Assessable income: receipt of government grant by a school bus operator

When is a state government grant paid to a school bus operator, returning income on an accruals basis, included in assessable income under section 15-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

The grant will be included in the assessable income under section 15-10 of the ITAA 1997 in the year the payment is received by the school bus operator.

The taxpayer carries on a business as a school bus operator.

They account for their income for tax purposes on an accruals basis.

A state government department is providing funding to school bus operators to upgrade their school buses. The funding has been made available due to community concern about the age and safety of some school buses.

Bus operators are required to use the funding to purchase more modern buses for school bus routes.

The taxpayer entered into a Deed of Agreement with the state government to accept financial assistance towards the purchase price of a new bus.

The Deed of Agreement provides that if a school bus is sold or withdrawn from operation on school bus routes within five years of the payment of the grant, then the operator must refund the state government part of the lump sum.

Section 15-10 of the ITAA 1997 includes in assessable income bounties and subsidies that are received in relation to carrying on a business and that are otherwise not assessable as ordinary income.

The payment of the state government grant to the school bus operator is a subsidy that is received in relation to the taxpayer's business and is not ordinary income.

Section 15-10 of the ITAA 1997 includes in assessable income a bounty or subsidy that 'you receive in relation to carrying on a business'.

The term 'receive' is not defined in the ITAA 1997. However, in discussing paragraph 26(g), the equivalent provision in the Income Tax Assessment Act 1936 (ITAA 1936), Taxation Ruling TR 97/1 states that the courts have interpreted 'received' in paragraph 26(g) as the same as 'derived' in subsection 25(1) of the ITAA 1936.

The question of when income is derived has been considered in a series of decisions of the Courts and it is often simply a question of whether a 'cash' or accruals basis should be used. Gibbs J said in Brent v. Federal Commissioner of Taxation (1971) 125 CLR 418; (1971) 71 ATC 4195; (1971) 2 ATR 563: It has become well established that unless the Act makes some specific provision on the point the amount of income derived is to be determined by the application of ordinary business and commercial principles and that the method of accounting to be adopted is that which 'is calculated to give a substantially correct reflex of the taxpayer's true income'.

Where a taxpayer is assessable on an accruals basis, the courts have considered that income is derived when a recoverable debt has been created and the taxpayer is not obliged to take any further steps before becoming entitled to payment ( Henderson v. Federal Commissioner of Taxation (1970) 119 CLR 612(1970) 70 ATC 4016; (1970) 1 ATR 596). However, there may be an exception where payments are received in advance of goods or services being provided.

In Arthur Murray (NSW) Pty Ltd v. Federal Commissioner of Taxation (1965) 114 CLR 314; (1965) 14 ATD 98 the taxpayer received amounts in advance for lessons to be given over future periods. Some of the lessons had not been given in the year in which the fees were paid. The High Court held that the fees could not be regarded at the time of receipt as assessable income of the taxpayer but became such assessable income only when they were earned by the provision of lessons. Until that time, the amounts had not 'come home' to the taxpayer. In their joint judgement, Barwick CJ, Kitto and Taylor JJ said that the ultimate enquiry was whether what had taken place was enough to satisfy the general understanding among practical business people of what constitutes a derivation of income. In discussing the possibility of having to make a refund the court said: But those circumstances nevertheless make it surely necessary, as a matter of good business sense, that the recipient should treat each amount of fees received but not yet earned as subject to the contingency that the whole or some part of it may have in effect to be paid back, even if only as damages, should the agreed quid pro quo not be rendered in due course. The possibility of having to make sure such a payment back (we speak of course in practical terms) is an inherent characteristic of the receipt itself. In our opinion it would be out of accord with the realities of the situation to hold, while the possibility remains, that the amount received has the quality of income derived by the company.

In terms of the grant received by the school operators for the purchase of a bus, the amount has 'come home' when it is expended for the intended purpose. At that point the bus operator has done everything necessary to earn the income. At that point it makes sound business and commercial sense to treat the income as derived.

Whilst the Deed of Agreement provides that if the bus is withdrawn from school bus routes within 5 years a portion of the grant must be refunded, this is insufficient to defer derivation of the income to a future point in time.