Private ruling: Income - grants
Published: May 2012
Ruling period: Year ending 30 June 2012 | Year ending 30 June 2013
Date scheme commenced: 1 July 2011

Ruling: Q1: Does the grant form part of your assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1:  | Q2: Is the grant assessable under section 15-2 of the ITAA 1997? | A2:  | Q3: Is the grant an assessable recoupment for the purposes of section 20-20 of the ITAA 1997? | A3: 

Relevant facts and circumstances: The Government Department (the Department) administers a program which enables a person with a disability or a nominated parent/guardian/carer who will receive payments on their behalf ('the direct payments user') to use their grant to choose, arrange and buy the supports and services that the disabled person requires to meet their needs (in accordance with their approved funding plan). As a parent of a disabled child, you requested and received a grant under a government funding program. The funding is provided in instalments over a defined period, in accordance with and subject to the terms of the Funding Agreement. Under the terms of the Funding Agreement, you must: (a) use the grant solely for the specified purpose; (b) not enter into any arrangements or commitments in relation to the program that are incompatible or inconsistent with the purpose of the grant; (c) receive Department approval in writing before you purchase services in addition to the approved services for which funding is provided; and (d) not use the grant to pay wages to yourself or to seek any financial benefit for yourself. A separate bank account must be established for the purposes of receiving direct payments. The bank account must not have a credit card or overdraft facility, nor be linked to any other bank account. You must ensure that adequate financial and operational records are kept and maintained whilst participating in the program. You must submit quarterly reports, supporting documentation and an end of financial year report. These records form the evidence of expenditure. All personnel hired by you to perform services funded by the grant must be filled by persons that have appropriate skills, qualifications or experience for such positions. You must have an up to date funding plan which outlines the goals of the person with a disability and details what funding will be provided and how the funding will be used to meet those goals. All expenditure from the bank account must be for an approved purpose in accordance with the disabled person's funding plan, which will be endorsed by the Department. You must consult with the disabled person as to the use and management of the funds. The expenditure can be for a variety of support needs but may not be used for the purchase of any capital equipment. You are required to keep records of how the funds are used and will have their spending regularly reviewed. Under an acquittal process, you are required to account for the spending of the funds on the goals in the funding plan. At the end of the acquittal process, or on termination of the program, any unspent and uncommitted funds will be returned to the Department within 30 days by the direct payments user. Alternatively, you may seek Department approval to retain all or part of the unexpended funds.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 subsection 6-5(1) | Income Tax Assessment Act 1997 section 15-2 | Income Tax Assessment Act 1997 Subdivision 20A

