Private ruling: Assessable income - Government Funding
Published: August 2014
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Questions and Answers | 1. Is the funding (the grant) received assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | No | 2. Is the grant assessable under section 15-10 of the ITAA 1997? | No | 3. Is the grant assessable under subdivision 20-A of the ITAA 1997? | Yes, in part

Relevant facts and circumstances: You are a private company. You operate from business premises that are rented from a related unit trust. You received government funding. The funding was specifically provided for you to: • Renovate/extend business premises; and • Acquire business equipment. You are required to spend the funds in accordance with the budget included in the agreement. The funding agreement forms part of the facts of this ruling.

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 of the Income Tax Assessment Act 1997 (ITAA 1997), or • If it is 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 of the ITAA 1997, as listed in section 10-5 of the ITAA 1997. Included in the list in section 10-5 of the ITAA 1997 are bounties and subsidies (section 15-10 of the ITAA 1997). Section 6-5 of the ITAA 1997 provides that 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 of the ITAA 1997 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. Taxation Ruling TR 2006/3 Income Tax: government payments to industry to assist entities (including individuals) to continue, commence or cease business sets out the ATO position on government payments to industry, 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. The grant does not constitute ordinary income as 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. Section 15-10 of the ITAA 1997 provides that assessable income includes a bounty or subsidy that: a) is received in relation to carrying on a business; and b) (b) is not assessable as ordinary income under section 6-5 of the ITAA 1997. 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. 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. 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 ) demonstrates that the scope of the phrase 'in relation to carrying on a business' in section 15-10 of the ITAA 1997 is to be interpreted widely. Payments received to acquire or construct an asset or assist with the capital costs of restructuring a business with a view to improving overall efficiency are 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. This is decided on the merits of each case. (Paragraph 102 of TR 2006/3) To be assessable under section 15-10 of the ITAA 1997 the grant must relate to the carrying on of the business, not merely to the commencement or cessation of it. First Provincial 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) To be considered assessable under section 15-10 of the ITAA 1997, the grant must be in relation to the carrying on of a business. 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) It is accepted that the funding for alterations to existing facilities, additional construction and the acquisition of associated equipment is not in relation to existing business activities but to commence a new activity and therefore the grant is not assessable under section 15-10 of the ITAA 1997. 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) of the ITAA 1997, 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 of the ITAA 1997 over two or more income years, section 20-40 of the ITAA 1997 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 of the ITAA 1997 for the depreciating asset in the later income years. Where the grant is used to fund depreciating assets, such as necessary equipment and furniture, it is an assessable recoupment (in the year amounts are deductible under Division 40 of the ITAA 1997) under subsection 20-20(3) of the ITAA 1997.