Private ruling: Primary Care Infrastructure Grants Program
Published: January 2014
Ruling period: Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016 | Year ended 30 June 2017 | Year ended 30 June 2018
Date scheme commenced: 1 July 2012

Ruling: Q1: Will the grant paid to the taxpayer for the construction of the facility which will be leased to a related entity for the purpose of operating the business be assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) as income according to ordinary concepts? | A1: No. | Q2: Will the grant paid to the taxpayer for the construction of the facility which will be leased to a related entity for the purpose of operating the business be assessable under section 15-10 of the ITAA 1997 as statutory income under bounties and subsidies? | A2: No. | Q3: Will the grant paid to the taxpayer for the construction of the facility which will be leased to a related entity for the purpose of operating the business be assessable under the capital gains tax provisions in the ITAA 1997? | A3: No. However, there are capital gain consequences when the property is eventually disposed of. Please see the Reasons for Decision for a further explanation. | Q4: Will the grant paid to the taxpayer for construction of the facility to be leased to a related entity for the purpose of operating a business be assessable under Subdivision 20-A of the ITAA 1997? | A4: Yes, but only to the extent that the grant is received to fund the cost of depreciating assets. Please see the Reasons for Decision for a further explanation | Q5: Will the grant paid to the taxpayer for construction of the facility to be leased to a related entity for the purpose of conducting the business be assessable under the conditions of TR 2006/3 "Conditional Grants" over a number of years as designated under the conditions of the project? | A5: Not applicable. The grant is not assessable except for that portion under Subdivision 20-A, which is subject to the timing provisions in that Subdivision.

Relevant facts and circumstances: You own two properties, both leased to en entity related to you which carries on a business. In the 2010-11 Budget, the Australian Government announced funding for a relevant grant program. Pursuant to this Program, you entered into a Funding Agreement (the Agreement) with the Commonwealth in the relevant year of income. A copy of the Agreement has been provided. Under the Agreement you will receive (and have started receiving) funding for to construct an extension of the property. The funds are paid by instalments as certain milestones are met by you as specified in the Agreement. The funds are only made available for the specific purposes set out in the Agreement. You (or any lessee) are required to use the property for the designated use period. A formula is provided in the Agreement for repayment of funds should the Agreement not be adhered to.

Relevant legislative provisions: Section 6-1 of the ITAA 1997 | Section 6-5 of the ITAA 1997 | Section 6-10 of the ITAA 1997 | Section 10-5 of the ITAA 1997 | Section 15-10 of the ITAA 1997 | Subdivision 20-A of the ITAA 1997 | Division 40 of the ITAA 1997 | Section 118-37 of the ITAA 1997

Reasons for decision: Summary: Section 6-1 of the ITAA 1997 provides that a taxpayer's assessable income includes ordinary income and statutory income. Ordinary income, pursuant to section 6-5 of the ITAA 1997, is income according to ordinary concepts. The courts have identified a number of factors which indicate whether an amount has the character of income. A frequent characteristic of income receipts is an element of periodicity, recurrence or regularity. However these characteristics are not always essential as in some circumstances proceeds from an isolated transaction received as a lump sum may also be income. In your situation, the grant payments received are a one-off payment (albeit paid in instalments as certain milestones are met). The payments are to assist you in undertaking construction of an extension to a building that you lease to a related entity. In G P International Pipecoaters Pty Ltd v FC of T (1990) 170 CLR 124; 90 ATC 4413; (1990) 21 ATR 1 the High Court commented on the characterisation of a payment that was intended to assist the recipient with capital costs, saying that such receipts would be capital in nature and therefore not ordinary income. It is therefore concluded that the payments made in accordance with the Agreement are not ordinary income in accordance with section 6-5 of the ITAA 1997. Statutory income, pursuant to section 6-10 of the ITAA 1997, is amounts that are not ordinary income but are included in assessable income by other provisions. Many of these provisions are listed in section 10-5 of the ITAA 1997. Relevantly, bounties or subsidies may be included in assessable income under section 15-10 of the ITAA 1997. Section 15-10 of the ITAA 1997 provides that assessable income includes a bounty or subsidy that: (a) you receive in relation to carrying on a business; and (b) is not assessable as ordinary income under section 6-5. A bounty or subsidy includes a grant and other financial assistance provided by Government to assist businesses ( The Squatting Investment Co v FC of T (1953) 86 CLR 570; (1953) 10 ATD 126; (1953) 5 AITR 496). In your situation, the grant is a bounty or subsidy for the purposes of section 15-10 of the ITAA 1997. As discussed in Question 1 above, the grant is not assessable as ordinary income under section 6-5 of the ITAA 1997. The remaining question is whether the grant was received by you in relation to the carrying on a business. Taxation Ruling TR 2006/3 provides the Commissioner's view on government payments which are paid to assist entities to continue, commence, or cease business. It is the Commissioner's view that a bounty or subsidy 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 this situation, the entire grant will be used by you as the property owner for the construction of an extension. You are the owner of the property and your only activity is to act as lessor in relation to this property and another property, both leased to the related entity. Taxation Ruling TR 97/11 provides the Commissioner's view on what constitutes 'the carrying on of a business'. With reference to the indicators provided in paragraph 13 of TR 97/11, the derivation of rental income from a single source does not generally constitute the receipt of business income. The Commissioner is satisfied your activity of leasing the two properties to the related entity is not the carrying on of a business. Notwithstanding the operation of a business from the property by the related entity, the Commissioner is satisfied that the requisite connection between the receipt of the grant by you as the property owner and the carrying on of a business does not exist. Therefore, although the grant is a bounty or subsidy received, it is not assessable income as it was not received in relation to carrying on of a business. Paragraph 118-37(2)(a) of the ITAA 1997 provides that a capital gain or capital loss is 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 under an enactment of an instrument of a legislative character. In relation to this, the Revised Explanatory Memorandum 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. The relevant grants program was announced by the Australian Government in the 2010-11 Budget. Therefore, the grant meets these requirements and the payment of the grant will not give rise to a capital gain. However, there are capital gain consequences when the property is eventually disposed of. Paragraph 6 of TR 2006/3 provides that if the payment recoups expenditure forming one of the elements of the cost base, the cost base is taken never to have included the original expenditure, thus potentially increasing a future capital gain or decreasing a future capital loss. To the extent that the grant is received to fund the cost of depreciating assets, it is an assessable recoupment under subdivision 20-A of the ITAA 1997 if the requirements of that subdivision are satisfied. 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 applies so that the total 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 other income years to the extent that further amounts are deductible under Division 40 of the ITAA 1997. Your tax agent has advised that you cannot as yet be certain as to what portion of the grant will be to fund the cost of depreciating assets, but that he will be able to calculate this once the information is available. TR 2006/3 provides that "Conditional Grants", which must be repaid unless the recipient meets agreed conditions within a specified period, may be included in assessable income after the specified period or, if appropriate, at the time the specified milestones are achieved. However, as it has been determined that the grant is not assessable income (except for that portion under Subdivision 20-A of the ITAA 1997 as discussed in question 4), it is not necessary to further consider whether or not the grant would be assessable over a period of time in accordance with the Agreement you have entered into. It is noted that Subdivision 20-A of the ITAA 1997 provides its own method of calculating the appropriate amounts of assessable income to be included in each year for any portion of the grant that is subject to these provisions.