Private ruling: Government grant
Published: February 2012
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Is the government grant received by the company assessable income under section 6-5 or 15-10 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Will the grant be an assessable recoupment to the extent that a deduction is allowable under section 40-880 of the ITAA 1997 in relation to the expenditure of the grant funds? Answer Yes.

Relevant facts and circumstances: The company was successful in acquiring a grant. The company was registered and commenced business activities in the same financial year it acquired the grant. The company signed an agreement with the grant provider that the grant was to be used to: · Investigate the potential market, competitors and industry, and develop sales and market forecasts; · Develop business plans; and · Prepare an information memorandum, identify potential investors and develop an investor pitch. The company has been working towards obtaining patents and trademarks and has not earned any income from sales. The company considers the expenditure incurred in relation to the grant will be deductible under section 40-880 of the ITAA 1997.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5, | Income Tax Assessment Act 1997 section 15-10, | Income Tax Assessment Act 1997 Subdivision 20-A, | Income Tax Assessment Act 1997 section 20-20, | Income Tax Assessment Act 1997 section 20-25, | Income Tax Assessment Act 1997 Division 40 and | Income Tax Assessment Act 1997 section 40-880.

Reasons for decision: Summary: As the grant payments were received to assist in commencing business activities, they are not considered assessable income under section 6-5 or 15-10 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Subsection 6-5 of the ITAA 1997 provides that the assessable income of a taxpayer includes income according to ordinary concepts, referred to as ordinary income. Section 15-10 of the ITAA 1997 includes in assessable income bounties and subsidies that are received in relation to carrying on a business and that are otherwise not assessable as ordinary income. Taxation Ruling TR 2006/3 discusses the assessability of government payments to industry to assist entities (including individuals) to continue, commence or cease business. At paragraph 26 of the ruling it states that: Government payments to industry to commence or cease a business are not assessable as ordinary income of the recipient under section 6-5 or as a bounty or subsidy in relation to carrying on a business under section 15-10. However, the payment may give rise to an assessable recoupment under Subdivision 20-A. Government payments to commence business include payments to assist with the cost of evaluating whether to commence a business, to reimburse the cost of taxation advice, for the commencement of a business or to assist with the purchase of a depreciating asset. In your case, the grant received by the company was to be used to: Investigate the potential market, competitors and industry, and develop sales and market forecasts; · Develop business plans; and · Prepare an information memorandum, identify potential investors and develop an investor pitch. These activities are considered to be undertaken to commence the business. Therefore, the grant received is not assessable income under section 6-5 or 15-10 of the ITAA 1997. | Summary: The grant money received will be considered an assessable recoupment to the extent that a deduction is allowable for eligible expenditure under section 40-880 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Subdivision 20-A of the ITAA 1997 includes an amount in your assessable income if you receive the amount as an assessable recoupment. Subsection 20-25(1) of the ITAA 1997 defines recoupment of a loss or outgoing to include any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery (however described) and a grant in respect of the loss or outgoing. An assessable recoupment will arise under subsection 20-20(3) of the ITAA 1997 only in respect of deductions allowable under the provisions listed in section 20-30 of the ITAA 1997. These provisions include expenditure deductible under Division 40 of the ITAA 1997. In the company's case, the grant received will be considered an assessable recoupment to the extent that a deduction is allowable under section 40-880 of the ITAA 1997 in relation to the expenditure of the grant funds.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.