Private ruling: government grant
Published: December 2013
Ruling period: Year ended 30 June 2013 | Year ended 30 June 2014
Date scheme commenced: 1 July 2012

Ruling: Q1: Will funding paid under the government grant program be assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Will funding paid under the government grant program be assessable under section 15-10 of the ITAA 1997? | A2: No. | Q3: Will funding paid under the government grant program be assessable under the capital gains tax provisions? | A3: No. | Q4: Will funding paid under the government grant program be assessable under Subdivision 20-A of the ITAA 1997? | A4: Yes.

Relevant facts and circumstances: The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are: · the application for private ruling received, · the additional information provided. The Trust owns land and buildings. The trustee of the Trust is a company. The property is currently leased to the partnership for the purposes of operating a business A partner applied for funding under a government grant program on behalf of the Trust. The application for a grant was successful. The agreement was executed by the company as trustee for the Trust. The funds were paid to the Trust. The Trust used the funds to carry out capital works on the property and also purchased some depreciable assets. The funding was paid to the trust in instalments during the 2012-13 and 2013-14 financial years. The Unit Trust does not conduct any business activities or employ any staff. Its only activity involves investments, and in particular the ownership and leasing of the property.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 subsection 6-5(2) | Income Tax Assessment Act 1997 section 10-5 | Income Tax Assessment Act 1997 section 15-10 | Income Tax Assessment Act 1997 Subdivision 20-A | Income Tax Assessment Act 1997 subsection 20-20(3) | Income Tax Assessment Act 1997 section 20-40 | Income Tax Assessment Act 1997 section 104-25 | Income Tax Assessment Act 1997 section 104-35 | Income Tax Assessment Act 1997 section 104-155 | Income Tax Assessment Act 1997 paragraph 118-37(2)(a) | Income Tax Assessment Act 1997 subsection 110-45(3)

Reasons for decision: Summary: Ordinary income Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year. Ordinary income is 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 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 of the ITAA 1997. ATO policy concerning government payments to industry is set out in Taxation Ruling TR 2006/3 . At paragraph 84 of TR 2006/3, 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. Application to your circumstances The grant does not constitute ordinary income. 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 from any usual business activities in relation to either the existing medical practice or from the actual operation of the extended facility. Accordingly, the grant is not assessable under section 6-5 of the ITAA 1997. Statutory Income - a Bounty or Subsidy Under section 6-10 of the ITAA 1997 some amounts that are not 'ordinary income' are included in your assessable income due to another provision of the tax law. These amounts are referred to as 'statutory income'. Subsection 6-10(1) of the ITAA 1997 refers to provisions about assessable income - a summary list of these provisions is contained within section 10-5 of the ITAA 1997. 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.' To be assessable under section 15-10 of the ITAA 1997 the subsidy must relate to the 'carrying on' of the business, not merely to the commencement or cessation of it. 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). Application to your circumstances The funding under the government grant program does not constitute an assessable bounty or subsidy. To be considered assessable under section 15-10 of the ITAA 1997 the receipt must be in relation to the carrying on of a business. The Trust owns the property and has been allocated government funding to make improvements to the building. The Trust will not be operating the relevant business, this will be conducted by the partnership. The Trust's only activity will be to act in the capacity of lessor in relation to the property and to derive periodical rental payments from the entity that will be operating the business. The extent of the Trust's activities as a lessor will be aligned more readily with the type of activities generally undertaken by a passive investor; it is clear that the Trust will not be carrying on a business in this regard. As the Trust will not be carrying on the business or a business of leasing properties, any receipts in relation to the funding will not be assessed under section 15-10 of the ITAA 1997 as a bounty or subsidy. Section 104-25 of the ITAA 1997 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) of the ITAA 1997 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.' Application to your circumstances Under the agreement, the government department creates rights in the Trust to receive payments upon the completion of several milestones and the provision of progress reports as stated in the agreement. These rights will be satisfied under CGT event C2 when the government department makes the payments to the Trust. However, we find that the grant meets the requirements of paragraph 118-37(2)(a) of the ITAA 1997 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 project approved in line with the government grant program. Therefore, any capital gain made by the Trust from the C2 CGT event will be disregarded under paragraph 118-37(2)(a) of the ITAA 1997. If the cost of a depreciating asset is deductible under Division 40 of the ITAA 1997 over two or more income years, section 20-40 of the ITAA 1997 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 of the ITAA 1997 for the depreciating asset in the later income years. To the extent that the grant is received to fund the cost of depreciating assets, it is an assessable recoupment under subsection 20-20(3) of the ITAA 1997.