Private ruling: Income tax – Assessable income – Other types of income – Grants
Date of advice: 19 June 2018
Published: August 2018
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Is the grant from a government entity assessable income? | A1: Yes.

Relevant facts and circumstances: You and a family member own property. The property is not used to produce income. You and a family member (the land owners) executed a management conservation agreement (MCA) with a government entity. On part of the property (the Controlled land) is subject to the MCA. The MCA was entered into for the purpose of managing and improving the health of the land. In consideration of the grant the land owners agree to comply with the following: ● To carry out the Management activities as described in the Site Management Plan. ● Comply with the commitments as described in the Site Management Plan. ● Comply with various ancillary matters set out in the agreement. A government entity provided a grant. The grant was paid in a number of payments over the period of the MCA. During the period of the MCA the land owners agree to undertake the following: ● Retain all standing (dead or alive) and fallen timber/branches/leaf litter (excluding the removal of small stems as part of the ecological thinning). ● Exclude livestock. ● Take all reasonable steps to prevent fire on the land. ● Control and manage pest plants and animals. ● Maintain all existing and newly constructed fencing in a stock proof condition. ● Not to apply fertiliser on the site or crop the site. ● Not to remove rocks or extract or introduce soil. ● Not to allow supplementary feeding of stock within the site. ● Not to plant non-indigenous plant species on the site. ● Not to undertake drainage alternation on the site ● Establish photo points. Under the MCA the land owners are required to provide reports on expenditure and the activities undertaken to a government entity. The land owners have undertaken work as part of the MCA.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 6-5(1)

Reasons for decision: Summary: All legislative references in this Ruling are to the Income tax Assessment Act 1997 unless otherwise indicated. Subsection 6-5(1) provides that an amount is included in assessable income if it is income according to ordinary concepts (ordinary income). However, as there is no definition of 'ordinary income' in income tax legislation it is necessary to apply principles developed by the courts to the facts of each case. Whether or not a particular receipt is ordinary income depends on its character in the hands of the recipient. In GP International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation (1990) 170 CLR 124; 90 ATC 4413; (1990) 21 ATR 1 (the Pipecoaters case), the Full High Court stated: To determine whether a receipt is of an income or of a capital nature, various factors may be relevant. Sometimes the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business. In MIM Holdings Ltd v. Commissioner of Taxation 97 ATC 4420; (1997) 36 ATR 108 (the MIM case), Northrop, Hill and Cooper JJ, relying on Hayes v. FCT (1956) 96 CLR 47 and Reuter v. FC of T 111 ALR 716; 93 ATC 4037 said that 'amounts paid in consideration of the performance of services will almost always be income'. The question of whether an amount is a product of the taxpayer's services (that is, paid in consideration of the performance of the taxpayer's services) has been considered in a number of High Court decisions. The following guidance is afforded by those decisions: ● the whole of the circumstances must be considered; ● a generally decisive consideration is whether the receipt is the product in a real sense of any employment of, or services rendered by the recipient, or of any business, or any revenue production activity carried on by the recipient; ● other considerations that are relevant but not decisive include: ● the motive of the donor (payer) in paying the amount; ● the regularity and periodicity of the payment, however a payment in a lump sum does not require a conclusion that the payment is capital; and ● the recipient's expectation that an amount will be received The agreement between land owners and the government entity specifies the rights and obligations of both the landholders and the government entity under the MCA and includes a schedule of management activities the land owners are required to meet to receive the payments. Under the MCA the land owners agreed to provide conservation management services to the government entity while they continue to own the property. Accordingly, the payments are the product, in a real sense, of the services rendered by the landowners to the government entity. Other factors such as the land owner’s expectation of receipt of the payment in return for undertaking activities as set out in the MCA and the purpose of the government entity in making the payment (to provide an incentive for land owners to carry out the work) also support the conclusion that the payments are the product of the services rendered. The fact that the grant is made in a number of payments does not alter this conclusion. Although the MCA activities are to be undertaken over a long period under the MCA, the numbers of payments are made in a number of lump sums. Accordingly, a question arises as to when the payments received under the agreement are assessable. Taxation Ruling TR 98/1 states that when accounting for income in respect of a year of income, a taxpayer must adopt the method that, in the circumstances of the case, is the most appropriate. Where income results primarily from the services rendered, or work performed by the taxpayer personally, it is generally assessable on a receipts basis and the total amount received under the agreement is assessable in the income year that it is received. However there are circumstances in which an advance payment is made where the amount received is not derived as income when it is received, but as it is earned. The High Court in Arthur Murray (NSW) Pty Ltd v. Federal Commissioner of Taxation 114 CLR 314; 14 ATD 98; (1965) 9 AITR 673 (the Arthur Murray case) referred to the significance of an amount not being income unless it had been earned. In that case the High Court decided that prepaid fees in relation to dancing lessons not yet delivered should not be treated as income derived at the time the fees were paid. The principles arising out of the Arthur Murray case may be summarised as follows: ● subject to any special statutory provision, the inquiry to be made in each case is whether the receipt would, according to established accounting and commercial principles, be regarded as income derived; ● as a matter of business good sense, the recipient should treat each amount of fees received but not yet earned as subject to the contingency that the whole or some part of it may have in effect to be paid back; and ● nothing in the ITAA 1997 is contraindicated or ignored when a receipt of money as a prepayment under a contract for future services is said not to constitute by itself a derivation of assessable income. The Administrative Appeals Tribunal (AAT) in Case U7 87 ATC 127; Tribunal Case 20 18 ATR 3120 (Case U7) considered that there was a close analogy between the taxpayer's situation and that of a prepayment under a contract for future services. The AAT applied the principles arising from the Arthur Murray case, notwithstanding that the taxpayer was not held to be contracting to render future services to the Commonwealth. In Case U7 the taxpayer had received an advance of grant monies that it would become entitled to on making certain expenditure on agreed research and development activities. The taxpayer's entitlement to the grant was in direct proportion to the proper expenditure on that work and the AAT considered that the taxpayer, in the year in question, had not done all that was required of it to earn the full amount prepaid to it. The decisions in both the Arthur Murray case and Case U7 support the position taken in Taxation Ruling TR 2006/3 which states that 'an assessable [government payment to industry] that is an advance payment is derived by the recipient to the extent that the recipient has done everything necessary to be entitled to retain the amount received'. The circumstances underlying the payment of the funding for ongoing conservation management are that the lump sum payment is intended to provide payment for ongoing conservation management activities that the landowners are to provide on a regular basis. It is considered that the lump sum payments to the land owners for ongoing conservation management activities to be provided over the term of the MCA is to be accounted for as it is earned over the period of the agreement. This means that the land owner’s individual's income tax returns for each year covered by the MCA will include an amount for ongoing conservation management based on the activities undertaken in each year. Consequently, the grant is considered assessable under section 6-5 of the ITAA 1997.