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

Ruling: Q1: Is the Primary Care Infrastructure (PCI) Grant paid by the Government for capital funding, to enhance the capacity of your existing premises to deliver GP Superclinic-style services, assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Is the grant assessable under section 15-10 of the ITAA 1997? | A2: No. | Q3: Is the grant assessable under the capital gains tax (CGT) provisions of the ITAA 1997? | A3: No. | Q4: Is the grant assessable under Subdivision 20-A of the ITAA 1997? | A4: Yes, in part, to the extent that the funding is expended on and deductions are claimed in respect of any of the items listed in the table in section 20-30 of the ITAA 1997?

Relevant facts and circumstances: The arrangement that is the subject of the Ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are: • your application for private ruling; and • the grant Funding Agreement between the grantor and the recipient The company has been approved to receive a Primary Care Infrastructure (PCI) Grant from the Department of Health (DoH). The Company has, for a number of years, conducted a general medical practice. The director and principal of the company is himself a general medical practitioner (GP). The premises in which the clinic is conducted are owned by a related entity, a Family Trust, pursuant to a secure, long term commercial lease between the parties. As eligible lessee, the company undertook all of the works and improvements relevant to the terms of the grant. In the earlier years the clinic was a typical GP medical practice, providing general healthcare to the local community; however when patients required specialist advice or care not able to be provided by the resident practitioners, they were often forced to travel long distances to receive it. In expanding the clinic to accommodate additional practitioners, the long term objective of the practice was to provide additional medical resources to the local community and to eventually develop a broader, team-based environment which would become the platform for the ultimate development of a fully integrated, holistic and preventative health facility which could provide a full range of health services, from community support and education through to high end specialist care. One of the key factors in being able to achieve such an aim, is in being able to offer facilities and an environment which would attract and retain the personnel who would set up and conduct their practices in the locality and environment. Whilst the clinic was able to offer a broader range of practitioners, an integrated team approach was not fully able to be achieved due to limitations associated with accommodation and facilities generally. Following finalisation of the upgrade, the clinic now accommodates many more medical services. The clinic also provides extended hours to provide additional practitioner and specialist sessions and after hours community education programs. The cost of the building works, furniture and internal fittings and equipment will be incurred by the company.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 6-10 | Income Tax Assessment Act 1997 Section 10-5 | Income Tax Assessment Act 1997 Section 15-10 | Income Tax Assessment Act 1997 Subsection 20-20(3) | Income Tax Assessment Act 1997 Section 20-25 | Income Tax Assessment Act 1997 Section 20-40 | Income Tax Assessment Act 1997 Section 104-25 | Income Tax Assessment Act 1997 Paragraph 118-37(2)(a) | Income Tax Assessment Act 1997 Subsection 110-45(3)

