is merely acting as 'agent' for a transaction in which the grant is beneficially received by the 'principal' i.e. the Super Fund. It follows that the Service Trust is not caught in relation to this transaction under the CGT provisions. The Property Trust Under the guidelines the government agency created rights in the Service Trust to receive payments upon the completion of several milestones as stated in the EM. These rights will be satisfied under CGT event C2 when government agency makes the payments to the Service Trust. As it has been established that the Super Fund is the beneficial recipient of the funding and taxing entity it will make a capital gain equal to the difference between the capital proceeds and the cost base of the rights. CGT exemption under paragraph 118-37(2)(a) Paragraph 1 of the Grant Programme Guidelines states that the Australian Government committed $ to grant funding in the Budget. The Commonwealth administers the Program via the government agency. We find that the Program meets the requirements of paragraph 118-37(2)(a) as outlined in the revised EM and the grant complies because it is a payment received as reimbursement or payment of expenses incurred in relation to the Program. Therefore, any capital gain made by the Property Trust from the C2 CGT event will be disregarded under paragraph 118-37(2)(a). Cost Base Reduction Although there is no capital gain at the time, there are capital gains consequences when the property is eventually sold. To the extent that the grant is received to fund the cost of purchasing land and buildings or for constructing or renovating buildings, it is a recoupment of those costs. In accordance with subsection 110-45(3) this recoupment will reduce the cost base of the property, except so far as the amount is otherwise included in your assessable income.

The advice in the Register has been edited and may not contain all the factual details relevant to each decision. Do not use the Register to predict ATO policy or decisions. | With regard to the Grant received, did the Trust (the Service Trust) merely act as agent for the Super Fund with the latter being the actual beneficial recipient of the funding for taxation purposes? | Is the Grant received by the Service Trust as agent for the Super Fund, which is not carrying on a business, considered assessable income of the Super Fund under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | Question 3: Is the Grant considered assessable income of the Super Fund under section 15-10 of the ITAA 1997? | If the cost of a depreciating asset is deductible over two or more years under Division 40 of the ITAA 1997, will section 20-40 of the ITAA 1997 operate such that the total of assessable recoupments to be included in assessable income in a particular year will equal the total amount of the depreciation deduction claimed in that year? | Yes. However, expenditure incurred under Division 43 of the ITAA 1997 is excluded from the Subdivision 20-A assessable recoupment provisions. | Relevant facts: The business is in Australia. | The Service Trust is a related entity which he/she controls. The trust provides services to the medical practice such as administration and staff, supplies and a fully equipped and maintained medical practice. | The freehold property is owned by the Super Fund and the spouse, both related parties. The Super Fund and the spouse lease the premises to the Business Operator via the Service Trust. | The Grant was lodged in the name of the Service Trust and not the Super Fund as provided in the guidelines of the relevant government authority. The Government authority transferred the funds directly into the Service Trust. However, in accordance with the conditions of the Agreement, all funding is allocated at the completion of the project, being the renovation of the medical building owned by the Super Fund. | The government funding was sought to refurbish and allow increased capacity in the form of an upgrade to consulting and clinical rooms. | Expenditure on the project totalled $. | The refurbishment was undertaken to provide: | ● Improved student and junior employee access to 'buddy' teaching employees, | ● Upgrade rooms to better meet the needs of clients. | As a result of the grant, additional health services and professionals were taken on by the practice including, two registrars, a part-time audiologist and a diabetes consultant. | Rent from the various allied health professionals located at the premises is paid directly to the Service Trust which makes one periodical rental payment to the Property Owner.