Reasons for decision: Summary: The direct payments received from the Department do not form part of your assessable income under section 6-5 of the ITAA 1997. The direct payments received from the Department are: · not given or granted to you in relation to employment or services rendered under section 15-2; and · not assessable recoupments under Subdivision 20-A of the ITAA 1997. | Detailed Reasoning - Detailed explanation: A payment or other benefit received by a taxpayer is assessable income if it is: · income in the ordinary sense of the word (ordinary income); or · an amount or benefit that through the operation of the provisions of the tax law is included in assessable income (statutory income). | Detailed Reasoning - Ordinary Income: Subsection 6-5(1) of the ITAA 1997 provides that the assessable income of a taxpayer includes income according to ordinary concepts, which is called ordinary income. Whether a payment received is income depends upon a close examination of all relevant circumstances, however 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. The courts have established that the following factors are also relevant: · whether the payment is the product of any employment, services rendered, or any business; · the quality or character of the payment in the hands of the recipient; · the motive of the person making the payment; and · the nature of the relationship between the payer and the payee. | Detailed Reasoning - The nature of the relationship between the Department and the direct payments user: The Department is responsible for the administration of the program which enables the direct payments users to use the funds to choose, arrange and buy the supports and services that they require to meet their needs (in accordance with their approved funding plan). Certain features of the arrangement point to the existence of a fiduciary relationship between the direct payments user and the Department. By entering into the agreement the direct payments user agrees to apply the funds to obtain approved goods and services, which would otherwise be provided by the Department. Therefore, the direct payments user can be said to be acting on behalf of the Department in discharging its duty to provide these services. The arrangement clearly guards against abuse by the direct payments user. The terms of the funding agreement confine the use of the direct funding payments to approved purposes, that is, uses permitted by the approved funding plan, protecting the Department and ensuring that public funds are used only in a way that discharges the Department's statutory duty. The fact that this protection is expressed in a contract is not inconsistent with the existence of a fiduciary relationship. A second critical feature is that the fiduciary may not profit from the position in which he or she is placed. The fiduciary must treat his or her own interests as subservient to the interests of the principal, in this case the Department. The fiduciary must not use the grant to pay wages to himself or herself or make any financial benefit. These elements are clearly present. | Detailed Reasoning - The scope of the fiduciary relationship: The subject matter of the program is the provision of funds to the direct payments user to obtain approved goods and services. Apart from holding and applying the funds for the approved purposes, the direct payments user has no other obligations to the Department under the arrangement. It is clear, then, that the scope of the direct payments user's fiduciary obligations to the Department under the program relates to the direct payments user's holding and application of the funds. The discretionary powers the direct payments user has as to the use of the funds are authorised under the funding agreement and fall within the purposes for which direct funding may be provided under the relevant legislation. These powers do not conflict with the fiduciary obligations that the direct payments user owes to the Department. On the contrary, they are designed to further the objects and principles of the relevant legislation. The fiduciary duties owed by the direct payments user to the Department indicate that the direct payments are not beneficially held and used by the recipient for private purposes but are held and used on behalf of the Department. The direct payments user under the funding agreement is neither an employee of the Department nor in receipt of the payments in relation to the carrying on of a business. Under the terms of the Funding Agreement, while the direct payments user obtains and manages the goods and services, they do not receive any amount as a reward for taking on this role. The direct payments user is precluded from gaining any financial benefit, may not employ himself or herself and must use the funds only for approved purposes. The approved funding plan permits the funds to be used only for paying for the disability services and meeting the direct costs of managing these services. The direct payments user must account for the use of the funds and must repay any money not spent for an approved purpose. In these circumstances, the funds are not a payment for services rendered. The payment of the grant that you received is not income from personal services. The payment is not earned and it was not expected or relied upon as you had to apply for it and you may not have been successful. The payment has some element of periodicity, recurrence or regularity, as it is paid quarterly over one twelve-month period but essentially it is a one off grant as it is a twelve-month pilot. For the reasons given above, it is concluded that the direct payments do not have the character of ordinary income under subsection 6-5(1) of the ITAA 1997. | Detailed Reasoning - Statutory income: Section 6-10 of the ITAA 1997 includes in assessable income amounts that are not ordinary income. These amounts are called statutory income. A list of the statutory income provisions can be found in section 10-5 of the ITAA 1997. That list includes a reference to section 15-2 and Subdivision 20-A of the ITAA 1997. | Detailed Reasoning - Employment or services rendered: Section 15-2 of the ITAA 1997 provides that assessable income shall include: ... the value to you of all allowances, gratuities, compensation, benefits, bonuses and premiums provided to you in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by you ... You do not receive the funds for any employment or services rendered. Therefore the direct payments you receive are not statutory income under section 15-2 of the ITAA 1997. | Detailed Reasoning - Assessable recoupment: Subdivision 20-A of the ITAA 1997 operates to include in assessable income amounts received as recoupments of specified losses or outgoings allowed or allowable as deductions. As the payments are not being made by way of insurance or indemnity, the relevant provision is subsection 20-20(3) of the ITAA 1997 which provides that an amount is an assessable recoupment of a loss or outgoing if a taxpayer: · receives the amount (except by way of insurance or indemnity); and · can deduct an amount for the loss or outgoing in the current year or has deducted or can deduct an amount for it in an earlier year under a provision listed in the tables at section 20-30 of the ITAA 1997. As no deduction is allowable or would be allowable to you in respect of the expenditure incurred for the disability services, the payments received by you are not assessable recoupments under Subdivision 20-A of the ITAA 1997.

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