ATO Interpretative Decision

ATO ID 2006/292

Income Tax

Whether funding provided by a State government to a company under an industry investment incentive scheme is a grant or a loan
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If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Is funding provided by a State government to a company to assist its expansion of the business premises and the upgrading of the manufacturing capabilities assessable as a grant, subsidy or bounty for the purposes of section 15-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

No. Funding provided by a State government under an industry investment incentive scheme is not assessable as a grant, subsidy or bounty for the purposes of section 15-10 of the ITAA 1997 since the amount received is a loan.

Facts

A company received payments from a State government under an industry investment incentive scheme which was set up to provide incentives in the form of funding to new or existing businesses for investing in business ventures in that State.

Under the scheme agreement, no interest is payable and periodic repayments are not required. The company must repay the total amount on the termination date which is the earlier of the expiry date of the scheme agreement and the date upon which a repayment event occurs. If the company fails to repay the amount, the amount or so much of it as remains unpaid for the time being will bear interest at the prescribed rate calculated from the termination date to the date on which it is repaid in full.

Reasons for Decision

A Grant/Subsidy/Bounty

Section 15-10 of the ITAA 1997 provides that assessable income includes a bounty or subsidy that is received in relation to carrying on a business and is not assessable as ordinary income under section 6-5 of the ITAA 1997.

In Reckitt & Colman Pty Ltd v. FC of T 74 ATC 4185; (1974) 4 ATR 501 Mahoney J considered whether grants under the Industrial Research and Development Grants Act 1967 were assessable income under paragraph 26(g) of the Income Tax Assessment Act 1936 (ITAA 1936). In relation to the meaning of 'bounty' and 'subsidy' in that provision, Mahoney J stated:

whatever the terms signify, they include in my opinion a financial grant made by the State for the purpose of encouraging a particular activity in the field of trade and commerce.

This suggests that the financial grants provided by the government fall within the meaning of 'bounty' and 'subsidy'. If a financial assistance provided by the government is a bounty, a subsidy or a grant, it is accordingly included as an assessable income under section 15-10 of the ITAA 1997.

The term 'bounty', 'subsidy' and 'grant' are not defined in legislation, so the ordinary meaning are applied to these terms.

In the Macquarie Dictionary 2nd edn, The Macquarie Library Pty Ltd, NSW, the following meanings are provided:

'Bounty' is defined to include '1. generosity in giving. 2. whatever is given bounteously; a benevolent, generous gift. 3. a premium or reward, one offered by a government.'
'Subsidy' is defined to include '1. a direct pecuniary aid furnished by a government to a private industrial undertaking, a cultural organisation, or the like. 2. a sum paid, often in accordance with a treaty, by one government to another, to secure some service in return. 3. a grant or contribution of money.'
'Grant' is defined to include 'that which is granted, as a privilege or right, a sum of money, as for a student's maintenance, or a tract of land.'

A Loan

In Case 5/94 94 ATC 130; AAT Case 9221 (1993) 27 ATR 1117 at 1125, it was said:

the term loan is not defined in the Act, but is defined in Chitty on Contracts, 1989, 26th ed, at para 3574:
Definition of loan. A contract of loan of money is a contract whereby one person lends or agrees to lend a sum of money to another, in consideration of the promise expressed or implied to repay that sum on demand, or at a fixed or determinable future time, or conditionally upon an event which is bound to happen, with or without interest. In many circumstances, the question whether a particular transaction is, in law a loan or not will be immaterial, since the transaction will take effect according to the intention of the parties, however the contract may be classified...

This definition indicates that a loan should possess the following elements:

•
a person lends or agrees to lend money to another
•
in consideration of a promise to repay that sum
•
the repayment is at a fixed or determinable future time
•
the repayment can be made with or without interest, and
•
an equivalent amount will be repaid.

Based on the above analysis, it is clear that a loan involves an obligation on the borrower to repay the principal with or without interest whereas a grant, a bounty or a subsidy does not impose an obligation on the recipient to repay the amount received.

In this case, the funding provided to the company by a State government under an industry investment incentive scheme is a loan because it has all the elements of a loan. The State government has lent money to the company who has in return promised to repay the equivalent amount in full on the termination date which is the earlier of the expiry date of the scheme agreement and the date upon which a repayment event occurs. The scheme agreement has imposed an obligation on the company to repay the sum at a determinable future time with or without interest. Although the repayment will be made with or without interest, it will not alter the nature of the funding as a loan.

As the funding provided by a State government under such scheme is a loan, it is not assessable under section 15-10 of the ITAA 1997.

Date of decision:  11 November 2005

Year of income:  Year ended 30 June 2000

Legislative References:
Income Tax Assessment Act 1997
   section 15-10
   section 6-5

Income Tax Assessment Act 1936
   subparagraph 26(g)

Case References:
Case 5/94
   94 ATC 130

AAT Case 9221
   (1993) 27 ATR 1117

Reckitt & Colman Pty Ltd v. FC of T
   74 ATC 4185
   (1974) 4 ATR 501

Related Public Rulings (including Determinations)
Taxation Ruling TR 2006/3

Other References:
The Macquarie Dictionary 2nd edn, The Macquarie Library Pty Ltd, NSW

Keywords
Borrowings & loans
Dealings & transactions
Government grants income
Income

Siebel/TDMS Reference Number:  4938833; 1-5RWGQY7; 1-D4LR6S4

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  27 October 2006
Date reviewed:  2 March 2018

ISSN: 1445-2782

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