Assessable income: farm business support grants

Is a Farm Business Support Grant, received by the taxpayer under the Victorian Government's Assistance Scheme for drought affected farmers, assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. A Farm Business Support Grant, received by the taxpayer under the Victorian Government's Assistance Scheme for drought affected farmers, is assessable under section 6-5 of the ITAA 1997.

The taxpayer is carrying on a farming business.

The taxpayer received a Farm Business Support Grant ('the Grant') under the Victorian Government's Assistance Scheme for farmers affected by dry seasonal conditions in the 2002-03 income year.

The purpose of the Grant is to reduce the financial burden on normally profitable farming businesses during a drought period. The Grant is available to assist farmers where they can demonstrate an adverse turnaround in income or expenditure due to dry seasonal conditions, resulting in a projected loss for the 2002-03 income year.

The assistance is determined on an individual basis and made as a grant of up to 33% of the anticipated loss to a maximum of $20,000 per farming enterprise, providing the farmer can demonstrate that appropriate risk management practices have been undertaken.

Subsection 6-5(1) of the ITAA 1997 provides that the assessable income of a taxpayer includes income according to ordinary concepts, which is called ordinary income.

Ordinary income has generally been held to include three categories: • income from providing personal services • income from property; and • income from carrying on a business.

The factors which determine if a receipt is of an income or capital nature, were identified by the Full High Court in G P International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation (1990) 170 CLR 124; 90 ATC 4413; (1990) 21 ATR 1 ( GP International Pipecoaters Case ). Some of these factors include: • The character of the receipt in the hands of the taxpayer. • The scope of a taxpayer's business by reason of which the amount in question is received. • The application of 'a business conception to the facts of the case'.

In the GP International Pipecoaters Case the receipts which were equivalent to the construction costs of its pipe-coating plant, were assessable income because they were derived by the taxpayer in the ordinary course of the business in which it was engaged.

In Reckitt & Colman Pty Ltd v. FC of T 74 ATC 4185; (1974) 4 ATR 501 ( Reckitt's Case ), the taxpayer manufactured a range of household, toiletry, pharmaceutical and food products and also maintained a laboratory to conduct programmes of research and development of existing and new products to be produced by the company. The taxpayer received a grant under the Industrial Research and Developments Grants Act 1967 to assist them with the increased costs they had incurred in undertaking their research and development. The Supreme Court of New South Wales held that the payments were income according to ordinary concepts as they represented reimbursement of expenditures of a revenue nature and were derived in the ordinary course of business.

The principle established in Reckitt's Case was applied to AAT Case 9472 (1994) 28 ATR 1155; Case 22/94 ; 94 ATC 225 ( Case 22/94 ), involving a taxpayer who, in partnership with his wife, carried on a cane farming business. Financial assistance was provided under a joint Commonwealth and State Government scheme that was available to sugar farmers who had an obligation to pay interest on a loan. The assistance was provided to the partnership in a form described as a lump sum interest subsidy. Each year, one-seventh of the subsidy became non-refundable.

It was held that once the assistance became non-refundable it was assessable as income according to ordinary concepts. In the judgement, it was said: In turning to the first of the respondent's submissions, namely the assessability of the assistance under s25(1), it is necessary for the tribunal to determine "the nature of the payment itself and the relationship of it to the activities, actual or potential, of the recipient". (see Reckitt and Colman Pty Ltd v FCT (1974) 4 ATR 501; 74 ATC 4186). The question is whether or not the payment can be regarded as being ordinarily incidental to or arising out of the carrying on of the applicant's cane farming business. It is the finding of this tribunal that it is.

The taxpayer's circumstances are analogous to those of the taxpayer in Case 22/94 . Payment of the Grant is dependent upon the taxpayer carrying on a commercially viable farming operation and is specifically made to financially assist a normally profitable farming business during the drought. The nature and character of the Grant are regarded as 'ordinarily incidental to or arising out of the carrying on of' the taxpayer's farming business.

Accordingly, the Grant is assessable as income according to ordinary concepts under section 6-5 of the ITAA 1997.

(Note: If the Grant was not ordinary income, it would have been assessable as a bounty or subsidy under section 15-10 of the ITAA 1997.)