Private ruling: Income - government grant
Published: October 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Will the grant paid to you for the construction of the facility which will be leased to a related entity for the purpose of operating the business be assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) as income according to ordinary concepts? | A1: No. | Q2: Will the grant paid to you for the construction of the facility which will be leased to a related entity for the purpose of operating the business be assessable under section 15-10 of the ITAA 1997 as statutory income under bounties and subsidies? | A2: No. | Q3: Will the grant paid to you for the construction of the facility which will be leased to a related entity for the purpose of operating the business be assessable under the capital gains tax provisions in the ITAA 1997? | A3: No. However, there are capital gain consequences when the property is eventually disposed of. | Q4: Will the grant paid to you for construction of the facility to be leased to a related entity for the purpose of operating a business be assessable under Subdivision 20-A of the ITAA 1997? | A4: Yes, but only to the extent that the grant is received to fund the cost of depreciating assets.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You own the property and existing dwellings as well as the dwellings the grant provided. You rent the property to a partnership related to you. You entered into a Funding Agreement (the Agreement) with the Commonwealth. The purpose of the Grant is to redevelop the existing property to modernise facilities. The funds were paid by instalments as certain milestones are met by you. The funds were only made available for the specific purposes set out in the Agreement. You are not in the business of providing accommodation.

Relevant legislative provisions: Section 6-1 of the ITAA 1997 | Section 6-5 of the ITAA 1997 | Section 6-10 of the ITAA 1997 | Section 10-5 of the ITAA 1997 | Section 15-10 of the ITAA 1997 | Subdivision 20-A of the ITAA 1997 | Division 40 of the ITAA 1997 | Section 118-37 of the ITAA 1997

Reasons for decision: Summary: Section 6-1 of the 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 your situation, the payments received under the Grants Program are a one-off payment (albeit paid in instalments as certain milestones are met). The payments are to assist you in undertaking improvements to your property that you lease to a related entity. 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. It is therefore concluded that the payments made in accordance with the Funding Agreement 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. 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. 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 entire grant will be used by you as the property owner improvements. You are the owner of the property and your only activity is to act as lessor in relation to this 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 your activity of leasing the property to the related entity is not the carrying on of a business. The Commissioner is satisfied that the requisite connection between the receipt of the grant by you as the property owner and the carrying on of a business does not exist. Therefore, although the grant is a bounty or subsidy received, it is not assessable income as it was not received in relation to carrying on of a business. Paragraph 118-37(2)(a) of the ITAA 1997 provides that a 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. The grant meets these requirements and the payment of the grant will not give rise to a capital gain. However, there are capital gain consequences when the property is eventually disposed of. 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. To the extent that the grant is received to fund the cost of depreciating assets, it is an assessable recoupment under subdivision 20-A of the ITAA 1997 if the requirements of that subdivision are satisfied. 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 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 other income years to the extent that further amounts are deductible under Division 40 of the ITAA 1997.