Reasons for decision: Summary: A payment or other benefit received by a taxpayer is included in assessable income if: • It is income according to ordinary concepts in terms of section 6-5, or • If not ordinary income it may be included in your assessable income because it is caught under the general 'statutory income' provisions in section 6-10, as listed in section 10-5. Included in the list in section 10-5 are bounties and subsidies (section 15-10). | Detailed Reasoning - Ordinary Income: Section 6-5 states, in part, the following: 6-5(1) Your assessable income includes income according to ordinary concepts, which is called ordinary income. 6-5(2) If you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year. … The intent of section 6-5 is to include in assessable income those receipts which can be categorised as income according to ordinary concepts. Although the expression 'income according to ordinary concepts' is not defined in the ITAA 1997, there is a substantial body of case law from which a number of factors have been drawn to determine whether an amount has the character of income according to ordinary concepts. A frequent characteristic of income receipts is an element of periodicity, recurrence or regularity, even if the receipts are not directly attributable to services rendered. This view is supported by ATO Interpretative Decision report, ATO ID 2003/902 which cited the same reasoning in finding that a government grant paid in two instalments to a medical practitioner was not assessable under section 6-5. ATO policy concerning government payments to industry is set out in Taxation Ruling TR 2006/3 Income Tax: government payments to industry to assist entities (including individuals) to continue, commence or cease business. At paragraph 84, it provides that ordinary income generally falls within three categories: • Income from providing personal services, • Income from property, or • Income from carrying on a business. | Detailed Reasoning - Application to your circumstances: The PCI Grant does not constitute ordinary income. Whilst it will be paid in separate instalments it does not possess the necessary elements of periodicity, recurrence or regularity that are common to receipts of ordinary income. Further, in terms of TR 2006/3 it does not constitute income from the provision of personal services, is not sourced from property, and has not been derived directly from any existing business activity. | Detailed Reasoning - Statutory Income - a Bounty or Subsidy: Under section 6-10 some amounts that are not 'ordinary income' are included in your assessable income due to another provision of the tax law. These amounts are 'statutory income'. . Subsection 6-10(1) refers to provisions about assessable income - a summary list of these provisions is contained within section 10-5. One of the statutory income provisions listed in section 10-5 is section 15-10, which deals with the treatment of bounties and subsidies. Section 15-10 provides that assessable income includes a bounty or subsidy that: (a) is received in relation to carrying on a business; and (b) is not assessable as ordinary income under section 6-5.' | Detailed Reasoning - In relation to carrying on a business: In determining the correct treatment of the payment it needs to be considered whether the bounty or subsidy has been received 'in relation to carrying on a business.' 'In relation to' A grant 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 the Full Federal Court decision in First Provincial Building Society Ltd v. FC of T (1995) 128 ALR 118; (1995) 95 ATC 4145; (1995) 30 ATR 207; (1995) 56 FCR 320 ( First Provincial ), Hill J was discussing the antecedent of section 15-10, that is, paragraph 26(g) of the Income Tax Assessment Act 1936 (ITAA 1936). He stated that it is important to note that the former provision contained the words ' received in or in relation to carrying on of a business ... (emphasis added).' When the provision was incorporated into the ITAA 1997, it was rewritten as a bounty or subsidy 'you receive in relation to carrying on of a business.' In First Provincial , Hill J specifically discussed the relationship between the terms 'received in relation to' and 'received in'. He concluded that the scope of the term 'received in relation to' was sufficiently broad enough to also cover the meaning of the narrower 'received in' which implied a more direct connection. 'Carrying on a business' or 'commencement' The First Provincial case demonstrates that the scope of the phrase 'in relation to carrying on a business' in section 15-10 is to be interpreted widely. Payments made towards the restructuring of business operations with a view to improving overall efficiency are generally considered to be 'in relation to carrying on a business'. (Paragraph 102 of TR 2006/3) 'Some business restructures may not be in relation to carrying on a business, for example if a business changes its structure to facilitate a new activity …' (emphasis added). This is decided on the merits of each case. (Paragraph 102 of TR 2006/3) To be assessable under section 15-10 the subsidy must relate to the 'carrying on' of the business, not merely to the commencement or cessation of it. the First Provincial case illustrates that the expression 'carrying on of the business' is limited to the activities of the business which are directed towards the gaining or producing of assessable income rather than merely to the business itself. (Paragraph 101 of TR 2006/3) Government payments 'to commence or cease business' as opposed to 'in relation to carrying on a business' are not considered to be assessable as ordinary income under section 6-5 or as a bounty or subsidy under section 15-10.' (Paragraphs 103 and 128 of TR 2006/3.) | Detailed Reasoning - Application to your circumstances: The PCI Grant does not constitute an assessable bounty or subsidy. To be considered assessable under section 15-10 the receipt must be in relation to the carrying on of a business and not to facilitate a new activity. You applied for the government funding to enhance the capacity of your existing premises and broaden your services to deliver GP Superclinic-style services. With regard to the use of the funding, we find that it is not used in relation to: • merely increasing the efficiency of an existing medical practice business; or • the actual carrying on of the business activity. As the enhancement of your existing premises and business restructure is not merely in relation to carrying on your existing business, but will facilitate a new activity, any receipts in relation to the funding are on capital account and are not assessed under section 15-10 as bounties or subsidies. | Detailed Reasoning - Capital gains tax provisions: Section 104-25 deals with cancellation, surrender and similar endings to CGT assets, a CGT event C2. A C2 event occurs when the ownership of an intangible CGT asset ends by the asset being released, discharged or satisfied. This would occur when a taxpayer's rights under an agreement come to an end - generally at the time the taxpayer's obligations have been discharged and the taxpayer receives payment. A capital gain occurs if the capital proceeds from the ending of the rights are more than the asset's cost base. CGT exemption under paragraph 118-37(2)(a) Paragraph 118-37(2)(a) provides, in part, that a capital gain may be 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 or local governing body. In relation to this paragraph, the Revised Explanatory Memorandum (EM) 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.' | Detailed Reasoning - Application to your circumstances: Under the Program, DoHA created rights in the company to receive payments upon the completion of several milestones as stated in the Agreement. These rights are satisfied under CGT event C2 when DoHA makes the payments to the company. You will make a capital gain equal to the difference between the capital proceeds and the cost base of the rights. However, we find that the Program meets the requirements of paragraph 118-37(2)(a) as outlined in the revised EM and the grant complies because it is a payment received as reimbursement or payment of expenses incurred in relation to the Program. Therefore, any capital gain made by you from the C2 CGT event will be disregarded under paragraph 118-37(2)(a). | Detailed Reasoning - Question 4: Subsection 20-20(3) of the ITAA 1997 provides that an amount you have received as recoupment of a loss or outgoing (except by way of insurance or indemnity) is an assessable recoupment if you can deduct an amount for the loss or outgoing for the current year or you have deducted or can deduct an amount for the loss or outgoing for an earlier income year under a provision listed in section 20-30 of the ITAA 1997. Recoupment is a defined term and has the meaning given by subsection 20-25(1) of the ITAA 1997. Under paragraph 20-25(1)(b), a recoupment of a loss or outgoing includes a grant in respect of the loss or outgoing. If the cost of a depreciating asset is deductible under Division 40 over two or more income years, section 20-40 applies so that the total of 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 later income years to the extent that further amounts are deductible under Division 40 for the depreciating asset in the later income years. | Detailed Reasoning - Application to your circumstances: The grant was spent partly on equipment associated with the new facility. To the extent that the grant is used to fund the cost of depreciating assets, such as necessary equipment and furniture, it is an assessable recoupment under subsection 20-20(3).

Reasons for decision: Note: Unless otherwise stated all subsequent legislative references pertain to the ITAA 1997.