Issue
Is an amount received from the NSW Department of Land and Water Conservation (DLWC) for the protection and long term sustainable management of native vegetation assessable income?
Decision
No. The amount is not ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997).
Facts
The DLWC entered into a Registered Property Agreement (the Agreement) with a landowner to achieve long term sustainable management and protection of native vegetation. The Agreement has statutory power and formally binds the landowner to undertake certain management responsibilities. The Agreement is registered in perpetuity on the property title.
As part of the Agreement, the DLWC contributes an amount of money towards the undertaking of specific on-ground works by the landowner (that is, fencing, direct seeding and weed removal) which are designed to facilitate the conservation of native vegetation. The landowner can have this work undertaken by an arms-length contractor or can undertake the work himself or herself.
Reasons for Decision
Under the terms of the Agreement, the funding provided by the DLWC is to reimburse expenses agreed to be incurred by the landowner under the agreement.
If the landowner uses arms-length contractors to undertake the work and the cost of using the contractor is reimbursed by the DLWC, then the amount received from the DLWC is not assessable income. The landowner does not enter into the transaction to make a profit or gain, rather it is a reimbursement of costs agreed to be performed under the property agreement.
However, if the landholder undertakes the work rather than use arms-length contractors, the amount received from the DLWC would be included in assessable income as ordinary income under section 6-5 of the ITAA 1997. In this situation, any expenses related to undertaking the work would be an allowable deduction.