Private ruling: Grant payments
Published: January 2014
Ruling period: Year ended 30 June 2012 | Year ended 30 June 2013 | Year ended 30 June 2014
Date scheme commenced: 1 July 2011

Ruling: Q1: Is the grant received assessable income in the year of receipt? | A1: No. | Q2: Will the funding paid under the agreement give rise to a capital gains tax (CGT) event? | A2: Yes. | Q3: Will any capital gain or capital loss resulting from funding paid under the agreement be disregarded? | A3: Yes. | Q4: Will the cost base and reduced cost base of the CGT asset constructed be reduced to the extent of the funding received as a recoupment of expenditure? | A4: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5. | Income Tax Assessment Act 1997 section 10-5 | Income Tax Assessment Act 1997 section 15-10 | Income Tax Assessment Act 1997 section 104-25 | Income Tax Assessment Act 1997 section 104-35 | Income Tax Assessment Act 1997 section 104-155 | Income Tax Assessment Act 1997 Paragraph 118-37(2)(a) | Income Tax Assessment Act 1997 subsection 110-45(3)

Reasons for decision: Summary: Ordinary income Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business. Other characteristics of income that have evolved from case law include receipts that: · are earned, · are expected, · are relied upon, and · have an element of periodicity, recurrence or regularity. The grant received 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. The grant does not constitute income from the provision of personal services and is not sourced from property. It is also not derived directly from any usual business activities of entity B. Entity B is not carrying on a business and has not yet commenced receiving rental income. Therefore the grant is not regarded as ordinary assessable income under section 6-5 of the ITAA 1997. Statutory income Statutory income is not ordinary income, but is included in assessable income by specific provisions of the income tax law (section 6-10 of the ITAA 1997). These specific provisions are listed in section 10-5 of the ITAA 1997. The list includes bounties and subsidies, which are included in assessable income by virtue of the section 15-10 of the ITAA 1997. Section 15-10 of the ITAA 1997 provides that your 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 of the ITAA 1997. To be assessable under section 15-10 of the ITAA 1997 the subsidy must relate to the 'carrying on' of the business, not merely to the commencement or cessation of it. 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). In your case, the funding does not constitute an assessable bounty or subsidy. Entity B owns the property and has been allocated funding. Entity B will not be operating the relevant business. Entity B's activity will be to act in the capacity of lessor in relation to the property and to derive rental payments. The extent of entity B's activities as a lessor will be aligned more readily with the type of activities generally undertaken by a passive investor. It is not considered that entity B is carrying on a business. Therefore, any receipts in relation to the funding will not be assessed under section 15-10 of the ITAA 1997 as a bounty or subsidy. Capital gains tax provisions Section 104-25 of the ITAA 1997 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. Paragraph 118-37(2)(a) of the ITAA 1997 provides, that a capital gain 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 or local governing body. In this case, under the agreement, entity A creates rights for entity B to receive payments upon the completion of several milestones and the provision of progress reports as stated in the agreement. These rights are satisfied under CGT event C2 when the final payment is made. However, as the requirements of paragraph 118-37(2)(a) of the ITAA 1997 are met, any capital gain made by entity B from the CGT C2 event will be disregarded. Please note, that although there is no capital gain or loss at the time of receipt of the grant payments, there will be capital gains consequences when entity B eventually disposes of the property. To the extent that the grant is received to fund the cost of constructing buildings, it is a recoupment of those costs. This recoupment reduces the cost base and reduced cost base of the property as per subsection 110-45(3) and subsection 110-55(6) of the ITAA 1997. Further information regarding depreciating assets 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. To the extent that the grant is received to fund the cost of depreciating assets, it is an assessable recoupment under subsection 20-20(3) of the ITAA 1997. 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.

Relevant facts: 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: | § the application for private ruling, and | § Funding agreement between you and entity A. | In 20XX, a group of entities wanted to merge. | As there were no suitable premises, they agreed to construct a purpose built building. | Feasibility activities were undertaken and a vacant parcel of land was deemed suitable. | In 20YY, entity B was incorporated. | Entity B acquired the vacant parcel of land. | Entity B was successful in its application for a grant. | The first grant payment was received in the relevant income year. | Payments are made upon the relevant milestone requirements being met. | The purpose of the grant is to assist entity B with the construction of a building in order to make it available to rent for the various tenants. | Entity B will carry out the sole function of owning and renting the premises. | Entity B must provide monthly reports.