Private ruling: Government grant
Date of advice: 23 July 2020
Published: August 2020
Ruling period: Year ending 30 June 2020
Date scheme commenced: 1 July 2019

Ruling: Q1: Is the government grant (the Grant) received by you considered to be ordinary income and therefore assessable income under section 6-5 of the Income Tax Assessment Act (ITAA 1997 ) ? | A1: No | Q2: Is the Grant received by you assessable under section 15-10 of the ITAA 1997? | A2: Yes

Relevant facts and circumstances: You were established by a Government under an Act as a body corporate. You are not exempt from income tax. Your functions and powers are set out in Regulations and include: · The control, management and administration of certain common property vested in you; · The maintenance of the common property and all chattels in the your possession; and · The maintenance of equipment adapted or designed for use in the provision of services in respect of the common property vested in you. You derive revenue from various sources. The Government and you signed a document in 2019. Subject to the terms of the Agreement, the Government will pay you a grant ("the Funding") for undertaking certain activities (the Project). You did not apply for any grant, it was granted through negotiation with various stakeholders. All of the improvements are to common ownership areas.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 15-10

Reasons for decision: Summary: The Grant received is assessable as statutory income under section 15-10 of the Income Tax Assessment Act (ITAA 1997). We accept that the principles of mutuality will apply to a proportion of that grant. We further accept that as a Body Corporate and as per Taxation Ruling (TR) 2015/3 Income tax: matters relating to strata title bodies constituted under strata title , that a proportion of the assessable income may be allocated to the owners in relation to their holding of the relevant asset. Accordingly, this also means that you cannot claim any deductions in relation to that income. | Detailed Reasoning - Detailed reasoning: Taxation Ruling TR 2006/ 3 Income Tax: government payments to industry to assist entities (including individuals) to continue, commence or cease business provides the Commissioner's view on the taxation treatment of government payments to industry including consideration of section 6-5 of the ITAA 1997. TR 2006/3 applies to schemes which involve bounties, subsidies, grants and rebates paid or funded by the Commonwealth or a State, Territory or local government, or government agency. The payment of a grant by an organisation does not have a fixed or 'standard' tax treatment. The tax treatment applicable to any particular grant will depend upon a combination of factors, including: · the nature and characteristics of the grant; in particular the purpose of the grant and how the grant funding will be delivered, · the status and circumstances of the grantee, and · the provisions of any governing legislation or agreements. | Detailed Reasoning - Taxation of grants to entities (including individuals) carrying on a business: The receipt of a grant by a business entity may result in an amount being included in the entity's assessable income where the grant has the character of 'ordinary income'. Factors that may indicate that the grant is ordinary income include: · the grant is a product or incident of any services rendered or business carried on by the entity; · the purpose of the grant is to supplement or replace lost income or profits; and · the periodicity, recurrence or regularity of the grant; A grant that is not ordinary income may be included in assessable income as statutory income. The most likely categories of statutory income that may apply to a grant where a business is being carried on include: · the grant is received in relation to carrying on a business · the grant is received for the disposal, loss or destruction of a depreciating asset; · the grant is received as a recoupment of certain deductible losses or outgoings and is not otherwise assessable; or · a CGT event happens because the grant is received and there is a capital gain. In your case, your functions and powers are set out in Regulations and include: · The control, management and administration of certain common property vested in you; · The maintenance of the common property and all chattels in your possession; and · The maintenance of equipment adapted or designed for use in the provision of services in respect of the common property vested in you. You derive income from both mutual and non-mutual sources. That you are in business is not in dispute. | Detailed Reasoning - Statutory income: Section 15-10 is a statutory income provision (see section 10-5) which deals with the treatment of bounties or subsidies. Section 15-10 provides that an amount is included in a taxpayer's assessable income if it is: · a bounty or subsidy; · received in relation to carrying on a business; and · not assessable as ordinary income under section 6-5. | Detailed Reasoning - Bounty or subsidy: The terms 'bounty' and 'subsidy' are not defined in income tax legislation and therefore take its ordinary meaning. The Macquarie Dictionary [Online edition] defines 'subsidy' as including 'a grant or contribution of money'. The ordinary meaning adopted by case law is 'aid provided by the Crown (government) to foster or further some undertaking or industry - see Placer Development Ltd v. Cth (1969) 121 CLR 353 at 373. Following the decisions in The Squatting Investment Co Ltd v. Federal Commissioner of Taxation (1953) 86 CLR 570; 10 ATD 126 and Reckitt & Colman Pty Ltd v FC of T 74 ATC 4185, it is now well accepted that a 'bounty' or 'subsidy' includes a financial grant made by a government. The Grant received by you is such a bounty or subsidy as it is aid provided by a government to assist you in your business activities. | Detailed Reasoning - Received in relation to carrying on a business: TR 2006/3 provides guidance on the meaning of 'in relation to carrying on a business' in section 15-10 in paragraphs 99 to 101. Paragraph 100 examines the meaning of 'in relation to' and based on the decision in First Provincial First Provincial Building Society Ltd v FC of T (1995) 56 FCR 320; 95 ATC 4145 (First Provincial) concludes that the term includes within its scope payments that have a direct or indirect connection to the business. As stated by Hill J in at 333: The words 'in relation to' are words of wide import. They are capable of referring to any relationship between the two subject matters, in the present case the receipt of the bounty or subsidy, on the one hand, and the carrying on of the business, on the other... the degree of connection will be 'a matter of judgment on the facts of each case'....What is necessary, at the least, in the present context is that there be a real connection... the relationship need not be direct, it may also be indirect. In O'Grady v. Northern Queensland Company Limited (1990) 169 CLR 356 (O'Grady), McHugh J also said at CLR 376: the prepositional phrase "in relation to" is indefinite. But, subject to any contrary indication derived from its context or drafting history, it requires no more than a relationship, whether direct or indirect, between two subject matters (emphasis added) The comments by Hill J in First Provincial and McHugh J in O'Grady make it clear that all that is required for a bounty or subsidy to be received in relation to carrying on a business is that there is 'a relationship' to the carrying on of a business that is not so remote as to be insignificant. It is also clear from the use of the expression 'any relationship' by Hill J and the conclusion that the relationship may be indirect that there is no requirement that the relationship be the dominant or main relationship. The degree of the connection will be a matter of judgement on the facts of each case (see O'Grady (1989-90) 169 CLR 356 at 376). In this case the Grant made to you is a one off in order to complete the Project. The Commissioner considers that it is in the ordinary course of business for you to undertake activities to improve the common property. Therefore, the grant is in relation to the business you undertake and is taxable under section 15-10 of the ITAA 1997. | Detailed Reasoning - Ordinary income: Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident will include ordinary income derived from all sources, whether in or out of Australia, during the income year. The courts have also identified a number of factors that indicate whether an amount has the character of income: · The receipt is earned, · The receipt is expected, · The receipt is relied upon, · The receipt has an element of periodicity, recurrence or regularity, or · The receipt is for the replacement of income. We consider that whilst the Grant was received in the course of carrying on a business, it does not exhibit the characteristics of ordinary income. As the Funding is a one-off payment and there is no element of periodicity, regularity or recurrence, the Grant can be viewed as a one-off receipt by you rather than ordinary income. Such a receipt would not be assessable under section 6-5 of the ITAA 1997. | Detailed Reasoning - Conclusion: As the Grant received by you meets all the requirements of section 15-10, it is a bounty or subsidy, received in relation to carrying on a business and is not assessable as ordinary income. It is, therefore, assessable as statutory income under section 15-10 of the ITAA 1997.