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

Ruling: Q1: Is a grant paid under a government scheme (the scheme) in respect of a patent assessable over the effective life of the patent? | A1: No

Relevant facts and circumstances: The company has received two payments under the scheme in respect of a patent. The carrying on of trading or business activities is a precondition of a payment under the scheme.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 15-10.

Reasons for decision: Summary: Grants paid under the scheme are available to offset the costs incurred by Australian resident taxpayers of certain business activities. The carrying on of trading or business activities is a precondition of a payment under the scheme. As there is a fundamental connection between the receipt of the grant and the carrying on of a business, the payment is considered to be income of the recipient received in relation to the carrying on of a business and is required to be brought to account as assessable income under section 15-10 of the ITAA 1997. The term 'received' is not defined in the ITAA 1997. However, in discussing paragraph 26(g), the equivalent provision in the Income Tax Assessment Act 1936 (ITAA 1936), Taxation Ruling TR 97/1 states that the courts have interpreted 'received' in paragraph 26(g) as the same as 'derived' in subsection 25(1) of the ITAA 1936. The question of when income is derived has been considered in a series of decisions of the Courts and it is often simply a question of whether a 'cash' or accruals basis should be used. Gibbs J said in Brent v. Federal Commissioner of Taxation (1971) 125 CLR 418; (1971) 71 ATC 4195; (1971) 2 ATR 563: It has become well established that unless the Act makes some specific provision on the point the amount of income derived is to be determined by the application of ordinary business and commercial principles and that the method of accounting to be adopted is that which 'is calculated to give a substantially correct reflex of the taxpayer's true income'. Where a taxpayer is assessable on an accruals basis, the courts have considered that income is derived when a recoverable debt has been created and the taxpayer is not obliged to take any further steps before becoming entitled to payment ( Henderson v. Federal Commissioner of Taxation (1970) 119 CLR 612(1970) 70 ATC 4016; (1970) 1 ATR 596). However, there may be an exception where payments are received in advance of goods or services being provided. In Arthur Murray (NSW) Pty Ltd v. Federal Commissioner of Taxation (1965) 114 CLR 314; (1965) 14 ATD 98 the taxpayer received amounts in advance for lessons to be given over future periods. Some of the lessons had not been given in the year in which the fees were paid. The High Court held that the fees could not be regarded at the time of receipt as assessable income of the taxpayer but became such assessable income only when they were earned by the provision of lessons. Until that time, the amounts had not 'come home' to the taxpayer. In their joint judgement, Barwick CJ, Kitto and Taylor JJ said that the ultimate enquiry was whether what had taken place was enough to satisfy the general understanding among practical business people of what constitutes a derivation of income. In discussing the possibility of having to make a refund the court said: But those circumstances nevertheless make it surely necessary, as a matter of good business sense, that 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, even if only as damages, should the agreed quid pro quo not be rendered in due course. The possibility of having to make sure such a payment back (we speak of course in practical terms) is an inherent characteristic of the receipt itself. In our opinion it would be out of accord with the realities of the situation to hold, while the possibility remains, that the amount received has the quality of income derived by the company. In terms of the grant received by recipients under the scheme, the amount has 'come home' when it is expended for the intended purpose. At that point the recipient has done everything necessary to earn the income. This is notwithstanding that the effective life of a patent is 20 years.