Private ruling: GP Super Clinic grant payments
Published: July 2013
Ruling period: Years ended 30 June 2012 - 30 June 2016
Date scheme commenced: 1 July 2011

Ruling: Q1: Are the Government grants received by the Trust ordinary income? | A1: No | Q2: Are the Government grants received by the Trust statutory income? | A2: No

Relevant facts and circumstances: In the 2010-11 Budget, the Australian Government announced funding for this particular Program. Pursuant to this Program, the Trust entered into an Agreement with the Commonwealth during the 2012 income year. Under the Agreement, the Trust will receive (and has started receiving) funding for capital works on a property to construct a facility in accordance with the program. A copy of the Funding Agreement has been provided. The funds are paid by instalments as certain milestones are met by the Trust as specified in Annexure A to the Agreement. The funds are only made available to the Trust for the specific purposes set out in the Agreement. The Trust (and any lessee) is required to use the property for the designated use for a designated period from the date of commencement of operations. On completion of the construction, the Trust will enter into a lease with a related party. The related party will operate the facility as its business: managing the property, marketing to attract sub-lessees, entering into sub-lease arrangements, and maintaining the property. The related party operating the facility will be required under the lease to comply with the conditions contained in the Agreement and to use the property for the designated use. The Trust's only activity at that time will be the leasing of the property to the related party.

Relevant legislative provisions: Section 6-1 of the Income Tax Assessment Act 1997 | Section 6-5 of the Income Tax Assessment Act 1997 | Section 6-10 of the Income Tax Assessment Act 1997 | Section 10-5 of the Income Tax Assessment Act 1997 | Section 15-10 of the Income Tax Assessment Act 1997 | Section 102-5 of the Income Tax Assessment Act 1997 | Section 118-37 of the Income Tax Assessment Act 1997

Reasons for decision: Summary: Section 6-1 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a taxpayer's assessable income includes ordinary income and statutory income. Ordinary income, pursuant to section 6-5 of the ITAA 1997, is income according to ordinary concepts. The courts have identified a number of factors which indicate whether an amount has the character of income. A frequent characteristic of income receipts is an element of periodicity, recurrence or regularity. However these characteristics are not always essential as in some circumstances proceeds from an isolated transaction received as a lump sum may also be income. In G P International Pipecoaters Pty Ltd v FC of T (1990) 170 CLR 124; 90 ATC 4413; (1990) 21 ATR 1 the High Court commented on the characterisation of a payment that was intended to assist the recipient with capital costs, saying that such receipts would be capital in nature and therefore not ordinary income. In your situation, the payments received under the Agreement are in effect a one-off payment - the funding for one capital construction project in accordance with the Agreement being entered into. This is despite the fact the total amount is being paid in instalments as certain milestones are met. It is concluded that the payments received are not ordinary income in accordance with 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, and capital gains may be included under section 102-5 of the ITAA 1997. | Detailed Reasoning - Bounties or subsidies: 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 businesses ( The Squatting Investment Co v FC of T (1953) 86 CLR 570; (1953) 10 ATD 126; (1953) 5 AITR 496). In your situation, the grant is a bounty or subsidy for the purposes of section 15-10 of the ITAA 1997. As discussed in Question 1 above, the grant is not assessable as ordinary income under section 6-5 of the ITAA 1997. 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. It is the Commissioner's view that a bounty or subsidy 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 this situation, the grant funding is being used by the Trust as property owner for the construction of the property. The Trust's only activity after construction will be to act as lessor in relation to this property. It will lease the property to a related entity and that related entity will carry on the business of organising sub-lessees and tenants within the property. Taxation Ruling TR 97/11 provides the Commissioner's view on what constitutes 'the carrying on of a business'. With reference to the indicators provided in paragraph 13 of TR 97/11, the derivation of rental income from a single source does not generally constitute the receipt of business income. The Commissioner is satisfied that the Trust's activity of leasing the manufacturing facility to the business operator is not the carrying on of a business. Notwithstanding the operation of a business from the property by the related party, the Commissioner is satisfied that the requisite connection between the receipt of the grant by the Trust and the carrying on of a business does not exist. Therefore, although the grant is a bounty or subsidy received by the Trust, it is not assessable income as it was not received in relation to carrying on of a business. | Detailed Reasoning - Capital gains: Paragraph 118-37(2)(a) of the ITAA 1997 provides that any capital gain or capital loss is 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 under an enactment of an instrument of a legislative character. In relation to this, the Revised Explanatory Memorandum 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. In this instance, the Program was announced by the Australian Government in the 2010-11 Budget. Therefore, the grant meets these requirements and the payment of the grant will not give rise to a capital gain. However, there will be capital gain consequences when the property is eventually disposed of by the Trust. Paragraph 6 of TR 2006/3 provides that if the payment recoups expenditure forming one of the elements of the cost base, the cost base is taken never to have included the original expenditure, thus potentially increasing a future capital gain or decreasing a future capital loss.